-----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, GbMIZeC4NWTHhdJQWgq537sQywby6ttYfo4R9T8GTOOb4NwgWtwC8Easj1nT4L+S gOA8WNZuPRwdDEBfsmJx8g== 0000950134-00-010231.txt : 20001204 0000950134-00-010231.hdr.sgml : 20001204 ACCESSION NUMBER: 0000950134-00-010231 CONFORMED SUBMISSION TYPE: SC 13E3 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20001201 GROUP MEMBERS: AMERICAN INDUSTRIAL PROPERTIES REIT INC GROUP MEMBERS: DDR TRANSITORY SUB INC GROUP MEMBERS: DEVELOPERS DIVERSIFIED REALTY CORP SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN INDUSTRIAL PROPERTIES REIT INC CENTRAL INDEX KEY: 0000778437 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 756335572 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13E3 SEC ACT: SEC FILE NUMBER: 005-43183 FILM NUMBER: 782173 BUSINESS ADDRESS: STREET 1: 6210 N BELTLINE RD STREET 2: STE 170 CITY: IRVING STATE: TX ZIP: 75063 BUSINESS PHONE: 9727566000 MAIL ADDRESS: STREET 1: 6220 N BELTLINE ROAD STREET 2: SUITE 205 CITY: IRVING STATE: TX ZIP: 75063 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN INDUSTRIAL PROPERTIES REIT DATE OF NAME CHANGE: 19931203 FORMER COMPANY: FORMER CONFORMED NAME: TRAMMELL CROW REAL ESTATE INVESTORS DATE OF NAME CHANGE: 19931203 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN INDUSTRIAL PROPERTIES REIT INC CENTRAL INDEX KEY: 0000778437 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 756335572 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13E3 BUSINESS ADDRESS: STREET 1: 6210 N BELTLINE RD STREET 2: STE 170 CITY: IRVING STATE: TX ZIP: 75063 BUSINESS PHONE: 9727566000 MAIL ADDRESS: STREET 1: 6220 N BELTLINE ROAD STREET 2: SUITE 205 CITY: IRVING STATE: TX ZIP: 75063 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN INDUSTRIAL PROPERTIES REIT DATE OF NAME CHANGE: 19931203 FORMER COMPANY: FORMER CONFORMED NAME: TRAMMELL CROW REAL ESTATE INVESTORS DATE OF NAME CHANGE: 19931203 SC 13E3 1 d82307sc13e3.txt SCHEDULE 13E-3 - TRANSACTION STATEMENT 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 13E-3 RULE 13e-3 TRANSACTION STATEMENT (Under Section 13(e) of the Securities Exchange Act of 1934 and Rule 13e-3 thereunder) AMERICAN INDUSTRIAL PROPERTIES REIT (Name of Issuer) DEVELOPERS DIVERSIFIED REALTY CORPORATION DDR TRANSITORY SUB INC. AMERICAN INDUSTRIAL PROPERTIES REIT (Name of Person(s) Filing Statement) COMMON SHARES OF BENEFICIAL INTEREST (Title of Class of Securities) 026791202 (CUSIP Number of Class of Securities) SCOTT A. WOLSTEIN CHARLES W. WOLCOTT CHIEF EXECUTIVE OFFICER CHIEF EXECUTIVE OFFICER DEVELOPERS DIVERSIFIED REALTY CORPORATION AMERICAN INDUSTRIAL PROPERTIES REIT 3300 ENTERPRISE PARKWAY 6210 NORTH BELTLINE ROAD, SUITE 170 BEACHWOOD, OHIO 44122 DALLAS, TEXAS 75063 (216) 755-5500 (972) 756-6000
(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications on Behalf of the Person(s) Filing Securities) With copies to: ROBERT A. WEIBLE BRYAN L. GOOLSBY Baker & Hostetler LLP GINA E. BETTS 3200 National City Center Locke Liddell & Sapp LLP 1900 East 9th Street 2200 Ross Avenue, Suite 2200 Cleveland, Ohio 44114 Dallas, Texas 75201 (216) 621-0200 (214) 740-8000
This statement is filed in connection with (check the appropriate box): a. [X] The filing of solicitation materials or an information statement subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c) under the Securities Exchange Act of 1934. b. [ ] The filing of a registration statement under the Securities Act of 1933. c. [ ] A tender offer. d. [ ] None of the above. Check the following box if soliciting materials or information statement referred to in checking box (a) as preliminary copies: [X] Check the following box if the filing is a final amendment reporting the results of the transaction: [ ] CALCULATION OF FILING FEE
- ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ TRANSACTION VALUATION* AMOUNT OF FILING FEE - ------------------------------------------------------------------------------------------------------ $158,703,956...................................... $31,741 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------
* For purposes of calculating the filing fee only. The filing fee was determined by adding (a) the product of (i) the 11,354,801 common shares of beneficial interest, par value $0.10 per share, of American Industrial Properties REIT (the "Common Shares") that are proposed to be acquired in the merger and (ii) the merger consideration of $13.74 per Common Share, plus (b) $1,350,990 payable to holders of options to purchase Common Shares in exchange for the cancellation of such options, plus (c) $1,338,000 payable to holders of dividend equivalent rights ("DERs") in exchange for the cancellation of such DERs (collectively, the "Total Consideration"). The payment of the filing fee, calculated in accordance with Regulation 240.0-11 under the Securities Exchange Act of 1934, as amended, equals one-fiftieth of 1% of the Total Consideration. [X] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. Amount Previously Paid: $31,741 Form or Registration No.: SCHEDULE 14A PRELIMINARY PROXY STATEMENT Filing Party: AMERICAN INDUSTRIAL PROPERTIES REIT Date Filed: DECEMBER 1, 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INTRODUCTION This Rule 13e-3 Transaction Statement on Schedule 13E-3 (this "Schedule 13E-3") is being filed by (a) Developers Diversified Realty Corporation, an Ohio corporation ("DDR"), (b) DDR Transitory Sub Inc., a Texas corporation and subsidiary of DDR ("DDR Sub"), and (c) American Industrial Properties REIT, a real estate investment trust organized under the Texas REIT Act and the issuer of the equity securities which are the subject of the Rule 13e-3 transaction ("AIP"). This Schedule 13E-3 relates to the Agreement and Plan of Merger, dated as of November 1, 2000 (the "Merger Agreement"), among DDR, DDR Sub and AIP. Concurrently with the filing of this Schedule 13E-3, AIP is filing with the Securities and Exchange Commission a proxy statement (the "Proxy Statement") under Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), relating to the special meeting of shareholders of AIP at which the shareholders of AIP will consider and vote upon, among other things, a proposal to approve and adopt the Merger Agreement and authorize the transactions contemplated thereby. A copy of the Proxy Statement is attached hereto as Exhibit (a)(2) and a copy of the Merger Agreement is attached as Appendix B to the Proxy Statement. All references in this Schedule 13E-3 to Items 1001 through 1016 are references to Items contained in Regulation M-A under the Exchange Act. The information contained in the Proxy Statement, including all annexes thereto, is hereby expressly incorporated herein by reference. As of the date hereof, the Proxy Statement is in preliminary form and is subject to completion or amendment. Capitalized terms used herein but not defined in this Schedule 13E-3 shall have the meanings given to them in the Proxy Statement. The information contained in this Schedule 13E-3 and/or the Proxy Statement concerning (a) AIP was supplied by AIP and neither DDR nor DDR Sub takes responsibility for the accuracy of such information and (b) DDR and/or DDR Sub was supplied by DDR and AIP takes no responsibility for the accuracy of such information. ITEM 1. SUMMARY TERM SHEET. Item 1001 The information contained in the sections of the Proxy Statement entitled "Summary Term Sheet" and "Questions and Answers About the Proposed Transactions" is incorporated herein by reference. ITEM 2. SUBJECT COMPANY INFORMATION. Item 1002 (a) The information contained in the section of the Proxy Statement entitled "The Companies -- AIP" is incorporated herein by reference. (b) The information contained in the section of the Proxy Statement entitled "The Special Meeting -- Record Date and Quorum Requirement" is incorporated herein by reference. (c)-(d) The information contained in the section of the Proxy Statement entitled "Historical Market Information" is incorporated herein by reference. (e) Not applicable. (f) The information contained in the sections of the Proxy Statement entitled "Special Factors -- Transactions and Relationships between AIP and DDR" and "-- Share Purchases" are incorporated herein by reference. 1 3 ITEM 3. IDENTITY AND BACKGROUND OF FILING PERSON. Item 1003 (a) The information contained in the sections of the Proxy Statement entitled "The Companies," "Trust Managers and Executive Officers of AIP," "Directors and Executive Officers of DDR" and "Directors and Executive Officers of DDR Sub" is incorporated herein by reference. Under one interpretation of the rules governing "going private" transactions under Rule 13e-3 of the Exchange Act, one or both of DDR and DDR Sub may be deemed to be an affiliate of AIP. (b) The information contained in the section of the Proxy Statement entitled "The Companies" is incorporated herein by reference. (c) The information contained in the sections of the Proxy Statement entitled "Trust Managers and Executive Officers of AIP," "Directors and Executive Officers of DDR" and "Directors and Executive Officers of DDR Sub" is incorporated herein by reference. None of the filing persons nor any of the individuals referred to in the information incorporated by reference into this Item 3 has been convicted in a criminal proceeding during the past five years (excluding traffic violations or similar misdemeanors), nor has any of these persons been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws or a finding of any violation of federal or state securities laws. Each of these persons is a citizen of the United States of America. ITEM 4. TERMS OF THE TRANSACTION. Item 1004 (a)(1) Not applicable. (a)(2)(i) The information contained in the sections of the Proxy Statement entitled "Summary Term Sheet," "Questions and Answers About the Proposed Transactions," "Summary -- Overview of the Transactions" and "The Merger Agreement" is incorporated herein by reference. (a)(2)(ii) The information contained in the sections of the Proxy Statement entitled "Summary -- Overview of the Transactions" and "Special Factors -- General Description" is incorporated herein by reference. (a)(2)(iii) The information contained in the sections of the Proxy Statement entitled "Special Factors -- DDR's Purpose and Reasons for the Merger," "-- Benefits of the Merger to DDR," "-- Recommendation of the Special Committee and the Board of Trust Managers; Reasons for the Merger" and "-- Benefits and Detriments to Non-DDR Shareholders" is incorporated herein by reference. (a)(2)(iv) The information contained in the section of the Proxy Statement entitled "The Special Meeting -- Required Vote" is incorporated herein by reference. (a)(2)(v) The information contained in the sections of the Proxy Statement entitled "The Merger Agreement -- Consequences of the Merger" and "-- Employee Share Plan" is incorporated herein by reference. (a)(2)(vi) The information contained in the section of the Proxy Statement entitled "Special Factors -- Anticipated Accounting Treatment of the Merger" is incorporated herein by reference. (a)(2)(vii) The information contained in the section of the Proxy Statement entitled "Special Factors -- Material Federal Income Tax Consequences" is incorporated herein by reference. (c) The information contained in the section of the Proxy Statement entitled "Special Factors -- Conflicts of Interest" is incorporated herein by reference. 2 4 (d) The information contained in the section of the Proxy Statement entitled "Dissenters' Rights" is incorporated herein by reference. (e) The information contained in the section of the Proxy Statement entitled "Special Factors -- Provision for Non-DDR Shareholders" is incorporated herein by reference. (f) Not applicable. ITEM 5. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS. Item 1005 (a) The information contained in the section of the Proxy Statement entitled "Special Factors -- Transactions and Relationships Between AIP and DDR" is incorporated herein by reference. (b) The information contained in the section of the Proxy Statement entitled "Special Factors -- Background of the Merger" is incorporated herein by reference. (c) The information contained in the sections of the Proxy Statement entitled "Special Factors -- Background of the Merger" and "-- Transactions and Relationships between AIP and DDR" is incorporated herein by reference. (e) The information contained in the sections of the Proxy Statement entitled "Summary -- Votes Required and Voting Agreements," "Special Factors -- Conflicts of Interest," "Special Factors -- Transactions and Relationships Between AIP and DDR" and "The Merger Agreement" is incorporated herein by reference. ITEM 6. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS. Item 1006 (a) The information contained in the section of the Proxy Statement entitled "The Merger Agreement -- Consequences of the Merger" is incorporated herein by reference. (b) The information contained in the sections of the Proxy Statement entitled "Special Factors -- Plans for AIP After the Merger" and "The Merger Agreement -- Consequences of the Merger" is incorporated herein by reference. ITEM 7. PURPOSES, ALTERNATIVES, REASONS AND EFFECTS. Item 1013 (a) The information contained in the sections of the Proxy Statement entitled "Special Factors -- DDR's Purpose and Reasons for the Merger," and "-- Recommendation of the Special Committee and the Board of Trust Managers; Reasons for the Merger" is incorporated herein by reference. (b) The information contained in the sections of the Proxy Statement entitled "Special Factors -- Background of the Merger" and "-- DDR's Purpose and Reasons for the Merger" is incorporated herein by reference. (c) The information contained in the sections of the Proxy Statement entitled "Special Factors -- DDR's Purpose and Reasons for the Merger," "-- Benefits of the Merger to DDR," "-- Recommendation of the Special Committee and the Board of Trust Managers; Reasons for the Merger" and "-- Benefits and Detriments to Non-DDR Shareholders" is incorporated herein by reference. (d) The information contained in the sections of the Proxy Statement entitled "Special Factors -- DDR's Purpose and Reasons for the Merger," "-- Benefits of the Merger to DDR," "-- Benefits and Detriments to Non-DDR Shareholders," "-- Conflicts of Interest," "-- Material Federal Income Tax Consequences," "-- Plans for AIP After the Merger," "-- Anticipated Accounting Treatment of the Merger," "The Merger Agreement -- Consequences of the Merger" and "Dissenters' Rights" is incorporated herein by reference. 3 5 ITEM 8. FAIRNESS OF THE TRANSACTION. Item 1014 (a)-(b) The information contained in the sections of the Proxy Statement entitled "Special Factors -- Background of the Merger," "-- Position of DDR Regarding Fairness of the Merger" and "-- Fairness of the Merger; Opinion of Financial Advisor" is incorporated herein by reference. (c) The information contained in the section of the Proxy Statement entitled "The Special Meeting -- Required Vote" is incorporated herein by reference. (d) The information contained in the sections of the Proxy Statement entitled "Special Factors -- Background of the Merger" and "-- Provision for Non-DDR Shareholders" is incorporated herein by reference. (e) The information contained in the sections of the Proxy Statement entitled "Special Factors -- Background of the Merger," and "-- Recommendation of the Special Committee and the Board of Trust Managers; Reasons for the Merger" is incorporated herein by reference. (f) Not applicable. ITEM 9. REPORTS, OPINIONS, APPRAISALS AND NEGOTIATIONS. Item 1015 (a)-(c) The information contained in the sections of the Proxy Statement entitled "Special Factors -- Background of the Merger," "-- Fairness of the Merger; Opinion of the Financial Advisor" and Appendix A to the Proxy Statement is incorporated herein by reference. ITEM 10. SOURCE AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION. Item 1007 (a), (b) and (d) The information contained in the section of the Proxy Statement entitled "Special Factors -- Source and Amount of Funds; Financing for the Merger" is incorporated herein by reference. (c) The information contained in the section of the Proxy Statement entitled "Fees and Expenses" is incorporated herein by reference. ITEM 11. INTEREST IN SECURITIES OF THE SUBJECT COMPANY Item 1008 (a) The information contained in the section of the Proxy Statement entitled "Principal Shareholders and Share Ownership of Management of AIP" is incorporated herein by reference. (b) The information contained in the section of the Proxy Statement entitled "Special Factors -- Share Purchases" is incorporated herein by reference. ITEM 12. THE SOLICITATION OR RECOMMENDATION. Item 1012 (d) The information contained in the sections of the Proxy Statement entitled "Summary -- Votes Required and Voting Agreements" and "The Special Meeting -- Required Vote" is incorporated herein by reference. (e) The information contained in the sections of the Proxy Statement entitled "Special Factors -- Position of DDR Regarding Fairness of the Merger" "-- Recommendation of the Special Committee and the Board of Trust Managers; Reasons for the Merger" is incorporated herein by reference. 4 6 ITEM 13. FINANCIAL STATEMENTS. Item 1010 (a) The information contained in the section of the Proxy Statement entitled "Selected Historical Consolidated Financial Data," AIP's Consolidated Financial Statements on pages F-1 through F-25 of AIP's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 filed with the SEC on March 29, 2000 and pages 3 through 15 of AIP's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 filed with the SEC on November 14, 2000 is incorporated herein by reference. (b) Not applicable. ITEM 14. PERSONS/ASSETS, RETAINED, EMPLOYED, COMPENSATED OR USED. Item 1009 (a)-(b) The information contained in the section of the Proxy Statement entitled "The Special Meeting -- Proxy Solicitation" is incorporated herein by reference. ITEM 15. ADDITIONAL INFORMATION. Item 1011 (b) The information contained in the section of the Proxy Statement entitled "Special Factors -- Litigation Relating to the Merger" is incorporated herein by reference. ITEM 16. EXHIBITS. Item 1016 (a)(2) -- Preliminary Proxy Statement filed with the Securities and Exchange Commission on December 1, 2000. (b)(1) -- Credit Agreement, dated as of January 28, 1999, by and among American Industrial Properties REIT, Bank One Texas, N.A., and the Lenders named therein. (b)(2) -- First Amendment to Credit Agreement, dated as of April 12, 1999 among American Industrial Properties REIT, Bank One Texas, N.A., and the Lenders named therein. (c) -- Opinion of Chase Securities Inc., attached as Appendix A to the Preliminary Proxy Statement.* (d)(1) -- Agreement and Plan of Merger, dated as of November 1, 2000, by and among American Industrial Properties REIT, Developers Diversified Realty Corporation and DDR Transitory Sub Inc., attached as Appendix B to the Proxy Statement.* (d)(2) -- Voting Agreement dated November 1, 2000, by and among American Industrial Properties REIT, Developers Diversified Realty Corporation, LaSalle Investment Management Group, Inc. and LaSalle Investment Management (Securities), L.P. (filed as Exhibit 99.1 to the Form 8-K filed by American Industrial Properties REIT with the SEC on November 8, 2000 and incorporated herein by reference). (d)(3) -- Voting Agreement dated November 1, 2000, by and among American Industrial Properties REIT, Developers Diversified Realty Corporation, Morgan Stanley Dean Witter Investment Management Inc., on behalf of its clients with respect to shares of AIP over which it (or its designee) exercises investment discretion, and MS Real Estate Special Situations Inc. (filed as Exhibit 99.2 to the Form 8-K filed by American Industrial Properties REIT with the SEC on November 8, 2000 and incorporated herein by reference).
5 7 (d)(4) -- Voting Agreement dated November 1, 2000, by and among American Industrial Properties REIT, Developers Diversified Realty Corporation and USAA Real Estate Company (filed as Exhibit 99.3 to the Form 8-K filed by American Industrial Properties REIT with the SEC on November 8, 2000 and incorporated herein by reference). (d)(5) -- Voting Agreement dated November 1, 2000, by and among American Industrial Properties REIT, Value Enhancement Fund IV, L.P. and LaSalle Investment Management (Securities), L.P. (filed as Exhibit 99.4 to the Form 8-K filed by American Industrial Properties REIT with the SEC on November 8, 2000 and incorporated herein by reference). (d)(6) -- Voting Agreement dated November 1, 2000, by and among American Industrial Properties REIT, Value Enhancement Fund IV, L.P., Morgan Stanley Dean Witter Investment Management Inc., on behalf of its clients with respect to shares of AIP over which it (or its designee) exercises investment discretion, and MS Real Estate Special Situations Inc. (filed as Exhibit 99.5 to the Form 8-K filed by American Industrial Properties REIT with the SEC on November 8, 2000 and incorporated herein by reference). (d)(7) -- Voting Agreement dated November 1, 2000, by and among American Industrial Properties REIT, Value Enhancement Fund IV, L.P. and USAA Real Estate Company (filed as Exhibit 99.6 to the Form 8-K filed by American Industrial Properties REIT with the SEC on November 8, 2000 and incorporated herein by reference). (f) -- Sections 25.10, 25.20 and 25.30 of the Texas REIT Act, attached as Appendix D to the Preliminary Proxy Statement.*
- --------------- * Incorporated by reference to the Preliminary Proxy Statement filed by American Industrial Properties REIT with the SEC on December 1, 2000. 6 8 SIGNATURE After due inquiry and to the best of their knowledge and belief, the undersigned certify that the information set forth in this statement is true, complete and correct. DEVELOPERS DIVERSIFIED REALTY CORPORATION By: /s/ JAMES A. SCHOFF ----------------------------------- Name: James A. Schoff Title: Vice Chairman and Chief Investment Officer DDR TRANSITORY SUB INC. By: /s/ JAMES A. SCHOFF ----------------------------------- Name: James A. Schoff Title: Vice President AMERICAN INDUSTRIAL PROPERTIES REIT By: /s/ CHARLES W. WOLCOTT ----------------------------------- Name: Charles W. Wolcott Title: President and Chief Executive Officer Dated: December 1, 2000 7 9 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ----------- (a)(2) -- Preliminary Proxy Statement filed with the Securities and Exchange Commission on December 1, 2000. (b)(1) -- Credit Agreement, dated as of January 28, 1999, by and among American Industrial Properties REIT, Bank One Texas, N.A., and the Lenders named therein. (b)(2) -- First Amendment to Credit Agreement, dated as of April 12, 1999 among American Industrial Properties REIT, Bank One Texas, N.A., and the Lenders named therein. (c) -- Opinion of Chase Securities Inc., attached as Appendix A to the Preliminary Proxy Statement.* (d)(1) -- Agreement and Plan of Merger, dated as of November 1, 2000, by and among American Industrial Properties REIT, Developers Diversified Realty Corporation and DDR Transitory Sub Inc., attached as Appendix B to the Proxy Statement.* (d)(2) -- Voting Agreement dated November 1, 2000, by and among American Industrial Properties REIT, Developers Diversified Realty Corporation, LaSalle Investment Management Group, Inc. and LaSalle Investment Management (Securities), L.P. (filed as Exhibit 99.1 to the Form 8-K filed by American Industrial Properties REIT with the SEC on November 8, 2000 and incorporated herein by reference). (d)(3) -- Voting Agreement dated November 1, 2000, by and among American Industrial Properties REIT, Developers Diversified Realty Corporation, Morgan Stanley Dean Witter Investment Management Inc., on behalf of its clients with respect to shares of AIP over which it (or its designee) exercises investment discretion, and MS Real Estate Special Situations Inc. (filed as Exhibit 99.2 to the Form 8-K filed by American Industrial Properties REIT with the SEC on November 8, 2000 and incorporated herein by reference). (d)(4) -- Voting Agreement dated November 1, 2000, by and among American Industrial Properties REIT, Developers Diversified Realty Corporation and USAA Real Estate Company (filed as Exhibit 99.3 to the Form 8-K filed by American Industrial Properties REIT with the SEC on November 8, 2000 and incorporated herein by reference). (d)(5) -- Voting Agreement dated November 1, 2000, by and among American Industrial Properties REIT, Value Enhancement Fund IV, L.P. and LaSalle Investment Management (Securities), L.P. (filed as Exhibit 99.4 to the Form 8-K filed by American Industrial Properties REIT with the SEC on November 8, 2000 and incorporated herein by reference). (d)(6) -- Voting Agreement dated November 1, 2000, by and among American Industrial Properties REIT, Value Enhancement Fund IV, L.P., Morgan Stanley Dean Witter Investment Management Inc., on behalf of its clients with respect to shares of AIP over which it (or its designee) exercises investment discretion, and MS Real Estate Special Situations Inc. (filed as Exhibit 99.5 to the Form 8-K filed by American Industrial Properties REIT with the SEC on November 8, 2000 and incorporated herein by reference). (d)(7) -- Voting Agreement dated November 1, 2000, by and among American Industrial Properties REIT, Value Enhancement Fund IV, L.P. and USAA Real Estate Company (filed as Exhibit 99.6 to the Form 8-K filed by American Industrial Properties REIT with the SEC on November 8, 2000 and incorporated herein by reference). (f) -- Sections 25.10, 25.20 and 25.30 of the Texas REIT Act, attached as Appendix D to the Preliminary Proxy Statement.*
- --------------- * Incorporated by reference to the Preliminary Proxy Statement filed by American Industrial Properties REIT with the SEC on December 1, 2000. EX-99.(A)(2) 2 d82307ex99-a2.txt PRELIMINARY PROXY STATEMENT FILED 12/1/00 1 SCHEDULE 14A (RULE 14A-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [ ] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Under Rule 14a-12 AMERICAN INDUSTRIAL PROPERTIES REIT - -------------------------------------------------------------------------------- (Name of Registrant as Specified in its Charter) Not Applicable - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [ ] No fee required. [X] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and 0-11. (1) Title of each class of securities to which transaction applies: American Industrial Properties REIT common shares of beneficial interest, $0.10 par value per share. - -------------------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: (i) 11,354,801 common shares of beneficial interest, (ii) in-the-money options to purchase 626,000 common shares of beneficial interest and (iii) dividend equivalent rights on 460,000 common shares of beneficial interest. - -------------------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): (i) $13.74 for each common share of beneficial interest in cash, (ii) the difference between $13.74 and the weighted average exercise price of $13.508 for each common share of beneficial interest subject to an in-the-money option and (iii) $2.909 for each dividend equivalent right on a common share of beneficial interest. - -------------------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: 11,354,801 common shares of beneficial interest X 13.74 per share = $156,014,966; 626,000 common shares of beneficial interest subject to "in-the-money" options X 2.1581 = $1,350,990; 460,000 dividend equivalent rights on common shares of beneficial interest X 2.909 = $1,338,000; Total proposed maximum aggregate value of the transaction: $158,703,956. - -------------------------------------------------------------------------------- (5) Total fee paid: $31,741 - -------------------------------------------------------------------------------- [ ] Fee paid previously with preliminary materials: - -------------------------------------------------------------------------------- [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: - -------------------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: - -------------------------------------------------------------------------------- (3) Filing Party: - -------------------------------------------------------------------------------- (4) Date Filed: - -------------------------------------------------------------------------------- 2 AMERICAN INDUSTRIAL PROPERTIES REIT 6210 N. BELTLINE ROAD, SUITE 170 IRVING, TEXAS 75063 , 2001 Dear Fellow Shareholder: We invite you to attend a special meeting of shareholders of American Industrial Properties REIT to be held on , 2001, at 9:00 a.m., local time, at 2200 Ross Avenue, floor, Dallas, Texas. The purpose of the special meeting is to vote upon two proposals, that if both approved, will result in you receiving $ per common share you own. You will be asked to vote on the following proposals: - the approval of the agreement and plan of merger with Developers Diversified Realty Corporation and DDR Transitory Sub Inc. and the transactions contemplated thereby, pursuant to which you will receive $ per common share in connection with the merger; and - the approval of the agreement of purchase and sale with Value Enhancement Fund IV, L.P. and the transactions contemplated thereby, pursuant to which 31 of our properties will be sold for $292.2 million. Although you are being asked to vote on these proposals separately, if either proposal is not approved, we will not close either of the transactions. The approval of the holders of 66 2/3% of our outstanding common shares is required to approve each of the transactions. Shareholders beneficially owning or having the right to vote approximately 70.7% of our outstanding common shares have signed voting agreements or agreed with AIP to vote their shares in favor of the two transactions. If they vote in accordance with those agreements, the transactions will be approved. In connection with the merger, Chase Securities Inc., the financial advisor to our special committee, delivered to the special committee of the board of trust managers, an opinion dated November 1, 2000 that, on the date of that opinion, the cash consideration proposed to be paid to the holders of our common shares in connection with the merger was fair from a financial point of view to these holders. The written opinion of Chase Securities is attached as Appendix A to the accompanying proxy statement, and you should read it carefully. The special committee is comprised of one trust manager. Two other trust managers resigned from the special committee before it made its recommendation on the proposals. A MAJORITY OF THE TRUST MANAGERS NOT DESIGNATED BY DDR, ACTING ON THE RECOMMENDATION OF THE REMAINING MEMBER OF THE SPECIAL COMMITTEE, HAS APPROVED AND ADOPTED THE MERGER AGREEMENT AND THE PROPERTY SALE AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. THEY BELIEVE THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, OUR SHAREHOLDERS. THEY RECOMMEND THAT YOU VOTE FOR BOTH OF THE PROPOSALS. THE TWO TRUST MANAGERS WHO RESIGNED FROM THE SPECIAL COMMITTEE VOTED AGAINST THE PROPOSALS. The accompanying proxy statement contains detailed information on the proposed transactions. A copy of the merger agreement is attached as Appendix B and a copy of the property sale agreement is attached as Appendix C to this proxy statement. You should read them carefully. Whether or not you plan to attend the special meeting, it is important that your shares are represented at the meeting. Not returning your proxy card or not instructing your broker how to vote any shares held for you in street name will have the same effect as a vote against the proposals. Accordingly, you are requested to promptly complete, sign and date the enclosed proxy card and return it in the envelope provided, whether or not you plan to attend. Doing so will not prevent you from voting your shares in person if you later choose to attend the special meeting. If the merger and the sale of properties are approved, you will receive instructions for surrendering your share certificates and a letter of transmittal to be used for this purpose. You should not submit your share certificates for exchange until you have received the instructions and the letter of transmittal. Sincerely, Charles W. Wolcott President and Chief Executive Officer THESE TRANSACTIONS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC, NOR HAS THE SEC PASSED UPON THE FAIRNESS OR MERITS OF THE TRANSACTIONS OR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS PROXY STATEMENT IS DATED , 2001, AND, TOGETHER WITH THE PROXY, IS FIRST BEING MAILED TO SHAREHOLDERS ON OR ABOUT , 2001. 3 AMERICAN INDUSTRIAL PROPERTIES REIT 6210 N. BELTLINE ROAD, SUITE 170 IRVING, TEXAS 75063 (972) 756-6000 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON , 2001 To the Shareholders of American Industrial Properties REIT: This is a notice that a special meeting of shareholders will be held on , 2001, at 9:00 a.m., local time, at 2200 Ross Avenue, floor, Dallas, Texas. The purpose of this meeting is for our shareholders to: - Consider and vote on a proposal to approve an agreement and plan of merger dated as of November 1, 2000, among American Industrial Properties REIT, DDR Transitory Sub Inc. and Developers Diversified Realty Corporation, and the transactions contemplated thereby, pursuant to which you will receive $ for each of our shares that you own. - Consider and vote on a proposal to approve the agreement of purchase and sale dated as of November 1, 2000, among American Industrial Properties REIT, certain of its affiliates and Value Enhancement Fund IV, L.P., and the transactions contemplated thereby, pursuant to which we will sell 31 of our properties for $292.2 million. - Consider and act upon any other matters as may properly come before the special meeting. Your board of trust managers has determined that only holders of our common shares at the close of business on , 2001, will be entitled to vote at the special meeting. Approval of the merger and the sale of the properties requires the holders of 66 2/3% of our common shares outstanding on the record date to vote in favor of the proposals. A form of proxy and a proxy statement containing more detailed information with respect to the matters to be considered at the special meeting accompany and are a part of this notice to shareholders. UNDER TEXAS LAW, YOU ARE ENTITLED TO DISSENTERS' RIGHTS IN CONNECTION WITH THE MERGER. SEE PAGE 61 OF THE PROXY STATEMENT FOR A DESCRIPTION OF THOSE RIGHTS AND THE PROCEDURES THAT YOU MUST FOLLOW TO EXERCISE YOUR RIGHTS. Regardless of whether you plan to attend the special meeting, please complete, sign and date the enclosed proxy card and return it promptly in the enclosed envelope. It is important that your shares be represented at the special meeting. You may revoke your proxy by: - delivering to our corporate secretary, before the taking of the vote at the special meeting, a written notice of revocation bearing a later date than the date of the proxy, or a later-dated proxy relating to the same shares; or - attending the special meeting and voting in person. By Order of the Board of Trust Managers Marc A. Simpson, Secretary Irving, Texas , 2001 4 TABLE OF CONTENTS SUMMARY TERM SHEET.......................................... 1 QUESTIONS AND ANSWERS ABOUT THE PROPOSED TRANSACTIONS....... 3 SUMMARY..................................................... 5 The Companies............................................. 5 Overview of the Transactions.............................. 5 The Special Meeting....................................... 6 Record Date; Voting Power................................. 6 Votes Required and Voting Agreements...................... 6 Special Committee......................................... 6 Fairness of the Merger.................................... 6 Conflicts of Interest..................................... 7 Other Terms of the Merger Agreement....................... 7 Sale of Property Portfolio................................ 9 Treatment of Share Options and Dividend Equivalent Rights................................................. 9 Accounting Treatment...................................... 9 Material Federal Income Tax Consequences.................. 9 Regulatory Approvals...................................... 9 Dissenters' Rights........................................ 9 Litigation Relating to the Merger......................... 9 HISTORICAL MARKET INFORMATION............................... 10 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............. 12 THE SPECIAL MEETING......................................... 14 Date, Time and Place of the Special Meeting............... 14 Matters to be Considered at the Special Meeting........... 14 Proxy Solicitation........................................ 14 Record Date and Quorum Requirement........................ 14 Required Vote............................................. 15 Voting Procedures......................................... 15 Other Matters to be Considered............................ 16 SPECIAL FACTORS............................................. 16 General Description....................................... 16 Background of the Merger.................................. 16 DDR's Purpose and Reasons for the Merger.................. 26 Benefits of the Merger to DDR............................. 26 Position of DDR Regarding Fairness of the Merger.......... 27 Recommendation of the Special Committee and the Board of Trust Managers; Reasons for the Merger................................. 27 Benefits and Detriments to Non-DDR Shareholders........... 30 Source and Amount of Funds; Financing for the Merger...... 30 Fairness of the Merger; Opinion of Financial Advisor...... 30 Conflicts of Interest..................................... 37 Transactions and Relationships Between AIP and DDR........ 39 Change In Control Payments................................ 40 Share Purchases........................................... 40 Material Federal Income Tax Consequences.................. 41 Plans for AIP After the Merger............................ 43 Conduct of the Business of AIP if the Merger is Not Completed.............................................. 43 Anticipated Accounting Treatment of the Merger............ 43 Regulatory Approvals Relating to the Merger............... 43 Provision for Non-DDR Shareholders........................ 43 Litigation Relating to the Merger......................... 43
i 5 THE MERGER AGREEMENT........................................................................................ 44 General................................................................................................... 44 Effective Time of the Merger.............................................................................. 44 Consequences of the Merger................................................................................ 44 Employee Share Plan....................................................................................... 45 Surrender and Exchange of Share Certificates; Payment for Shares.......................................... 45 Transfer of Shares........................................................................................ 46 Officers, Trust Managers and Governing Documents.......................................................... 46 Representations and Warranties............................................................................ 46 Conduct of Business Prior to the Merger................................................................... 47 Access to Information..................................................................................... 48 No Solicitation........................................................................................... 48 Conditions to the Merger.................................................................................. 49 Termination............................................................................................... 51 Termination Fees.......................................................................................... 51 Indemnification........................................................................................... 52 Amendment................................................................................................. 52 FEES AND EXPENSES........................................................................................... 52 THE COMPANIES............................................................................................... 53 AIP....................................................................................................... 53 DDR and DDR Sub........................................................................................... 53 PRINCIPAL SHAREHOLDERS AND SHARE OWNERSHIP OF MANAGEMENT OF AIP.................................................................................................... 54 TRUST MANAGERS AND EXECUTIVE OFFICERS OF AIP................................................................ 56 DIRECTORS AND EXECUTIVE OFFICERS OF DDR..................................................................... 58 DIRECTORS AND EXECUTIVE OFFICERS OF DDR SUB................................................................. 60 DISSENTERS' RIGHTS.......................................................................................... 61 THE SALE OF PROPERTIES...................................................................................... 62 INDEPENDENT AUDITORS........................................................................................ 65 SHAREHOLDER PROPOSALS....................................................................................... 65 WHERE YOU CAN FIND MORE INFORMATION......................................................................... 65 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................................. 66
ii 6 SUMMARY TERM SHEET This summary term sheet highlights information contained in this proxy statement and may not contain all of the information that is important to you. We urge you to read carefully this proxy statement, including the appendices and the other documents we refer to in this proxy statement. In this proxy statement, the terms "AIP," "we," "us" and "our" refer to American Industrial Properties REIT. - Shareholder Vote -- You are being asked to approve two transactions, the completion of each of which is dependent on the approval of the other. First, you are being asked to approve and adopt the merger agreement, by which DDR Transitory Sub Inc. will be merged into AIP, resulting in Developers Diversified Realty Corporation being the sole shareholder of AIP. Second, you are being asked to approve and adopt a property sale agreement, by which we will sell immediately prior to the merger a portfolio of 31 of our properties to a private investment fund managed by Lend Lease Real Estate Investments, Inc. Please read "Special Factors" on page 16 and "The Sale of Properties" on page 62. Both the merger agreement and the property sale agreement must be approved and adopted by the affirmative vote of the holders of 66 2/3% of our outstanding common shares. Please read "The Special Meeting -- Required Vote" on page 15. - Payment -- In the merger, each of the issued and outstanding common shares owned by our shareholders, other than DDR, DDR Sub and their respective direct and indirect subsidiaries, will be converted into the right to receive $ in cash, without interest. That amount will be reduced if we pay you a dividend prior to closing in order to maintain REIT status or to avoid having REIT taxable income for federal income tax purposes. If all or substantially all of our properties remaining after the sale to Value Enhancement Fund are sold within six months after the effective date of the merger for more than an agreed upon amount, you may receive additional consideration. We sometimes refer to the per share amount to be paid in the merger as the "merger consideration." Please read "Special Factors -- General Description" on page 16. - DDR Sub -- DDR Transitory Sub Inc., which we refer to as "DDR Sub," is a newly formed Texas corporation that is wholly-owned by Developers Diversified Realty Corporation, an Ohio corporation, which we refer to as "DDR." - Value Enhancement Fund -- Value Enhancement Fund IV, L.P., which we refer to as "Value Enhancement Fund," is a Georgia limited partnership that is managed by Lend Lease Real Estate Investments, Inc., which we refer to as "Lend Lease." - Continuing Shareholder -- Following completion of the merger, all shares of DDR Sub stock will become AIP common shares. DDR is the sole shareholder of DDR Sub and as a result will own all of our common shares following completion of the merger. Please read "The Merger Agreement -- Consequences of the Merger" on page 44. - Voting Agreements -- DDR has agreed with us to vote its common shares in favor of the proposals. Each of Morgan Stanley Dean Witter Investment Management Inc., on behalf of certain clients, MS Real Estate Special Situations Inc., LaSalle Investment Management, Inc., on behalf of certain clients, LaSalle Investment Management (Securities), LP, on behalf of certain clients, and USAA Real Estate Company, which, together with DDR, beneficially own or have the right to vote in the aggregate approximately 70.7% of our outstanding common shares on the record date have entered into voting agreements with each of DDR and Value Enhancement Fund by which each of them has agreed to vote in favor of the proposals. If these shareholders vote as they have agreed to in the voting agreements and DDR votes as it agreed with us, the proposals will be approved and adopted regardless of how any other shareholder votes on these issues. The voting agreements signed by the 1 7 LaSalle entities allow them to vote against the proposals if in the exercise of their fiduciary duties to their investment advisory clients, they believe they should vote against the proposals. Please read "The Special Meeting -- Required Vote" on page 15. - Effects of the Transaction -- This is a "going private" transaction. As a result of the merger: - DDR will own AIP; - Our shareholders other than DDR will no longer have any interest in our future earnings or growth; - We will no longer be a public company; and - Our common shares will no longer be traded on the New York Stock Exchange. - Please read "The Merger Agreement -- Consequences of the Merger" on page 44. - Tax Consequences -- Generally, the merger consideration will be taxable for U.S. federal income tax purposes. You will recognize taxable gain or loss in the amount of the difference between the amount of the merger consideration and your adjusted tax basis for each common share of AIP that you own. Please read "Special Factors -- Material Federal Income Tax Consequences" on page 41. - Conditions -- The merger agreement and the sale of properties are subject to approval by our shareholders, compliance with certain financial covenants, and customary conditions and the closing of each transaction is conditioned on the closing of the other transaction. Please read "The Merger Agreement -- Conditions to the Merger" on page 49. - After the Merger -- Upon completion of the merger, DDR will own all of our common shares. You will not own any of our common shares after completion of the merger. Please read "The Merger Agreement -- Consequences of the Merger" on page 44. 2 8 QUESTIONS AND ANSWERS ABOUT THE PROPOSED TRANSACTIONS The following questions and answers are intended to provide brief answers to frequently asked questions concerning the merger and the proposed sale of properties. These questions and answers do not, and are not intended to, address all the questions that may be important to you. You should read carefully the "Summary" section and the remainder of this document as well as the appendices and the documents incorporated by reference in this document. Q: WHAT WILL HAPPEN IN THE TRANSACTIONS? A: If the transactions are approved, the sale of 31 of our properties to Value Enhancement Fund will occur. Immediately following the sale of properties, DDR Sub will be merged into AIP. In the merger, all of your shares will be converted into the right to receive $ per share in cash and all shares in DDR Sub will be converted into AIP common shares. The result of the merger is that DDR will be the sole shareholder of AIP, controlling our remaining 39 properties and DDR will be relieved of its obligation to purchase additional common shares or preferred shares from AIP. If all or substantially all of our properties remaining after the sale to Value Enhancement Fund are sold within six months after the effective date of the merger for more than an agreed upon amount, you may receive additional consideration. Q: WHEN DO YOU EXPECT THE TRANSACTIONS TO BE COMPLETED? A: We are working to complete the transactions during the first quarter of 2001. Q: WHEN IS THE SPECIAL MEETING? A: , 2001. Q: WHO IS ENTITLED TO VOTE? A: All persons and entities that are holders of AIP common shares at the close of business on , 200 . Q: WHAT ARE WE BEING ASKED TO VOTE UPON? A: You are being asked to approve the merger of DDR Sub into AIP and, immediately preceding the merger, the sale of 31 of our properties to Value Enhancement Fund. Q: WHAT VOTE IS REQUIRED TO APPROVE THE TRANSACTIONS? A: Approval of each of the transactions requires the holders of 66 2/3% of our common shares outstanding on the record date to vote in favor of each of the transactions. Q: CAN DDR, AS A SHAREHOLDER OF AIP, VOTE ON THE TRANSACTIONS? A: Yes. Q: WHY DID THE BOARD FORM A SPECIAL COMMITTEE? A: Because four of our trust managers are designees of DDR, one of our trust managers' employer has invested in DDR on behalf of its clients, and one of our employee trust managers would receive severance payments in connection with any change of control transaction. These circumstances create actual or potential conflicts of interest for those trust managers to which the special committee is not subject. Therefore, the board appointed a special committee of three disinterested trust managers to review and evaluate the proposals. Two of the three trust managers resigned from the special committee before it made its recommendation to the board on the proposals and subsequently voted against the proposals. Q: HOW DO THE BOARD OF TRUST MANAGERS AND THE SPECIAL COMMITTEE RECOMMEND THAT I VOTE? Our board of trust managers, acting on the recommendation of the remaining member of our special committee, by a vote of a majority of our trust managers not designated by DDR, has approved and recommended that shareholders vote For approval of the proposals. The sole member of the special committee and a majority of our trust managers not designated by DDR believe that the merger is fair to, and in the best interests of, our shareholders. The four trust managers that are designees of DDR abstained from voting on the proposals. Our two trust managers that are not employees or designees of our institutional shareholders resigned from the special committee before it made its recommendation regarding the proposals and thereafter voted against the proposals. 3 9 Q: WHAT WILL HAPPEN TO MY COMMON SHARE DIVIDENDS? A: Under the merger agreement, we may pay a dividend only in the minimum amount necessary to avoid jeopardizing our status as a REIT under federal tax laws or to avoid having taxable income for federal income tax purposes. The common consideration per share you will receive in the merger would be reduced by the amount of any such dividend. We may also pay a dividend based on cash generated from operations if there is a delay of more than three days between the scheduled closing on , 2001 and the actual closing date. Any such dividend would not affect the amount of the merger consideration. Q: WHAT WILL HAPPEN TO AIP'S EXECUTIVE OFFICERS AFTER THE MERGER? A. They will no longer be employed by AIP. Q: WILL I OWE ANY U.S. FEDERAL INCOME TAXES AS A RESULT OF THE MERGER? A. The receipt of cash for common shares in the merger will be a taxable transaction for U.S. federal income tax purposes and may also be a taxable transaction under applicable state, local, foreign or other tax laws. Q: WHAT HAPPENS IF I TRANSFER MY SHARES AFTER THE RECORD DATE? A: The record date for the special meeting is earlier than the expected date of the transactions. Therefore, transferors of shares after the record date but prior to the transactions will retain their right to vote at the special meeting, but the right to receive the merger consideration will transfer with the shares. Q: WHAT DO I NEED TO DO NOW? A: Simply indicate on your proxy card how you want to vote and sign, date and mail it to us in the enclosed envelope as soon as possible. Q: WHAT HAPPENS IF I DO NOT RETURN A PROXY CARD? A: The failure to return your proxy card will have the same effect as voting against the proposals. Q: MAY I VOTE IN PERSON? A: Yes. You may attend the special meeting and vote your shares in person, rather than signing and mailing a proxy card. Q: MAY I CHANGE MY VOTE AFTER I HAVE VOTED? A: Yes. You may change your vote at any time before your proxy is voted at the special meeting by submitting a new proxy or you may attend the special meeting and vote in person. Simply attending the meeting will not revoke your proxy. Q: HOW WILL MY SHARES BE VOTED IF I RETURN A BLANK SIGNED PROXY CARD? A: Your proxy will be voted in favor of the proposals. Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY SHARES FOR ME? A: Your broker will vote your shares only if you provide instructions on how to vote. You should instruct your broker how to vote your shares, following the directions your broker provides. If you do not provide instructions to your broker, your shares will not be voted and they will be counted as votes against the transactions. Q: SHOULD I SEND MY SHARE CERTIFICATES NOW? A: No. After the merger is completed, you will receive written instructions for exchanging your share certificates. Q: WHO CAN HELP ANSWER MY QUESTIONS? A: If you have additional questions about the transactions, you should contact Tony Koeijmans at (972) 756-6000. Q: AM I ENTITLED TO EXERCISE ANY DISSENTERS' RIGHTS IN CONNECTION WITH THE MERGER? A: Yes. Your rights to dissent are described on page 61 and the procedures that you must follow to exercise your rights are set forth on pages 61-62. Q: WILL DDR SHAREHOLDERS BE REQUIRED TO VOTE ON THE MERGER AGREEMENT? A: No. 4 10 SUMMARY This summary highlights selected information from this proxy statement and may not contain all of the information that is important to you. We have included page references in parentheses to direct you to a more complete description of the topics presented in this summary. To understand the merger and the sale of properties fully and for a more complete description of the legal terms of the merger and the sale of properties, you should read carefully this entire proxy statement, the merger agreement and the property sale agreement which are attached as appendices to this proxy statement. THE COMPANIES (See page 53) American Industrial Properties REIT 6210 N. Beltline Road, Suite 170 Irving, Texas 75062 (972) 756-6000 Web site: www.aipreit.com We are a REIT focused on the light industrial property sector, including office showroom, service center and flex properties, low-rise office and small bay distribution buildings. AIP's portfolio of 70 properties comprises approximately 7.5 million square feet in 11 states. We are based in Irving, Texas and have acquired, managed and improved industrial and other commercial properties since 1985. Developers Diversified Realty Corporation 3300 Enterprise Parkway Beachwood, Ohio 44122 (216) 755-5500 Web site: www.ddrc.com DDR is a Beachwood, Ohio based REIT that currently owns and manages 209 shopping centers in 40 states totaling 49.2 million square feet of real estate under management. DDR is a self-administered and self-managed REIT operating as a fully integrated real estate company which develops, leases and manages shopping centers. DDR Sub was formed in August 2000 for the sole purpose of effectuating the merger. DDR Sub is a subsidiary of DDR. DDR, as of the record date, owns 46.0% of our issued and outstanding common shares and has the right to designate four of our trust managers. OVERVIEW OF THE TRANSACTIONS Under the sale agreement, we will sell 31 of our properties to Value Enhancement Fund for $292.2 million. Value Enhancement Fund is an investment fund managed by Lend Lease. Neither Value Enhancement Fund nor Lend Lease is affiliated with AIP. Neither of these entities directly owns any of our shares. Immediately following the sale of properties, DDR Sub will be merged into us. Our shareholders, other than DDR, DDR Sub and their respective direct and indirect subsidiaries, will receive $ for each of our shares they own. The aggregate $ million we will pay to our shareholders in connection with the merger will be funded from the sale of the 31 properties to Value Enhancement Fund, the $34.2 million of net proceeds we received when we sold our Manhattan Towers property and from operations. While the proceeds from these sales and the expected cash generated from operations are expected to be sufficient to pay the common share consideration to the non-DDR shareholders, we may utilize such funds to pay down existing lines of credit during the period prior to closing and then would reborrow the funds as necessary under our existing lines of credit to make the cash payments to the non-DDR shareholders at closing. In the merger, DDR Sub shares will be converted into AIP shares. As a result, DDR will become the sole shareholder of AIP, controlling our remaining 39 properties and DDR will be relieved of its obligation to purchase additional common shares or preferred shares from AIP. If AIP sells all or substantially all of its properties remaining after the sale to Value Enhancement Fund during the six months after the effective date of the merger, and if the net aggregate sale price exceeds the aggregate agreed upon property values, you will receive a distribution of your pro rata share of the excess. If either of the transactions is not approved, neither transaction will be completed. 5 11 THE SPECIAL MEETING (See page 14) The special meeting of our shareholders is scheduled to be held at 9:00 a.m., local time, on , 2001, at 2200 Ross Avenue, floor, Dallas, Texas. RECORD DATE; VOTING POWER (See page 14) Our board of trust managers has fixed the close of business on , 2001 as the record date to determine holders of our shares entitled to notice of and to vote at the special meeting. As of the record date, there were shares issued and outstanding, held by approximately record holders. If you held common shares at the close of business on the record date, you are entitled to one vote per share on any matter that properly comes before the special meeting. VOTES REQUIRED AND VOTING AGREEMENTS (See page 15) The approval of the merger and of the sale of properties requires the affirmative vote of holders of 66 2/3% of our common shares outstanding on the record date. DDR has agreed with us to vote in favor of the proposals. Five of our shareholders, USAA Real Estate Company, Morgan Stanley Dean Witter Investment Management Inc., on behalf of certain clients, MS Real Estate Special Situations Inc., LaSalle Investment Management, Inc., on behalf of certain clients, LaSalle Investment Management (Securities), LP, on behalf of certain clients, and their affiliates, beneficially own or have the right to vote in the aggregate, together with DDR, approximately 70.7% of the total common shares outstanding on the record date. The five shareholders have entered into voting agreements with DDR and Value Enhancement Fund to vote the shares they own or over which they exercise voting control in favor of the proposals. The voting agreements signed by the LaSalle entities provide that they may vote against the proposals if they believe they must do so to satisfy their fiduciary duties to their investment advisory clients. Our trust managers and executive officers collectively held a total of approximately 0.7% of the common shares outstanding on the record date. SPECIAL COMMITTEE Our board of trust managers believed that eight of our trust managers, Charles W. Wolcott, Albert T. Adams, Scott A. Wolstein, Robert H. Gidel, James A. Schoff, Edward B. Kelly, Stanley J. Kraska, Jr. and T. Patrick Duncan had actual or potential conflicts of interest in evaluating the transactions because of their employment with us, their affiliation with DDR or their involvement in litigation concerning a transaction involving AIP. Therefore, the board appointed a special committee of three trust managers who did not have actual or potential conflicts to review and evaluate the proposals. Two of the three trust managers resigned from the special committee before it made its recommendation to the board on the proposals and subsequently voted against the proposals. FAIRNESS OF THE MERGER (See page 30) The special committee has received, and the board is entitled to rely upon, the opinion dated November 1, 2000 of Chase Securities Inc., the financial advisor to the special committee. The opinion states that, on that date, the cash consideration to be received by the holders of our common shares in the merger was fair from a financial point of view to those holders. Based on the terms of the merger agreement on that date, the per share cash consideration to be received by the holders of the common shares was not less than $13.74 per share, less any dividends paid to maintain REIT status or to keep us from having REIT taxable income for federal income tax purposes. DDR, DDR Sub and their respective direct and indirect subsidiaries will not receive any of the merger consideration. For its services, Chase Securities received retainer fees totaling $500,000. If the merger is completed, Chase Securities will receive an additional $2.0 million, subject to upward adjustment. In addition, we have agreed to reimburse Chase Securities for its reasonable expenses incurred in connection with its services, including the fees and disbursements of its counsel, and we have agreed to indemnify Chase Securities against various liabilities, including liabilities arising under the federal securities laws. The full text of the written opinion of Chase Securities is attached to this proxy statement as Appendix A, and you should read it carefully. THE OPINION OF CHASE SECURITIES IS DIRECTED TO THE SPECIAL COMMITTEE AND MAY BE RELIED UPON BY THE 6 12 BOARD OF TRUST MANAGERS AND IS NOT A RECOMMENDATION TO YOU AS TO HOW YOU SHOULD VOTE AT THE SPECIAL MEETING. CONFLICTS OF INTEREST (See page 37) Some members of our board of trust managers and management have interests in the merger that may conflict with your interests as a holder of our common shares. As a result of the merger, our officers, trust managers, and parties that designated some of our trust managers will receive a total of approximately $ million in consideration for their shares, severance, options and dividend equivalent rights, as described below. - Our executive officers, Charles W. Wolcott, Marc A. Simpson, Lewis D. Friedland and David B. Warner, will receive severance, option cash out and dividend equivalent right cancellation payments totaling $ million in the aggregate. They will also have their medical benefits continued for a period of up to one year or the benefits will be cashed out. Mr. Wolcott also serves as a trust manager. - The LaSalle entities, which have one representative on our board, and which own beneficially, on behalf of certain clients, 7.6% of DDR's outstanding common shares, will receive $ for their shares on the same basis as our other shareholders. - DDR, our largest shareholder, which has four representatives on our board, will gain control of AIP and 39 of our remaining properties for the assumption of approximately $ of debt and all of our remaining obligations and liabilities after the merger. It will also be relieved of its future funding obligations under its July 1998 share purchase agreement with AIP. AIP will continue to indemnify to the fullest extent permitted by law our existing trust managers, officers and employees after the merger. Additionally, we will continue the indemnification arrangements and trust managers' and officers' liability insurance for our existing trust managers, officers and employees after the merger. These obligations are guaranteed by DDR after the merger. OTHER TERMS OF THE MERGER AGREEMENT The merger agreement is attached to this proxy statement as Appendix B. You should read the merger agreement. It is the legal document that governs the merger. Conditions to the Merger (See page 49) The completion of the merger depends upon the satisfaction of a number of conditions, including: - the approval of the merger by the holders of 66 2/3% of our outstanding common shares; - the absence of any order or legal restraint of any court or governmental entity preventing or prohibiting the merger; the closing of the sale of 31 properties to Value Enhancement Fund for net cash proceeds of not less than $135.4 million; - the continued accuracy of each party's representations and warranties and the fulfillment of each party's agreements contained in the merger agreement; - the absence of a material adverse effect, other than shareholder litigation, with respect to AIP which would give DDR the right to terminate the merger agreement; - the delivery by our legal counsel of a legal opinion on specified tax matters; - the holders of no more than 10% of our outstanding common shares shall have exercised dissenters' rights; - the sale of our Manhattan Towers property for net proceeds of not less than $34.2 million; - our transaction expenses not exceeding $13.738 million; - our net other assets being not less than $17.702 million; and - our outstanding debt and available credit under our lines of credit being not more than $137.4 million. We have satisfied the condition regarding Manhattan Towers and [we are deemed to have satisfied the conditions set forth above in the third, eighth, ninth and tenth bullet points above]. 7 13 Other than the condition requiring shareholder approval, which is an independent legal requirement, each party to the merger may waive any condition that is intended for its benefit. If any of AIP, DDR or DDR Sub elects to waive a condition and complete the merger, we will evaluate the facts and circumstances giving rise to the waiver at that time. If we determine that these facts and circumstances are material to shareholders, we will disclose this information in a supplement to this proxy statement before the special meeting and will resolicit your proxy. Termination (See page 51) Any party may terminate the merger agreement under a number of circumstances, including the following: - mutual written consent of the parties; - any governmental entity has issued an injunction, order, decree or ruling, or taken any other action restraining, enjoining or otherwise prohibiting the merger that remains in effect on May 31, 2001; - the merger has not been completed by May 31, 2001, but this right to terminate the merger agreement will not be available to any party whose breach of the merger agreement has been the cause of or resulted in the failure to complete the merger by that date; or - we fail to get approval of the merger from the holders of at least 66 2/3% of our common shares. In addition, DDR or DDR Sub, but not AIP, may terminate the merger agreement under a number of circumstances, including the following circumstances: - our board of trust managers has withdrawn or modified, in any manner which is adverse to DDR or DDR Sub, its recommendation or approval of the merger agreement; - our board of trust managers has recommended to our shareholders or approved an acquisition proposal from another party; - we have signed a definitive agreement regarding an acquisition proposal from a third party; or - we breach the merger agreement or fail to satisfy our closing conditions. AIP, but not DDR or DDR Sub, may terminate the merger agreement if prior to the special meeting, our trust managers: - withdraw or modify their recommendation of the merger agreement; or - approve or recommend a superior acquisition proposal. We may also terminate the merger agreement if DDR or DDR Sub breaches the agreement or they fail to satisfy their closing conditions. Termination fees (See page 51) In the following circumstances, a party will be entitled to receive termination fees: - We must pay DDR $4.5 million if the merger agreement is terminated for any of the following reasons: - breach of any representation, warranty, covenant, obligation or agreement by AIP such that the conditions to closing cannot be satisfied by May 31, 2001; - failure to close the sale to Value Enhancement Fund because of our breach of the property sale agreement; - if prior to the special meeting, the board withdraws its recommendation in favor of the merger; - if we enter into a definitive agreement with respect to an acquisition proposal; or - the board approves or recommends a superior acquisition proposal. - DDR must pay us $4.5 million if the merger agreement is terminated because DDR or DDR Sub breaches any representation, warranty, covenant, obligation or agreement, such that the conditions to closing cannot be satisfied by May 31, 2001. If the merger agreement is terminated because of a breach by DDR, DDR is responsible for the $3.0 million termination fee to be paid by us to Value Enhancement Fund. In all other cases, AIP 8 14 would be responsible for any termination fee due to Value Enhancement Fund. SALE OF PROPERTY PORTFOLIO (See page 62) In connection with the merger, you are being asked to approve the sale of 31 of our properties to Value Enhancement Fund for $292.2 million. The proceeds from the sale will be used to help fund the cash payment for your shares in connection with the merger. The property sale is conditioned upon the approval of the merger and other customary conditions. The property sale agreement is attached to this proxy statement as Appendix C. You should read the property sale agreement. TREATMENT OF SHARE OPTIONS AND DIVIDEND EQUIVALENT RIGHTS (See page 38) When the merger occurs, each outstanding option to purchase our common shares will be canceled in exchange for cash equal to the difference between the $ cash merger consideration and the then current exercise price per share of that share option. DDR will not be paid for any of its 100,000 options. We will pay an aggregate of $ to cash out all outstanding options. We have entered into mutual releases and settlement agreements with each of our employees who holds dividend equivalent rights, commonly known as "DERs." Under the terms of the agreements, each employee will receive an average of $2.909 for each DER held. An aggregate of 460,000 DERs are outstanding. As a result, we will pay an aggregate of $1,338,000 to cancel our DERs. ACCOUNTING TREATMENT (See page 43) The merger is expected to be accounted for using the purchase method of accounting in accordance with GAAP. MATERIAL FEDERAL INCOME TAX CONSEQUENCES (See page 41) You will generally recognize gain or loss for federal income tax purposes equal to the difference between the amount of cash you receive in the merger and the adjusted basis of your shares. DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, YOU ARE URGED TO CONSULT YOUR TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO YOU OF THE MERGER, INCLUDING THE EFFECTS OF STATE, LOCAL OR OTHER TAX LAWS. REGULATORY APPROVALS (See page 43) None of the parties is required to make filings with or obtain approvals from regulatory authorities in connection with the merger, other than the filing of articles of merger with Dallas County and the Secretary of State of the State of Texas. DISSENTERS' RIGHTS (See page 61) Under Texas law, you are entitled to dissenters' rights. Your rights and the procedures you must follow in order to validly exercise those rights are described on page 61. LITIGATION RELATING TO THE MERGER (See page 43) Since the announcement of the proposed transactions, DDR, AIP and the trust managers have been named as defendants in a purported shareholder class action and derivative lawsuit seeking, among other things, to enjoin the proposed merger. The complaint alleges breach of fiduciary duties, abuse of control of AIP, waste and unjust enrichment in connection with the proposed merger. DDR, AIP and the trust managers deny the allegations and intend to vigorously defend themselves. 9 15 HISTORICAL MARKET INFORMATION Our common shares are traded on the New York Stock Exchange under the symbol "IND." The following table shows the per share high and low sales prices of our common shares on the last full trading day before the announcement on November 2, 2000 of the signing of the property sale agreement and the merger agreement.
HIGH LOW - ---- ------ $13.38...................................................... $12.88
The following table shows, for the periods indicated, the per share high and low sales prices of our common shares as reported by the New York Stock Exchange. The following table also shows the distributions paid per common share during the periods indicated. The closing sale price of our common shares on November 1, 2000 was $12.50. The closing sale price of our common shares on , the last trading day prior to the date of this proxy statement, was $ . You are encouraged to obtain current market quotations for our common shares.
DISTRIBUTIONS PER HIGH LOW COMMON SHARE ------ ------ ----------------- 1998 First Quarter............................................... $14.38 $12.50 $ -- Second Quarter.............................................. 13.69 11.56 0.18 Third Quarter............................................... 13.75 9.88 0.20 Fourth Quarter.............................................. 11.75 9.13 0.20 1999 First Quarter............................................... $12.00 $ 9.56 $0.20 Second Quarter.............................................. 14.75 10.00 0.20 Third Quarter............................................... 15.00 10.63 0.22 Fourth Quarter.............................................. 13.00 11.00 0.22 2000 First Quarter............................................... $12.25 $10.06 $0.22 Second Quarter.............................................. 13.75 11.25 0.22 Third Quarter............................................... 14.25 12.69 0.22 Fourth Quarter.............................................. -- -- 0.22
For the year ended December 31, 2000, we paid distributions totaling $0.88 per common share. Under the merger agreement, we may authorize, declare and pay dividends only in the minimum amount necessary to avoid jeopardizing our status as a REIT under the Internal Revenue Code and to avoid having positive REIT taxable income for federal income tax purposes. Any dividends paid for these purposes will reduce the amount of merger consideration. We may also pay a dividend based on cash generated by operations if there is a delay between the scheduled closing date and the closing. Any dividend paid for that reason would not reduce the amount of merger consideration. If the merger is not consummated, our future distributions will be at the discretion of our board of trust managers and will depend upon numerous factors, including gross revenues received from properties, operating expenses, capital expenditures for properties and interest expense incurred in borrowing. Pursuant to Internal Revenue Code provisions, a REIT is generally required to distribute at least 95% of its REIT taxable income. Recently enacted legislation reduces the REIT distribution requirement to 90% for taxable years beginning after December 31, 2000. Distributions to the extent of our current and accumulated earnings and profits for federal income tax purposes generally will be taxable to shareholders as ordinary dividend income, ordinary gain or capital gain. 10 16 Distributions in excess of earnings and profits generally will be treated as a non-taxable reduction of the shareholder's basis in the common shares to the extent thereof, which may have the effect of deferring taxation until the sale of the shares, and thereafter as taxable gain. Following is an allocation of our 2000 distributions to shareholders:
AMOUNT OF DISTRIBUTION PER DISTRIBUTION TYPE COMMON SHARE PERCENTAGE - ----------------- ------------ ---------- Ordinary taxable dividend................................... $ % 20% rate capital gain....................................... Section 1250 ordinary gain.................................. Return of capital........................................... -------- ------- $ 100.00% ======== =======
11 17 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA We are providing the following information to aid you in your analysis of the financial aspects of the transaction. The historical consolidated operating and balance sheet data for the nine months ended September 30, 2000 and 1999 have been derived from our unaudited consolidated financial statements and accounting records. The historical consolidated operating data for the years ended December 31, 1999, 1998, 1997, 1996 and 1995 and the balance sheet data as of December 31, 1999, 1998, 1997, 1996 and 1995 have been derived from our audited consolidated financial statements and accounting records. This information may not be indicative of our future operating results. This information is only a summary and you should read it together with our consolidated financial statements, and quarterly financial statements included in the Annual Report on Form 10K and Quarterly Reports on Form 10Q, which are incorporated by reference into this document. All amounts are in thousands, except per share and property data.
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ----------------------- ----------------------------------------------------------- 2000 1999 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- --------- --------- --------- OPERATING DATA Property Revenues Rents.................................. $ 54,608 $ 52,796 $ 71,028 $ 39,559 $ 9,367 $ 8,592 $ 8,676 Tenant reimbursements.................. 12,475 10,958 15,854 8,798 2,834 2,728 2,734 ---------- ---------- ---------- ---------- --------- --------- --------- Total Property Revenues......... 67,083 63,754 86,882 48,357 12,201 11,320 11,410 ---------- ---------- ---------- ---------- --------- --------- --------- Property Expenses Property taxes......................... 7,335 6,631 9,453 4,980 1,607 1,421 1,397 Property management fees............... 1,763 1,284 1,678 1,474 418 430 428 Utilities.............................. 3,093 3,053 4,051 2,673 480 476 478 General operating...................... 3,030 2,794 3,864 2,489 891 849 795 Repairs and maintenance................ 2,222 2,072 3,330 2,218 524 529 431 Other property operating expenses...... 2,565 3,433 4,508 2,212 395 317 322 ---------- ---------- ---------- ---------- --------- --------- --------- Total Property Expenses......... 20,008 19,267 26,884 16,046 4,315 4,022 3,851 ---------- ---------- ---------- ---------- --------- --------- --------- Income from Property Operations.......... 47,075 44,487 59,998 32,311 7,886 7,298 7,559 Trust administration and overhead........ (3,187) (3,398) (4,628) (3,729) (2,504) (3,378) (2,404) Depreciation............................. (9,698) (9,517) (13,819) (7,928) (2,774) (2,577) (2,479) Amortization............................. (882) (476) (716) (455) (383) (332) (298) Interest and other income................ 320 419 735 705 546 158 369 Interest on notes payable................ -- (111) (111) (869) (1,462) (4,003) (4,707) Interest on mortgages payable............ (19,390) (19,607) (26,451) (14,270) (4,316) (1,898) (1,778) Provision for possible losses on real estate................................. -- -- -- (10,060) -- -- (600) ---------- ---------- ---------- ---------- --------- --------- --------- Income (Loss) from Operations............ 14,238 11,797 15,008 (4,295) (3,007) (4,732) (4,338) Minority interests in consolidated subsidiaries........................... (385) (260) (313) 28 -- -- -- Gain (Loss) on sale of real estate....... 2,906 (75) (200) -- 2,163 177 (191) Income in equity of joint venture........ 120 -- 624 -- -- -- -- ---------- ---------- ---------- ---------- --------- --------- --------- Income (Loss) before extraordinary items.................................. 16,879 11,462 15,119 (4,267) (844) (4,555) (4,529) Extraordinary items: Gain (Loss) on extinguishment of debt.... (329) (585) (513) (23) 2,643 5,810 (55) Provision for change in control costs.... -- -- -- (5,780) -- -- -- ---------- ---------- ---------- ---------- --------- --------- --------- NET INCOME (LOSS)........................ $ 16,550 $ 10,877 $ 14,606 $ (10,070) $ 1,799 $ 1,255 $ (4,584) ========== ========== ========== ========== ========= ========= ========= PER SHARE DATA (BASIC AND DILUTED)(A) Gain (Loss) before extraordinary items... $ 0.81 $ 0.56 $ 0.74 $ (0.35) $ (0.26) $ (2.50) $ (2.50) Extraordinary gain (loss)................ (0.02) (0.03) (0.03) (0.47) 0.80 3.20 (0.05) ---------- ---------- ---------- ---------- --------- --------- --------- Net Income (loss)........................ $ 0.79 $ 0.53 $ 0.71 $ (0.82) $ 0.54 $ 0.70 $ (2.55) ========== ========== ========== ========== ========= ========= ========= Dividends paid........................... $ 0.66 $ 0.64 $ 0.86 $ 0.78 $ -- $ 0.20 $ 0.20 ========== ========== ========== ========== ========= ========= ========= Weighted average Shares outstanding -- Basic and Diluted........................ 20,962,721 20,378,579 20,513,356 12,251,591 3,316,788 1,821,648 1,815,080 ========== ========== ========== ========== ========= ========= ========= PROPERTY DATA Total properties (at end of period)...... 71 75 74 65 36 13 15 Total square feet (at end of period)..... 7,814 8,344 8,057 7,391 4,175 1,451 1,592 Total square feet (weighted average)..... 7,859 8,260 8,286 5,453 1,699 1,579 1,557 OTHER DATA Funds from operations.................... $ 24,010 $ 21,340 $ 28,947 $ 13,713 $ 1,159 $ (1,473) $ (243) Cash flow provided by (used in): Operating activities..................... $ 22,178 $ 20,702 $ 33,059 $ 2,961 $ (776) $ (5,658) $ 3,848 Investing activities..................... 7,940 (142,407) (141,150) (179,673) (61,898) 5,173 144 Financing activities..................... (30,045) 120,491 104,450 171,174 70,347 (3,199) (3,217)
12 18 The number of shares outstanding and per share data have been restated to reflect the impact of the one-for-five reverse share split, which was approved by our shareholders on October 15, 1997.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------------------------------- 2000 1999 1998 1997 1996 1995 ------------- --------- --------- --------- --------- --------- BALANCE SHEET DATA Assets Real estate.......................... $ 634,091 $ 642,186 $ 505,132 $ 265,312 $ 94,472 $ 101,897 Accumulated depreciation............. (54,803) (46,931) (33,449) (25,521) (23,973) (23,441) --------- --------- --------- --------- --------- --------- Net real estate...................... 579,288 595,255 471,683 239,791 70,499 78,456 Cash and cash equivalents............ 9,404 8,220 11,567 13,804 5,376 8,353 Other assets, net.................... 18,531 17,207 17,080 4,800 3,061 2,573 --------- --------- --------- --------- --------- --------- Total Assets................. $ 607,223 $ 620,682 $ 500,330 $ 258,395 $ 78,936 $ 89,382 ========= ========= ========= ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage and unsecured notes payable........................... $ 320,536 $ 334,873 $ 266,539 $ 121,426 $ 53,216 $ 62,815 Accrued interest..................... 1,976 2,229 1,477 269 602 5,178 Tenant security deposits............. 3,067 2,954 2,138 1,254 471 521 Other liabilities.................... 15,050 15,587 17,651 7,231 1,964 1,620 --------- --------- --------- --------- --------- --------- Total Liabilities............ 340,629 355,643 287,805 130,180 56,253 70,134 Minority interests................... 4,366 6,551 6,946 6,444 -- -- Shareholders' Equity: Shares of beneficial interest........ 2,116 2,109 1,721 982 200 908 Additional paid in capital........... 383,458 383,067 327,805 224,363 127,856 124,605 Retained earnings.................... (123,346) (126,688) (123,947) (103,574) (105,373) (106,265) --------- --------- --------- --------- --------- --------- Total Shareholders' Equity... 262,228 258,488 205,579 121,771 22,683 19,248 --------- --------- --------- --------- --------- --------- Total Liabilities and Shareholders' Equity....... $ 607,223 $ 620,682 $ 500,330 $ 258,395 $ 78,936 $ 89,382 ========= ========= ========= ========= ========= =========
13 19 THE SPECIAL MEETING DATE, TIME AND PLACE OF THE SPECIAL MEETING This proxy statement is being furnished to the holders of our common shares in connection with the solicitation of proxies by the board of trust managers for use at the special meeting of shareholders. The special meeting will be held on , 2001 at 9:00 a.m., local time, at 2200 Ross Avenue, floor, Dallas, Texas. MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING At the special meeting, holders of our common shares will consider and vote upon a proposal to approve the merger agreement with DDR and DDR Sub and the transactions contemplated thereby, and a proposal to approve the property sale agreement with Value Enhancement Fund and the transactions contemplated thereby. Additional information concerning the special meeting, the merger agreement and the property sale agreement is set forth below, and copies of the merger agreement and the property sale agreement are attached to this proxy statement as Appendix B and Appendix C, respectively, and incorporated by reference into this proxy statement. PROXY SOLICITATION We will bear the expense of preparing, printing and mailing this proxy statement and the proxies solicited by this document. In addition to the use of the mails, proxies may be solicited by our officers and trust managers and regular employees, without additional remuneration, by personal interviews, written communications, telephone, telegraph or facsimile transmission. We also will request brokerage firms, nominees, custodians and fiduciaries to forward proxy materials to the beneficial owners of common shares held of record by these brokerage firms, nominees, custodians and fiduciaries and will provide reimbursement for the cost of forwarding the materials in accordance with customary charges. RECORD DATE AND QUORUM REQUIREMENT The record date for the special meeting has been fixed as the close of business on , 2001. Holders of our common shares are invited to attend the special meeting. Only holders of our common shares on the record date may vote at the special meeting and they will have one vote per share on matters properly presented at the special meeting. On the record date, there were common shares outstanding, which were held by approximately record holders. As of the record date, our trust managers and executive officers and their affiliates were entitled to vote common shares, representing approximately % of the total common shares then outstanding. Our trust managers (other than Messrs. Bricker and Giles) and our executive officers have advised us that they intend to vote their shares in favor of the transactions. Messrs. Bricker and Giles have notified us that they intend to vote against the transactions. They do not intend, however, to make a recommendation with respect to the transactions. A list of shareholders will be available for examination by holders of our common shares for any purpose related to the special meeting, during the 10-day period preceding the special meeting, at our offices, 6210 N. Beltline Road, Suite 170, Irving, Texas 75063. The presence at the special meeting, either in person or by proxy, of the holders of a majority of the outstanding common shares entitled to vote will constitute a quorum for the transaction of business by the holders of common shares at the special meeting. Common shares present in person or represented by proxy, including shares whose holders abstain or do not vote with respect to one or more of the matters presented for shareholder approval, will be counted for purposes of determining whether a quorum exists at the special meeting. 14 20 REQUIRED VOTE The vote of the holders of 66 2/3% of our common shares outstanding on the record date is the only vote required to approve each of the proposals. Each of the Morgan Stanley Dean Witter entities, USAA Realco and the LaSalle entities have signed agreements with each of Value Enhancement Fund and DDR, and DDR has agreed with us, to vote the common shares over which each has beneficial ownership or voting control, representing in the aggregate approximately 70.7% of the total common shares outstanding on the record date, in favor of the proposals. If these shareholders vote in accordance with their voting agreements, the proposals will be approved. The LaSalle entities have the right to vote against the proposals if they believe they should do so to satisfy their fiduciary duties to their investment advisory clients. Approval of at least a majority of the non-DDR shareholders is not required to complete the merger. VOTING PROCEDURES Common shareholders who attend the special meeting may vote by ballot. However, we know that many of you may not be able to attend the special meeting. Accordingly, our board of trust managers is soliciting proxies so that each holder of common shares on the record date has the opportunity to vote on the sale of properties, the merger and any other proposal to be considered at the special meeting. When a proxy card is returned properly signed and dated, the shares represented by the proxy card will be voted in accordance with the instructions on the proxy card. If you do not return a signed proxy card or vote your common shares at the special meeting, your common shares will not be voted and thus will have the effect of a vote against the transactions. A properly executed proxy marked "Abstain" will not be voted. Since the affirmative vote of 66 2/3% of the common shares outstanding and entitled to vote at the special meeting is required to approve the transactions, a proxy marked "Abstain" will have the effect of a vote against the transactions. Abstentions occur when a shareholders affirmatively elects to abstain from voting on the matter at issue by so marking his or her proxy card. Except for routine and non-controversial matters, the rules of the New York Stock Exchange do not permit brokers and nominees to vote the shares that they hold for customers either for or against a proposal without specific instructions from the person who beneficially owns those shares. The votes not permitted to be cast on non-routine matters are called "broker non-votes." Broker non-votes will be treated as shares that are present for the purpose of determining the presence of a quorum. However, for the purposes of determining the outcome of any matter as to which the broker or nominee has indicated on the proxy that it does not have discretionary authority to vote, those shares will be treated as not entitled to vote with respect to that matter. The merger and the sale of the properties are not considered routine and non-controversial matters for this purpose. Therefore, if your common shares are held by a broker or other nominee and you do not give your broker or nominee instructions on how to vote your shares on the transactions, this will have the same effect as voting against the transactions. You are urged to mark the box on the proxy card to indicate how your common shares are to be voted. If you return a signed proxy card, but do not indicate how your shares are to be voted, the common shares represented by the proxy card will be voted "FOR" the merger and the sale of the properties. The proxy card also confers discretionary authority on the individuals named on the proxy card to vote the shares represented by the proxy card on any other matter that is properly presented for action at the special meeting. You may revoke an executed and returned proxy card at any time before it is voted by: - notifying in writing our corporate secretary prior to the vote at the special meeting, at American Industrial Properties REIT, 6210 N. Beltline Road, Suite 170, Irving, Texas 75063; - granting a subsequent proxy; or - appearing in person and voting at the special meeting. Attendance without voting at the special meeting will not in and of itself constitute revocation of a proxy. 15 21 OTHER MATTERS TO BE CONSIDERED We are not aware of any business or matter other than the proposals to approve the merger and the sale of 31 of our properties. If, however, any other matter properly comes before the special meeting, the proxy holders will vote on these matters in their discretion. SPECIAL FACTORS GENERAL DESCRIPTION At the time the merger becomes effective, DDR Sub will be merged with and into AIP. We will be the surviving entity in the merger and AIP will be governed by our current declaration of trust and bylaws. As a result of the merger, our common shareholders, other than DDR, DDR Sub and their respective direct and indirect subsidiaries, will receive $ in cash, without interest, for each common share they hold. DDR will be our sole shareholder, thereby controlling our remaining 39 properties. If AIP sells all or substantially all of its properties remaining after the sale to Value Enhancement Fund within six months after the effective date of the merger, and if the sale price exceeds values determined prior to the merger by AIP and DDR, you will receive additional merger consideration. The additional consideration per share will be calculated by subtracting the agreed value from the sale price and dividing the result by the total number of common shares, including shares held by DDR and its affiliated entities, outstanding on the closing date. BACKGROUND OF THE MERGER Since our formation, our fundamental business objective has been to maximize shareholder value by maintaining long-term growth in funds from operations for distribution to shareholders. To achieve this objective, we commenced our operations with an emphasis on the acquisition and operation of light industrial/office flex properties. More recently, we have focused on maximizing the internal growth of our portfolio through internalizing property management and accounting. Beginning in early 1998 and continuing into 1999, market prices for publicly traded REITs experienced significant declines. During this period, there were relatively few real estate offerings in the public equity markets and the liquidity of the real estate debt markets had tightened. As a result, we were constrained from obtaining financing through the public equity or debt markets. The only equity financing available to us was through sales of our common and/or preferred shares to DDR under the July 1998 share purchase agreement. For a discussion of that agreement, see "Transactions and Relationships Between AIP and DDR" on page 39. Because of these developments, we were limited in our ability to achieve our business objective of increasing funds from operations through strategic acquisitions. In early 1999, our board of trust managers held several meetings to discuss, among other things, the performance of and growth opportunities for AIP. The trust managers also evaluated our business plan and discussed the share price and the need to increase shareholder value, including how to promote analyst coverage. These discussions led to the determination in May 1999 that we should retain the services of Salomon Smith Barney Inc. to assist us in our review of strategic alternatives, including a sale of AIP, a strategic merger with a complementary real estate entity, selected asset sales, liquidation of AIP, and continuation of AIP's strategy. From mid-May through August 1999, our board of trust managers held several meetings to discuss, and were updated periodically as to, the progress of AIP's strategic alternative review. During this period, our trust managers created a committee of the board consisting of Messrs. Wolcott, Wolstein, Gidel, Bricker and Morris to investigate the different strategic alternatives. On August 4, 1999, the trust managers held their quarterly meeting. At this meeting, the trust managers directed Salomon Smith Barney, AIP's financial advisor, to begin contacting select potential 16 22 buyers in order to explore the interest of these parties in a possible transaction with AIP and the valuation levels that could be obtained in a transaction as part of AIP's strategic alternative review. Following this meeting, our board of trust managers and management, with the assistance of Salomon Smith Barney, identified potential buyers based upon several criteria, including: (1) parties that owned or had invested in flex properties; (2) parties that had real estate portfolios located in geographic regions where AIP's properties are located; or (3) parties that were well known institutional real estate investors (including opportunity funds and pension funds) to which AIP's growth characteristics and size might be attractive. The initial list included 50 potential buyers comprised of 16 public companies, 19 opportunity funds and 15 pension fund advisors. As the process continued, the list expanded to include an additional 10 buyers as a result of outside inquiries. In mid-September 1999, a process was undertaken to elicit offers from interested parties for all or a significant portion of our assets. Some parties which expressed interest in only specific assets were encouraged to submit bids for only such assets even though our preference remained that if the decision was made to sell our assets, we would like to sell all of our assets in a single transaction. In total, confidentiality agreements were ultimately sent to 60 potential buyers which had indicated interest in a possible transaction with AIP. On September, 10, 1999, the trust managers reestablished the board committee for purposes of evaluating strategic alternatives available to AIP. The committee membership was changed to reduce the size of the committee and to have broader institutional representation on the committee. Messrs. Wolstein, Bricker, Duncan and Morris were appointed as the members of the committee. The committee was empowered to evaluate the strategic alternatives available to AIP and to make a recommendation to the full board. In the initial round of bids, two privately-held companies submitted preliminary indications of interest for the entire company, subject to due diligence, of $14.00 and $12.50 to $14.25 per share (gross valuation before transaction costs), respectively. Additionally, Lend Lease orally indicated a total asset valuation, subject to due diligence, of approximately $625 million, or $13.35 per share on a gross valuation basis without deduction for transaction expenses, and another institutional investor indicated that it was evaluating making a joint proposal for the industrial portion of our assets with a public company as its partner at a valuation of approximately $350 million. Four other bidders submitted indications of interest for portions of the Company's portfolio ranging from one asset for $3 million to 14 assets for $140 million. On November 3, 1999, our board of trust managers convened its regular quarterly meeting. AIP's advisors also attended the meeting. Mr. Wolcott disclosed to the board that he had been contacted by representatives of one of the bidders, referred to as "bidder A," regarding the possibility of management participating in a possible bid for AIP or its assets. Mr. Wolcott stated that he had informed bidder A that he would have to notify the committee of management's potential participation and discuss it with the board before engaging in any discussions. Mr. Wolcott confirmed that he had not seen, nor had he participated in the preparation of bidder A's written bid. Salomon Smith Barney stated that the written bid from bidder A did not reference any agreement with management or any condition to its bid of management's participation. A discussion followed as to the nature of management's participation in any of the bids and the process for evaluating the strategic alternatives available to AIP. AIP's legal and financial advisors were directed to exclude management from any discussions with bidders while bidder A continued to be a potential bidder. On November 15, 1999, our trust managers met with AIP's advisors to discuss the composition and the formation of a special committee of trust managers in connection with AIP's review of strategic alternatives and to receive an update on the status of the bid process. Mr. Wolcott then updated the board as to the status of management's potential participation with bidder A. Mr. Wolcott stated that management had not reached an agreement with bidder A but that negotiations were ongoing. Salomon Smith Barney then proceeded to update the board on the status of the bid process. Following a discussion of the potential conflicts of interest, the board then formed a special committee to consist of three disinterested trust managers, Messrs. Bricker, Giles and Morris, and authorized the special committee to 17 23 review, evaluate and make a determination with respect to acquisition proposals and other strategic alternatives and report their conclusions to the board. On November 20, 1999, the newly formed special committee, comprised of Messrs. Bricker, Giles and Morris, held its organizational meeting, elected Mr. Bricker as chairman, established a tentative schedule and agenda for its meetings and selected Salomon Smith Barney and Thompson & Knight L.L.P. to serve as independent financial advisors and independent counsel, respectively, to the committee. The committee then reviewed with Salomon Smith Barney strategic alternatives and the status of various indications of interest for AIP. The committee discussed in detail the interests of members of our board of trust managers in connection with acquisition proposals. At this meeting, counsel for AIP reviewed the basic form of acquisition documents to be submitted to prospective bidders and counsel for the special committee reviewed the role of special committees and the duties and responsibilities of the special committee to AIP and the holders of its common shares. From November 1999 through October 2000, the special committee held 38 meetings. There was unanimous attendance at the meetings, except that Mr. Giles did not attend the meetings on April 24 and May 24, 2000 and one of the meetings on May 26, 2000. Messrs. Bricker and Giles resigned from the special committee in August 2000. On November 22, 1999, the special committee met and reviewed with AIP's financial advisor, Salomon Smith Barney, the status of discussions and negotiations with prospective bidders and the status of their due diligence and data room reviews. On November 24, 1999, we issued a press release disclosing our exploration of strategic alternatives. Management of AIP notified Mr. Wolstein that management had terminated its discussions with bidder A and management would be available to participate in discussions with bidders. On December 6, 1999, our special committee and the other trust managers met for a transaction update and to discuss revised indications of interest that had been submitted by those third party bidders that continued to express an interest in a possible transaction with AIP. Lend Lease had submitted a final written indication of interest for the entire company at a price of $13.58 per share (net of assumed transaction costs of $9.9 million). Bidder A had submitted a final written indication of interest for the entire company at a price of $13.00 per share (net of unspecified transaction costs), assuming consummation of various property sales and the conversion of AIP equity interests into mezzanine financing. The institutional investor that had offered $13.00 to $13.50 in its initial indication, indicated that it had not finalized due diligence sufficiently to confirm that its final offer would be in this range. The other privately-held bidder provided a verbal indication of $10.40 to $11.00 (net of unspecified transaction costs), but did not submit a written indication. At this meeting, the special committee directed Salomon Smith Barney to decline the verbal offer from one of the privately-held bidders, and confirm the bids of bidder A and Lend Lease while waiting for the institutional investor's final indication. The special committee also directed Salomon Smith Barney, among other things, to obtain individual asset bids for properties that may be able to be sold separately. On December 10, 1999, the institutional investor indicated that, based upon extensive work performed over the past 10 days, it could not confirm its preliminary bid range. This bidder indicated its revised bid would be in the upper $12.00 range and, therefore, it would not be submitting a firm bid. On December 13, 1999, the special committee met with AIP's advisors and was updated regarding bid submissions and potential bid submissions by third parties. At this meeting, the special committee also discussed with its advisors other strategic alternatives, including the sale of AIP, a continuation or modification of the current business strategy and liquidation of AIP. On December 13, 1999, our board of trust managers met to review the status of AIP's strategic alternatives. At this meeting, the trust managers reviewed with Salomon Smith Barney then current REIT market conditions, the bids received and alternatives to be considered by the board, including completing the current sale process, continuing as a public company or liquidating assets. 18 24 After this meeting, the special committee instructed Salomon Smith Barney to notify Lend Lease and bidder A that their bids were too low, and to attempt to seek a higher value from these parties. Bidder A indicated that it was unable to raise its bid. Lend Lease indicated that it might be able to bid a higher value for a significant portion of our assets if it were not required to bid for the entire company. Lend Lease was encouraged to re-bid on this basis. On December 17, 1999, Lend Lease submitted a bid to acquire 35 of our properties for $361 million. On December 23, 1999, the special committee met with AIP's advisors to discuss and review, among other things, the revised offer submitted by Lend Lease and a revised business strategy for AIP prepared by management. At this meeting, the special committee was informed by Salomon Smith Barney that DDR had indicated an interest in a two-step transaction in which some of AIP's assets would be sold to Lend Lease and AIP would then merge with DDR. The special committee authorized Salomon Smith Barney to discuss with DDR and Lend Lease possible offers for AIP on that basis. On January 13, 2000, Lend Lease and DDR, along with AIP's and DDR's financial advisors, met to discuss possible proposals. At this meeting, DDR and Lend Lease discussed allocating assets among collateral pools in order to minimize debt prepayment penalties. DDR also encouraged Lend Lease to bid on more assets. On January 26, 2000, our board was updated as to potential proposals from Lend Lease and DDR. At this meeting, Salomon Smith Barney indicated that it had discussed and reviewed with Lend Lease and AIP's management team a portfolio of 41 assets that Lend Lease was evaluating in contemplation of a bid. Additionally, Salomon Smith Barney reported that bidder A had reiterated its interest in pursuing a transaction with AIP for $13.25 (net of unspecified transaction costs) per share to AIP shareholders. On February 1, 2000, Lend Lease submitted a revised bid for 38 of our properties for $365 million. Subsequently, Lend Lease removed six properties and bid $322.4 million for 32 of our properties. On February 8, 2000, Chadwick Saylor, DDR's financial advisor, notified Lend Lease that DDR could not propose a transaction to AIP unless Lend Lease's portfolio acquisition created more value to us. On February 14, 2000, Lend Lease orally communicated to DDR and Salomon Smith Barney a revised offer of $330 million for the same 32 assets. Lend Lease emphasized that this offer was its final offer and, if it was not accepted in a timely manner, Lend Lease would pursue other opportunities. Based on the revised Lend Lease offer, DDR orally indicated to the special committee that, in order to facilitate a transaction, it would consider acquiring all our remaining real estate assets in a merger transaction. During January and early February, several calls were received from bidder A reiterating its interest in pursuing a transaction for our entire company. Bidder A submitted a revised bid on February 7, 2000 reflecting a valuation of approximately $13.30 (net of unspecified transaction costs) per AIP common share. On February 18, 2000, the special committee met with AIP's advisors and was updated as to the communications and developments that had occurred with respect to proposals to acquire all of AIP since its last meeting, including a revised indication of interest from bidder A that placed a valuation for us at $13.35 (net of unspecified transaction costs) per common share. The special committee was informed that the bidder A proposal contemplated an offer of $11.55 in cash per share and $1.80 in proceeds from the sale of certain of our properties prior to consummation of the transaction with bidder A. It was noted that the bidder A proposal required conversion of equity interests in AIP and contemplated mezzanine financing and material conditions to consummation of the proposal. At this meeting, the special committee was also informed that negotiations with Lend Lease resulted in an offer of $330 million for 32 of our properties and that Lend Lease had indicated that the offer was final. DDR indicated that it would consider acquiring all of the remaining assets and assuming all remaining liabilities in a merger transaction. Based on DDR's analysis of the transaction costs, the DDR and Lend Lease proposals indicated a value of 19 25 $14.21 per AIP common share before transaction costs and $13.59 after transaction costs estimated to be approximately $13.0 million. The special committee reviewed the basic terms and conditions of bidder A's proposal and concluded that the revised offer was inadequate as compared to the combined Lend Lease and DDR proposals. The special committee directed Salomon Smith Barney to continue negotiations with Lend Lease and DDR to increase the per share price to non-DDR shareholders in the event that the proposed acquisitions were consummated. The special committee met on February 22, 2000 and February 23, 2000 to discuss the Lend Lease and DDR proposals. The special committee also discussed DDR's existing share purchase obligations under its share purchase agreement with AIP, and our acquisition of properties previously owned by an affiliate of DDR. The special committee also discussed various alternatives to increase the proposed bid price for our common shares and established its strategy for the conduct of further negotiations with DDR. The special committee was informed by Salomon Smith Barney that DDR had indicated that it was reluctant to guarantee a firm price to non-DDR shareholders because DDR's due diligence was incomplete. The special committee concluded that it would be advisable and in the best interest of AIP and its shareholders to encourage further negotiations with Lend Lease and DDR, and in order to further such negotiations, the special committee concluded that AIP should enter into exclusivity agreements with Lend Lease and DDR for a period of two weeks. At this meeting, the special committee reviewed the estimated transaction costs, including investment banking fees, legal, accounting and other fees, debt prepayment and assumption fees and severance payments under existing employment contracts. The special committee discussed the ways of possibly reducing the amount of such costs in order to increase the net price to AIP shareholders, including negotiating the amount of severance payments to management and the fees payable to AIP's financial advisors. On February 23, 2000, the board of trust managers held a regular quarterly meeting. The special committee stated that additional time would be required to complete its evaluation of strategic alternatives and review and consideration of various acquisition proposals submitted by third parties. The special committee recommended that exclusivity agreements be executed with each of DDR and Lend Lease that would restrict us from negotiating with other parties from February 28, 2000 through March 13, 2000 to provide the parties additional time to complete their respective due diligence review of us and our assets. After discussion, our trust managers agreed to provide these exclusivity agreements. On February 25, 2000, the special committee met and discussed the anticipated transaction costs, including the amount of anticipated severance and other payments to management of AIP, in connection with the consummation of the Lend Lease and DDR proposals. On March 22, 2000, the special committee met with AIP's advisors and was updated as to discussions, negotiations and developments since the special committee's last meeting. The special committee was advised that DDR and Lend Lease had submitted preliminary bids resulting in a gross price range before transaction costs of $13.39 to $13.62 per AIP common share, with a net cash price range to non-DDR shareholders of $13.09 to $13.32 after approximately $6.0 million of estimated transaction costs, as calculated by DDR. The special committee reiterated its desire to increase the net price to our shareholders from the proposed range through further negotiations with Lend Lease and DDR. After further discussions, the special committee rejected the DDR and Lend Lease offers and instructed Salomon Smith Barney to relay the special committee's views to DDR and Lend Lease. On March 31, 2000, the special committee met and reviewed a draft proposal dated March 24, 2000 from DDR setting forth a proposed price to non-DDR holders of AIP common shares of $13.85 per AIP common share before transaction costs. Another alternative, under which the proceeds from the proposed sale of assets to Lend Lease could be used to repurchase AIP common shares from DDR and other major shareholders, was also discussed. The chairman noted that, at his request, management had prepared and distributed to members of the special committee a written analysis of this buy-out proposal. The special committee discussed the analysis and the summary of the buy-out assumptions. The special committee also reviewed and discussed an analysis of transaction costs prepared by management. The special committee noted that, based on management's analysis of the transaction costs associated with the Lend 20 26 Lease and DDR transactions, the net price to non-DDR shareholders following confirmation of the transactions would be in the range of $13.04 to $13.24 per AIP common share, reflecting estimated transaction costs of $13.0-$18.0 million, as calculated by management. The special committee discussed the viability of redeeming DDR's and other major shareholders' share positions and the comparison of that transaction with the proposed DDR and Lend Lease bids for AIP. At this meeting, the special committee also discussed the possible retention of a separate financial advisor for the special committee to advance negotiations with DDR and Lend Lease. On April 4, 2000, the special committee met to consider and take action upon the pending bids of Lend Lease and DDR at a resulting gross valuation cash price of $13.85 per AIP common share to the non-DDR shareholders, reflecting a net price to non-DDR shareholders in the range of approximately $13.04 to $13.27 per AIP common share. The committee reviewed and summarized the discussions and negotiations since the bid proposals were first presented to the committee in December 1999. Mr. Bricker, the chairman of the special committee, summarized the alternatives available to AIP, including accepting or rejecting the acquisition proposals of DDR and Lend Lease, rejecting the DDR proposal and consummating the sale of assets to Lend Lease followed by the liquidation of AIP or the use of the proceeds to repurchase AIP common shares, and continuation as an independent company with a revised business plan. Mr. Wolcott joined the meeting and responded to questions from members of the committee regarding the net asset valuation prepared by management. Following this discussion, the committee voted two to one (with Mr. Morris voting against) to reject the latest DDR and Lend Lease proposals. On April 7, 2000, the special committee met telephonically and Mr. Bricker reviewed the status of the pending negotiations with Lend Lease and DDR, including the revised bid dated April 5, 2000 from DDR proposing an increase in price for the remaining assets of AIP, following the sale of assets to Lend Lease, resulting in an aggregate value for AIP of $14.00 per AIP common share on a gross basis and $13.70, net of estimated transaction costs of approximately $6.0 million, as calculated by DDR. After a full discussion, the special committee was unable to reach a conclusion regarding the revised proposal. During the discussion, the special committee authorized AIP management to continue direct negotiations with Lend Lease regarding the proposed sale of assets. Chase Securities, the financial advisor being considered by the special committee, joined the conference call and was briefed on the current status of the negotiations. Chase Securities detailed its qualifications, experience and independence and discussed the scope of the proposed assignment and fee arrangements. On April 13, 2000, AIP asked Lend Lease if it would remove from its bid the Manhattan Towers asset. In addition, AIP asked Lend Lease to reevaluate its decision not to purchase five assets that were part of the portfolio on which DDR had bid. Lend Lease also agreed to reconsider those five properties. On April 19, 2000, pursuant to its discussions with management, Lend Lease submitted a revised bid that excluded the Manhattan Towers asset. The revised bid amount of $288.7 million was $44 million lower than its previous bid, which had included Manhattan Towers. Lend Lease informed AIP that it would not bid on the five properties it was asked to reevaluate. On April 24, 2000, the special committee met to discuss Chase Securities' proposed activities relating to developing transaction valuations, developing alternatives to the separate pending proposals of Lend Lease and DDR, and initiating direct negotiations with DDR and Lend Lease. Chase Securities was then formally engaged to serve as the special committee's financial advisor. On April 25, 2000, the board of trust managers met to discuss the status and process of the deliberations. Our board of trust managers agreed that the negotiation of a potential Lend Lease transaction should be given priority pending the review of any other strategic alternatives. On May 2, 2000, the special committee met and Chase Securities made a detailed presentation regarding its activities since its retention by the committee. The presentation included analyses of all offers, a preliminary real estate analysis, a review of the DDR July 1998 share purchase agreement, trading characteristics of AIP, and a review of strategic alternatives available to AIP in light of the current market situation, including merger/sale transactions, liquidation, or a stand alone transaction with DDR. Chase 21 27 Securities also reviewed the discussions it had with Lend Lease and DDR. In reviewing the strategic alternatives, a number of considerations were discussed including limited liquidity for AIP shares, significant overhang represented by large institutional investors, lack of third party research coverage, and transaction costs associated with any transaction, among other discussion items. Chase Securities also provided an outline of the next steps and considerations to be undertaken, including finalizing a strategic alternative review and formulating final and thorough responsive proposals to DDR and Lend Lease. After a full discussion, the committee unanimously concluded that it could support a minimum net price of $13.50 per AIP common share. The committee requested that Chase Securities meet with representatives of DDR to discuss the transaction valuations and minimum price per share. On May 3, 2000, our board of trust managers held its regular quarterly meeting. The special committee reported, based upon the advice of Chase Securities, that it was recommending that AIP proceed in negotiations with Lend Lease on the sale of a significant portfolio of assets and with DDR on a proposed merger of AIP into DDR simultaneously with the sale to Lend Lease and with the sale of Manhattan Towers as a standalone transaction. In addition, the chairman of the special committee, Mr. Bricker, had a telephonic discussion with representatives from Lend Lease expressing the special committee's desire to move forward with a transaction and the execution of a term sheet. On May 11, 2000, the special committee met to discuss definitive term sheets for the pending bids of Lend Lease and DDR to acquire AIP and the analysis of the proposed transactions prepared by management. In particular, the committee reviewed a summary of the provisions of the Lend Lease term sheet, including the purchase price of $288.7 million in cash and debt assumption, the earnest money deposit, the conditions to closing, the description of properties and the required documentation, and the provisions of the DDR term sheet, including the structure of the proposed transaction, the merger consideration, the possible subsequent sale of properties by DDR, the closing, the conditions to closing, indemnity, voting arrangements and termination and break-up fees. The committee also reviewed summaries of prior discussions between members of the committee and other third parties to acquire specific assets of AIP. At this meeting, the special committee received a report from the transaction costs committee, a separate committee of trust managers appointed by the board to review and negotiate transaction costs in connection with the Lend Lease and DDR proposals, including executive compensation payments, investment banking fees and legal fees. The special committee met on May 24, 2000 and twice on May 26, 2000 to discuss the status of the negotiations with Lend Lease. The committee outlined its position with respect to several material terms contained in the Lend Lease term sheet, including the purchase price for the properties, the required minimum debt assumption, the payment of costs associated with the transaction, the respective amounts of the escrow deposit, break-up fees and the closing date and closing conditions, and authorized Chase Securities, AIP management and counsel to continue negotiations with Lend Lease in accordance with the committee's conclusions. The committee also reviewed and discussed the response of DDR to the definitive term sheet submitted by AIP. The committee concluded that an agreement needed to be reached with DDR regarding transaction costs, working capital of AIP at closing and other cost assumptions in order to arrive at an acceptable minimum net price per share to AIP shareholders upon consummation of the merger. The committee directed Chase Securities to continue to negotiate with DDR to resolve these issues. On May 30, 2000, the board of trust managers held a meeting during which the trust managers directed management to proceed with the listing and sale of Manhattan Towers. On June 12, 2000, the special committee met to discuss the latest drafts of the term sheets for Lend Lease and DDR. Following a detailed discussion, the committee unanimously concluded that the proposed term sheet with DDR should be revised to provide that it be structured as a merger directly into DDR or a subsidiary of DDR, that non-DDR shareholders receive a net price of at least $13.50 per share upon consummation of the transaction, that DDR agree not to reduce the value attributable to the DDR portfolio based on further due diligence and that DDR pay Lend Lease or reimburse AIP in the event that AIP is required to pay a break-up fee or reimburse Lend Lease for out-of-pocket costs due to DDR's actions or its failure to comply with the proposed term sheet or other agreements. 22 28 On June 13, 2000, the board of trust managers met and the special committee reported that the transactions as currently proposed were unacceptable and that, if the transactions were to proceed, DDR would have to commit to the items discussed in the committee's June 12, 2000 meeting. On June 19, 2000, the special committee met to consider final drafts of the term sheets with Lend Lease and DDR. The committee reviewed a proposed letter agreement by which DDR agreed to the transaction terms outlined by the special committee at its June 12 meeting, including the extension of the termination date of the DDR share purchase commitment to AIP. The committee also reviewed the exclusive negotiation agreement and term sheet with Lend Lease, including the cost reimbursement obligation of AIP under certain circumstances, the amount of loan assumption fees to be absorbed by Lend Lease and the break-up fees payable by AIP in certain events. After discussion, the special committee unanimously approved the proposed term sheets and related documents with Lend Lease and DDR and concluded that the committee was prepared to submit its recommendation to the AIP board that AIP enter into the documentation and proceed to further negotiate the Lend Lease and DDR proposals. On June 22, 2000, the board of trust managers convened a special meeting. Counsel for the special committee outlined the terms of the agreement reached on June 19, 2000 between DDR and the special committee. Counsel for the special committee, management of AIP and AIP legal counsel then discussed the status of the term sheet with Lend Lease providing for the purchase of approximately $288.7 million of assets from AIP. The chairman of the special committee stated that the recommendation of the special committee to the board was to approve the execution of the DDR and Lend Lease term sheets and related documents and proceed with the negotiation of the definitive terms, provisions and conditions of the proposed transactions and the definitive agreements. A general discussion on these proposed transactions ensued. After discussion, the non-DDR trust managers unanimously authorized the execution of the DDR and Lend Lease term sheets. Shortly after the June 22 board meeting, the term sheets and related documents were executed and delivered by the parties. On July 19, 2000 and July 24, 2000 the special committee met. At the first meeting, the chairman raised concern about the valuation of the proposed Lend Lease transaction. The chairman expressed his desire to reassess the transactions in order to ensure that shareholder value would be maximized in the event the pending transactions with Lend Lease and DDR were consummated. At the second meeting, the chairman again raised his concerns about the valuation for the proposed transaction with Lend Lease. The special committee reviewed Salomon Smith Barney's previous efforts to solicit indications of interest from potential bidders. The committee was also briefed on the risks and challenges of attempting to realize additional incremental proceeds for the Lend Lease portfolio properties, including execution risks, the necessity of maintaining the DDR bid proposal at its current rate, the reimbursement of expenses to Lend Lease pursuant to the term sheet and the risks associated with the likely type of purchaser for our property type and related financing risks. On August 1, 2000, the special committee continued its discussions of the $288.7 million purchase price to be paid by Lend Lease for certain of our properties and reviewed strategic alternatives, including the implications of pursuing the proposed transaction with DDR on a stand-alone basis. Representatives of Chase Securities presented a strategic alternatives review and summarized these strategic alternatives, the rationale for them, issues presented in connection therewith and preliminary valuation considerations of each alternative. Each member of the special committee stated his views with respect to the value of the Lend Lease properties and the chairman was requested to prepare a report of the special committee for submission to the board of trust managers scheduled for the following day. On August 2, 2000, the board of trust managers convened a regular quarterly meeting. Mr. Bricker, the chairman of the special committee, indicated that he could not support the Lend Lease transaction due to his unresolved concern over the pricing of the proposed sale to Lend Lease. Mr. Giles, another member of the special committee, indicated a similar concern with respect to then current pricing of the transaction. Mr. Morris, the other member of the special committee, indicated that he supported the Lend 23 29 Lease and DDR transactions at the current pricing. After discussion, management was authorized to extend the negotiation period under the exclusivity agreement with Lend Lease to August 25, 2000 in order to determine if additional progress could be obtained in negotiations with Lend Lease. On August 7, 2000, the special committee met to continue its discussion of the portfolio valuation and the purchase price to be paid by Lend Lease for specific properties of AIP. The committee unanimously concluded that a recommendation should be made to AIP's board of trust managers that management be instructed to enter into further negotiations with Lend Lease with a view to increasing the price to be paid by Lend Lease for the properties to be acquired pursuant to the Lend Lease proposal. On August 8, 2000, the board of trust managers met and Mr. Bricker reported that the special committee had directed management to negotiate further with Lend Lease on behalf of AIP. On August 9, 2000, the special committee met to review and discuss the results of the negotiations between AIP management and representatives of Lend Lease regarding the purchase price to be paid by Lend Lease for the Lend Lease portfolio. Mr. Wolcott reported that Lend Lease had offered to increase its purchase price by $3.5 million and agreed to certain modifications to the term sheet for the proposed transaction as requested by the committee. At the meeting, Mr. Bricker and Mr. Giles announced that neither of them intended to vote for the proposed sale of assets to Lend Lease under the current terms. It was unanimously determined that the special committee's current position be conveyed to the board of trust managers at the meeting to be held following the meeting of the special committee. On August 9, 2000, the trust managers met and Mr. Wolcott summarized the results of negotiations with Lend Lease pursuant to the direction of the special committee. Mr. Wolcott stated that, based upon conversations with Lend Lease on August 8 and 9, during which Mr. Wolcott informed Lend Lease that the special committee had met and directed him to request an additional purchase price increase of Lend Lease. Mr. Wolcott reported that Lend Lease was willing to, among other things, increase its purchase price by $3.5 million to $292.2 million. In consideration for this concession, Lend Lease proposed it would receive an increased break-up fee of an additional $3.5 million if the Lend Lease transaction did not occur and an extension of the exclusivity period through August 18, 2000. Mr. Bricker then reported that the special committee had met prior to this meeting and had considered this information. Mr. Bricker stated that the informal recommendation of the special committee, with Mr. Morris disagreeing, was to reject the Lend Lease transaction for the same reasons previously discussed with the board. After further discussion, the board of trust managers agreed to extend the exclusivity agreement with Lend Lease to August 25, 2000. On August 10, 2000, Mr. Giles resigned from the special committee. On August 15, 2000, Mr. Giles notified counsel for the special committee that he opposed the transactions because he believed the pricing was too low based on Chase Securities' preliminary range of values for AIP's properties. Mr. Giles also stated that he believed the timing of the transactions was poor, that we were in a down market, that we should wait to sell until the market improved, and the transactions would result in inadequate consideration to shareholders. On August 15, 2000, Mr. Bricker notified the board that he opposed the proposed transaction with Lend Lease. He stated that his opposition resulted from several factors, including the fact that the Lend Lease purchase price was at the low end of the valuation range prepared by Chase Securities, that the aggregate purchase price paid by AIP for these properties was roughly the same as the proposed aggregate sale price to Lend Lease, that net operating income on these properties had increased since their purchase by AIP and that the capitalization rate proposed to be paid on these properties by Lend Lease was too high. On August 16, 2000, our trust managers met and Mr. Wolcott informed the board that both Mr. Bricker and Mr. Giles had distributed letters to each of the trust managers setting forth their opposition to the proposed transactions. The trust managers discussed in detail Mr. Giles' and Mr. Bricker's stated positions. 24 30 On August 25, 2000, our trust managers met and Mr. Morris led a discussion regarding the status of the Lend Lease transaction and the proposed merger with DDR. After discussion, the board agreed to extend the exclusivity agreement with Lend Lease until September 15, 2000. Mr. Bricker informed the trust managers that he opposed the extension of the Lend Lease exclusivity agreement and he was resigning from the special committee due to his opposition to the extension and the Lend Lease transaction. After discussion, our non-DDR trust managers determined that the special committee should proceed with Mr. Morris as the sole member. Between August 28, 2000 and September 13, 2000, Mr. Morris, as the sole remaining member of the special committee, met on several occasions with Chase Securities and the special committee's legal advisors, our management and AIP legal counsel to discuss the status of negotiations with DDR and Lend Lease. During this period, Mr. Morris, the sole member of the special committee, engaged in direct negotiations with representatives of both DDR and Lend Lease. On September 13, 2000, the board of trust managers convened a special meeting. Mr. Morris reported that some issues relating to the DDR and Lend Lease transactions had been resolved but other issues were outstanding. After discussion of these items, Mr. Morris stated that the special committee's recommendation was to move forward with the negotiations based on progress made to date. Based on this recommendation, the trust managers agreed that additional negotiations should proceed and the trust managers authorized a two-week extension of the Lend Lease exclusivity period. Between September 20, 2000 and October 20, 2000, Mr. Morris, as the sole remaining member of the special committee, met on several occasions with Chase Securities, the special committee's legal advisors, our management and AIP legal counsel to discuss the status of negotiations with DDR and Lend Lease. Mr. Morris also engaged in direct negotiations with DDR representatives during this period. During this period, DDR, AIP and Lend Lease discussed which of DDR or Lend Lease would acquire the outlying parcels associated with the Summit Park and Cameron Creek properties. It was ultimately decided that the two parcels would remain with AIP and not be sold to Lend Lease. On October 26, 2000, the sole remaining member of the special committee met with representatives of Thompson & Knight, Locke Liddell & Sapp and Chase Securities to consider the proposed transactions and to discuss the status of the Lend Lease and DDR definitive agreements. He reported, among other things, that the agreements relating to the DDR and Lend Lease transactions, which had been prepared originally in July 2000, had been negotiated extensively from July through October. Mr. Morris announced that the committee had determined to recommend to the board of trust managers that the board approve the proposed transactions with Lend Lease and DDR, subject to receipt of a favorable opinion from Chase Securities as to the fairness from a financial point of view, of the transaction with DDR. Representatives of Chase Securities reviewed with Mr. Morris the process undertaken in connection with the issuance of a fairness opinion and the bases on which the conclusions to be reached in the opinion would be made. Counsel for the special committee and counsel for AIP then reviewed the material terms of the agreements, including the pricing provisions, the termination provisions, and the other recent revisions to the DDR merger agreement. Mr. Morris was also briefed on the status of the Lend Lease transaction. By written consent dated November 1, 2000, Mr. Morris, as the sole remaining member of the special committee, approved in all respects and recommended to the entire board of trust managers the proposed sale of properties to Value Enhancement Fund and the proposed merger with an affiliate of DDR for the purchase price and on the terms, provisions and conditions set forth in the Lend Lease property sale agreement and the DDR merger agreement, respectively. On November 1, 2000, a meeting of our board of trust managers was convened and the special committee, the trust managers not designated by DDR and representatives of Chase Securities, Thompson & Knight and Locke Liddell & Sapp discussed the proposed transactions. A representative of Thompson & Knight outlined the review of the proposed transactions undertaken by the special committee, the negotiation process and the material terms of the transactions. A representative of Locke Liddell & Sapp reviewed the fiduciary duties of the board under the circumstances. Chase Securities delivered its oral opinion to the special committee and, at the direction of the special committee, to the 25 31 non-DDR trust managers, confirmed by delivery of its written opinion to the special committee dated November 1, 2000, that the $13.74 cash per AIP common share to be received by the non-DDR holders of AIP common shares in the merger was fair from a financial point of view to such holders. Chase Securities also reviewed the financial analysis it performed. After considering these matters, the sole member of the special committee submitted his recommendation that the board approve and declare advisable the property sale and the merger, that the transactions be submitted to the shareholders and that AIP's shareholders approve the transactions. The DDR designated trust managers then joined the meeting. The trust managers then voted on the transactions, which were considered together. Messrs. Giles and Bricker voted against the proposal. Messrs. Adams, Gidel, Schoff and Wolstein abstained from the vote, and Messrs. Duncan, Kelly, Morris, Kraska and Wolcott voted in favor of the proposal. Prior to the vote, Mr. Kraska reminded the board that, as he had previously disclosed, the LaSalle entities have an ownership interest in DDR on behalf of certain clients. The board next discussed the need for agreement between management and AIP regarding the severance and other payments due to management upon the sale of properties to Value Enhancement Fund and the closing of the merger. The board then voted on the mutual releases and settlement agreements to be entered into with management in connection with the transactions. The DDR designees and Messrs. Bricker and Wolcott abstained, Mr. Giles voted against the agreements and Messrs. Duncan, Kelly, Morris and Kraska voted in favor of the agreements. Finally, the board voted on a proposal to approve revised fees that would be owed by AIP to its financial advisors in connection with the transactions. Messrs. Giles and Bricker voted against the proposal and the other nine trust managers voted in favor of the proposal. Subsequent to the board meeting, the mutual release and settlement agreements, voting agreements, the property sale agreement and the merger agreement were executed. On November 2, 2000, prior to commencement of trading on the New York Stock Exchange, AIP and DDR issued a joint press release announcing the transactions. On November 9, 2000, we sold our Manhattan Towers property to a third party for gross proceeds of approximately $55.4 million. DDR'S PURPOSE AND REASONS FOR THE MERGER DDR believes that the merger transaction and its unilateral control of AIP's assets following the merger will enable DDR's shareholders and analysts following DDR to more clearly understand the financial impact to DDR of its investment in the light industrial/office properties of AIP. Additionally, DDR believes that although AIP's business is not directly complementary to that of DDR and its subsidiaries, DDR can obtain operating benefits and cost savings by integrating some of AIP's operations into DDR and its subsidiaries. At the present time, DDR's only cash return on its investment in AIP is the distributions it receives on the AIP common shares it owns. However, if AIP were wholly-owned by DDR, decisions could be made solely by DDR regarding AIP's operations and the use of AIP's cash flow. DDR determined that it was an appropriate time to make its acquisition offer to AIP based on its knowledge of the real estate industry, its assessment of the underlying value of AIP's assets and DDR's desire to take advantage of the benefits described below under "Benefits of the Merger to DDR." BENEFITS OF THE MERGER TO DDR Following the merger, DDR will become the sole shareholder of AIP and, therefore, will have unilateral control over the assets of AIP remaining after the sale to Value Enhancement Fund and the 26 32 closing of the merger. DDR believes the value of AIP can be enhanced following the merger by the following: - AIP will become a private company as a result of the merger and will, therefore, have greater operating flexibility, allowing it to focus on enhancing value by emphasizing growth and the operating cash flow without the constraint of the public market's emphasis on quarterly earnings; - the elimination of the costs associated with being a public company should reduce the overall operational and administrative costs of AIP following the merger; - DDR will be able to manage directly the assets of AIP and thereby combine AIP's operations with its other activities to enable DDR to obtain certain operating efficiencies with respect to the remaining assets of AIP after the merger; - DDR will no longer have a contingent obligation to purchase additional shares from AIP; - DDR's sole control of the AIP assets will enable the public market to assess more clearly the value of the assets to DDR; and - DDR plans to make efforts to dispose of AIP's properties in an orderly manner over time, and, therefore, could realize a profit on the sale depending upon its ability to increase the value of the properties after the merger, and market conditions at the time of sale. POSITION OF DDR REGARDING FAIRNESS OF THE MERGER DDR believes that the merger and the $ per share merger consideration are fair, from a financial point of view, to the holders, other than DDR, of AIP's common shares. The amount of the merger consideration was determined by management of DDR after considering the factors set forth below and following negotiations with the special committee of the AIP board of trust managers. The factors considered by management of DDR included the following: - the historical and projected financial performance of AIP; - that the $ per share merger consideration represents approximately a % premium over the closing price for the AIP common shares on November 1, 2000, the last full trading day prior to announcement of the merger; - that the merger is not subject to DDR obtaining financing to consummate the merger; - that the merger provides the public shareholders who are considering selling their AIP common shares with the opportunity to exchange their shares for $ per share in cash without incurring the transaction costs typically associated with market sales; and - the ability of shareholders who object to the merger to obtain "fair value" for their shares if they exercise and perfect their dissenters' rights under the Texas REIT Act. DDR did not find it practicable to, and therefore did not, quantify or otherwise assign relative weights to the individual factors it considered in reaching its conclusion as to fairness. RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF TRUST MANAGERS; REASONS FOR THE MERGER In its deliberations with respect to the merger agreement, the entire special committee and the board consulted with our management and our financial and legal advisors, and it was the committee's objective to maximize shareholder value. With limited access to equity or debt capital to expand AIP, the entire special committee recommended the pursuit of strategic alternatives. The entire special committee directed its advisors to evaluate the proposals for the entire company and pursue various strategies to maximize shareholder value. It was the view of the sole remaining member of the committee that the perception in the marketplace for the prospects of AIP's assets would begin to diminish as the economy began to slow, 27 33 which would negatively impact access to capital, future growth prospects and shareholder value, thus reducing financial returns to shareholders. After considerable review, in the business judgment of the sole remaining member of the special committee, the best alternative to maximize shareholder value and financial returns to shareholders was to sell AIP. Importantly, the sole member of the special committee wanted to ensure that if a buyer emerged for a large portion of the company, that another buyer or merger candidate for the remainder of the company (including the assumption of all liabilities and contingent liabilities) be identified, thus maximizing shareholder value and financial returns to shareholders. THE BOARD OF TRUST MANAGERS, ACTING ON THE RECOMMENDATION OF THE SOLE REMAINING MEMBER OF THE SPECIAL COMMITTEE, HAS BY A MAJORITY VOTE OF THE TRUST MANAGERS NOT DESIGNATED BY DDR, APPROVED THE MERGER AGREEMENT AND RECOMMENDED THAT HOLDERS OF OUR COMMON SHARES VOTE FOR THE MERGER. THE MAJORITY OF OUR TRUST MANAGERS NOT DESIGNATED BY DDR AND THE SOLE REMAINING MEMBER OF THE SPECIAL COMMITTEE BELIEVE THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, OUR SHAREHOLDERS. OF OUR 11 TRUST MANAGERS, FIVE MEMBERS VOTED FOR, TWO VOTED AGAINST, AND THE FOUR DDR DESIGNEES ABSTAINED ON, THE PROPOSAL TO APPROVE THE MERGER AGREEMENT. OUR TWO TRUST MANAGERS WHO RESIGNED FROM THE SPECIAL COMMITTEE VOTED AGAINST THE MERGER. THE REASONS THEY VOTED AGAINST THE TRANSACTIONS ARE DESCRIBED IN "BACKGROUND OF THE MERGER" ON PAGE 24. In consideration of the recommendation of the special committee and board with respect to the merger, you should be aware that some of our trust managers and management of AIP have interests in the merger that may conflict with the interests of our shareholders generally. The board and special committee were aware of these interests and considered them, among other matters, in approving the merger agreement. See "Conflicts of Interest" on page 37. The factors considered by the special committee and the board include those enumerated below. While all of these factors were considered by the special committee and the board, neither the special committee nor the board made determinations with respect to each of these factors separately. Rather, the special committee and the board each made its respective judgment with respect to the merger agreement based on the total mix of information available to it, and the judgments of individual trust managers may have been influenced to a greater or lesser degree by their individual views with respect to different factors. In making its decision to approve the merger agreement, each of the special committee and the board considered the following supporting factors, which were all of the material factors considered by the special committee and the board: - The board and the special committee believed that they had thoroughly explored other alternatives to maximize shareholder value, including remaining independent or engaging in a transaction with a third party. - The board and the special committee believed, based on discussions with third parties and active negotiations with DDR, that the cash price of $13.74 per share was the best price that could be obtained by AIP in light of the available alternatives. - The special committee received, and the board relied upon, the opinion of Chase Securities as to the fairness from a financial point of view to the public shareholders of the $13.74 per share to be received in the merger and the analysis presented to the special committee by Chase Securities. - If DDR causes AIP to sell all or substantially all of its properties remaining after the sale to Value Enhancement Fund during the six months following the effective date of the merger for more than the agreed upon values of the properties, our shareholders will receive their pro rata part of the sales proceeds based upon AIP share ownership prior to the merger. 28 34 - The board and the special committee believed that the other terms of the merger agreement were fair to us. Specifically, the board and the special committee considered: - the representations and warranties made by each party; - the covenants of the parties and the effect of those provisions on our operations prior to the merger; - the provisions that permit the special committee and the board to withdraw or modify their respective recommendations regarding the merger; - the provisions that allow the board to accept a superior proposal; and - the limited number of conditions to the obligations of DDR and DDR Sub, which should increase the likelihood of a timely consummation of the merger; - The alternative courses of action available to AIP given - the limited possibilities for AIP to expand through acquisitions given AIP's limited access to capital; - the fact that few parties expressed an interest in acquiring AIP despite an exhaustive search on behalf of AIP by AIP's financial advisor for an acquiror; and - the fact that there could be no assurance that if AIP did not move forward immediately with Value Enhancement Fund and DDR, either or both of them would not terminate their offers. - The right of shareholders who do not vote in favor of the merger to exercise dissenters' rights. - The historical and projected financial performance of AIP. - The $13.74 per share merger consideration represents an approximate 9.9% premium over the closing price for the common shares on November 1, 2000, the last full trading day prior to announcement of the merger. The special committee and the board also considered the negative factors discussed below in their deliberations concerning the merger: - the fact that, following the merger, shareholders will cease to participate in our future earnings or growth, if any, and to benefit from increases, if any, in our value; - the potential or actual conflicts of interest of our officers and trust managers in connection with the merger; and - the merger will be a taxable transaction to our shareholders. The sole member of the special committee believes the merger is procedurally fair because: - the special committee consisted of a trust manager who was not our employee, and therefore had no expectation to derive any personal financial benefit from the merger different from that of any other shareholder and thus could, without question of self-dealing, negotiate on an arm's-length basis with representatives of DDR on your behalf; - the special committee and the board had each considered DDR's and Lend Lease's proposals on numerous occasions, thereby maintaining continuously sufficient information to reach an informed business decision on DDR's proposal; - the special committee was advised by independent outside legal counsel and an independent financial advisor, which helped to ensure that the special committee understood its responsibility to recommend only a transaction that was in your best interests, and that the special committee pursued that goal independently, in good faith and diligently; and 29 35 - we had thoroughly explored the other alternatives prior to entering into transactions with Lend Lease and DDR, which provided a basis for a determination of our value as a going concern and to consider the adequacy of the consideration offered by DDR. BENEFITS AND DETRIMENTS TO NON-DDR SHAREHOLDERS AIP and DDR believe the merger is fair, from a financial point of view, to the non-DDR shareholders and will result in the following benefits to AIP's public shareholders: (1) the non-DDR shareholders will realize the value of their investment in AIP in cash at a price which represents a 9.9% premium to the market price for the common shares prior to the announcement of the merger and (2) the merger eliminates the risk of a decline in the value of their investment in AIP. The primary detriment to the non-DDR shareholders of the completion of the merger is that they will cease to have any ownership interest in AIP and, therefore, will cease to participate in future earnings or growth, if any, of AIP and to benefit from increases, if any, in the value of AIP. In addition, the non-DDR shareholders may recognize a taxable gain upon completion of the merger. SOURCE AND AMOUNT OF FUNDS; FINANCING FOR THE MERGER We estimate that the total amount of funds required to purchase all of our outstanding shares, other than the excluded shares, under the merger agreement and to pay related fees will be approximately $ million. A portion of these funds has been obtained through the sale of our Manhattan Towers property, which generated net proceeds to us of approximately $34.2 million. We will obtain net proceeds of $ from the sale of our portfolio of 31 properties to Value Enhancement Fund, and approximately $ from operations. Any remaining amount necessary to close the merger will be borrowed under our existing line of credit with Bank One Texas, N.A. We expect the amount outstanding under this line of credit prior to the merger, assuming retirement of the Prudential Securities Credit Corporation acquisition line described below, will be approximately $28.0 million. The Bank One line was initiated on January 28, 1999 and, assuming adequate collateral availability, has a maximum borrowing amount of $50 million. The line matures on January 28, 2001. We are currently in negotiations with Bank One to extend this line for an additional year. The Bank One line is a secured line and we currently have 18 properties pledged as collateral for this line. Six of those properties will be sold to Value Enhancement Fund. We currently intend to retire our acquisition line with Prudential Securities Credit with proceeds of borrowing under the Bank One line and to transfer the four properties collateralizing the Prudential Securities Credit line to the Bank One line. Assuming completion of this transaction in the merger, 16 properties would serve as collateral for the Bank One line. The Bank One line provides for a variable rate of interest based upon our debt ratio in effect from time to time. The line of credit currently bears interest at 1.75% over the 30 day LIBOR rate, or 8.37%. The Bank One line contains typical borrowing covenants and restrictions. We are currently in compliance with all of these restrictions. The consent of Bank One will be required to close the merger. We are currently discussing this matter with Bank One and at this time, we believe we will obtain that consent. FAIRNESS OF THE MERGER; OPINION OF FINANCIAL ADVISOR At meetings of the special committee and, at the direction of the special committee, the board of trust managers on November 1, 2000, Chase Securities gave its oral opinion, confirmed in writing, addressed to the special committee and to be relied upon by the board of trust managers, that, as of November 1, 2000, the date of the opinion, and based upon the assumptions made, matters considered and limits of review set forth in the opinion, the cash consideration to be paid to the holders of common shares in the proposed merger is fair from a financial point of view to the common shareholders. Based on the terms of the merger agreement on that date, the per share cash consideration to be received by the holders of common shares was $13.74 per share. DDR, DDR Sub and their respective direct and indirect subsidiaries will not receive any of the merger consideration. The amount of the merger consideration was determined through negotiation between the special committee, with the assistance of Chase Securities, and DDR. 30 36 Chase Securities was retained to act as financial advisor to the special committee of the board of trust managers and to render an opinion to the special committee as to the fairness, from a financial point of view, of the per share cash consideration to be received by the holders of common shares of AIP (other than DDR and any of its affiliated entities). Chase Securities rendered its opinion to the special committee on November 1, 2000, to the effect that, as of that date, and based upon the assumptions made, matters considered, and limits of review set forth in its opinion, the per share cash consideration to be received by the holders of common shares of AIP (other than DDR and any of its affiliated entities) pursuant to the merger agreement, subject to adjustment, was fair from a financial point of view, to the holders of common shares (other than DDR and any of its affiliated entities). In rendering its opinion, Chase Securities was informed by AIP that the consummation of the merger is contingent upon the consummation of the sale of a portfolio of 31 properties to Value Enhancement Fund for not less than $135.4 million cash consideration, net of related closing costs, repayment of indebtedness for money borrowed secured by the Lend Lease portfolio and related prepayment penalties and fees, and the consummation of the sale of Manhattan Towers for not less than $34.2 million cash consideration, net of related closing costs, repayment of indebtedness for money borrowed secured by the Manhattan Towers and related prepayment penalties and fees. In rendering its opinion, Chase Securities assumed that AIP and certain wholly-owned subsidiaries, as applicable, will receive no less than $135.4 million cash consideration for the sale of the 31 property portfolio, net of related closing costs, repayment of indebtedness for money borrowed secured by the portfolio and related prepayment penalties and fees, and AIP will receive no less than $34.2 million cash consideration for the sale of Manhattan Towers, net of related closing costs, repayment of indebtedness for money borrowed secured by Manhattan Towers and related prepayment penalties and fees. THE FULL TEXT OF THE WRITTEN OPINION OF CHASE SECURITIES DATED NOVEMBER 1, 2000, WHICH SETS FORTH THE ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY CHASE SECURITIES IN RENDERING ITS OPINION, IS ATTACHED AS APPENDIX A TO THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. THE CHASE SECURITIES OPINION IS DIRECTED TO THE SPECIAL COMMITTEE AND RELATES ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE PER SHARE CASH CONSIDERATION TO BE RECEIVED BY THE HOLDERS OF COMMON SHARES OF AIP (OTHER THAN DDR AND ANY OF ITS AFFILIATED ENTITIES) PURSUANT TO THE MERGER AGREEMENT, AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY OF THE HOLDERS OF COMMON SHARES AS TO HOW SUCH HOLDER OF COMMON SHARES SHOULD VOTE, OR AGREE TO VOTE, WITH RESPECT TO THE MERGER. THE SUMMARY OF CHASE SECURITIES' OPINION SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE WRITTEN OPINION ATTACHED HERETO AS APPENDIX A. THE HOLDERS OF COMMON SHARES ARE URGED TO READ THE ENTIRE OPINION CAREFULLY. In arriving at its opinion, Chase Securities, among other things: - reviewed drafts of the merger agreement, the purchase and sale agreement and the Manhattan Towers purchase and sale agreement in the forms provided to them, including the most recent drafts dated October 31, 2000 and has assumed that the final forms of such agreements, as applicable, will not vary in any regard that is material to its analysis; - reviewed certain publicly available business and financial information it deemed relevant relating to AIP and the industries in which AIP operates; - reviewed certain internal non-public financial and operating data provided to it by the management of AIP relating to AIP's business, including certain forecast and projection information as to future financial results of such business; - discussed with members of the senior management of AIP, AIP's operations, historical financial statements and future prospects, before and after giving effect to the merger and the sale of the portfolio to Value Enhancement Fund and the sale of Manhattan Towers, as well as such other matters as it deemed necessary or appropriate; 31 37 - compared the financial and operating performance of AIP with publicly available information concerning certain other companies and businesses it deemed reasonably comparable and reviewed the relevant stock market information for such other companies; - reviewed the financial terms of certain recent business combinations and acquisition transactions it deemed reasonably comparable to the merger and the sale of the 31 property portfolio and the sale of Manhattan Towers and otherwise relevant to its inquiry; and - made such other analyses and examinations as it deemed necessary or appropriate. Chase Securities assumed and relied upon, without assuming any responsibility for verification, the accuracy and completeness of all of the financial and other information provided to, discussed with, or reviewed by or for Chase Securities, or publicly available, for purposes of the opinion and further relied upon the assurances of management of AIP that it was not aware of any facts that would make that information inaccurate or misleading. Chase Securities neither made nor obtained any independent evaluations or appraisals of the assets or liabilities of AIP nor did Chase Securities conduct a physical inspection of the properties and facilities of AIP. Chase Securities assumed that the financial forecast and projection information provided to or discussed with it by or on behalf of AIP were reasonably determined on bases reflecting the best currently available estimates and judgments of the management of AIP as to the future financial performance of AIP. We refer you to the information under the heading "Financial Projections" below. Chase Securities expressed no view as to such forecast or projection information, or the assumptions upon which it was based. In connection with the preparation of its opinion, Chase Securities was not authorized by AIP or the special committee to solicit, nor did Chase Securities solicit, offers from third parties for the acquisition of all or any part of the equity or assets of AIP. Chase Securities' opinion was necessarily based on market, economic and other conditions as they existed and could be evaluated on the date of its opinion. The opinion was limited to the fairness, from a financial point of view, to the holders of the trust common shares of AIP (other than DDR, DDR Sub and their respective direct and indirect subsidiaries) of the per share cash consideration to be received in the merger and Chase Securities expressed no opinion as to the underlying decision by AIP to engage in the merger, the sale of the portfolio to Value Enhancement Fund or the sale of Manhattan Towers. Chase Securities also expressed no opinion on matters of a tax, accounting or legal nature related to the merger, the sale of the portfolio or the sale of Manhattan Towers. Chase Securities' opinion does not constitute a recommendation to any holder of equity interests in AIP as to how such holder should vote, or agree to vote, with respect to the merger. The following is a summary of the material financial analyses performed by Chase Securities and reviewed with the special committee in connection with Chase Securities' presentation and its opinion to the special committee. Chase Securities has presented some of the summaries in tabular format. In order to understand the financial analysis more fully, you should read the tables together with the text of each summary. The summary set forth below does not purport to be a complete description of the analyses performed by Chase Securities in arriving at its opinion. Arriving at a fairness opinion is a complex process not necessarily susceptible to partial analysis or summary description. Chase Securities believes that its analyses must be considered as a whole and that selecting portions of analyses and of the factors considered by it, without considering all these factors and analyses, could create a misleading view of the processes underlying its opinion. No company or transaction used in the analyses set forth below as a comparison is directly comparable to AIP or the proposed merger. Chase Securities did not assign relative weights to any of its analyses in preparing its opinion. The matters considered by Chase Securities in its analyses were based on numerous macroeconomic, operating and financial assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond AIP's control and involve the application of complex methodologies and educated judgment. Any estimates incorporated in the analyses performed by Chase Securities are not necessarily indicative of actual past or future results or values, which may be significantly more or less favorable than these 32 38 estimates. Estimated values do not purport to be appraisals and do not necessarily reflect the prices at which businesses or companies may be sold in the future, and these estimates are inherently subject to uncertainty. Such analyses were prepared solely as part of Chase Securities' analysis of the fairness, from a financial point of view to the holders of common shares (other than DDR, DDR Sub and their respective direct and indirect subsidiaries) of the per share consideration to be received by such holders in the merger. Transaction Consideration. For purposes of its analysis, Chase Securities based its assumptions and estimates on the per share consideration to be paid for each common share (other than to DDR, DDR Sub and their respective direct and indirect subsidiaries). The per share consideration of $13.74 multiplied by the number of shares outstanding (20.992 million) equals an approximate total equity value of $288.4 million. The total equity value of $288.4 million plus net debt of $314.0 million projected for the consummation of the merger on January 31, 2001, including transaction expenses and contingency reserves, equals a total transaction value of $602.4 million. Comparable Company Analysis. Chase Securities reviewed and compared the operating performance and financial condition of five selected publicly traded REITs, which are referred to collectively as the "comparable companies," using publicly available information, with that of the operating performance and financial condition of AIP. Such comparable companies consisted of the following: - Bedford Property Investors; - Brandywine Realty Trust; - EastGroup Properties Inc.; - Keystone Properties Trust; and - PS Business Parks. Chase Securities' analysis included, among other things, a review of: - total market capitalization, calculated by adding equity market value and total debt, preferred units and preferred stock; - ratios of price per share to funds from operations, "FFO," per share; - ratios of price per share to adjusted funds from operations, "AFFO," per share; and - ratios of total market capitalization to earnings before interest expense, taxes, depreciation and amortization, "EBITDA." Chase Securities calculated the ratio of price per share as of October 27, 2000 to FFO per share using projected 2000 and 2001 FFO per share, as provided by Realty Stock Review, a national data service that monitors and publishes compilations of earnings estimates by selected research analysts regarding companies of interest to institutional investors, the ratio of price per share as of October 27, 2000 to AFFO per share using projected 2000 and 2001 AFFO per share based on equity analyst research reports and total market capitalization to EBITDA using projected 2000 and 2001 EBITDA based on equity analyst research reports. 33 39 These analyses showed the following:
SUGGESTED MULTIPLE RANGE FOR IMPLIED COMPARABLE MULTIPLES FOR COMPANIES TRANSACTION ------------- ------------- Price as compared to estimated current year FFO............. 7.0x- 9.0x 8.9x Price as compared to estimated next year FFO................ 6.0x- 8.0x 8.2x Price as compared to estimated current year AFFO............ 8.0x-10.0x 13.1x Price as compared to estimated next year AFFO............... 7.5x- 9.5x 11.2x Total Market Capitalization to estimated current year EBITDA.................................................... 9.5x-11.0x 10.2x Total Market Capitalization to estimated next year EBITDA... 9.0x-10.5x 9.7x
The implied multiples for the transaction were calculated using the $13.74 per share consideration that would be distributed to holders of common shares (other than DDR, DDR Sub and their respective direct and indirect subsidiaries) and the $602.4 million transaction value of the merger. Based on these analyses and AIP's estimated current year FFO, estimated next year FFO, estimated current year AFFO, estimated next year AFFO, estimated current year EBITDA, and estimated next year EBITDA, Chase calculated that the per share value implied by the transaction based on the multiples of the comparable companies was $8.40, using the estimated current year AFFO to $16.06, using the estimated current year EBITDA. None of the comparable companies were identical to AIP and, accordingly, an analysis of the foregoing necessarily involved complex considerations and judgements concerning the differences in financial and operational characteristics of the companies involved and other factors that could affect the companies compared to AIP. Precedent Transaction Analysis. Based upon publicly available information, Chase analyzed the purchase price and transaction value multiples of transactions for five selected corporate transactions involving the sale or merger of the entire target company, which are referred to collectively as the "precedent transactions." The precedent transactions were chosen based on a review of target companies that had general business, operating and financial characteristics representative of companies in the industry in which AIP operates. The precedent transactions reviewed were:
ANNOUNCEMENT DATE ACQUIRORS TARGETS - ----------------- --------- ------- 6/16/99.............................. Starwood Financial Trust Trinet Corporate Realty 3/01/99.............................. Duke Realty Weeks Corporation 11/17/99............................. ProLogis Industrial Trust Meridian Industrial Trust 7/09/98.............................. Reckson Associates/Metropolitan Tower Realty 12/23/97............................. Highwoods Properties J.C. Nichols Company
In connection with its analysis, Chase Securities calculated for each of the precedent transactions: - the purchase price, - total transaction value calculated by adding purchase price, total debt, preferred units and preferred stock; - ratios of offer price per share to FFO per share; - ratios of offer price per share to AFFO per share; and - ratios of total transaction value to EBITDA. Chase Securities calculated the ratio of offer price per share to FFO per share and AFFO per share using projected FFO and AFFO for the year in which the transaction was announced and the year following the announcement of the transaction and total transaction value to EBITDA using projected 34 40 EBITDA for the year in which the transaction was announced and the year following the announcement of the transaction. The results of this comparison were as follows:
SUGGESTED MULTIPLE RANGE IMPLIED FOR PRECEDENT MULTIPLES FOR TRANSACTIONS TRANSACTION -------------- ------------- Price as compared to estimated current year FFO............. 8.0x-10.0x 8.9x Price as compared to estimated next year FFO................ 7.0x- 9.0x 8.2x Price as compared to estimated current year AFFO............ 9.0x-11.0x 13.1x Price as compared to estimated next year AFFO............... 8.0x-10.0x 11.2x Total Market Capitalization to estimated current year EBITDA.................................................... 11.0x-12.5x 10.2x Total Market Capitalization to estimated next year EBITDA... 10.5x-12.0x 9.7x
The implied multiples for the transaction were calculated using the $13.74 per share consideration that would be paid to holders of common shares (other than DDR, DDR Sub and their respective direct and indirect subsidiaries) and the $602.4 million transaction value for the merger. Based on these analyses and AIP's estimated current year FFO, estimated next year FFO, estimated current year AFFO, estimated next year AFFO, estimated current year EBITDA and estimated next year EBITDA, the per share value implied by the suggested multiple range for precedent transactions was $9.45, using the estimated current year AFFO to $20.50, using the estimated next year EBITDA. None of the selected precedent transactions reviewed were identical to the merger and, accordingly, an analysis of the foregoing necessarily involved complex considerations and judgments concerning differences in financial and operational characteristics of the companies involved and other factors, including the general market conditions prevailing in the equity capital markets at the time of the transaction, that could affect the precedent transactions compared to the transactions. Chase Securities Estimated Adjusted Net Asset Value. Chase Securities performed a net asset value calculation that was preceded by due diligence which included: - a discussion with AIP management concerning the leasing and cap rate environment for each of its markets; - a review of AIP's historical and current year budgets; - a review of AIP prepared ARGUS cash flow projections; - a review of AIP prepared rent rolls; - a review of AIP's capital expenditure budget and year to date repair reports; - the completion of precedent property sales analysis for each of AIP's markets; and - site visits to selected properties which did not include physical inspections of such properties. Following this diligence, Chase Securities applied cap rates to AIP's 2000 budgeted net operating income (adjusted for a 3.0% property management fee and $0.10 psf capital expenditure reserve) that took into consideration market-by-market supply and demand fundamentals, market specific leasing conditions, tenant quality, and building age from which gross real estate asset value was calculated. Properties with occupancy rates in excess of 90% were considered stabilized, properties with occupancy rates less than 90% were leased up to 94% and properties with 100% occupancy were assigned a 3.0% vacancy allowance. Chase Securities then applied a 5% premium and 5% discount to this value that resulted in a gross real estate asset value range of $593.4 million to $650.2 million. In calculating estimated net asset value, Chase Securities subtracted net debt of $314.0 million from the gross real estate asset value range that resulted in an estimated net asset value range of $279.4 million to $336.2 million. Chase Securities then divided the 35 41 net asset value range by 20.992 million common shares outstanding to calculate a net asset value range of $13.31 to $16.01 per share. Finally, Chase Securities adjusted its estimated net asset value range for transaction expenses of $13.7 million that resulted in an estimated adjusted net asset value range of $12.66 to 15.36 per share. Chase Securities Liquidation Analysis. Chase Securities performed a liquidation analysis for AIP based upon projections and assumptions provided by AIP's management of projected net operating income and the projected debt balance for the year ended December 31, 2000. Under the liquidating analysis, AIP was liquidated over a 24-month period. Under the liquidation analysis, net operating income growth was approximately 3.0% per annum after the first two quarters until the end of the 24-month period. Additionally, Chase Securities assumed that Manhattan Towers was sold for net proceeds of $34.4 million. AIP's general and administrative expenses were assumed to be $1.146 million in the first two quarters and to decline by 10% in the next two quarters and decline by 50% thereafter. Capital expenditures, tenant improvements and leasing costs are assumed to be 15% of the net operating income. Chase Securities sold a percentage of assets per quarter at various cap rates, ranging from 10.25%-11.00% in the conservative scenario and 9.75% to 10.50% in the aggressive scenario, and correspondingly reduced the amount of debt and interest expense for each quarter's disposition. Chase Securities applied this methodology throughout the eight quarters to arrive at the total amount of proceeds from asset sales. Finally, Chase Securities took this amount and reduced it by the total amount of debt associated with the sales, along with various costs associated with the liquidation process, to arrive at the total liquidation proceeds. Chase Securities calculated the net present value of the total liquidation proceeds using 15%, 17.5% and 20.0% discount rates and then divided by the total shares outstanding (20.992 million) to arrive at a per share liquidation value. The Chase Securities liquidation analysis resulted in values ranging from $12.08 to $13.78 per share. Dividend Discount Analysis. Chase Securities performed a dividend discount analysis for AIP based upon projections and assumptions provided by AIP's management of projected FFO per common share and projected annual dividend payouts per common share for the years ending December 31, 2001 to December 31, 2006. Under the dividend discount model methodology, implied equity values are estimated by discounting dividends per share for the years 2001 through 2005 using discount rates reflecting an expected equity total return and calculating a terminal value by applying exit multiples on projected 2006 FFO for AIP. Chase Securities used discount rates ranging from 15.0% to 18.0% and terminal multiples of 7.0x to 9.0x. The present value of the dividends and the terminal value were added together to determine a range of equity values for AIP which ranged from $236.7 million to $316.6 million. On a per share basis, assuming 20.992 million common shares outstanding, this equated to $11.27, using a terminal multiple of 7.0x and a discount rate of 18.0% to $15.08, using a terminal multiple of 9.0x and a discount rate of 15.0%. Free Cash Flow Analysis. Chase Securities performed a discounted free cash flow analysis for AIP based upon projections and assumptions provided by AIP's management of projected net operating income and projected free cash flow for the years ending December 31, 2001 to December 31, 2006. Under the discounted free cash flow model methodology, implied equity values are estimated by discounting free cash flow for the years 2001 through 2005 using discount rates reflecting an expected equity total return and calculating a terminal value by applying exit cap rates to projected 2006 net operating income for AIP. Chase Securities used terminal cap rates of 10.0% to 12.0% and discount rates ranging from 15.0% to 18.0%. Chase Securities selected these ranges of discount rates and terminal value cap rates based on a review of companies that Chase Securities deemed comparable to AIP. The present value of free cash flow and the terminal value were added together to determine a range of equity for AIP which ranged from $242.4 million to $327.0 million. On a per share basis, assuming 20.992 million common shares outstanding, this equated to $11.55, using a terminal cap rate of 12.0% and a discount rate of 18.0% to $15.58, using a terminal cap rate of 10.0% and a discount rate of 15.0%. AIP retained Chase Securities to act as exclusive financial advisor to the special committee based upon its experience and expertise. Chase Securities, as part of its financial advisory business, is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions and valuations for estate, corporate and other purposes. The Chase Manhattan Corporation and its affiliates, 36 42 including Chase Securities, in the ordinary course of business, may have from time to time, provided, and in the future may continue to provide, for customary compensation, commercial and investment banking services to AIP, DDR, Lend Lease and their respective affiliates, including serving as agent bank for the Lend Lease credit facility, serving as agent bank for the Lend Lease Global Properties, SICAF, credit facility and serving as agent bank for the Lend Lease (U.S.) Finance, Inc., credit facility. In the ordinary course of business, Chase Securities or its affiliates may trade in the debt and equity securities of AIP and DDR and their respective affiliates, for their own accounts and for the accounts of their customers and, accordingly, may at any time hold a long or short position in such securities. AIP entered into a letter agreement with Chase Securities, dated May 5, 2000 which sets forth the terms of Chase Securities' engagement, as financial advisor to the special committee. Pursuant to the terms of the letter agreement, AIP has paid and agreed to pay Chase Securities the following fees for its services rendered in connection with the merger: - a retainer fee of fee of $500,000, $100,000 of which was paid upon the execution of the letter agreement and the remaining $400,000 of which was paid in four equal monthly installments of $100,000 per month for the four months immediately following the month in which the letter agreement was executed; and - a transaction fee of $2,000,000, payable upon the consummation of the merger, subject to adjustment upward based upon the final consideration received by holders of common shares (other than DDR, DDR Sub and their respective direct and indirect subsidiaries). AIP has also agreed to reimburse Chase Securities for its legal expenses incurred in connection with its preparation and delivery of its opinion, and for its other reasonable expenses incurred in connection with its engagement, and to indemnify Chase against certain liabilities incurred in connection with its engagement, including liabilities under the federal securities laws. CONFLICTS OF INTEREST In considering the recommendations of the board of trust managers and the sole member of the special committee, you should be aware that some of our members of management and trust managers have interests in the merger that are different from, or in addition to, your interest as a shareholder generally. These conflicts of interests are further described below and under the caption "The Merger -- Background of the Merger" beginning on page 16. 37 43 Total Consideration Payable to Trust Managers and Management. The total amount of consideration that our trust managers and management will receive individually in the merger is listed in the table below and described in more detail in the remainder of this section. Receipt of the payments described below is contingent upon the completion of the merger.
COMMON SEVERANCE COMMON SHARE TOTAL NAME AND TITLE PAYMENTS SHARES OPTIONS DERS CONSIDERATION - -------------- ---------- -------- -------- -------- ------------- Charles W. Wolcott................... $1,040,000 $ $ $580,000 $ President and CEO, trust manager Lewis D. Friedland................... 806,250 290,000 Exec. V.P. and COO Marc A. Simpson...................... 560,000 145,000 Sr. V.P., Secretary and Treasurer David B. Warner...................... 525,000 145,000 Sr. V.P. -- Real Estate Operations Scott A. Wolstein.................... -- -- Chairman of the Board Albert T. Adams...................... -- -- trust manager William H. Bricker................... -- -- trust manager T. Patrick Duncan.................... -- -- trust manager Robert H. Gidel...................... -- -- trust manager Robert E. Giles...................... -- -- trust manager Edward B. Kelley..................... -- -- trust manager Stanley J, Kraska, Jr................ -- -- trust manager J. Timothy Morris.................... -- -- trust manager James A. Schoff...................... -- -- trust manager
AIP Shares. Our common shares held individually by our officers and trust managers will be converted into the right to receive the same merger consideration as shares held by other shareholders. The total amounts that our trust managers and executive officers will receive for their shares are listed in the table above. Shares Options and DERs. The terms of our options provide that all outstanding options will automatically accelerate on a change in control. We have taken the necessary actions to provide for the cancellation at the time the merger becomes effective of all outstanding options to acquire common shares in exchange for a per option cash payment equal to the cash merger consideration of $ , less the then current exercise price of the option immediately before the effective time. At the effective time, our trust managers and executive officers will receive the cash payments listed in the table above for DERs and options that they hold based on an average price of $2.909 per DER and the excess of $ over the then current exercise price per share of the options. The payment for termination of the DERs was negotiated 38 44 by the sole member of the special committee and management and approved by our board. Officers' and Trust Managers' Indemnification and Insurance. The merger agreement provides that we will indemnify our and our subsidiaries' present and former officers, employees, trust managers and directors from liabilities arising out of actions or omissions in these capacities prior to the time the merger becomes effective, to the same extent as provided in our organizational documents or any written indemnification agreements or under any of our benefit plans. In addition, we will maintain directors' and officers' insurance coverage for six years after the effective time of the merger on terms no less favorable to these indemnified parties than existing insurance coverage. DDR has guaranteed the performance of these AIP obligations. The LaSalle Entities. The LaSalle entities, on behalf of their clients, own beneficially or have voting control of 7.6% of DDR's outstanding common stock. TRANSACTIONS AND RELATIONSHIPS BETWEEN AIP AND DDR Under the share purchase agreement dated as of July 30, 1998, between AIP and DDR, as amended, DDR purchased 2,207,624 common shares of AIP for $14,711,778 in cash and the transfer of five properties from DDR to AIP. In November 1998, in a subsequent closing under the purchase agreement, AIP issued 2,815,192 common shares to DDR in exchange for the cancellation of $43,635,476 in aggregate principal amount of outstanding debt owed to DDR by AIP. This transaction included undeveloped land purchased by AIP from DDR in the amount of $2.3 million plus interest, which land was then contributed by AIP to a joint venture with a third party. From November 20, 1998 through November 20, 2000, AIP had the option under the share purchase agreement to sell to DDR additional common and/or preferred shares for an aggregate purchase price that did not exceed in the aggregate $200,000,000. Any common shares sold to DDR would be at a price of $15.50 per share. If DDR became the owner of 49.9% of our outstanding shares, we could sell only preferred shares to DDR, at a price of $14.00 per share. These per share prices were subject to downward adjustment if the closing price for AIP common shares for the 10 days preceding the date we exercised our option was below $12.12 per share. After DDR had funded $100 million of this additional commitment, we could require DDR to purchase an additional $100 million in AIP common shares or preferred shares, depending on whether DDR owned 49.9% of all outstanding common shares, only so long as: - the trading price of DDR common stock was above $18.00; and - DDR's aggregate investment in AIP did not exceed 10% of DDR's market capitalization. The proceeds of any share sale to DDR were to be used solely for the purpose of funding property acquisitions approved by a majority of the members of the board of trust managers that were not affiliates of the seller of the property or of the assignor that assigned its right to acquire the property to AIP. This additional purchase option could only be exercised by action of a majority of our trust managers, excluding the trust managers designated by DDR. In December 1998, pursuant to this additional purchase option, AIP issued an aggregate of 868,386 of its common shares to DDR in exchange for $13,459,993 to fund property acquisitions by AIP in accordance with the terms of the purchase agreement. All common shares issued by AIP under the purchase agreement prior to January 15, 1999 were sold to DDR at a price of $15.50 per common share. In January 1999, AIP issued 3,410,615 common shares to DDR in exchange for $48,800,000 to fund certain property acquisitions by AIP in accordance with the terms of the purchase agreement and the cancellation of $3,000,000 in aggregate principal amount of outstanding debt owed to DDR by AIP. Of those shares, 1,543,005 common shares were issued at a price of $15.50 per common share and 1,867,610 common shares were issued at a price of $14.93 per common share. In August 1999, AIP issued 354,839 common shares to DDR in exchange for $5,500,000 to fund certain property acquisitions by AIP in accordance with the terms of the purchase agreement. AIP issued these shares at a price of $15.50 per common share. At November 1, 2000, the date the merger agreement was signed, $166.6 million remained outstanding under our additional purchase option. If the merger does not close by 39 45 May 31, 2001 because of a breach of the merger agreement by DDR or DDR Sub, we will regain our right to cause DDR to purchase up to $166.6 million of preferred shares or additional common shares from AIP. AIP's right would be extended for a period of time from its original termination date of November 20, 2000 by the number of days between June 19, 2000 and the later of (1) the date on which the breach occurs or (2) the first date on which a trust manager not designated by DDR becomes aware of the breach. Effective October 8, 1998, AIP acquired from DDR an 88.5% limited partnership interest in DDR/ Tech 29 Limited Partnership, a limited partnership whose assets consist of two light industrial properties and one office property totaling 290,991 sq. ft., located in Silver Springs, Maryland. In consideration for the property and for accrued interest on other borrowings, AIP issued approximately $16.1 million in common shares to DDR. The shares issued were valued at $15.50 per share. During 1998, AIP also borrowed an aggregate of $47.2 million from DDR in several unsecured borrowings at a fixed rate of interest of 10.25%, that provided for quarterly payments of interest and were due 30 days after demand, and AIP paid interest to DDR on these borrowings of approximately $660,000 for the year ended December 31, 1998. In December 1999, AIP repaid in full the borrowings from DDR made in 1998 to finance acquisitions. AIP also paid interest of $111,000 to DDR at the time of that repayment. AIP paid DDR $19,000 and $17,000 in management fees for the years ended December 31, 1998 and 1999, respectively, for management services with respect to certain real estate investments of AIP. CHANGE IN CONTROL PAYMENTS In December 1998, when DDR had purchased in excess of 33% of our outstanding shares, we made change in control payments under the bonus and severance agreements to our executive officers, and the options, restricted shares and DERs held by them vested as follows:
RESTRICTED CASH OPTIONS DERS SHARES EXECUTIVE OFFICER PAYMENT VESTED VESTED VESTED - ----------------- -------- ------- ------- ---------- Charles W. Wolcott........................... $862,500 190,000 200,000 14,000 Lewis D. Friedland........................... 693,750 101,000 100,000 6,000 Marc A. Simpson.............................. 472,500 52,000 50,000 3,500 David B. Warner.............................. 455,625 52,000 50,000 3,500
SHARE PURCHASES None of AIP, its trust managers or executive officers, DDR Sub or DDR and its affiliates has engaged in any transaction with respect to AIP common shares within 60 days prior to the date of this proxy statement. The following table sets forth purchases of AIP common shares by AIP during 1998, including, by quarter, the number of shares purchased and the high, low and average price paid. AIP made no share repurchases during 1999 and 2000.
PRICE PER SHARE AIP PURCHASES OF NUMBER ------------------------- COMMON SHARES OF SHARES LOW HIGH AVERAGE - ---------------- --------- ------ ------ ------- Fiscal Year 1998 First Quarter................................... 29,200 $13.13 $13.56 $13.40 Second Quarter.................................. 66,783 12.19 13.38 12.99 Third Quarter................................... 27,800 12.06 12.31 12.20
40 46 For a description of the purchases of AIP common shares by DDR, see "The Merger -- Transactions and Relationships between AIP and DDR." MATERIAL FEDERAL INCOME TAX CONSEQUENCES The following is a summary of the material federal income tax consequences of the merger to holders of our common shares. This summary does not address all aspects of federal income taxation that may be relevant to our common shareholders in light of their particular circumstances or to common shareholders subject to special treatment under the federal income tax laws. These shareholders may include financial institutions, tax-exempt organizations, insurance companies, dealers in securities or currencies, shareholders holding shares as part of a conversion transaction, as part of a hedge or hedging transaction, or as a position in a straddle for tax purposes, or shareholders who acquired our shares in connection with the exercise or other satisfaction of compensatory options. In addition, the summary below does not consider the effect of any foreign, state, local or other tax laws that may be applicable to the merger. The discussion assumes that common shareholders hold their common shares as capital assets and not as inventory or as property held primarily for sale to customers in the ordinary course of a trade or business. This summary is based upon the provisions of the Internal Revenue Code of 1986, treasury regulations, Internal Revenue Service rulings and judicial decisions, all in effect as of the date hereof and all of which are subject to change by subsequent legislative, judicial or administrative action. Some of these changes may possibly be retroactive. This summary is for general informational purposes only and is not tax advice. Dividends. Distributions paid on our common shares, other than the merger consideration, generally will constitute dividends for U.S. federal income tax purposes and will be taken into account as ordinary income to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles, and then will constitute a return of capital that is applied against a shareholder's basis in the shares to the extent these distributions exceed those earnings and profits. Distributions in excess of our current or accumulated earnings and profits and a shareholder's basis in the shares will be treated as a gain from the sale or exchange of the shares. As long as AIP qualifies as a REIT, corporate shareholders will not be eligible for the dividends received deduction as to such amounts. Holders of Shares. In general, upon receipt of the merger consideration, a holder of our common shares will be treated as if their common shares had been redeemed. Such redemption of common shares will be a taxable transaction. The U.S. federal income tax consequences of the redemption to a shareholder will depend on whether, based on such shareholder's particular circumstances, such shareholder qualifies for capital gain or loss treatment under section 302 of the Internal Revenue Code. If a shareholder does not qualify for capital gain or loss treatment, the redemption will be taxable to the shareholder as a dividend. If the shareholder will not actually or constructively own shares of any class of stock of AIP or DDR immediately after the redemption, such shareholder will qualify for capital gain or loss treatment under section 302 of the Internal Revenue Code. In such case, the shareholder will recognize capital gain or loss equal to the difference between the amount of cash received in the redemption and its adjusted tax basis in the redeemed shares. Such gain or loss will be long-term capital gain or loss if the shareholder held such shares for more than one year at the time of the redemption. If a shareholder actually or constructively owns shares of any class of stock of AIP or DDR immediately after the redemption of AIP's common shares, the shareholder should consult its tax advisor regarding the U.S. federal income tax consequences of the redemption in its particular situation, including the possibility that the receipt of any proceeds in the redemption will be treated as a dividend taxable as ordinary income. Foreign Shareholders. In the case of any foreign shareholder, for United States federal income tax purposes, i.e. a non-resident alien individual, a foreign corporation, or a foreign estate or trust, except as set forth in the next paragraph, we will withhold 30% of the merger consideration payable to the foreign shareholder in order to satisfy certain withholding requirements in connection with the receipt of fixed or determinable annual or periodical gains, profits, and income, unless the foreign shareholder proves in a 41 47 manner satisfactory to us that either (a) the redemption of its common shares pursuant to the merger will qualify as a sale or exchange with respect to such foreign shareholder under Section 302 of the Internal Revenue Code, rather than as a dividend for federal income tax purposes, in which case no withholding will be required, except as otherwise provided herein, (b) the foreign shareholder is eligible for a reduced tax treaty rate with respect to dividend income, in which case we will withhold at the reduced treaty rate, or (c) no withholding is otherwise required. Foreign shareholders are urged to consult their own tax advisers regarding the application to them of these withholding rules and other tax consequences of the merger to them. Under the Foreign Investment in Real Property Tax Act of 1980, a common shareholder, that is a foreign shareholder will generally not be subject to U.S. federal income or withholding tax on the gain recognized on the disposition of our common shares pursuant to the merger if (a) we are a "domestically controlled REIT" within the meaning of the Internal Revenue Code; or (b) our common shares are regularly traded on an established securities market within the meaning of the Internal Revenue Code and the shareholder does not own, actually or constructively under attribution rules provided in the Internal Revenue Code, in excess of 5% of the fair market value of all of our common shares outstanding at any time during the shorter of the five-year period preceding the merger or the shareholder's holding period. We believe that we are a "domestically controlled REIT." We also believe that our common shares are regularly traded on an established securities market within the meaning of the Internal Revenue Code. We will endeavor to determine whether our common shares continue to be regularly traded on an established securities market prior to the merger and whether we are a "domestically controlled REIT" as of the effective time of the merger. A foreign shareholder of our common shares who does not meet either of the above exceptions will be subject to (a) United States federal income tax at regular graduated rates on any gain recognized on the disposition of its shares in the merger; and (b) withholding in respect of this tax at a rate of 10% of the amount realized by the foreign shareholder in the merger. Foreign shareholders are urged to consult their tax advisors concerning the potential applicability of these exceptions and the consequences of a sale or other disposition of the common shares held by foreign shareholders in advance of the merger. Certification of Non-Foreign States. In order to avoid withholding under the Foreign Investment in Real Property Tax Act of 1980, a shareholder of our common shares who is not a foreign shareholder must certify under penalties of perjury as to its non-foreign status by completing the certification form that will be included with the letter of transmittal in connection with the merger. Backup Withholding. The exchange of common shares in the merger will be reported to the Internal Revenue Service. Backup withholding at a rate of 31% will apply to the merger proceeds unless the exchanging shareholder furnishes a taxpayer identification number in the manner prescribed by applicable Treasury regulations, certifies that the number is correct, certifies as to no loss of exemption from backup withholding and meets other conditions. Backup withholding does not apply to foreign shareholders, corporations and other exempt non-foreign shareholders. A foreign shareholder will be exempt from backup withholding if the applicable certification requirements are satisfied. The payment or distribution of merger proceeds to or through the United States office of a broker is subject to information reporting and backup withholding unless an exemption from information reporting and backup withholding is established. Any amounts withheld under the backup withholding rules described above will be allowed as a refund or a credit against United States federal income tax liability of the shareholder if the required information is furnished to the Internal Revenue Service on a timely basis. DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, YOU ARE URGED TO CONSULT YOUR TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO YOU OF THE MERGER, INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL OR OTHER TAX LAWS. 42 48 PLANS FOR AIP AFTER THE MERGER If DDR completes the merger, it intends to maintain AIP as a private REIT which will operate AIP's remaining properties and implement an orderly disposition plan. DDR will take certain steps after the approval of the merger to (1) retain AIP's status as a REIT (although private), and (2) prevent AIP from becoming a qualified REIT subsidiary of DDR. There are no current plans or proposals which relate to or would result in: - an extraordinary corporate transaction, such as a merger, reorganization or liquidation involving AIP; - a sale or transfer of a material amount of AIP's assets; or - any other material change in AIP's corporate structure or business. DDR's management has begun and intends to continue a study of AIP and its assets, corporate structure, capitalization, operations, properties, policies, management and personnel to determine what changes will be desirable following completion of the merger in order to organize and integrate AIP's activities with those of DDR and its other subsidiaries. CONDUCT OF THE BUSINESS OF AIP IF THE MERGER IS NOT COMPLETED If the merger is not completed, AIP's board of trust managers expects that AIP's current management will continue to operate AIP's business substantially as currently operated. AIP anticipates that DDR would continue to be a substantial shareholder and have the right to nominate four of the 11 members of the board of trust managers. AIP's board is not currently considering any other alternative to the merger. If the merger does not close by May 31, 2001 because of a breach of the merger agreement by DDR or DDR Sub, we will retain our right to cause DDR to purchase up to $166.6 million of preferred shares or additional common shares from AIP. The purchase price for the shares would be based upon AIP's trading price. AIP's right would be extended for a period of time from its original termination date of November 20, 2000 by the number of days between June 19, 2000 and the later of (1) the date on which the breach occurs or (2) the first date on which a trust manager not designated by DDR becomes aware of the breach. If AIP had this right, the board would consider whether the sale of shares would be accretive to shareholders. If so, and if there were appropriate property acquisitions to be funded in connection therewith, it would require that DDR purchase shares from AIP. ANTICIPATED ACCOUNTING TREATMENT OF THE MERGER The merger is expected to be accounted for using the purchase method of accounting in accordance with GAAP. REGULATORY APPROVALS RELATING TO THE MERGER No party is required to make filings with or obtain approvals from regulatory authorities in connection with the merger, other than the filing of articles of merger with Dallas County and the Secretary of State of the State of Texas. PROVISION FOR NON-DDR SHAREHOLDERS Neither DDR nor AIP has made any provision to grant non-DDR shareholders access to the files of AIP or DDR or to obtain counsel or appraisal services at their expense. LITIGATION RELATING TO THE MERGER On November 3, 2000, a purported shareholder class action and derivative action lawsuit was filed in Dallas County Court at Law No. 1 by a shareholder of AIP seeking, among other things, to enjoin the 43 49 consummation of the merger. DDR and our trust managers have been named as defendants in the lawsuit, and AIP has been named as a nominal defendant. The plaintiff alleges that the defendants have breached fiduciary duties, abused their control of AIP, and committed waste by agreeing to the terms of the announced merger and that the defendants will be unjustly enriched in connection with the proposed merger. The plaintiff has also sued for unspecified damages, punitive damages and attorneys' fees. The defendants deny the plaintiff's allegations of wrongdoing and intend to vigorously defend themselves. THE MERGER AGREEMENT The following describes the material terms of the merger agreement. The full text of the merger agreement is attached to this proxy statement as Appendix B and is incorporated in this proxy statement by reference. We encourage you to carefully read the entire merger agreement. GENERAL The merger agreement provides that upon the terms and subject to the conditions of the merger agreement, DDR Sub will be merged with and into us and that, following the merger, the separate existence of DDR Sub will cease and we will continue as the surviving entity. When the merger occurs: - each outstanding share of common stock of DDR Sub will be converted into a common share of AIP; - each outstanding AIP common share held by non-DDR shareholders will be converted into the right to receive $ in cash, without interest and any additional consideration that may be payable to current shareholders upon the sale of AIP's remaining properties as described on page ; and - common shares and share options held by DDR, DDR Sub or their affiliates (other than individuals) will be canceled in the merger. The amount of merger consideration may be reduced if dividends are paid to maintain REIT status or to avoid REIT taxable income for federal income tax purposes. EFFECTIVE TIME OF THE MERGER The merger agreement provides that if all the conditions to the merger agreement are satisfied or waived prior to the special meeting, the closing of the merger will take place as soon as practicable following the special meeting. Promptly after the closing, we and DDR Sub will file the necessary documents with public officials to complete the merger. We expect that, if all conditions to the merger have been satisfied or waived, the merger will occur within three business days after the special meeting. CONSEQUENCES OF THE MERGER Pursuant to the merger agreement, following approval and adoption of the merger and subject to the fulfillment or waiver of the conditions to closing, DDR Sub will be merged with and into AIP and AIP will continue as the surviving entity in the merger. As a result of the merger, each common share of AIP issued and outstanding immediately prior to the completion of the merger, other than the excluded shares described below, will be automatically converted into the right to receive cash as described above. The AIP common shares that will not be converted into the merger consideration are: - shares held in AIP's treasury, which will be canceled without any payment thereon; - shares held by DDR, DDR Sub and their direct or indirect subsidiaries, which will be canceled without any payment thereon; and 44 50 - shares held by shareholders who have perfected their dissenters' rights, which will be subject to appraisal in accordance with Texas law. At the completion of the merger, all AIP common shares, other than the shares for which dissenters' rights were perfected, will no longer be outstanding and will be canceled and retired and will cease to exist, and each certificate formerly representing those shares will thereafter represent only the right to receive the merger consideration. Also, on completion of the merger, each share of DDR Sub common stock will be canceled and automatically converted into the right to receive one AIP common share. Therefore, following the merger, the non-DDR shareholders will cease to participate in future earnings or growth, if any, of AIP or benefit from any increases, if any, in the value of AIP and they will no longer bear the risk of any decrease in value of AIP. Distributions by AIP after completion of the merger will be paid to DDR as the sole shareholder of AIP and not to the non-DDR shareholders. The rate of distributions after the completion of the merger may be greater than the rate of dividends currently paid by AIP. The AIP common shares are currently registered under the Securities Exchange Act of 1934. Following the merger, the common shares will become eligible for termination of that registration and AIP's registration under the Securities Exchange Act will be terminated. Additionally, the AIP common shares will be delisted from the New York Stock Exchange. AIP's obligations to file reports with the SEC will also be terminated. In addition, AIP will be relieved of its obligation to comply with the other requirements of the Securities Exchange Act, including the proxy rules, the short-swing trading profits provisions and, with respect to future transactions involving AIP, the "going private" provisions of Rule 13e-3 under the Securities Exchange Act. Accordingly, less information will be required to be made publicly available than is currently the case. DDR, however, will continue to be a publicly traded and reporting company. EMPLOYEE SHARE PLAN At the effective time, each option to purchase our common shares, other than those held by DDR, will be converted into the right to receive an amount in cash equal to the difference between the cash merger consideration and the then current exercise price of the option. Also at the effective time, each DER will be converted into the right to receive the negotiated average price of $2.909 per DER. SURRENDER AND EXCHANGE OF SHARE CERTIFICATES; PAYMENT FOR SHARES Promptly after the time the merger becomes effective, AIP will deposit with BankBoston, N.A., the exchange agent, an amount of cash equal to the aggregate amount of cash merger consideration to be paid to holders of our common shares immediately before the merger became effective and the amount of the final dividend, if any. A final dividend will be paid from operating revenue generated after the anticipated closing date, but only if the closing is delayed more than three days beyond that date. The exchange agent will then send to persons who held our common shares immediately before the merger became effective a letter of transmittal containing instructions for use in effecting the exchange of their AIP share certificates for the merger consideration payable to them. If you held our common shares immediately before the effective time of the merger, upon surrender to the exchange agent of an outstanding certificate or certificates which represented our shares and acceptance of such certificate by the exchange agent, the exchange agent will deliver to you the merger consideration owed to you pursuant to the merger agreement. No interest will be paid or accrue on any cash payable to you. Any portion of the merger consideration payable which remains undistributed for two years after the effective time will be delivered to AIP. If, at that time, you have not previously exchanged your certificates, you may thereafter only look to AIP, and then only as a general creditor, for payment of the merger consideration owed to you. If you do not have your share certificate, you may make an affidavit of that fact. In addition, we may require that you post a bond in a reasonable amount determined by us with respect to the missing share 45 51 certificate. Upon receipt of the affidavit and any required bond, the exchange agent will issue the merger consideration payable to you. TRANSFER OF SHARES At and after the effective time, our transfer agent will not record on the share transfer books transfers of any of our common shares that were outstanding immediately prior to the effective time of the merger. OFFICERS, TRUST MANAGERS AND GOVERNING DOCUMENTS From and after the effective time of the merger, Messrs. Wolstein, Gidel, Adams and Schoff will remain as trust managers of AIP. Our other trust managers and our officers will resign on or prior to the effective time. Our declaration of trust and bylaws in effect immediately prior to the effective time will continue to be our governing documents after the merger, each until later amended. REPRESENTATIONS AND WARRANTIES We made customary representations and warranties in the merger agreement relating to various aspects of our businesses and financial statements and other matters, including, among other things: - our and our subsidiaries' organization and good standing; - our and our subsidiaries' authority to enter into and the validity and effectiveness of the merger agreement; - our and our subsidiaries' capital structure; - the absence of conflicts, violations or defaults under our declaration of trust, bylaws and other agreements; - required consents and approvals, or the absence thereof, of governmental entities relating to the merger; - the documents and reports filed and to be filed, including this proxy statement, with the SEC and the accuracy and completeness of the information contained in those documents and reports; - litigation matters; - our and our subsidiaries' compliance with applicable laws; - the absence of recent material changes or events; - tax matters; - material liabilities or the absence thereof; - the absence of defaults under material loans, contracts, agreements, laws and court orders; - our and our subsidiaries' ownership of real property; - environmental matters; - pension and benefit plans and other matters relating to the Employee Retirement Income Security Act of 1974; - labor and employment matters; - our and our subsidiaries' ownership of intangible property; - insurance matters; - takeover statutes; 46 52 - Chase Securities' fairness opinion; and - the Investment Company Act of 1940. The merger agreement also contains customary representations and warranties of DDR and DDR Sub relating to various aspects of their business, including, among other things: - their organization and good standing; - their authority to enter into and the validity and effectiveness of the merger agreement; - the absence of conflicts, violations or defaults under their charter documents and other agreements; - the Investment Company Act of 1940; - required consents and approvals, or the absence thereof, of governmental entities; - the information supplied or to be supplied in connection with the documents and reports filed, and to be filed, with the SEC, including this proxy statement, and the accuracy and completeness of the information contained in those documents and reports; - their capital structure; - litigation matters and compliance with law; and - their access to funds sufficient to consummate the transactions contemplated by the merger agreement. CONDUCT OF BUSINESS PRIOR TO THE MERGER We have agreed, prior to the time the merger occurs, to operate our and our subsidiaries' businesses in the ordinary course in substantially the same manner as previously conducted and to use all commercially reasonable effects to preserve intact our business organization, and retain the services of our current officers and key employees. In addition, the merger agreement places specific restrictions on our ability and the ability of our subsidiaries to: - except as described below, authorize, declare or pay any dividends on or make other distributions in respect of any of our common shares; - make or rescind any material express or deemed tax election; - materially change our methods, principles or practices of accounting except as required by the SEC, GAAP or applicable law; - acquire or enter into any option or contract to acquire additional real property; - incur additional indebtedness except for working capital under our revolving lines of credit; - encumber assets; - commence construction of, or enter into agreements to develop or construct, other real estate projects; - amend our organizational documents; - change our capital structure; - issue securities or change the terms of any outstanding securities; - sell, dispose of or agree to sell or dispose of any of our properties; - make loans, advances, capital contributions or investments in any entity other than our subsidiaries; 47 53 - commit to purchase real estate in excess of $500,000 individually and $1,000,000 in the aggregate; - guarantee indebtedness; - enter into any related party transactions; - increase compensation or enter into employment or other agreements; - adopt any new employee benefit plan; - change the ownership of our subsidiaries; or - agree, commit or arrange to take any action listed above. Under the merger agreement, we are permitted to pay a dividend, but only in the minimum amount necessary to avoid jeopardizing our status as a REIT under the Internal Revenue Code and having positive REIT taxable income for federal income tax purposes. Any dividends paid for these purposes will reduce the amount of the merger consideration. We may also pay a dividend from operating revenues if the closing occurs after , 2001. A dividend paid for that purpose would not reduce the amount of the merger consideration. ACCESS TO INFORMATION We have agreed to allow DDR and DDR Sub, their officers, employees, accountants, counsel, financial advisors and other representatives, upon reasonable advance notice, reasonable access during normal business hours to our properties, books, contracts, commitments, personnel and records. We further agreed to furnish promptly to DDR and DDR Sub all other information concerning our business, properties and personnel as they may reasonably request. NO SOLICITATION In the merger agreement, we have agreed that, prior to the merger: - except as described below, neither we nor any of our subsidiaries will initiate, solicit or knowingly encourage, directly or indirectly, any acquisition proposal, or engage in any negotiations concerning or otherwise provide any confidential information or take any action designed or reasonably likely to facilitate any acquisition proposal; - except as described below, we will use our reasonable best efforts to cause our officers, trust managers, employees, agents and financial advisors not to engage in the activities listed in the preceding bullet point; - we will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted prior to November 1, 2000 with respect to the above actions; and - we will promptly notify DDR Sub if we receive any such inquiries or proposals, or any requests for information, or if any such negotiations or discussions are sought to be initiated or continued. The merger agreement does not prohibit our board of trust managers from: - furnishing information to, or engaging in discussions or negotiations with, any third party that makes an unsolicited acquisition proposal if: - the board determines, in good faith, following consultation with and after considering the advice of its legal and financial advisors, that these actions could reasonably be expected to result in a superior acquisition proposal; and - prior to furnishing information to, or engaging in discussions or negotiations with, the third party, we provide written notice to DDR and DDR Sub to the effect that we are furnishing information 48 54 to, or entering into discussions with, that third party, and the status of the discussions or negotiations with the third party; or - if applicable, taking and disclosing to our shareholders a position, as contemplated by Rules 14d-9 and 14e-2 under the Securities Exchange Act of 1934, or making any disclosure to our shareholders with regard to an acquisition proposal. The board of trust managers may withdraw or modify its approval or recommendation of the merger agreement only if it decides to approve and recommend a superior acquisition proposal. The term "acquisition proposal" means an inquiry, proposal or offer with respect to a transaction, other than the transactions contemplated by the sale agreement or the merger agreement, involving, or any purchase of, all or any significant portion of our assets or any of our equity securities or any assets or securities of our subsidiaries. The term "superior acquisition proposal" means a bona fide acquisition proposal: - that the board of trust managers (excluding DDR's designees), or an authorized committee of the board, determines to be more favorable to our shareholders from a financial point of view than the merger, based upon advice from our financial advisor and legal counsel that the value of the consideration provided for in the proposal is superior to the value of the consideration provided for in the merger; and - for which any required financing is then committed or which, in the good faith reasonable judgment of our board of trust managers and legal counsel, is reasonably capable of being financed by the third party, if financing is required. CONDITIONS TO THE MERGER Conditions to each party's obligations The respective obligations of each party to complete the merger are subject to the satisfaction prior to the closing date of the following conditions: - approval and adoption of the merger agreement by the holders of 66 2/3% of the outstanding common shares entitled to vote on the merger; - receipt of all required consents, approvals, permits and authorizations required to be obtained from any governmental entity in connection with the transactions contemplated by the merger; - absence of any temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction, or order of any governmental entity having jurisdiction over us, DDR or DDR Sub, and absence of any other legal restraint or prohibition preventing or making illegal the consummation of the merger; and - the sale of the 31 properties to Value Enhancement Fund shall have closed. Conditions to DDR's and DDR Sub's obligations DDR's and DDR Sub's obligations to effect the merger are further subject to the satisfaction or waiver of the following conditions: - we will have performed in all material respects the obligations required to be performed by us under the merger agreement at or prior to the closing date, and DDR and DDR Sub will have received a certificate to that effect signed on our behalf by our chief executive officer and our chief financial officer; - our representations and warranties described in the merger agreement will be true and correct in all material respects on and as of the closing date (or as of a particular date, where applicable), and 49 55 DDR will have received a certificate to that effect, signed on our behalf by our chief executive officer and chief financial officer; - DDR will have been furnished with evidence of the receipt of all consents required by the merger agreement; - no material adverse effect will have occurred since November 1, 2000 with respect to us, and DDR and DDR Sub will have received a certificate to that effect from our chief executive officer or our chief financial officer; - the tax opinion of Locke Liddell & Sapp LLP, our counsel, will have been delivered to us, DDR and DDR Sub; - all of our officers and trust managers, other than DDR's designees to our board, will have resigned; - DDR Sub will have received a comfort letter from Ernst & Young, LLP, our auditors; - shareholders holding not more than 10% of our outstanding shares will have exercised dissenters' rights; - DDR and DDR Sub will have received from us FIRPTA certificates for the DDR properties; - Manhattan Towers will have been sold and generated net cash proceeds of not less than $34.2 million; - our transaction expenses will not exceed $13.738 million; - the net cash proceeds to us from the sale of the 31 properties to Value Enhancement Fund will not be less than $135.4 million; - our net other assets will not be less than $17.702 million; - the aggregate principal amount of our indebtedness and the amount of indebtedness available under our lines of credit will not exceed $137.4 million; and - the LaSalle entities, on behalf of their clients, the Morgan Stanley Dean Witter entities, on behalf of their clients, and USAA Realco will have voted in favor of the merger agreement. We have satisfied the condition regarding the sale of Manhattan Towers. The merger agreement provides that we will be deemed to have satisfied the ninth, tenth, eleventh and twelfth conditions listed above if the sum or the actual amounts of the items described in the ninth, eleventh and twelfth conditions minus the actual amount of transaction expenses is within $1 million of the base amount of $173.564 million. In accordance with the merger agreement, the calculation was made on , 2001. Based on the calculation, we have satisfied the conditions nine through 12. [Because the result was $ more than the base amount, the merger consideration was increased from $13.74 per share to $ per share. OR Because the result was within $1 million of the base amount, the merger consideration remained at $13.74.] Conditions to our obligations Our obligation to effect the merger is further subject to the satisfaction or waiver of the following conditions: - DDR and DDR Sub will have performed in all material respect the obligations required to be performed by them under the merger agreement at or prior to the closing date, and we will have received a certificate to that effect signed on behalf of DDR by its chief executive officer or its chief financial officer; - the representations and warranties of DDR and DDR Sub described in the merger agreement will be true and correct in all material respects on and as of the closing date (or as of a particular date, 50 56 where applicable), and we will have received a certificate to that effect signed on behalf of DDR by its chief executive officer and its chief financial officer; - as to DDR and DDR Sub, no material adverse effect will have occurred since November 1, 2000, and we will have received a certificate to that effect from each of their respective chief executive officers and chief financial officers; - the cash consideration you are to receive is $13.74 or more; and - all consents and waivers from third parties in connection with the merger have been obtained. TERMINATION The merger agreement may be terminated and the merger may be abandoned at any time prior to the effective time as follows: - by mutual written consent of our board of trust managers and DDR's and DDR Sub's respective boards of directors; - any of the parties if: - any governmental entity has issued an injunction, order, decree or ruling, or taken any other action restraining, enjoining or otherwise prohibiting the consummation of the merger that remains in effect on May 31, 2001; - the merger is not consummated by May 31, 2001 and the terminating party's breach of any representation, warranty, covenant or other obligation under the merger agreement has not been the cause of or resulted in the failure of the merger to occur on or before May 31, 2001; - we fail to get approval of the merger from the holders of at least 66 2/3% of the outstanding common shares; or - the other party has breached its representations, warranties, covenants or obligations such that the conditions to closing cannot be satisfied by May 31,2001. - by DDR or DDR Sub, if: - prior to the special meeting, our board of trust managers has withdrawn or modified, in any manner which is adverse to DDR, its recommendation or approval of the merger or the merger agreement or the board has approved or recommended to our shareholders any superior acquisition proposal; or - AIP enters into a definitive agreement with respect to an acquisition proposal. - by us, if: - prior to the special meeting and subject to payment by us of a termination fee: - the board of trust managers has withdrawn or modified its recommendation or approval of the merger agreement or the board has approved or recommended a superior acquisition proposal. TERMINATION FEES The merger agreement provides that, except as described below, all costs and expenses incurred in connection with the merger agreement will be paid by the party incurring the expense. - AIP must pay DDR $4.5 million if the merger agreement is terminated for any of the following reasons: - breach of any representation, warranty, covenant, obligation or agreement by AIP such that the conditions to closing cannot be satisfied by May 31, 2001; 51 57 - failure to close the sale of the 31 properties to Value Enhancement Fund in accordance with the sale agreement because of AIP's breach of that agreement; - if prior to the shareholders meeting, the board withdraws its recommendation in favor of the merger; - if AIP enters into a definitive agreement with respect to an acquisition proposal; or - if the board approves or recommends a superior acquisition proposal. - DDR must pay AIP $4.5 million if the merger agreement is terminated because DDR breaches any representation, warranty, covenant, obligation or agreement, such that the conditions to closing cannot be satisfied by May 31, 2000. If the sale agreement is terminated because of a breach by DDR, DDR will be responsible for any termination fee to be paid by AIP to Value Enhancement Fund under the property sale agreement. INDEMNIFICATION The merger agreement provides that, from and after the time the merger agreement becomes effective, AIP will indemnify our and our subsidiaries' present and former officers, employees, directors and trust managers from liabilities arising out of actions or omissions in their capacity as such prior to or at the effective time of the merger, to the extent provided in our or our subsidiaries' organizational documents or any written indemnification agreements or other employee benefit plan or pension plan. In addition, AIP will maintain directors' and officers' insurance coverage for six years after the effective time of the merger on terms no less favorable to these indemnified parties than existing insurance coverage. DDR has agreed to guarantee these obligations after the merger is effective. AMENDMENT The merger agreement may be amended at any time only by written agreement of AIP, DDR and DDR Sub. However, after the required shareholder approval, no term or condition contained in the merger agreement may be amended or modified in any manner that by law requires further approval by our shareholders without our obtaining this further shareholder approval. FEES AND EXPENSES Whether or not the transactions are completed, all fees and expenses incurred in connection with the merger will be paid by the party incurring the expenses. If AIP terminates the property sale agreement, in addition to paying a termination fee, AIP must reimburse Value Enhancement Fund for its verifiable out-of-pocket costs, including legal fees, up to $450,000. In addition to any termination fee and expenses that may become payable by AIP under the merger agreement or the property sale agreement, AIP's estimated fees and expenses to be incurred in connection with the proposed transactions are as follows: Filing fees (SEC)........................................... $31,741 Legal, accounting and financial advisor's fees of AIP and the special committee..................................... Printing and solicitation fees and expenses................. Miscellaneous............................................... ------- Total............................................. $ =======
52 58 THE COMPANIES AIP We are an Irving, Texas based REIT focused on the light industrial property sector including office showroom, service center and flex properties, low-rise office and small bay distribution buildings. At September 30, 2000, our portfolio consisted of 71 properties comprised of approximately 7.8 million square feet in 11 states. We are a self-administered REIT that has acquired, managed and improved industrial and other commercial properties since 1985. Our properties were approximately 93.6% leased at December 31, 1999 and 92.3% at September 30, 2000. Our real estate assets are operated with the same long-term objectives and therefore are viewed as a single operating segment. Our executive offices are located at 6210 N. Beltline Road, Suite 170, Irving, Texas 75063. Our telephone number is (972) 756-6000. DDR AND DDR SUB DDR is an Ohio based REIT formed in 1992 and DDR Sub is a newly formed Texas REIT that was formed to effectuate the merger. DDR currently owns and manages 209 shopping centers in 40 states totaling 49.2 million square feet of real estate under management. DDR is a self-administered and self-managed REIT operating as a fully integrated real estate company which develops, leases and manages shopping centers. The principal executive offices of DDR and DDR Sub are located at 3300 Enterprise Parkway, Beachwood, Ohio 44122. The telephone number for each of these entities is (216) 755-5500. DDR owns 46.0% of our issued and outstanding common shares, and under the share purchase agreement entered into with AIP in July 1998, DDR has designated four of our trust managers. 53 59 PRINCIPAL SHAREHOLDERS AND SHARE OWNERSHIP OF MANAGEMENT OF AIP The following table sets forth information on the beneficial ownership of our common shares as of the record date by persons known to us to own more than 5% of our outstanding common shares, each of our trust managers and executive officers and all of our trust managers and executive officers as a group. The following information with respect to beneficial ownership of more than 5% of our outstanding common shares is based on reports on Schedule 13D or Schedule 13G filed with the SEC. A person is deemed to be the beneficial owner of the number of common shares of which that person has the right to acquire beneficial ownership, for example, by exercise of share options, within 60 days after the record date. Except as otherwise noted, all persons named below have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to community property laws where applicable.
NUMBER OF SHARES BENEFICIALLY PERCENT NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OF CLASS - ------------------------------------ ------------ -------- Albert T. Adams............................................. 2,000(1) * William H. Bricker.......................................... 5,400(2) * T. Patrick Duncan........................................... 1,200 * Robert H. Gidel............................................. 4,048(1) * Robert E. Giles............................................. 8,012(2) * Edward B. Kelley............................................ 2,000 * Stanley J. Kraska, Jr. ..................................... --........ J. Timothy Morris........................................... 1,000(3) * James A. Schoff............................................. 2,000(1) * Charles W. Wolcott.......................................... 336,000(4) 1.56% Scott A. Wolstein........................................... 2,006(1)(10) * Lewis D. Friedland.......................................... 160,006(5) * Marc A. Simpson............................................. 90,898(6) * David B. Warner............................................. 79,900(6) * USAA Real Estate Company.................................... 1,680,086(7) 7.79% 9830 Colonnade Boulevard, Suite 600 San Antonio, Texas 78230 Morgan Stanley Dean Witter & Co. The Morgan Stanley Real Estate Special Situations Fund II, L.P. Morgan Stanley Dean Witter Investment Management Inc. .... 1,999,653(8) 9.27% 1585 Broadway New York, New York 10036 LaSalle Investment Management (Securities) LP and LaSalle Investment Management, Inc. .............................. 1,507,578(9) 6.97% 100 East Pratt Street Baltimore, Maryland 21202 Scott A. Wolstein and Developers Diversified Realty Corporation............................................... 9,756,656(10) 45.23% 3300 Enterprise Parkway Beachwood, Ohio 44122 All trust managers and executive officers as a group(14 persons).................................................. 694,479(1)(2)(3) 3.24% (4)(5)(6)
- --------------- * Ownership is less than 1% of outstanding common shares. (1) Includes vested options to purchase 2,000 common shares. (2) Includes vested options to purchase 5,000 common shares. (3) Includes vested options to purchase 1,000 common shares. 54 60 (4) Includes vested options to purchase 250,000 common shares. (5) Includes vested options to purchase 135,000 common shares. (6) Includes vested options to purchase 70,000 common shares. (7) Based upon Amendment No. 4 to Schedule 13D filed jointly by United States Automobile Association, USAA Capital Corporation, and USAA Realco on August 6, 1998. USAA is the sole stockholder of USAA Capital Corporation and USAA Capital Corporation is the sole stockholder of Realco. Based upon these relationships, USAA, USAA Capital Corporation, and USAA Realco have shared voting and dispositive power over 1,680,086 common shares. (8) Based upon Amendment No. 1 to Schedule 13D filed jointly by Morgan Stanley Dean Witter & Co. (f/k/a Morgan Stanley, Dean Witter, Discover & Co.), Morgan Stanley Dean Witter Investment Management Inc. (f/k/a Morgan Stanley Asset Management Inc.) and Morgan Stanley Real Estate Special Situations Fund II, L.P. on March 17, 1998, Morgan Stanley Dean Witter has sole voting and dispositive power over 120,231 common shares and shared voting and dispositive power over 1,879,422 common shares held by the investors for whom Morgan Stanley Dean Witter Investment Management acts as an investment advisor. Pursuant to separate investment management agreements between Morgan Stanley Dean Witter Investment Management and Morgan Stanley Real Estate Special Situations Fund II, Morgan Stanley Dean Witter Investment Management has been granted voting and dispositive power with respect to the common shares held by Morgan Stanley Real Estate Special Situations Fund II. Morgan Stanley Dean Witter Investment Management has shared voting and dispositive power over 1,879,422 common shares held by Morgan Stanley Dean Witter Investment Management purchasers and the Morgan Stanley Real Estate Special Situations Fund II has shared voting and dispositive power over 652,415 of such common shares. Pursuant to separate investment management agreements between Morgan Stanley Dean Witter Investment Management and the Morgan Stanley Dean Witter Investment Management purchasers, Morgan Stanley Dean Witter Investment Management has been granted voting and dispositive power with respect to the common shares held by each of the Morgan Stanley Dean Witter Investment Management purchasers. (9) Based upon Amendment No. 2 to Schedule 13D filed jointly by LaSalle Investment Management (Securities) LP and LaSalle Investment Management, Inc. on February 10, 1998, (i) LaSalle Investment Management (Securities) LP has sole voting and dispositive power over 480,213 common shares and shared voting and dispositive power with respect to 480,212 common shares; and (ii) LaSalle Investment Management, Inc. has shared dispositive power with respect to 542,153 common shares. Includes vested options to purchase 5,000 common shares. (10) Based upon Amendment No. 7 to Schedule 13D filed jointly by DDR and Scott A. Wolstein on November 14, 2000, DDR has sole voting and dispositive power over 9,756,650 common shares and Mr. Wolstein has sole voting and dispositive power over 2,006 common shares (which amount includes beneficial ownership of 2,000 common shares as a result of options that are exercisable). Mr. Wolstein, as chairman of the board, president and chief executive officer of DDR, may be deemed to beneficially own all shares held by DDR. 55 61 TRUST MANAGERS AND EXECUTIVE OFFICERS OF AIP The following persons are the trust managers and executive officers of AIP.
NAME AGE POSITION(S) AND OFFICE(S) HELD - ---- --- ------------------------------ Scott A. Wolstein.......... 48 Chairman of the Board of Directors and Chief Executive Officer of the Company Albert T. Adams............ 49 Trust Manager William H. Bricker......... 68 Trust Manager T. Patrick Duncan.......... 52 Trust Manager Robert H. Gidel............ 49 Trust Manager Robert E. Giles............ 52 Trust Manager Edward B. Kelley........... 60 Trust Manager Stanley J. Kraska, Jr. .... 40 Trust Manager J. Timothy Morris.......... 34 Trust Manager James A. Schoff............ 54 Trust Manager Charles W. Wolcott......... 47 Trust Manager, President and Chief Executive Officer Lewis D. Friedland......... 41 Executive Vice President and Chief Operating Officer Marc A. Simpson............ 46 Senior Vice President and Chief Financial Officer, Secretary and Treasurer David B. Warner............ 42 Senior Vice President -- Real Estate Operations
Scott A. Wolstein was appointed as a trust manager and as Chairman of the Board of Trust Managers on July 30, 1998. Mr. Wolstein became Chairman of DDR in February 1997, and has served as President and Chief Executive Officer of DDR since its organization in 1992 and February 1993 initial public offering. Mr. Wolstein was a principal and executive officer of DDR's predecessor prior to 1993. Mr. Wolstein is a graduate of the Wharton School at the University of Pennsylvania and of the University of Michigan Law School. He is currently a member of the Board of Trustees of the National Association of Real Estate Investment Trusts and the International Council of Shopping Centers and serves as the General Co-Chairman of the Cleveland Campaign for the State of Israel Bonds. He is also a member of the Young Presidents Organization, The Urban Land Institute, the National Realty Committee and the Wharton Real Estate Center. Albert T. Adams was appointed as a trust manager on July 30, 1998. Mr. Adams has been a partner with the law firm of Baker & Hostetler LLP in Cleveland, Ohio, since 1984, and has been affiliated with the firm since 1977. Mr. Adams is a graduate of Harvard College, Harvard Business School and Harvard Law School. He serves as a member of the Board of Trustees of the Greater Cleveland Roundtable and of the Western Reserve Historical Society. Mr. Adams also serves as a director of DDR, Associated Estates Realty Corporation, Boykin Lodging Company, Captec Net Lease Realty, Inc. and Dairy Mart Convenience Stores, Inc. William H. Bricker has served as a trust manager since September 1985. Mr. Bricker was appointed Chairman and Chief Executive Officer of LTV Corporation in November 2000. He has served as President of DS Energy Services Incorporated and has consulted in the energy field and on international trade since 1987. In May 1987, Mr. Bricker retired as the Chairman and Chief Executive Officer of Diamond Shamrock Corporation where he held various management positions from 1969 through May 1987. He received his Bachelor of Science and Master of Science degrees from Michigan State University. T. Patrick Duncan has served as a trust manager since December 1996. Mr. Duncan joined USAA Realco in November 1986 as Chief Financial Officer. With over 24 years of experience, Mr. Duncan serves as Senior Vice President of Real Estate Operations with responsibilities which include the direction of all acquisitions, sales, management and leasing of real estate for USAA-affiliated companies. Mr. Duncan received degrees from the University of Arizona in Accounting and Finance. He is a Certified Public Accountant, Certified Commercial Investment Manager, and holds a Texas Real Estate Broker's 56 62 License. Mr. Duncan is also a member of the Board of Directors for the Daughters of Charity and a member of the Board of Directors of the North San Antonio Chamber of Commerce. Robert H. Gidel has served as a trust manager since July 1998. Mr. Gidel also serves as a Member of the Board of Directors of DDR, Lone Star Opportunity Funds I and II and Fortress Investment Trust. Since 1993, Mr. Gidel has been the managing partner of Liberty Partners, an investment partnership formed to purchase securities interests in private and public real estate companies. He has assumed management and governance roles in many of the companies in which the partnership has invested. He was President and Chief Executive Officer of Brazos Partners from 1993-1995, President and Chief Operating Officer of Paragon Group, Inc. from 1995-1997 and President of Meridian Point Realty Trust VIII from 1997-1998. Prior to 1993, Mr. Gidel was a Managing Director of Alex. Brown Kleinwort Benson Realty Advisors. He is a graduate of Warrington College of Business at the University of Florida with a major in real estate. Robert E. Giles has served as a trust manager since March 1996. Mr. Giles is currently Executive Vice President of Crown Castle UK Ltd., a communication sites and wireless network services company. From 1995 to 1999, Mr. Giles was the owner and President of Robert E. Giles Interests, Inc., a real estate consulting and development firm and President of Title Network, Ltd., a national title insurance agency. Mr. Giles was a Vice President with the J.E. Robert Companies, Inc. from 1994 to 1995. From 1990 to 1994, Mr. Giles was President and a Director of National Loan Bank, a publicly-held company created through the merger of Chemical Bank and Texas Commerce Bank. Mr. Giles received his Bachelor of Arts degree from University of Texas -- Austin in 1970 and received a Master of Arts degree from University of Texas -- Arlington in 1973. Edward B. Kelley has served as a trust manager since December 1996. Mr. Kelley is President of USAA Realco and of La Cantera Development Company. He joined Realco in April 1989 as Executive Vice President and Chief Operating Officer before assuming his new title in August 1989. Mr. Kelley received his Bachelor of Business Administration degree from St. Mary's University in 1964 and a Masters in Business Administration from Southern Methodist University in 1967, and is a Member of the Appraisal Institute. Mr. Kelley is a member of the Board of Directors of USAA Equity Advisors, Inc. Stanley J. Kraska, Jr. has served as a trust manager since July 1997. Mr. Kraska has been employed by LaSalle Investment Management (Securities) LP or its affiliates since February 1988. He currently serves as Managing Director, with responsibility for private placement investment. Mr. Kraska graduated from Dartmouth College in 1982 with a Bachelor of Arts degree and received a Master of Business Administration degree from Harvard University in 1986. J. Timothy Morris has served as a trust manager since January 15, 1999. Mr. Morris is a Principal at Morgan Stanley Dean Witter and head of Morgan Stanley's Real Estate Special Situations Program. Mr. Morris has over 12 years of experience at Morgan Stanley Dean Witter in the investment banking and direct investment areas. Prior to heading up the Special Situations initiative, Mr. Morris spent five years in Hong Kong running Morgan Stanley Dean Witter's real estate business for Asia. Mr. Morris currently serves on the board of Grove Property Trust, as well as on the boards of two private REITs. He is a graduate of Indiana University and holds a Bachelor of Science degree in Finance. James A. Schoff has served as a trust manager since July 1998. Mr. Schoff is Vice Chairman of the Board and Chief Investment Officer of DDR. Prior to this, Mr. Schoff served as DDR's Executive Vice President and Chief Operating Officer from the time of the DDR's initial public offering, and he was a principal and executive officer of DDR's predecessor. Mr. Schoff is a graduate of Hamilton College and Cornell University Law School. Mr. Schoff practiced law with the firm of Thompson, Hine and Flory where he specialized in the acquisition and syndication of real estate properties. Mr. Schoff currently serves as a member of the Executive Committee and Board of Trustees of the Western Reserve Historical Society and the National Committee for Community and Justice. Charles W. Wolcott currently serves as trust manager, President and Chief Executive Officer. Mr. Wolcott was hired as the President and Chief Executive Officer of AIP in May 1993 and has served 57 63 as a trust manager since August 1993. Mr. Wolcott was President and Chief Executive Officer for Trammell Crow Asset Services, a real estate asset and portfolio management affiliate of Trammell Crow Company, from 1990 to 1992. He served as Vice President and Chief Financial and Operating Officer of AIP from 1988 to 1991. From 1988 to 1990, Mr. Wolcott was a partner in Trammell Crow Ventures Operating Partnership. Prior to joining the Trammell Crow Company in 1984, Mr. Wolcott was President of Wolcott Corporation, a firm engaged in the development and management of commercial real estate properties. Mr. Wolcott graduated from the University of Texas at Austin in 1975 with a Bachelor of Science degree and received a Master of Business Administration degree from Harvard University in 1977. Lewis D. Friedland currently serves as Executive Vice President and Chief Operating Officer. He was hired as the Vice President and Chief Investment Officer of AIP in 1997. Prior to joining the Trust, Mr. Friedland was a founding partner of Crimson Partners, an investment firm formed in 1992 that engaged in the acquisition and development of real estate assets. Prior to founding this firm, he was a Division Partner and Managing Director of Trammell Crow Company where he was responsible for that firm's development, leasing, and property management activities in Richmond, Va. Mr. Friedland graduated from the Wharton School of the University of Pennsylvania in 1981 with a Bachelor of Science Degree in Economics and received a Master of Business Administration degree from Harvard University in 1985. Marc A. Simpson currently serves as Senior Vice President and Chief Financial Officer, Secretary and Treasurer. Mr. Simpson was hired as the Vice President and Chief Financial Officer, Secretary and Treasurer of AIP in March 1994. From November 1989 through March 1994, Mr. Simpson was a Manager in the Financial Advisory Services Group of Coopers & Lybrand L.L.P. Prior to that time, he served as Controller of Pacific Realty Corporation, a real estate development company. Mr. Simpson graduated with a Bachelor of Business Administration degree from Midwestern State University in 1978, and received a Master of Business Administration degree from Southern Methodist University in 1990. David B. Warner currently serves as Senior Vice President -- Real Estate Operations. Mr. Warner was hired as Vice President and Chief Operating Officer of AIP in May 1993. From 1989 through the date he accepted a position with AIP, Mr. Warner was a Director of the Equity Investment Group for the Prudential Realty Group. From 1985 to 1989, he served in the Real Estate Banking Group of NCNB Texas National Bank. Mr. Warner graduated from the University of Texas at Austin in 1981 with a degree in finance and received a Master of Business Administration from the same institution in 1984. DIRECTORS AND EXECUTIVE OFFICERS OF DDR
NAME AGE POSITION(S) AND OFFICE(S) HELD - ---- --- ------------------------------ Chairman of the Board of Directors and Scott A. Wolstein......................... 48 Chief Executive Officer Vice Chairman of the Board of Directors James A. Schoff........................... 54 and Chief Investment Officer David M. Jacobstein....................... 53 President and Chief Operating Officer Daniel B. Hurwitz......................... 34 Executive Vice President Joan U. Allgood........................... 47 Vice President and General Counsel William H. Schafer........................ 42 Senior Vice President and Chief Financial Officer Eric Mallory.............................. 39 Senior Vice President of Development William N. Hulett III..................... 56 Director Albert T. Adams........................... 49 Director Dean S. Adler............................. 43 Director Barry A. Sholem........................... 44 Director Terrance R. Ahern......................... 41 Director Robert H. Gidel........................... 49 Director
58 64 For a description of the business experience of Messrs. Wolstein, Schoff, Adams and Gidel, see "Trust Managers and Executive Officers of AIP" on pages 56-57. David M. Jacobstein has been the President and Chief Operating Officer of DDR since May 1999. From 1986 until the time he joined DDR, Mr. Jacobstein was employed by Wilmorite, Inc., a Rochester, New York based shopping center developer where most recently he served as Vice Chairman and Chief Operating Officer. Mr. Jacobstein is a graduate of Colgate University and George Washington University Law School. Prior to joining Wilmorite, Mr. Jacobstein practiced law with the firms of Thompson, Hine & Flory LLP in Cleveland, Ohio and Harris, Beach & Wilcox in Rochester, New York where he specialized in corporate and securities law. He is a member of the International Council of Shopping Centers and has served as a Vice-President of the Colgate University Alumni Corporation and as President of the Allendale Columbia School (Rochester, NY) Board of Trustees. Daniel B. Hurwitz was appointed Executive Vice President in June 1999. Mr. Hurwitz most recently served as Senior Vice President and Director of Real Estate and Development for Reading, Pennsylvania based Boscov's Department Store, Inc., a privately held department store chain from 1991 until he joined DDR. Prior to Boscov's, Mr. Hurwitz served as Development Director for The Shopco Group, a New York City based developer of regional shopping malls. Mr. Hurwitz is a graduate of Colgate University, and the Wharton School of Business Executive Management Program at the University of Pennsylvania. He is a member of the International Council of Shopping Centers and has served as a Board member of the Colgate University Alumni Corporation, Reading JCC, American Cancer Society (Regional), and the Greater Berk's Food Bank. Joan U. Allgood has been a Vice President and General Counsel of DDR since its organization as a public company and General Counsel of its predecessor entities since 1987. Mrs. Allgood practiced law with the firm of Thompson, Hine and Flory from 1983 to 1987, and is a graduate of Denison University and Case Western Reserve University School of Law. William H. Schafer has been a Vice President and Chief Financial Officer of DDR since its organization as a public company and the Chief Financial Officer of its predecessor entities since April 1992. Mr. Schafer joined the Cleveland, Ohio office of the Price Waterhouse LLP accounting firm in 1983 and served there as a Senior Manager from July 1990 until he joined the organization in 1992. Mr. Schafer graduated from the University of Michigan with a Bachelor of Arts degree in Business Administration. Eric Mallory is the Vice President of Development since April 1999. Prior to that, Mr. Mallory was Executive Vice President of PREIT-Rubin, Inc. in Philadelphia, Pennsylvania since 1993. Mr. Mallory is a graduate of the University of Pittsburgh and received his MBA from the University of Evansville. William N. Hulett III has been managing member of Fame Development, Ltd., a residential real estate developer since June 1999. Mr. Hulett has been a Director of BridgeStreet Accommodations, Inc., an American Stock Exchange listed company in the extended stay lodging industry, since June 1997. From June 1997 to June 1998, Mr. Hulett served as President and Chief Executive Officer of BridgeStreet and from June 1998 to June 1999 he served as Vice Chairman of the Board of Directors of BridgeStreet. From September 1995 to May 1997, Mr. Hulett was the Co-Chairman and Chief Executive Officer of the Rock and Roll Hall of Fame and Museum in Cleveland, Ohio. From May 1981 to May 1993, Mr. Hulett was the President of Stouffer Hotel Company, the owner of a national hotel chain. Prior to that time, Mr. Hulett served as Vice President of Operations for Westin Hotels, based in Seattle, Washington. In December 1991, he completed a third consecutive term as Chairman of the Convention and Visitors Bureau of Greater Cleveland. Mr. Hulett is Chairman of the Northern Ohio Chapter of the American Red Cross, a director of Cuyahoga Community College and a member of the Civic Vision 2000 Steering Committee. He is also a director of the Greater Cleveland Growth Association and Cleveland Development Advisors. Mr. Hulett was named Business Executive of the Year for 1995 by the Sales and Marketing Executives Association. 59 65 Dean S. Adler is currently a principal with Lubert-Adler Partners, L.P., a private equity real estate investment company which he founded in 1997. From 1987 through 1996, Mr. Adler was a principal and co-head of the private equity group of CMS Companies, specializing in acquiring operating businesses and real estate. Mr. Adler is a graduate of the Wharton School and the University of Pennsylvania Law School. He was an instructor at the Wharton School between 1981 and 1983. He currently serves as a member of the Board of Directors of The Lane Company, Electronics Boutique, Inc., U.S. Franchise Systems Inc. and Trans World Entertainment Corporation. Mr. Adler has served on such community boards as the UJA National Young Leadership Cabinet and he is currently a member of the Alexis de Tocqueville Society and is co-chairman of The Walt Frazier Youth Foundation. Barry A. Sholem is currently the Co-Chairman and Managing Director of Donaldson, Lufkin & Jenrette, Inc. Real Estate Capital Partners, a $750 million real estate fund which invests in a broad range of real estate related assets, which he joined in January 1995. Prior to joining Donaldson, Lufkin & Jenrette, Inc., Mr. Sholem was with Goldman, Sachs & Co. for fifteen years and was head of the Real Estate Principal Investment Area for Goldman, Sachs & Co. on the West Coast. Mr. Sholem is a graduate of Brown University and Northwestern University's J.L. Kellogg Graduate School of Management. Mr. Sholem is currently active in the Urban Land Institute, the International Council of Shopping Centers, the U.C. Berkeley Real Estate Advisory Board and the Business Roundtable. Terrance R. Ahern is a co-founder and principal of The Townsend Group, an institutional real estate consulting firm formed in 1986 which represents primarily tax-exempt clients such as public and private pension plans, endowment, foundation and multi-manager investments. Mr. Ahern is a member of the Board of Directors of the Pension Real Estate Association. He was formerly a member of the Board of Governors of NAREIT. Prior to founding The Townsend Group, Mr. Ahern was a Vice President of a New York based real estate investment firm and was engaged in the private practice of law. Mr. Ahern received a B.A. and J.D. from Cleveland State University. DIRECTORS AND EXECUTIVE OFFICERS OF DDR SUB
NAME AGE POSITION(S) AND OFFICE(S) HELD - ---- --- ------------------------------ David M. Jacobstein............................. 53 Director, President James A. Schoff................................. 54 Vice President Joan U. Allgood................................. 47 Director, Vice President and Secretary William H. Schafer.............................. 42 Director, Treasurer
For a description of the business experience of Mr. Schoff, see "Trust Managers and Officers of AIP." For a description of the business experience of Messrs. Jacobstein and Schafer and Ms. Allgood, see "Directors and Executive Officers of DDR" on pages 58-59. 60 66 DISSENTERS' RIGHTS The Texas REIT Act entitles any AIP shareholder who objects to the merger and who follows the procedures set forth in the Texas REIT Act, instead of receiving the consideration proposed under the merger, to receive cash equal to the "fair value" of that shareholder's common shares of AIP. The following summary of the procedures relating to the exercise of dissenters' rights is not a complete statement of those rights and is qualified in its entirety by reference to Sections 25.10, 25.20 and 25.30 of the Texas REIT Act, which are reproduced in full as Appendix D attached to this proxy statement. ANY SHAREHOLDER CONTEMPLATING THE POSSIBILITY OF DISSENTING FROM THE MERGER SHOULD CAREFULLY REVIEW THE TEXT OF APPENDIX D, PARTICULARLY THE SPECIFIC STEPS REQUIRED TO PERFECT DISSENTERS' RIGHTS, AND SHOULD CONSULT HIS OR HER LEGAL COUNSEL. DISSENTERS' RIGHTS WILL BE LOST IF THE PROCEDURAL REQUIREMENTS OF SECTION 25.20 OF THE TEXAS REIT ACT ARE NOT FULLY AND PRECISELY FOLLOWED. AIP shareholders who follow the procedure set forth in Section 25.20 of the Texas REIT Act are entitled to receive a cash payment equal to the fair value of their common shares equaling the value of the shares on the day before the meeting relating to the merger, excluding any appreciation or depreciation in the value of the shares in anticipation of the proposed action. Unless all of the procedures set forth in Section 25.20 of the Texas REIT Act are followed by a shareholder who wishes to exercise dissenters' rights, that shareholder will be bound by the terms of the merger. To be entitled to a cash payment upon exercise of dissenters' rights, a shareholder must first file, before the special meeting, with AIP a written notice objecting to the merger. This objection must state that the shareholder will exercise the shareholder's right to dissent if the merger is completed and must contain the shareholder's address. A shareholder desiring to exercise that shareholder's dissenters' rights must not vote in favor of adoption and approval of the merger agreement. A vote against approval and adoption of the merger agreement, however, will not in itself constitute a notice of intent to exercise dissenters' rights. After the merger has been approved by the AIP shareholders, AIP will send to each shareholder who filed a notice indicating intent to exercise dissenters' rights and did not vote in favor of the merger agreement, a notice that the merger has been approved. This notice must be mailed within 10 days after approval of the merger. The shareholder then has 10 days from the date AIP's notice was delivered or mailed to the shareholder to make written demand on AIP for payment of the fair value of the shareholder's shares. A shareholder who fails to make a demand within the 10 day period is bound by the merger and will receive the merger consideration. Within 20 days after receiving the shareholder's demand for fair value, AIP must deliver or mail to the shareholder a written notice either stating that AIP accepts the amount claimed in the demand and agrees to pay that amount within 90 days after the date on which the merger was effective or containing an estimate by AIP of the fair value of the shares and an offer to pay the amount of that estimate within 90 days after the date the merger was effective, subject to receipt of notice from the shareholder that the shareholder agrees to accept the amount of that estimate. If, within 60 days after the date on which the merger was effective, the value of the shares is agreed on between the shareholder and AIP, then payment for the shares will be made within 90 days after the date on which the merger was effective. If, within that 60-day period, the shareholder and AIP do not agree on the value of the shares, either the shareholder or AIP within 60 days after the expiration of that 60-day period may file a petition in any court in Dallas County, Texas asking for a finding and determination of the fair value of the shareholder's shares. The court will then determine whether each dissenting shareholder has fully complied with the provisions of Section 25.20 of the Texas REIT Act and, therefore, has become entitled to the valuation of and payment of its shares. The court will then appoint one or more qualified appraisers to determine the value of the shares. Based on the appraisers' report, the court will determine the fair value of the shares and will order AIP to pay that value, together with interest on the value of the shares, beginning 91 days after the date on which the merger was effective. Upon payment of the value of the shares as determined by the court, the dissenting shareholders cease to have any interest in those shares or in AIP. 61 67 Any shareholder who has exercised dissenters' rights and demanded payment for the shareholder's shares is not entitled to vote or exercise any of the rights of a shareholder except the right to receive payment for the shareholder's shares. Within 20 days after demanding payment for shares, each holder of certificates representing those shares must submit the certificates to AIP for notation on the certificate that demand for fair value has been made. The failure of holders of certificated shares to submit the certificates to AIP, at AIP's option, will terminate the shareholder's dissenters' rights. Any shareholder who has demanded payment for the shareholder's shares may withdraw that demand at any time before payment of those shares has been made or before any petition has been filed with a court to determine fair value. THE SALE OF PROPERTIES In order to facilitate the merger, we have entered into the sale agreement with Value Enhancement Fund, under which we will sell 31 of our properties for gross proceeds of $292.2 million. The closing of the sale of the properties to Value Enhancement Fund is a condition to the closing of the merger. The cash generated from the sale will be used to purchase the AIP common shares under the merger agreement. THE APPROVAL OF THE HOLDERS OF AT LEAST 66 2/3% OF OUR OUTSTANDING COMMON SHARES ON THE RECORD DATE IS REQUIRED TO APPROVE THIS PROPOSAL. IF USAA REALCO, THE MORGAN STANLEY DEAN WITTER ENTITIES, DDR AND THE LASALLE ENTITIES VOTE THEIR SHARES IN ACCORDANCE WITH THE VOTING AGREEMENTS THEY SIGNED, THIS PROPOSAL WILL BE APPROVED. THE VOTING AGREEMENTS SIGNED BY THE LASALLE ENTITIES PROVIDE THAT THEY MAY VOTE AGAINST THE PROPOSALS IF THEY BELIEVE THEY MUST DO SO TO SATISFY THEIR FIDUCIARY DUTIES TO THEIR INVESTMENT ADVISORY CLIENTS. A MAJORITY OF OUR TRUST MANAGERS NOT DESIGNATED BY DDR HAS APPROVED AND ADOPTED THE PROPERTY SALE AGREEMENT IN CONNECTION WITH THE APPROVAL OF THE MERGER AGREEMENT AND BELIEVES THAT THE TRANSACTIONS CONTEMPLATED BY THE PROPERTY SALE AGREEMENT IN THE CONTEXT OF THE MERGER TRANSACTION ARE IN THE BEST INTERESTS OF OUR SHAREHOLDERS. ACCORDINGLY, THESE TRUST MANAGERS RECOMMEND THAT SHAREHOLDERS VOTE FOR THIS PROPOSAL. The closing of the transactions contemplated by the sale agreement will take place immediately prior to the closing of the merger. The purchaser under the sale agreement, Value Enhancement Fund, is a private investment fund managed by Lend Lease, an institutional real estate advisor. Under the property sale agreement, Value Enhancement Fund has the right to assign the agreement to one or more assignees upon the following conditions: - the assignee is an entity controlling, controlled by or under common control with Value Enhancement Fund or an entity in which Value Enhancement Fund is a direct or indirect investor; - all of the earnest money has been delivered by Value Enhancement Fund in accordance with the purchase and sale agreement; - the assignee will assume all obligations under the purchase and sale agreement, but Value Enhancement Fund will remain primarily liable for the performance of the obligations; - Value Enhancement Fund will notify AIP promptly upon the designation of an assignee; and - a copy of the executed assignment and assumption agreement that will be delivered to AIP at least five days prior to the closing. In connection with the purchase of the properties, Value Enhancement Fund will assume up to $149.947 million of debt and other liabilities associated with the properties. Under the property sale agreement, we have agreed, among other things, to the following: - obtaining approval of the AIP shareholders to the sale as soon as possible; - using our commercially reasonable efforts to sell our Manhattan Towers property for a purchase price of at least $48 million; 62 68 - using our commercially reasonable efforts to cause the merger to occur contemporaneously with the sale of the properties; and - not to initiate or solicit any inquiries or negotiations with respect to a sale of all or any significant portion of our assets or those of our subsidiaries. We have satisfied the condition regarding Manhattan Towers. Our obligations and the obligations of Value Enhancement Fund to complete the purchase and sale of the properties are subject to, among other things, the following conditions: - each of the party's representations and warranties contained in the sale agreement being true and correct in all material respects as of the closing date; - Value Enhancement Fund's receipt of consent of lenders to its assumption of at least $118 million of the debt associated with the properties; - receipt by Value Enhancement Fund of estoppel certificates from nine of 10 of our major tenants and from 75% of our other tenants; - receipt of approval of the AIP shareholders for the sale; and - compliance with all of the covenants and obligations contained in the sale agreement. We will be obligated to pay Value Enhancement Fund a termination fee of $3.0 million and reimburse it for actual out-of-pocket expenses not to exceed $450,000, if any of the following occurs and we elect to or are required to terminate the sale agreement: - we are not able to obtain approval of our shareholders for the sale; - we are unable to cause the contemporaneous closing of the merger; - we receive a superior acquisition proposal, as determined in good faith by our board of trust managers; or - the sale of properties is not closed because the conditions described above are not satisfied as a result of our default. 63 69 The properties which are to be sold to Value Enhancement Fund or its assignee are described below:
OCCUPANCY AT SEPTEMBER 30, PROPERTY NAME TYPE CITY STATE GLSF 2000 - ------------- ---------------- ---------------- ---------- --------- ---------------- 107 Woodmere Light Industrial Folsom California 57,496 100.0% 100 Alfred Light Industrial Santa Clara California 33,824 100.0% AeroTech Light Industrial Colorado Springs Colorado 75,892 100.0% Avion Business Center Light Industrial Carrollton Texas 70,844 94.8% Battlefield Business Park Light Industrial Manassas Virginia 154,226 100.0% Black Canyon Technical Center Light Industrial Phoenix Arizona 100,000 100.0% Bridgeway Technology Center Light Industrial Newark California 170,751 99.3% Cameron Creek Business Park Light Industrial Austin Texas 50,021 100.0% Central Park Office Tech Light Industrial Richardson Texas 73,099 90.0% Columbia Corporate Center Light Industrial Aliso Viejo California 128,110 89.2% Corporex Plaza I Light Industrial Tampa Florida 94,063 97.4% Humboldt Tech Center Light Industrial Sunnyvale California 60,030 100.0% Huntington Drive Light Industrial Monrovia California 62,218 98.2% Interlocken Office Park Light Industrial Broomfield Colorado 121,970 100.0% Inverness Business Park Light Industrial Englewood Colorado 99,862 100.0% Junction II Business Park Light Industrial San Jose California 77,374 100.0% Metro Business Park Light Industrial Phoenix Arizona 109,933 91.5% Northpointe B Light Industrial Sterling Virginia 36,655 100.0% Northpointe C Light Industrial Sterling Virginia 49,039 100.0% Presidents Plaza Light Industrial Tampa Florida 42,649 97.1% Skyway Business Center Light Industrial Irving Texas 66,504 87.1% Southeast Commercial Center Light Industrial Austin Texas 34,514 100.0% Stewart Plaza Light Industrial Sunnyvale California 47,054 100.0% Summit Park Light Industrial Austin Texas 96,950 100.0% --------- TOTAL LIGHT INDUSTRIAL 1,913,078 485 Clyde Office Mountain View California 61,600 100.0% Academy Point Atrium II Office Colorado Springs Colorado 90,766 97.5% Baytech Park Office San Jose California 188,825 100.0% Centre Pointe Office Park Office Walnut Creek California 196,671 98.2% Gibraltar Tech Center Office Sunnyvale California 36,228 100.0% Northview Business Center Office Austin Texas 254,805 100.0% Spring Valley Business Park #6 Office Richardson Texas 94,304 100.0% --------- TOTAL OFFICE 923,199 TOTAL PORTFOLIO 2,836,277 PORTFOLIO OCCUPANCY 98.08%
If Value Enhancement Fund fails to perform its obligations under the property sale agreement for any reason except our failure to perform thereunder, we may terminate the agreement and we will be entitled to receive Value Enhancement Fund's $3,000,000 earnest money deposit. 64 70 INDEPENDENT AUDITORS Our consolidated financial statements incorporated in this document by reference from our annual report on Form 10-K for the year ended December 31, 1999 have been audited by Ernst & Young LLP, independent auditors, as stated in their report, which is incorporated herein by reference. Representatives of Ernst & Young LLP are expected to be present at the special meeting, will have the opportunity to make a statement if they so desire and will be available to respond to appropriate questions. SHAREHOLDER PROPOSALS If the merger is completed, there will be no public shareholders and no public participation in any of our future meetings of shareholders. If, however, the merger is not completed, our shareholders would continue to be entitled to attend and participate in our shareholder meetings and we will inform you by press release or other reasonable means of the date by which shareholder proposals must be received by us for inclusion in the proxy materials relating to the next annual meeting. All shareholder proposals must comply with the rules and regulations of the SEC. WHERE YOU CAN FIND MORE INFORMATION AIP and DDR are subject to the reporting requirements of the Securities Exchange Act of 1934, and file reports, proxy statements and other information with the SEC at its Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxies, information statements and other information regarding issuers that file electronically, and the address of that site is http://www.sec.gov. AIP's common shares and DDR's common shares are listed on the New York Stock Exchange. All reports, proxy statements and other information that AIP and DDR filed with the New York Stock Exchange may be inspected at the New York Stock Exchange's offices at 20 Broad Street, New York, New York 10005. You should rely only on the information contained in this document. We have not authorized anyone to provide you with information that is inconsistent with information contained in this document. The information in this document is current as of the date it is mailed to shareholders, and not necessarily as of any later date. If any material change occurs during the period in which this document is required to be delivered, this document will be supplemented or amended. All information regarding AIP in this document has been supplied by AIP, and all information regarding DDR and DDR Sub has been supplied by DDR. 65 71 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The SEC allows us to "incorporate by reference" the information we file with it, which means that we can disclose important information to you by referring you to that information. The information incorporated by reference is considered to be part of this document, and the information we file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and any future filings made with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 subsequent to the date of this document and prior to the date of the special meeting or any adjournment or postponement thereof. The following documents we have filed with the SEC (File No. 1-9016) are incorporated by reference: - Annual Report on Form 10-K for the year ended December 31, 1999; - Quarterly Report on Form 10-Q for the quarter ended March 31, 2000; - Quarterly Report on Form 10-Q for the quarter ended June 30, 2000; - Current Report on Form 8-K filed on February 17, 2000; - Quarterly Report on Form 10-Q for the quarter ended September 30, 2000; - Current Report on Form 8-K filed on November 8, 2000; and - Current Report on Form 8-K filed on November 9, 2000. You may request a copy of these filings at no cost by writing or telephoning , , at the following address and telephone number: American Industrial Properties REIT 6210 N. Beltline Road Suite 170 Irving, Texas 75063 (972) 756-6000 If you would like to request documents, please do so by , 2001 to receive them before the special meeting. 66 72 APPENDIX A [CHASE LOGO] CHASE SECURITIES INC. 707 TRAVIS, 7-CBBN-388 HOUSTON, TX 77002 November 1, 2000 The Special Committee of the Board of Trust Managers American Industrial Properties REIT 6210 North Beltline, Suite 170 Irving, Texas 75063 Members of the Special Committee: You have informed us that American Industrial Properties REIT (the "Seller"), Developers Diversified Realty Corporation ("Parent"), owner of approximately 46% of the common shares of beneficial interest of the Seller, par value $.10 per share ("Trust Common Shares"), and DDR Transitory Sub Inc., ("Buyer"), a direct wholly-owned subsidiary of Parent, propose to enter into an Agreement and Plan of Merger dated as of November 1, 2000 (the "Merger Agreement") which provides, among other things, that a merger will occur between the Buyer and the Seller in which Buyer will be merged with and into the Seller (the "Merger"). Pursuant to the Merger Agreement, the shareholders of the Seller (other than Buyer and any of its affiliates) will receive for each Trust Common Share $13.74 in cash (the "Per Share Cash Consideration"), subject to adjustment (i) downward for any distribution made or dividend paid by the Seller, to the shareholders of the Seller, other than the Final Dividend (as defined in the Merger Agreement) and (ii) upward if the Base Amount (as defined in the Merger Agreement) is more than $1,000,000 greater than $173,564,000, determined in accordance with Section 6.2(m) of the Merger Agreement. The shareholders of Seller (other than Buyer and any of its affiliates) will be entitled to receive a supplemental payment if Buyer sells all or substantially all of the DDR Properties (as defined in the Merger Agreement), at any time during the first six months following the Closing Date (as defined in the Merger Agreement), for an amount greater than the agreed-upon aggregate values of the DDR Properties set forth on Exhibit B to the Merger Agreement. You have also informed us that the Seller, AIP-Alfred, Inc. ("AIP-A"), AIP/Battlefield GP, Inc. ("AIP/B"), AIP-SWAG Operating, L.P. ("AIP-S"), AIP Properties #3, L.P. ("AIP-P") and AIP Operating, L.P. ("AIPO"; AIP-A, AIP/B, AIP-S, AIP-P and AIPO, collectively, the "Seller Subs"), all wholly-owned subsidiaries of the Seller and Value Enhancement Fund IV, L.P. ("Purchaser") propose to enter into an Agreement of Purchase and Sale dated as of November 1, 2000 (the "Lend Lease Purchase Agreement") which provides, among other things, for the sale (the "Lend Lease Sale") by the Seller and the Seller Subs to Purchaser of the Property (as defined in the Lend Lease Purchase Agreement, referred to herein as the "Lend Lease Portfolio") for not less than $135,400,000 cash consideration (net of related closing costs, repayment of indebtedness for money borrowed secured by the Lend Lease Portfolio and related prepayment penalties and fees) (the "Lend Lease Portfolio Consideration"). You have also informed us that the Seller and Divco West Properties, LLC ("Manhattan Towers Purchaser") have entered into an Agreement of Purchase and Sale dated August 16, 2000, as amended August 29, 2000, as further amended September 21, 2000 (the "Manhattan Towers Purchase Agreement"; the Merger Agreement, the Lend Lease Purchase Agreement and the Manhattan Towers Purchase Agreement, collectively, the "Agreements") which provides, among other things, for the sale (the "Manhattan Towers Sale"; the Lend Lease Sale and the Manhattan Towers Sale, collectively, the "Real Estate Sale") by the Seller to Manhattan Towers Purchaser of the Property (as defined in the Manhattan CHASE SECURITIES INC. IS A MEMBER OF NASD/SIPC, AND IS A WHOLLY-OWNED SUBSIDIARY OF THE CHASE MANHATTAN CORPORATION. A-1 73 American Industrial Properties REIT November 1, 2000 Page 2 Towers Purchase Agreement, referred to herein as the "Manhattan Towers"; the Lend Lease Portfolio and the Manhattan Towers, collectively, the "Real Estate") for not less than $34,200,000 cash consideration (net of related closing costs, repayment of indebtedness for money borrowed secured by the Manhattan Towers and related prepayment penalties and fees) (the "Manhattan Towers Consideration"; the Lend Lease Portfolio Consideration and the Manhattan Towers Consideration, collectively, the "Aggregate Real Estate Consideration"). You have also informed us that the consummation of the Merger is contingent upon the consummation of the Real Estate Sale, provided that the Seller and the Seller Subs, as applicable, receive the Aggregate Real Estate Consideration in exchange for the Real Estate. In rendering this opinion, we assume that the Real Estate Sale will be consummated and the Seller will receive the Aggregate Real Estate Consideration. You have requested that we render our opinion as to the fairness, from a financial point of view, to the holders of Trust Common Shares (other than Buyer and any of its affiliates) of the Per Share Cash Consideration to be received by such holders in the Merger. In arriving at the opinion set forth below, we have, among other things: (a) reviewed drafts of the Agreements in the forms provided to us, including the most recent drafts dated October 31, 2000 and have assumed that the final forms of such Agreements, as applicable, will not vary in any regard that is material to our analysis; (b) reviewed certain publicly available business and financial information we deemed relevant relating to the Seller and the industries in which the Seller operates; (c) reviewed certain internal non-public financial and operating data provided to us by the management of the Seller relating to the Seller's business, including certain forecast and projection information as to future financial results of such business; (d) discussed with members of the senior management of the Seller, the Seller's operations, historical financial statements and future prospects, before and after giving effect to the Merger and/or the Real Estate Sale, as well as such other matters as we deemed necessary or appropriate; (e) compared the financial and operating performance of the Seller with publicly available information concerning certain other companies and businesses we deemed reasonably comparable and reviewed the relevant stock market information for such other companies; (f) reviewed the financial terms of certain recent business combinations and acquisition transactions we deemed reasonably comparable to the Merger and the Real Estate Sale and otherwise relevant to our inquiry; and (g) made such other analyses and examinations as we have deemed necessary or appropriate. We have assumed and relied upon, without assuming any responsibility for verification, the accuracy and completeness of all of the financial and other information provided to, discussed with, or reviewed by or for us, or publicly available, for purposes of this opinion and have further relied upon the assurances of management of the Seller that they are not aware of any facts that would make such information inaccurate or misleading. We have neither made nor obtained any independent evaluations or appraisals of the assets or liabilities of the Seller nor have we conducted a physical inspection of the properties and facilities of the Seller. We have assumed that the financial forecast and projection information provided to or discussed with us by or on behalf of the Seller have been reasonably determined on bases reflecting the best currently available estimates and judgments of the management of the Seller as to the future financial A-2 74 American Industrial Properties REIT November 1, 2000 Page 3 performance of such companies. We express no view as to such forecast or projection information, or the assumptions upon which they were based. Our opinion herein is necessarily based on market, economic and other conditions as they exist and can be evaluated on the date of this letter. Our opinion is limited to the fairness, from a financial point of view, to the holders of the Trust Common Shares (other than Buyer and any of its affiliates) of the Per Share Cash Consideration to be received in the Merger and we express no opinion as to the underlying decision by the Seller to engage in the Merger or the Real Estate Sale. We also express no opinion on matters of a tax, accounting or legal nature related to the Merger or the Real Estate Sale. This opinion does not constitute a recommendation to any holder of equity interests in the Seller as to how such holder should vote (or agree to vote) with respect to the Merger. Chase Securities Inc., as part of its financial advisory business, is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions and valuations for estate, corporate and other purposes. We have acted as financial advisor to the Special Committee of the Board of Trust Managers of the Seller in connection with the Merger and will receive a fee from the Seller for our services, including for rendering this opinion, payment of a significant portion of which is contingent upon the consummation of the Merger and the Real Estate Sale. In addition, the Seller has agreed to indemnify us for certain liabilities arising out of our engagement. As we have previously advised you, The Chase Manhattan Corporation and its affiliates, including Chase Securities Inc., in the ordinary course of business, may have from time to time, provided, and in the future may continue to provide, for customary compensation, commercial and investment banking services to the Seller, Parent, Lend Lease Real Estate Investments, Inc. and their respective affiliates, including serving as agent bank for the Lend Lease Real Estate Investments, Inc. credit facility, serving as agent bank for the Lend Lease Global Properties, SICAF, credit facility and serving as agent bank for the Lend Lease (U.S.) Finance, Inc. credit facility. In the ordinary course of business, we or our affiliates may trade in the debt and equity securities of the Seller and Parent and their respective affiliates, for our own accounts and for the accounts of our customers and, accordingly, may at any time hold a long or short position in such securities. Based upon and subject to the foregoing, we are of the opinion, as of the date hereof, that the Per Share Cash Consideration in the Merger is fair, from a financial point of view, to the holders of Trust Common Shares (other than Buyer and any of its affiliates). This opinion is for the use and benefit of the Special Committee of the Board of Trust Managers of the Seller in its evaluation of the Merger and shall not be used for any other purpose without the prior written consent of Chase Securities Inc., provided that the Special Committee of the Board of Trust Managers of the Seller may provide a copy of this opinion to the Board of Trust Managers of the Seller and, provided further that, the Board of Trust Managers of the Seller may rely upon this opinion in its evaluation of the Merger. Very truly yours, /s/ CHASE SECURITIES INC. CHASE SECURITIES INC. A-3 75 APPENDIX B AGREEMENT AND PLAN OF MERGER AMONG DEVELOPERS DIVERSIFIED REALTY CORPORATION, DDR TRANSITORY SUB INC. AND AMERICAN INDUSTRIAL PROPERTIES REIT DATED AS OF NOVEMBER 1, 2000 B-1 76 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 THE MERGER............................................... B-8 1.1 The Merger.................................................. B-8 1.2 Closing..................................................... B-8 1.3 Effective Time.............................................. B-8 1.4 Effect of Merger on Declaration of Trust and Bylaws......... B-9 1.5 Board of Managers and Officers.............................. B-9 1.6 Effect on Shares............................................ B-9 1.7 Dissenters' Rights.......................................... B-9 1.8 Share Options and Related Matters........................... B-10 1.9 Exchange of Certificates; Pre-Closing Dividends; Fractional Shares...................................................... B-10 1.10 Right to Receive Dividends.................................. B-11 1.11 Additional Merger Consideration............................. B-12 ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF SELLER................. B-12 2.1 Organization and Qualification; Subsidiaries................ B-12 2.2 Authority Relative to Agreements; Board Approval............ B-13 2.3 Capital Stock............................................... B-13 2.4 No Conflicts; No Defaults; Required Filings and Consents.... B-14 2.5 SEC Matters and Absence of Undisclosed Liabilities.......... B-14 2.6 Litigation; Compliance With Law............................. B-15 2.7 Absence of Certain Changes or Events........................ B-15 2.8 Tax Matters; REIT and Partnership Status.................... B-16 2.9 Compliance with Agreements.................................. B-17 2.10 Financial Records; Trust Declaration and Bylaws; Corporate Records..................................................... B-18 2.11 Properties.................................................. B-19 2.12 Environmental Matters....................................... B-23 2.13 Employees and Benefit Plans................................. B-24 2.14 Labor Matters............................................... B-26 2.15 No Payments to Employees, Officers or Directors............. B-26 2.16 Insurance................................................... B-26 2.17 Proxy Statement; Additional Filings......................... B-27 2.18 Takeover Statutes........................................... B-27 2.19 Opinion of Financial Advisor................................ B-27 2.20 Knowledge Defined........................................... B-27 2.21 Investment Company Act of 1940.............................. B-27 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PARENT AND BUYER....... B-27 3.1 Organization................................................ B-27 3.2 Due Authorization........................................... B-27 3.3 No Conflicts: No Defaults, Required Filings and Consents.... B-28 3.4 Proxy Statement; Additional Filings......................... B-28 3.5 Investment Company Matters.................................. B-28 3.6 Capital Structure........................................... B-28 3.7 Litigation; Compliance With Law............................. B-28 3.8 Funding..................................................... B-29 ARTICLE 4 COVENANTS................................................ B-29 4.1 Acquisition Proposals....................................... B-29 4.2 Conduct of Seller's Business Pending Merger................. B-30 4.3 Other Actions............................................... B-32 4.4 Releases.................................................... B-32 4.5 DRIP........................................................ B-32
B-2 77
PAGE ---- ARTICLE 5 ADDITIONAL COVENANTS..................................... B-33 5.1 Preparation of the Proxy Statement; Seller Shareholders Meeting..................................................... B-33 5.2 Access to Information: Confidentiality...................... B-34 5.3 Reasonable Efforts; Notification............................ B-34 5.4 Public Announcements........................................ B-35 5.5 Transfer and Gains Taxes.................................... B-35 5.6 Benefit Plans and Other Employee Arrangements............... B-35 5.7 Indemnification From and After the Effective Time........... B-35 5.8 Declaration of Dividends and Distributions.................. B-37 5.9 Outside Property Management Agreements...................... B-37 5.10 Lend Lease and Manhattan Towers Transactions................ B-37 5.11 Parent Guarantee............................................ B-38 5.12 Share Purchase Agreement.................................... B-38 5.13 Lend Lease and Manhattan Towers Agreements.................. B-38 5.14 Voting Agreement by Parent.................................. B-38 5.15 Settlement of Litigation.................................... B-38 ARTICLE 6 CONDITIONS............................................... B-38 6.1 Conditions to Each Party's Obligation to Effect the Merger...................................................... B-38 6.2 Conditions to Obligations of Parent and Buyer............... B-39 6.3 Conditions to Obligations of Seller......................... B-41 ARTICLE 7 TERMINATION, AMENDMENT AND WAIVER........................ B-42 7.1 Termination................................................. B-42 7.2 Certain Fees and Expenses................................... B-43 7.3 Effect of Termination....................................... B-44 7.4 Amendment................................................... B-44 7.5 Extension; Waiver........................................... B-44 ARTICLE 8 GENERAL PROVISIONS....................................... B-45 8.1 Nonsurvival of Representations and Warranties............... B-45 8.2 Notices..................................................... B-45 8.3 Interpretation.............................................. B-45 8.4 Counterparts................................................ B-46 8.5 Entire Agreement; No Third-Party Beneficiaries.............. B-46 8.6 Governing Law............................................... B-46 8.7 Assignment.................................................. B-46 8.8 Enforcement................................................. B-46 8.9 Severability................................................ B-46 8.10 Survival.................................................... B-46
B-3 78 INDEX OF DEFINED TERMS
SECTION WHERE TERM TERM IS DEFINED - ---- --------------- 1940 Act.................................................... 2.21 Abstracts................................................... 2.11(f) Acquisition Proposal........................................ 4.1(a) Action...................................................... 2.6(a) ADA......................................................... 2.11(e) Additional Filings.......................................... 5.1(a) Affiliates.................................................. 2.8(c) Agreement................................................... Introduction AICPA Statement............................................. 5.1(b) Allocable Portion........................................... 1.11 Articles of Merger.......................................... Recital B Anticipated Closing Date.................................... 6.2(m) Base Amount................................................. 6.2 Benefit Arrangements........................................ 2.13(h) Blue Sky Laws............................................... 2.4(e) Board Manager............................................... Recital A Board of Managers........................................... Recital A Buyer....................................................... Introduction Buyer Base Amount........................................... 7.2 Buyer Break-Up Fee.......................................... 7.2 Buyer Break-Up Fee Tax Opinion.............................. 7.2 Buyer Properties............................................ 2.11(a) Buyer Shares................................................ 1.6(a) Bylaws...................................................... 1.4 Capital Expenditure Budget and Schedule..................... 2.11(i) CERCLA...................................................... 2.12(e) Certificates................................................ 1.9(b) Claim....................................................... 2.12(g)(i) Closing..................................................... 1.2 Closing Date................................................ 1.2 Code........................................................ 2.8(a) Comfort..................................................... 5.1(b) Commitment.................................................. 2.7 Common Consideration........................................ 1.6(c) Controlled Group Liability.................................. 2.13(h) DDR Properties.............................................. 1.11 Development Agreements...................................... 4.2(i) Development Budget and Schedule............................. 2.11(j) Development Properties...................................... 2.11(j) Development Property........................................ 2.11(j) Dissenting Shares........................................... 1.7 DRIP........................................................ 1.9(b) Effective Time.............................................. 1.3 employee benefit plan....................................... 2.13(h) Employee Benefit Plans...................................... 2.13(h) Employees................................................... 2.13(h) Environmental Claim......................................... 2.12(g)(ii) Environmental Laws.......................................... 2.12(g)(iii) Environmental Permits....................................... 2.12(a)
B-4 79
SECTION WHERE TERM TERM IS DEFINED - ---- --------------- Environmental Reports....................................... 2.12(f) ERISA Affiliate............................................. 2.13(f) Estoppel Certificates....................................... 6.2(e) Exchange Act................................................ 2.4(e) Exchange Agent.............................................. 1.9(a) Exchange Fund............................................... 1.9(a) Executive Summaries of the Environmental Reports............ 2.12(f) Filings..................................................... 2.4(e) Final Dividend.............................................. 1.9(a) Form 10-K................................................... 2.5(a) Former Employees............................................ 5.6(b) GAAP........................................................ 2.5(b) Government Authority........................................ 2.5(a) Holders' Agreements......................................... Recital E HSR Act..................................................... 2.4(e) Impact fee.................................................. 2.11(c) Indemnified Parties......................................... 5.7(a) Indemnified Parties......................................... 5.7(b) Insurance Policies.......................................... 2.16 IRS......................................................... 2.8(a) Leases...................................................... 2.11(f) Lend Lease Agreement........................................ 2.4 Lend Lease Properties....................................... 2.11(a) Lend Lease Transaction...................................... 2.1(c) Letter of Transmittal....................................... 1.9(b) Liabilities................................................. 2.5(c) Liens....................................................... 2.1(d) Manhattan Towers Agreement.................................. 2.4 Manhattan Towers Properties................................. 2.11(a) Manhattan Towers Transaction................................ 2.1(c) Material Adverse Effect..................................... 2.1(c) Material Leases............................................. 2.11(f) Materials of Environmental Concern.......................... 2.12(g)(iv) Merger...................................................... Recital A Net Other Assets............................................ 6.2(m) Non-Parent Shareholders..................................... 1.11 Option Consideration........................................ 1.8 Outside Property Management Agreement....................... 5.9 Parent...................................................... Introduction Partnership Units........................................... 2.3(a) Pension Plans............................................... 2.13(h) Permitted Liens............................................. 2.11(a) Plan........................................................ 2.13(b) Projects.................................................... 2.11(j) Property.................................................... 2.11(a) Property Restrictions....................................... 2.11(a) Proxy Statement............................................. 5.1(a) Prudential.................................................. 4.4(b) Qualified REIT Subsidiary................................... 2.8(i) Qualifying Income........................................... 7.2 REIT........................................................ 2.8(b)
B-5 80
SECTION WHERE TERM TERM IS DEFINED - ---- --------------- REIT Act.................................................... 1.1 REIT Requirements........................................... 7.2 Release..................................................... 2.12(g)(v) Rent Roll................................................... 2.11(f) Resale Properties........................................... 1.11 SEC......................................................... 2.5(a) Securities Act.............................................. 2.4(e) Securities Laws............................................. 2.5(a) Seller...................................................... Introduction Seller Break-Up Fee......................................... 7.2 Seller Break-Up Fee Tax Opinion............................. 7.2 Seller Incentive Plan....................................... 1.8 Seller Options.............................................. 1.8 Seller Reports.............................................. 2.5(a) Seller Shareholders Meeting................................. 5.1(c) SSB......................................................... 4.4(b) Subsidiary.................................................. 2.1(b) Superior Acquisition Proposal............................... 4.1 Surviving Company........................................... 1.1 Surviving Company Preferred Shares.......................... 1.6(e) Surviving Company Shares.................................... 1.6(a) Target Amount............................................... 6.2 Tax......................................................... 2.8(a) Tenancy Leases.............................................. 2.11(l) Third Party Provisions...................................... 8.5 Transaction Expenses........................................ 6.2(l) Transfer and Gains Taxes.................................... 5.5 Trust Common Shares......................................... Recital E Trust Declaration........................................... 1.4 Unbudgeted Capital Expenditures............................. 6.2(m) Unincurred Capital Expenditures............................. 6.2(m) Welfare Plans............................................... 2.13(h)
B-6 81 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of November 1, 2000, is among Developers Diversified Realty Corporation, an Ohio corporation ("Parent"), DDR Transitory Sub Inc., a Texas corporation ("Buyer"), and American Industrial Properties REIT, a Texas real estate investment trust ("Seller"). RECITALS: A. The Boards of Directors of Buyer and Parent and the Board of Trust Managers of Seller (the "Board of Managers," and each individually, a "Board Manager") consider it advisable, subject to the conditions and other provisions contained herein, that Buyer shall merge with and into Seller (the "Merger"). B. Upon the terms and conditions set forth herein, Buyer and Seller shall execute Articles of Merger (collectively, the "Articles of Merger") in substantially the form attached hereto as Exhibit "A" and shall file such Articles of Merger in accordance with Texas law to effectuate the Merger. C. Seller has received a fairness opinion relating to the transactions contemplated hereby as more fully described herein. D. Parent, Buyer and Seller desire to make certain representations, warranties and agreements in connection with the transactions contemplated hereby. E. Parent and Buyer are unwilling to enter into this Agreement unless, contemporaneously with the execution and delivery of this Agreement, certain institutional holders of Seller's issued and outstanding common shares of beneficial interest, par value $0.10 per share ("Trust Common Shares"), enter into agreements (the "Holders' Agreements") providing for certain actions relating to the Trust Common Shares owned by them, and such holders have entered into the Holders' Agreements. NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements contained herein, the parties hereto hereby agree as follows: ARTICLE 1 THE MERGER 1.1 The Merger. Upon the terms and subject to the conditions of this Agreement, and in accordance with Section 23.40 of the Texas Real Estate Investment Trust Act (the "REIT Act"), Parent shall contribute all of its Trust Common Shares into Buyer and then Buyer shall be merged with and into Seller, with Seller as the surviving real estate investment trust (the "Surviving Company"). The name of the Surviving Company will be American Industrial Properties REIT. 1.2 Closing. The closing of the Merger (the "Closing") will take place on the later of (i) January 31, 2001 or (ii) within two (2) business days after the date on which the last to be satisfied of the conditions in Article 6 is satisfied or waived, provided, however, if all of the conditions are satisfied or waived prior to the Seller Shareholders Meeting (as defined below) immediately following the meeting (the "Closing Date"), at the offices of Locke Liddell & Sapp, 2200 Ross Avenue, Suite 2200, Dallas, Texas 75201, unless another date and time or place is agreed to in writing by the parties. 1.3 Effective Time. As soon as practicable following the satisfaction or waiver of the conditions set forth in Article 6, the parties shall execute and file the Articles of Merger, in accordance with Texas law, and shall make all other filings and recordings required under Texas law. The Merger shall become effective at such time ("Effective Time") as the Articles of Merger are accepted by both the County Clerk in Dallas County, Texas, and the Secretary of State of the State of Texas, or at such time as Buyer and Seller shall agree should be specified in the Articles of Merger (not to exceed thirty (30) days after B-7 82 the Articles of Merger are accepted for record). Unless otherwise agreed, the parties shall cause the Effective Time to occur on the Closing Date. 1.4 Effect of Merger on Declaration of Trust and Bylaws. The Third Amended and Restated Declaration of Trust (the "Trust Declaration") of Seller and the Fifth Amended and Restated Bylaws of Seller (the "Bylaws"), as in effect immediately prior to the Effective Time, shall continue in full force and effect after the Merger until further amended in accordance with applicable Texas law. 1.5 Board of Managers and Officers. The board of trust managers of the Surviving Company shall consist of Scott A. Wolstein, James A. Schoff, Robert H. Gidel and Albert T. Adams, and those persons shall continue to serve for the balance of their unexpired terms or their earlier death, resignation or removal. Seller shall cause all other members of the Board of Managers of Seller immediately prior to the Effective Time to submit their resignations as Board Managers on or prior to the Closing Date. Immediately prior to the Closing, all officers of Seller shall resign and all officers and directors of all Seller Subsidiaries shall resign. 1.6 Effect on Shares. Subject to Section 1.7, as of the Effective Time, automatically by virtue of the Merger and without any action on the part of any holder of the following securities or any party hereto: (a) Each common share, $0.01 par value, of Buyer (the "Buyer Shares") issued and outstanding immediately prior to the Effective Time shall be converted into one validly issued, fully paid and nonassessable Trust Common Share of the Surviving Company (the "Surviving Company Shares"). Certificates which, immediately prior to the Effective Time, represented Buyer Shares shall thereafter be deemed to represent the same number of Surviving Company Shares. The Surviving Company shall issue new certificates representing Surviving Company Shares to the shareholders of Buyer on a pro rata basis in accordance with their respective shares of Buyer upon surrender to the Surviving Company of share certificates formerly representing Buyer Shares. (b) Each Trust Common Share issued and outstanding immediately prior to the Effective Time and held by any direct or indirect Seller Subsidiary or in the treasury of Seller, shall be canceled and retired and cease to exist. Each Trust Common Share issued and outstanding immediately prior to the Effective Time and held by Parent, Buyer or any of their respective direct or indirect subsidiaries shall be contributed to Seller and become treasury shares of Seller, which shall be canceled in accordance with the immediately preceding sentence. (c) Each Trust Common Share issued and outstanding immediately prior to the Effective Time, other than those shares referred to in Section 1.6(b) and in Section 1.7, shall, subject to Section 5.8, be converted automatically into the right to receive $13.74 in cash (or such greater amount as determined in accordance with the last paragraph of Section 6.2(m)) (the "Common Consideration"). If Seller makes a distribution or pays to the holders of Trust Common Shares or declares a dividend other than the Final Dividend (as defined in Section 1.9(a)), the Common Consideration payable to holders of Trust Common Shares in the Merger shall be reduced by the amount derived by dividing the aggregate amount of such dividends and distributions by the number of Trust Common Shares issued and outstanding immediately prior to the Effective Time (including, without limitation, the Trust Common Shares held, directly or indirectly, by Parent). (d) Each certificate previously representing Trust Common Shares, other than shares referred to in Section 1.6(b) or in Section 1.7, shall thereafter represent only the right to receive the Common Consideration in accordance with Section 1.6(c) plus any declared but unpaid dividends on the shares represented thereby. The holders of certificates previously representing Trust Common Shares outstanding immediately prior to the Effective Time shall cease to have any rights with respect to Trust Common Shares except as otherwise provided herein or by law. 1.7 Dissenters' Rights. Notwithstanding anything in this Agreement to the contrary, Trust Common Shares outstanding immediately prior to the Effective Time and held by a holder who has not voted in favor of the Merger and who has dissented from the Merger in accordance with Sections 25.10, 25.20 B-8 83 and 25.30 of the REIT Act ("Dissenting Shares") shall not be converted into the right to receive the Common Consideration as provided in Section 1.6 and shall not be entitled to any of the additional consideration provided for in Section 1.11, unless and until such holder fails to perfect or withdraws or otherwise loses his right to payment under the REIT Act. If, after the Effective Time, any such holder fails to perfect or withdraws or loses his right to such payment, such Dissenting Shares shall thereupon be treated as if they had been converted as of the Effective Time into the right to receive the Common Consideration, if any, to which such holder is entitled, without interest thereon, and shall be eligible to receive a pro rata portion of any additional consideration payable under Section 1.11. Seller shall give Buyer prompt notice of any notice of dissent received by Seller and, prior to the Effective Time, Buyer shall have the right to participate in all negotiations and proceedings with respect to such dissents. Prior to the Effective Time, Seller shall not, except with the prior written consent of Buyer, make any payment with respect to, or settle or offer to settle, any such dissents. 1.8 Share Options and Related Matters. Each option (collectively, the "Seller Options") granted under the Seller's Employee and Trust Manager Incentive Plan, as amended (the "Seller Incentive Plan"), to a person other than Parent, which is outstanding (whether or not then exercisable) immediately prior to the Effective Time and which has not been exercised or canceled prior thereto, shall, at the Effective Time, be canceled and upon the surrender and cancellation of the option agreement representing such Seller Option, the Surviving Company shall pay to the holder thereof at the Closing, with respect to each canceled option, cash in an amount equal to the amount by which the Common Consideration exceeds the option exercise price. The cash payment shall be treated as compensation and shall be net of any applicable federal or state withholding tax (the "Option Consideration"). Seller shall pay at the Effective Time, to each participant having a deferral account under Seller's Deferred Compensation Plan for Non-Employee Trust Managers, cash in an amount equal to the value of his deferral account. 1.9 Exchange of Certificates; Pre-Closing Dividends; Fractional Shares. (a) From and after the Effective Time, Seller's transfer agent shall act as exchange agent (the "Exchange Agent"). Immediately prior to the Effective Time, (i) if the Closing occurs after the Anticipated Closing Date (as defined in Section 6.2(m)), to the extent such dividend would not cause Seller to fail to satisfy the condition set forth in Section 6.2(m), Seller shall have the right to declare a dividend in the amount per share on each Trust Common Share issued and outstanding immediately prior to the Effective Time (including, without limitation, the Trust Common Shares held, directly or indirectly, by Parent) equal to the amount of cash generated by operations during the period commencing on the fourth day immediately following the Anticipated Closing Date and ending at the close of business on the day immediately preceding the Closing Date (such amount to be certified in writing to Parent and Buyer by Seller's Chief Executive Officer and Chief Financial Officer) divided by the number of Trust Common Shares issued and outstanding on the record date for such dividend or distribution (including, without limitation, the Trust Common Shares held, directly or indirectly, by Parent) (the "Final Dividend"), and shall deposit with the Exchange Agent the aggregate amount required to pay the Final Dividend on each Trust Common Share issued and outstanding immediately prior to the Effective Time (including, without limitation, the Trust Common Shares held, directly or indirectly, by Parent), and (ii) Seller, Buyer and Parent shall deposit with the Exchange Agent, in accordance with the provisions of this Section 1.9, the aggregate Common Consideration to be paid to Seller's shareholders, excluding the holders of those shares referred to in Section 1.6(b) and in Section 1.7. The aggregate amount deposited by Seller and Buyer under this Section 1.9(a) is sometimes referred to in this Agreement as the "Exchange Fund." Seller shall fund the amount required to pay the Final Dividend solely from the cash generated by operations described above and shall not fund any portion of that amount, directly or indirectly, through borrowings. Seller shall retain the net cash proceeds from the sale of the Manhattan Towers Properties (except to the extent such proceeds must be distributed to shareholders to prevent Seller from having to pay federal income tax) and the Lend Lease Properties, and the Net Other Assets amounts for the deposit required under clause (ii) above, and shall include those net cash proceeds in the deposit made pursuant to clause (ii). If such deposited amounts are insufficient to pay in full the Common Consideration, Parent will fund the deficiency or Parent will cause the Surviving Company to fund such deficiency by drawing B-9 84 down from the Surviving Company's available line of credit (any associated costs to be borne by Parent and Buyer), and such amount as is necessary to cover any deficiency shall be deposited with the Exchange Agent. (b) Promptly, and in any event within two (2) business days after the Effective Time, Parent shall cause the Exchange Agent to mail to each holder of record of a certificate that immediately prior to the Effective Time represented Trust Common Shares ("Certificates") (except holders of those shares referred to in Section 1.6(b) and in Section 1.7) (i) a letter of transmittal (the "Letter of Transmittal") that shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates duly endorsed to the Exchange Agent and in such form and with such other provisions as Parent may reasonably specify and (ii) instructions for use in effecting the surrender of the Certificates and receiving the Final Dividend (if any) and the Common Consideration in respect thereof. Upon surrender of a Certificate to the Exchange Agent for cancellation together with such Letter of Transmittal, duly executed and completed in accordance with the instructions thereto, the holder of such Certificate shall be entitled to receive in exchange therefor a check representing the amount of the Final Dividend (if any) and the Common Consideration to which such holder shall be entitled, after giving effect to any required withholding tax, and the Certificate so surrendered shall be canceled forthwith. In the event of a transfer of ownership of Trust Common Shares which is not registered in the transfer records of Seller, checks for the Final Dividend (if any) and the Common Consideration to which the registered holder shall be entitled may be issued and paid to the applicable transferee if the Certificate representing such Trust Common Shares is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and by evidence reasonably acceptable to the Exchange Agent that any applicable stock transfer taxes have been paid. Immediately following the Effective Time, the Exchange Agent shall (x) pay to the administrator of Seller's Dividend Reinvestment Plan (the "DRIP") or to one or more persons designated by such administrator, an amount equal to the product of (1) the Final Dividend (if any) and the Common Consideration and (2) the number of Trust Common Shares held in the DRIP as of the Effective Time, and (y) make appropriate arrangements for the immediate payment of the Final Dividend (if any) and the Common Consideration to the beneficial owners of any Trust Common Shares that are held in book-entry or other electronic form and for which at the Effective Time there is no Certificate representing the ownership thereof. (c) At and after the Effective Time, there shall be no transfers on the stock transfer books of the Surviving Company of any Trust Common Shares which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Company, they shall be canceled and exchanged for the Final Dividend (if any) and the Common Consideration in accordance with this Section 1.9. (d) Any portion of the Exchange Fund (including the proceeds of any investments thereof) that remains unclaimed by the former holders of Trust Common Shares two (2) years after the Effective Time shall be delivered to the Surviving Company. Any former holder of Trust Common Shares who has not theretofore complied with this Article 1 shall thereafter look only to the Surviving Company for payment of the Final Dividend (if any) and the Common Consideration, as determined pursuant to this Agreement, without any interest thereon. None of Parent, Buyer, Seller, the Exchange Agent or any other person shall be liable to any former holder of Trust Common Shares for any amount properly delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by the Surviving Company, the posting by such person of a bond in such reasonable amount as the Surviving Company may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent or the Surviving Company will issue and pay in exchange for such lost, stolen or destroyed Certificate the Final Dividend (if any) and the Common Consideration. 1.10 Right to Receive Dividends. Notwithstanding anything in this Agreement to the contrary, any holder of Trust Common Shares who, on the date of the surrender of a Certificate, has not received any dividend or other distribution with respect to such shares with a declared record date on or prior to the B-10 85 date of such surrender shall nevertheless be entitled to receive any such dividend or distribution on the later of the date of such surrender or the payment date of such dividend or distribution. 1.11 Additional Merger Consideration. If at any time during the first six months following the Closing Date, Buyer sells all or substantially all of the properties listed on Exhibit B hereto (the "DDR Properties") for a net amount greater than the agreed-upon aggregate values of the DDR Properties set forth on Exhibit B, then the Allocable Portion (as defined below) of such incremental proceeds shall be paid into a trust created for the benefit of the Non-Parent Shareholders (as defined below). The funds, if any, held in such trust shall be distributed not later than nine months after the Closing Date to the Non-Parent Shareholders on a pro rata basis in accordance with their respective holdings of Trust Common Shares immediately prior to the Effective Time. "Allocable Portion" means the amount derived by multiplying the amount of such incremental proceeds from the sale of the DDR Properties by a fraction, the numerator of which is the number of Trust Common Shares held by the Non-Parent Shareholders immediately prior to the Effective Time and the denominator of which is the total number of Trust Common Shares issued and outstanding immediately prior to the Effective Time. "Non-Parent Shareholders" means all holders of Trust Common Shares immediately prior to the Effective Time except for Parent, Buyer, any other direct or indirect Parent subsidiary, and any holder of Trust Common Shares entitled to payment therefor under the REIT Act in accordance with Section 1.7 hereof. ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Parent and Buyer as follows: 2.1 Organization and Qualification; Subsidiaries. (a) Seller is a real estate investment trust duly organized and validly existing under the laws of the State of Texas. Seller has all requisite power and authority to own, operate, lease and encumber its properties and carry on its business as now conducted, and to enter into this Agreement and to perform its obligations hereunder. (b) Each Subsidiary is a corporation, partnership or limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, and has the corporate, partnership or limited liability company power and authority, as applicable, to own its properties and carry on its business as it is now being conducted. As used in this Agreement "Subsidiary" means each entity in which Seller owns any direct or indirect equity interest. (c) Seller and each of the Subsidiaries is duly qualified to do business and to the extent legally applicable is in good standing in such jurisdictions in which the ownership of its property or the conduct of its business requires such qualification, except for any jurisdiction in which any failure to be so qualified or to be in good standing would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect. As used in this Agreement, "Material Adverse Effect" means a material adverse effect on the financial condition, results of operations, business or prospects of Seller and the Subsidiaries (to the extent of Seller's interests therein), taken as a whole; provided, however, that any Action brought by a shareholder of Seller or in the name of or on behalf of Seller relating to this Agreement, the Merger, the sale by Seller of its Manhattan Towers Properties (the "Manhattan Towers Transaction") or the transaction to be consummated pursuant to the Lend Lease Agreement (as defined in Section 2.4 below) (the "Lend Lease Transaction") shall be deemed not to have a Material Adverse Effect. (d) Schedule 2.1(d) sets forth the name of each Subsidiary (whether owned directly or indirectly through one or more intermediaries). All of the outstanding shares of capital stock of, or other equity interests in, each of the Subsidiaries are duly authorized, validly issued, fully paid and nonassessable, and are owned, directly or indirectly, by Seller free and clear of all Liens, except as set forth in Schedule 2.1(d). As used in this Agreement, "Liens" means all liens, mortgages, deeds of trust, deeds to secure debt, security interests, pledges, claims, charges, easements and other encumbrances of any nature B-11 86 whatsoever. The following information for each Subsidiary is set forth in Schedule 2.1(d), to the extent applicable: (i) its name and jurisdiction of incorporation or organization; (ii) the type of and percentage interest held by Seller in the Subsidiary and the names of and percentage interest held by the other interest holders, if any, in the Subsidiary; and (iii) any loans from Seller to, or payments payable to Seller from, the Subsidiary, and the rate of interest thereon. 2.2 Authority Relative to Agreements; Board Approval. (a) The execution, delivery and performance of this Agreement and of all of the documents and instruments delivered in connection herewith by Seller are within Seller's power. Subject to the receipt of the requisite approval of Seller's shareholders and assuming this Agreement and such other documents and instruments constitute binding obligations of Buyer and Parent, this Agreement is, and the other documents and instruments required to be entered into hereunder will be, when executed and delivered by Seller, the valid and binding obligations of Seller, enforceable against Seller in accordance with their respective terms subject only to bankruptcy, insolvency, reorganization, moratorium or similar laws at the time in effect affecting the enforceability or right of creditors generally and to general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (b) A majority of the Board of Managers not designated by Parent has approved and declared advisable this Agreement and the transactions contemplated hereby in accordance with Texas law, and has determined to recommend that the shareholders of Seller vote in favor of and approve the Merger. (c) Neither the consummation of the Merger pursuant to this Agreement, nor (i) consummation of the transactions contemplated by the Lend Lease Transaction or (ii) consummation of the transactions contemplated by the Manhattan Towers Transaction, will give any person the right to demand payment for that shareholder's shares under the laws of the State of Texas, under the Trust Declaration, or otherwise, except for holders of Trust Common Shares who dissent from the Merger pursuant to and in accordance with the REIT Act. 2.3 Capital Stock. (a) Seller's authorized capital stock on the date hereof consists of 500,000,000 Trust Common Shares, and 50,000,000 preferred shares of beneficial interest, $0.10 par value. As of the date hereof, there are 20,992,195 Trust Common Shares issued and outstanding, and no preferred shares issued and outstanding. All such issued and outstanding Trust Common Shares are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights except those granted by contracts identified on Schedule 2.3(a). Seller has no outstanding bonds, debentures, notes or other obligations the holders of which have the right to vote (or which are convertible into or exercisable for securities the holders of which have the right to vote) with the shareholders of Seller on any matter. Other than (i) the limited partnership units ("Partnership Units") described in Schedule 2.3(a) to this Agreement which may be put to Seller or any Subsidiary by the holders thereof for Trust Common Shares or the cash equivalent thereof (at the option of Seller), (ii) options subject to grant under the option plans described in Schedules 2.3(a) and (b)of this Agreement, or (iii) as described in Schedule 2.3(c) to this Agreement, there are no existing options, warrants, calls, subscriptions, convertible securities, or other rights, agreements or commitments which obligate Seller or any Subsidiary to issue, transfer or sell any shares of capital stock or other equity interests of Seller. (b) Except as described in Schedule 2.3(a), no Subsidiary has issued Partnership Units or granted securities convertible into interests in Seller or in any Subsidiary and no Subsidiary is a party to any outstanding commitment of any kind relating to, or any presently effective agreement or understanding with respect to, interests in Seller or in any Subsidiary, whether issued or unissued. (c) Except for Seller's interests in the Subsidiaries or as described in Schedule 2.1(d), none of Seller or any of the Subsidiaries owns directly or indirectly any interest or investment (whether equity or debt) in any corporation, partnership, joint business, trust or other legal entity (other than investments in short-term investment securities). B-12 87 2.4 No Conflicts; No Defaults; Required Filings and Consents. Neither the execution and delivery by Seller of this Agreement, the agreement among Lend Lease Real Estate Investments, Inc., Seller and certain of Seller's Subsidiaries (the "Lend Lease Agreement") and the agreement relating to the sale of the Manhattan Towers property ("the Manhattan Towers Agreement"), nor the consummation by Seller of the transactions contemplated hereby and thereby in accordance with the terms hereof and thereof, will: (a) conflict with or result in a breach of any provision of the Trust Declaration or Bylaws; (b) except as described in Schedule 2.4(b), result in a breach or violation of, a default under, or the triggering of any payment or other obligation pursuant to, or accelerate vesting under, any tax protection agreement or other agreement to which Seller or any Subsidiary is a party or by which Seller or any Subsidiary is otherwise bound, or any Seller or Subsidiary stock option plan, option plan or similar compensation plan or any grant or award made under any of the foregoing; (c) violate or conflict with any statute, regulation, judgment, order, writ, decree or injunction applicable to Seller or to any of the Subsidiaries; (d) except as described in Schedule 2.4(d), violate or conflict with or result in a breach of any provision of, or constitute a default (or any event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination or in a right of termination or cancellation of, or accelerate the performance required by, or result in the creation of any Lien upon any of the properties of Seller or of any of the Subsidiaries under, or result in being declared void, voidable or without further binding effect, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust or any franchise, permit, lease, contract, agreement or other instrument, commitment or obligation to which Seller or any of the Subsidiaries is a party, or by which Seller or any of its Subsidiaries or any of their properties is bound or affected; or (e) require any consent, approval or authorization of, or declaration, filing or registration with, any Government Authority (as defined below), other than the Articles of Merger pursuant to Section 1.3 hereof and any filings required under the Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), state securities laws ("Blue Sky Laws") (collectively, the "Filings"), and any filings required to be made with the Texas State Department of Assessments and Taxation, if any, or any national securities exchange on which the Trust Common Shares are listed. 2.5 SEC Matters and Absence of Undisclosed Liabilities. (a) Seller has delivered or made available to Parent and Buyer the Annual Report on Form 10-K for the fiscal year ended December 31, 1999 filed by Seller with the Securities and Exchange Commission ("SEC") and all exhibits, amendments and supplements thereto, including all documents incorporated by reference therein (collectively, the "Form 10-K"), and each registration statement, report, proxy statement or information statement and all exhibits thereto prepared by Seller or relating to the Properties (as defined in Section 2.11(a)) for filing in the three (3) years ending on the date of this Agreement, each in the form (including exhibits and any amendments thereto) filed with the SEC (collectively the "Seller Reports"). The Seller Reports were filed with the SEC in a timely manner and constitute all forms, reports and documents required to be filed by Seller under the Securities Act and the Exchange Act and the rules and regulations promulgated thereunder (the "Securities Laws"). As of their respective dates and as amended through the date of this Agreement, the Seller Reports (other than preliminary materials), (i) complied as to form in all material respects with the applicable requirements of the Securities Laws and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading except to the extent such statements have been modified or superseded by later filed Seller Reports. To Seller's knowledge, there is no unresolved violation asserted by any Government Authority with respect to any of the Seller Reports. As used in this Agreement, "Government Authority" means any government or state (or any subdivision thereof) of or in the United B-13 88 States, or any agency, authority, bureau, commission, department or similar body or instrumentality thereof, or any government court or tribunal. (b) Each of Seller's balance sheets included in or incorporated by reference into the Seller Reports (including the related notes and schedules) fairly presented the financial position of Seller as of its date and each of the statements of operations, shareholders' equity (deficit) and cash flows included in or incorporated by reference into the Seller Reports (including any related notes and schedules) fairly presented the results of operations, retained earnings or cash flows, as the case may be, of Seller for the period covered thereby, in each case in accordance with United States generally accepted accounting principles ("GAAP") consistently applied during the periods involved and in accordance with Regulation S-X promulgated by the SEC, except as may be noted therein and except, in the case of the unaudited statements, for normal recurring year-end adjustments which would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect. (c) Except as and to the extent set forth in the Seller Reports or in any Schedule hereto, to Seller's knowledge, none of Seller or any of the Subsidiaries has any material Liabilities, nor do there exist any circumstances that would, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect. As used in this Agreement, "Liabilities" means, as to any person, all debts, adverse claims, liabilities and obligations, direct, indirect, absolute or contingent of such person, whether accrued, vested or otherwise, whether in contract, tort, strict liability or otherwise and whether or not actually reflected, or required by GAAP to be reflected, in such person's balance sheets or other books and records, including (i) obligations arising from noncompliance with any law, rule or regulation of any Government Authority or imposed by any court or any arbitrator of any kind, (ii) all indebtedness or liability of such person for borrowed money, or for the purchase price of property or services (including trade obligations), (iii) all obligations of such person as lessee under leases, capital or other, (iv) liabilities of such person in respect of plans covered by Title IV of ERISA, or otherwise arising in respect of plans for employees or former employees or their respective families or beneficiaries, (v) reimbursement obligations of such person in respect of letters of credit, (vi) all obligations of such person arising under acceptance facilities, (vii) all liabilities of other persons or entities, directly or indirectly, guaranteed, endorsed (other than for collection or deposit in the ordinary course of business) or discounted with recourse by such person or with respect to which such person is otherwise directly or indirectly liable, (viii) all obligations secured by any Lien on property of such person, whether or not the obligations have been assumed, and (ix) all other items which have been, or in accordance with GAAP would be, included in determining total liabilities on the liability side of such person's balance sheet. 2.6 Litigation; Compliance With Law. (a) Except as disclosed in Schedule 2.6(a), there is no action, suit, arbitration, inquiry, proceeding or investigation by or before any Government Authority (any such item, an "Action") pending or, to Seller's knowledge, threatened against Seller or any of the Subsidiaries that would, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect, or which questions the validity of this Agreement, the Lend Lease Agreement or the Manhattan Towers Agreement or of any action taken or to be taken in connection herewith or therewith. Except as disclosed in Schedule 2.6(a), there are no continuing orders, injunctions or decrees of any Government Authority to which Seller or any of the Subsidiaries is a party or by which any of its properties or assets are bound. (b) None of Seller or any of the Subsidiaries is in material violation of any statute, rule, regulation, order, writ, decree or injunction of any Government Authority or any body having jurisdiction over them or any of their respective properties which, if enforced, would, individually or in the aggregate with all other such violations, reasonably be expected to result in a Material Adverse Effect. 2.7 Absence of Certain Changes or Events. Except as disclosed in Schedule 2.7 or in any Seller Report, since June 30, 2000, Seller and each of the Subsidiaries has conducted its business only in the ordinary course of such business and has not acquired any real estate or entered into any financing arrangements in connection therewith, and there has not been (a) any change, circumstance or event that would reasonably be expected to result in a Material Adverse Effect, (b) any declaration, setting aside or B-14 89 payment of any dividend or other distribution with respect to the Trust Common Shares, (c) any commitment, contractual obligation, borrowing, capital expenditure or transaction (each, a "Commitment") entered into by Seller or any of the Subsidiaries, other than Commitments which would not, individually or in the aggregate, be expected to result in a Material Adverse Effect, (d) any change in Seller's accounting principles, practices or methods, (e) any increases by Seller in any bonuses, salaries or other compensation paid or payable to any holder of Trust Common Shares, Board Manager, officer or employee, or (f) any adoption of, or increase in benefits or amounts payable under, any Plan. 2.8 Tax Matters; REIT and Partnership Status. (a) Seller and each of the Subsidiaries has timely filed with the appropriate taxing authority all tax returns required to be filed by it or has timely requested extensions and any such request has been granted and has not expired. Each such tax return is complete and accurate in all material respects. All information shown on any such tax return is correct in all material respects, and all material Taxes shown as owed by Seller or by any of the Subsidiaries on any tax return have been paid or accrued, except for Taxes contested in good faith and for which adequate reserves have been taken. As used in this Agreement, "Tax" means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code (as defined below) Section 54A), customs duties, capital stock, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not. Each of Seller and each of the Subsidiaries has properly accrued all Taxes for periods subsequent to the periods covered by such tax returns as required by GAAP. None of Seller or any of the Subsidiaries has executed or filed with the Internal Revenue Service (the "IRS") or any other taxing authority any agreement now in effect extending the period for assessment or collection of any Tax. None of Seller or any of the Subsidiaries is a party to any pending action or proceeding by any taxing authority for assessment or collection of any Tax, and no claim for assessment or collection of any Tax has been asserted against it. No claim has been made by any authority in a jurisdiction where Seller or any of the Subsidiaries does not file tax returns that it is or may be subject to taxation or reporting in that jurisdiction. There is no dispute or claim concerning any information, reporting or tax liability of Seller or of any of the Subsidiaries, (i) claimed or raised by any taxing authority in writing or (ii) as to which Seller or any of the Subsidiaries has knowledge. Seller is a "domestically controlled" REIT within the meaning of Section 897(h)(4)(B) of the Internal Revenue Code of 1986, as amended (the "Code"), and to Seller's knowledge, there are no nondomestic registered beneficial owners of Trust Common Shares. To Seller's knowledge, no person or entity which would be treated as an "individual" for purposes of Section 542(a)(2) of the Code (as modified by Section 856(h) of the Code) owns or would be considered to own (taking into account the ownership attribution rules under Section 544 of the Code, as modified by Section 856(h) of the Code) in excess of 9.8% of the value of the outstanding equity interests in Seller. (b) Seller (i) made a valid election in its federal income tax return for the tax year ended December 31, 1993 to be taxed as a real estate investment trust within the meaning of Section 856 of the Code ("REIT") and has complied in all material respects (and will comply in all material respects) with all applicable provisions of the Code relating to a REIT, for 1993 through the date hereof, (ii) has operated, and will to continue to operate, in such a manner as to qualify as a REIT for 2000 and up to the Effective Time, (iii) has not taken or omitted to take any action which would reasonably be expected to result in a challenge to its status as a REIT, and, no such challenge is pending or threatened, and (iv) to its knowledge, will not be rendered unable to qualify as a REIT for federal income tax purposes as a consequence of the transactions contemplated by this Agreement. (c) Except as described in Schedule 2.8(c), no amount or other entitlement that could be received (whether in cash or property or the vesting of property) as a result of or in connection with any of the transactions contemplated hereby by any employee, officer, or manager of Seller or of any of the Subsidiaries or of any of their affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act; hereinafter, "Affiliates") who is a "disqualified individual" (as such term is defined in proposed Treasury B-15 90 Regulation Section 1.280G-1) under any employment, severance or termination agreement, other compensation arrangement or plan currently in effect would be characterized as an "excess parachute payment" (as such term is defined in Section 280G(b) of the Code). (d) Except as described in Schedule 2.8(d), the disallowance of a deduction under Section 162(m) of the Code for employee remuneration will not apply to any amount paid or payable by Seller or by any of the Subsidiaries under any contract, stock plan, program, arrangement or understanding currently in effect. (e) Each Subsidiary organized as a partnership or limited liability company (and any other Subsidiary that files tax returns as a partnership for federal income tax purposes) was and, as of the date hereof, continues to be, and will continue to be through the Closing Date, classified as a partnership or as a disregarded entity for federal income tax purposes. Neither Seller nor any Subsidiary holds any asset the disposition of which would be subject to rules similar to (i) Section 1374 of the Code as the result of Internal Revenue Service Notice 88-19, or (ii) those contained in proposed regulations issued under Treasury Regulation Section 1.337(d)-5, or temporary regulations issued under Treasury Regulation Section 1.337(d)-5T, if such regulations were finalized in the form proposed. (f) For each taxable year beginning with Seller's taxable year that ended December 31, 1993, the dividends paid by Seller on the Trust Common Shares have been and will continue to be paid pro rata, with no preference to any Trust Common Share as compared with other shares. (g) Seller has not actively conducted a business (i) from which it earns fees for services it performs and (ii) that would cause (x) Seller's REIT status to be lost or (y) rents from real property to be treated as not rent under the Code. (h) As required by Treasury Regulation Section 1.857-8, Seller has maintained the necessary records regarding the actual ownership of its shares, and has timely made (i.e., by January 30 of each calendar year) the requisite information requests of its shareholders regarding share ownership and has maintained a list of the persons failing or refusing to comply in whole or in part with Seller's demand for statements regarding share ownership. (i) Seller has never owned more than 10% of the voting common shares of any corporation other than a "Qualified REIT Subsidiary," i.e., (i) before 1998, a corporation, all of whose shares were owned by Seller at all times during such corporation's existence, and (ii) after January 1, 1998, a corporation (x) all of whose shares are owned by Seller, and (y) all of whose earnings and profits existing at the time Seller acquired all of its shares are distributed before the end of the tax year in which all of the shares are acquired. 2.9 Compliance with Agreements. (a) Seller is not in default under or in violation of the Declaration of Trust or the Bylaws and neither Seller nor any of the Subsidiaries is in default under or in violation of any material provision of the respective charter, bylaws, partnership agreement, operating agreement or any similar organizational document of such Subsidiaries. (b) Since January 1, 1997, each of Seller and each of the Subsidiaries has filed all reports, registrations and statements, together with any amendments required to be made with respect thereto, that it was required to file with any Government Authority and all other reports and statements required to be filed by it, including any report or statement required to be filed pursuant to the laws, rules or regulations of the United States, and has paid all fees or assessments due and payable in connection therewith. There is no unresolved violation asserted by any regulatory agency of which Seller has received any written notice which, if resolved in a manner unfavorable to Seller or any Subsidiary, would, individually or in the aggregate with all other such violations, reasonably be expected to result in a Material Adverse Effect. (c) Schedule 2.9(c) sets forth (i) a description of all material indebtedness of Seller and of each of the Subsidiaries, whether unsecured or secured or collateralized by mortgages, deeds of trust or other security interests in the Property (as defined in Section 2.11(a)) or any other assets of Seller or of any B-16 91 Subsidiary, or otherwise and (ii) each Commitment currently in effect entered into by Seller or by any of the Subsidiaries (including any guarantees of any third party's debt or any obligations in respect of letters of credit issued for Seller's or any Subsidiary's account) which may result in total payments or liability in excess of $100,000, excluding Commitments that are terminable on thirty (30) days or less notice, and excluding Commitments the breach of which would not, individually or in the aggregate with all other such breaches, reasonably be expected to result in a Material Adverse Effect. Neither Seller nor any of the Subsidiaries is in default, and, to Seller's knowledge, no event has occurred which, with the giving of notice or the lapse of time or both, would constitute a default, under any of the documents described in clause (i) or (ii) of the first sentence of this paragraph or in respect of any payment obligations thereunder. All joint venture and partnership agreements to which Seller or any of the Subsidiaries is a party as of the date hereof are described in Schedule 2.9(c), all of which are in full force and effect as against Seller or the applicable Subsidiary and, to Seller's knowledge, as against the other parties thereto, and none of Seller or any of the Subsidiaries is in default, and, to Seller's knowledge, no event has occurred which, with the giving of notice or the lapse of time or both, would constitute a default, with respect to any obligations thereunder, except as would not, individually or in the aggregate with all other such defaults, reasonably be expected to result in a Material Adverse Effect. To Seller's knowledge, the other parties to such agreements are not in breach of any of their respective obligations thereunder, except as would not, individually or in the aggregate with all other such defaults, reasonably be expected to result in a Material Adverse Effect. To Seller's knowledge, there is no condition with respect to any of the Subsidiaries (including with respect to the partnership agreements for the Subsidiaries that are partnerships) that would, individually or in the aggregate with all other such conditions, reasonably be expected to result in a Material Adverse Effect. (d) Except as disclosed in any other Schedule hereto, Schedule 2.9(d) sets forth a complete and accurate list of all material agreements to which Seller or any of the Subsidiaries is a party as of the date hereof relating to the development or construction of, additions or expansions to, or management or leasing services for, light industrial properties or office buildings or other real properties which are currently in effect and under which Seller or any of the Subsidiaries currently has, or expects to incur, any material obligation. (e) Except for (i) agreements made in the ordinary course of business with a maturity of less than one (1) year or that are terminable on thirty (30) days or less notice, and (ii) agreements the breach or nonfulfillment of which would not, individually or in the aggregate with all other such breaches or nonfulfillments, reasonably be expected to result in a Material Adverse Effect, Schedule 2.9(e) sets forth a complete and accurate list of all material agreements to which Seller or any Subsidiary is a party as of the date hereof which are not listed in any other Schedule hereto and are not exhibits to any filing made by Seller with the SEC. Each of the Lend Lease Agreement, the Manhattan Towers Agreement and each agreement listed on Schedule 2.9(e) is in full force and effect as against Seller and, to Seller's knowledge, as against the other parties thereto, no payments, if any, are delinquent, no notice of default thereunder has been sent or received by Seller or any of the Subsidiaries, and, to Seller's knowledge, no event has occurred which, with notice or lapse of time or both, would constitute such a default thereunder, except for any such default that would not, individually or in the aggregate with all other such defaults, reasonably be expected to result in a Material Adverse Effect. (f) Seller has no written policies regarding transactions with Affiliates. Schedule 2.9(f) lists all existing agreements with Affiliates relating to matters other than employment or severance, each of which employment or severance agreement is listed on Schedule 2.13(a). 2.10 Financial Records; Trust Declaration and Bylaws; Corporate Records. (a) The books of account and other financial records of Seller and of each of the Subsidiaries are in all material respects true and complete, have been maintained in accordance with good business practices, and are accurately reflected in all material respects in the financial statements included in the Seller Reports. B-17 92 (b) Seller has delivered or made available to Buyer true and complete copies of the Trust Declaration and the Bylaws, as amended to date, and the charter, bylaws, organizational documents, partnership agreements and joint venture agreements of the Subsidiaries, and all amendments thereto. All such documents are listed on Schedule 2.10(b). (c) The minute books and other records of corporate, trust or partnership proceedings of Seller and of each of the Subsidiaries contain accurate records of all meetings of the equity holders, managers and other governing bodies thereof and accurately reflect in all material respects all other corporate action of the managers, shareholders and directors and any committees of the Board of Managers and of the Subsidiaries which are corporations and all actions of the partners of the Subsidiaries which are partnerships. 2.11 Properties. (a) Schedule 2.11(a) sets forth a complete and accurate list and the address of all real property owned or leased by Seller or by any of the Subsidiaries or otherwise used by Seller or by any of the Subsidiaries in the conduct of their business or operations. That real property, together with the land at each address referenced in Schedule 2.11(a) and all buildings, structures and other improvements and fixtures located on or under such land and all easements, rights and other appurtenances to such land shall be referred to individually as a "Property" and collectively as the "Properties." Seller, or, in the case of properties owned by Subsidiaries, the Subsidiary or trustees holding legal title solely for the benefit of a Subsidiary indicated in Schedule 2.11(a), owns good and indefeasible fee simple title (or, if so indicated in Schedule 2.11(a), leasehold title) to each of the Properties, in each case free and clear of any Liens, title defects, common restrictions or covenants, laws, ordinances or regulations affecting use or occupancy (including zoning regulations and building codes) or reservations of interests in title (collectively, "Property Restrictions"), except for (i) Permitted Liens, (ii) Property Restrictions imposed or promulgated by law or by any Government Authority which are customary and typical for similar properties, and (iii) the obligations relating to the properties identified as Lend Lease Properties on Schedule 2.11(a) (the "Lend Lease Properties") arising under the Lend Lease Agreement and the obligations relating to the properties identified as Manhattan Towers Properties on Schedule 2.11(a) (the "Manhattan Towers Properties") arising under the Manhattan Towers Agreement. As used in this Agreement, "Permitted Liens" means (u) Liens (other than Liens imposed under ERISA or any Environmental Law or in connection with any Environmental Claim) for taxes or other assessments or charges of Governmental Authorities that are not yet delinquent or that are being contested in good faith by appropriate proceedings in each case, and with respect to which adequate reserves or other appropriate provisions are being maintained by Seller or the Subsidiaries to the extent required by GAAP, (v) statutory Liens of landlords, carriers, warehousemen, mechanics, materialmen and other Liens (other than Liens imposed under ERISA or any Environmental Law or in connection with any Environmental Claim) imposed by law and created in the ordinary course of business for amounts not yet overdue or which are being contested in good faith by appropriate proceedings, and in each case with respect to which adequate reserves or other appropriate provisions are being maintained by Seller or the Subsidiaries to the extent required by GAAP and which do not exceed $25,000 in the aggregate, (w) the Leases, (x) easements, rights-of-way and covenant restrictions which are customary and typical for properties similar to the Properties and which do not (1) interfere materially with the ordinary conduct of any Property or the business of Seller and the Subsidiaries as a whole or (2) detract materially from the value or usefulness of the Property to which they apply, (y) the Liens which were granted by Seller or any of the Subsidiaries to lenders pursuant to credit agreements in existence on the date hereof which are described in Schedule 2.9(c), and (z) such imperfections of title and encumbrances, if any, as would not individually or in the aggregate reasonably be expected to result in a Material Adverse Effect. To Seller's knowledge, none of the Permitted Liens interferes with, impairs, or is violated by the present use, occupancy or operation (or if applicable, development) of any Property that is not included in the Lend Lease Properties or in the Manhattan Towers Properties (the Properties not included in the Lend Lease Properties or the Manhattan Towers Properties, the "Buyer Properties") and none of the Property Restrictions interferes with, impairs, or is violated by, the existence of any building or other structure or B-18 93 improvement which constitutes a part of, or the present use, occupancy or operation (or, if applicable, development) of, any Buyer Property, except, in each such case, to the extent that any interference, impairment or violation would not, individually or in the aggregate with all other such items, reasonably be expected to have a Material Adverse Effect. American Land Title Association policies of title insurance (or marked title insurance commitments having the same force and effect as title insurance policies) have been issued by national title insurance companies insuring the fee simple or leasehold, as applicable, title of Seller or a Subsidiary or a trustee holding legal title solely for the benefit of a Subsidiary, as applicable, to each of the Buyer Properties in amounts at least equal to the original cost thereof, subject only to Permitted Liens, and to Seller's knowledge, all such policies are valid and in full force and effect and no claim has been made under any such policy. (b) Except as described in Schedule 2.11(b), Seller has no knowledge (i) that any currently required certificate, permit or license (including building permits and certificates of occupancy for tenant spaces) from any Government Authority having jurisdiction over any Property or any agreement, easement or other right that is necessary to permit the lawful use, occupancy or operation of the existing buildings, structures or other improvements that constitute a part of any of the Properties or which are necessary to permit the lawful use and operation of any existing driveways, roads or other areas of ingress and egress to and from any of the Properties has not been obtained or is not in full force and effect, or of any pending threat of modification or cancellation of any of same, or (ii) of any violation by any Property of any federal, state or municipal law, ordinance, order, regulation or requirement, including any applicable zoning law or building code, arising from the use or occupancy of such Property or otherwise. Except as described in Schedule 2.11(b), Seller has no knowledge of any current uninsured physical damage to any Buyer Property in excess of $25,000. To Seller's knowledge, except for repairs identified in the Capital Expenditure Budget and Schedule (as defined below in Section 2.11(i)), each Buyer Property: (x) is in good operating condition and repair and is structurally sound and free of defects, with no material alterations or repairs being required thereto under applicable law or insurance company requirements, and (y) consists of sufficient land areas, driveways and other improvements and lawful means of access and utility service and capacity to permit the use thereof in the manner and for the purposes to which it is presently devoted (or, in the case of the Development Properties (as defined below in Section 2.11(j)), for the development and operation thereon of the applicable Project), except, in each such case, to the extent that failure to meet such standards would not, individually or in the aggregate with all other such failures, reasonably be expected to have a Material Adverse Effect. (c) Seller has no knowledge (i) except as described in Schedule 2.11(c)that any condemnation, eminent domain or rezoning proceedings are pending or threatened with respect to any of the Buyer Properties, (ii) except as described in Schedule 2.11(c), that any road widening or change of grade of any road adjacent to any Buyer Property is underway or has been proposed, (iii) of any proposed change in the assessed valuation of any Buyer Property other than customarily scheduled revaluations, (iv) of any special assessment made or threatened against any Property, or (v) that any of the Buyer Properties is subject to any so-called "impact fee" or to any agreement with any Government Authority to pay for sewer extension, oversizing utilities, lighting or like expenses or charges for work or services by such Government Authority, except, in the case of each of the foregoing, to the extent that same would not, individually or in the aggregate with all other such items, reasonably be expected to have a Material Adverse Effect. (d) To Seller's knowledge, each of the Buyer Properties is an independent unit which does not rely on any facilities located on any property not included in such Property to fulfill any municipal or governmental requirement or for the furnishing to such Property of any essential building systems or utilities, other than facilities the benefit of which inures to the Buyer Properties pursuant to one or more valid easements. Each of the Buyer Properties is served by public water and sanitary systems and all other utilities, and, to Seller's knowledge, each of the Buyer Properties has lawful access to public roads, in all cases sufficient for the current use and occupancy of that Property (or, in the case of the Development Properties, for the development and operation thereon of the applicable Project (as defined herein)). To Seller's knowledge, all parcels of land included in each Buyer Property that purport to be contiguous are contiguous and are not separated by strips or gores. To Seller's knowledge, no portion of any Buyer B-19 94 Property lies in any flood plain area (as defined by the U.S. Army Corps of Engineers or otherwise) or includes any wetlands or vegetation or species protected by any applicable laws. To Seller's knowledge, no improvements constituting a part of any Buyer Property encroach on real property not constituting a part of such Property. (e) Except for matters addressed in the Capital Expenditure Budget and Schedule, no Property fails to comply with the requirements of the Americans With Disabilities Act (the "ADA") except for such noncompliance as Seller reasonably believes will not, individually or in the aggregate, have a Material Adverse Effect. (f) Seller has provided to Parent and Buyer an accurate rent roll for each Buyer Property as of September 30, 2000 (the "Rent Roll"), which identifies and accurately describes each lease of space in each Buyer Property (collectively, the "Leases"). Seller has delivered to Parent and Buyer an abstract of each Lease (the "Abstracts") which accurately describes the material terms thereof. With respect to each Lease for premises larger than 20,000 square feet of rentable space (each a "Material Lease" and collectively, the "Material Leases"), except as described in Schedule 2.11(f) and except for matters that are not, individually or in the aggregate, reasonably expected to have a material effect on any Buyer Property, (i) each of the Material Leases is valid and subsisting and in full force and effect as against each party thereto, and has not been amended, modified or supplemented, other than by any amendment, modification or supplement that has been provided to Parent and Buyer, (ii) the tenant under each of the Material Leases is in actual possession of the premises leased thereunder, (iii) no tenant under any Material Lease is more than thirty (30) days in arrears in the payment of rent, (iv) none of Seller or any of the Subsidiaries has received any written notice from any tenant under any Material Lease of its intention to vacate, (v) none of Seller or any of the Subsidiaries has collected payment of rent under any Material Lease (other than security deposits) for a period which is more than one (1) month in advance, (vi) no notice of default has been sent or received by the landlord under any Material Lease with respect to any defect that remains uncured as of the date hereof, no default has occurred under any Material Lease and, to Seller's knowledge, no event has occurred and is continuing which, with notice or lapse of time or both, would constitute a default under any Material Lease, (vii) no tenant under any of the Material Leases has any purchase option or kick-out right or is entitled to any concession, allowance, abatement, set-off, rebate or refund, (viii) none of the Material Leases and none of the rents or other amounts payable thereunder has been assigned, pledged or encumbered except in connection with financing secured by the applicable Buyer Property, which is described in Schedule 2.9(c), (ix) no brokerage or leasing commission or other compensation is due or payable to any Person with respect to or on account of any of the Material Leases or any extensions or renewals thereof, (x) except as set forth in the Abstracts, no space of a material size in any Buyer Property is occupied by a tenant rent-free, (xi) no tenant under any of the Material Leases has asserted any claim which is likely to affect the collection of rent from such tenant, and (xii) the landlord under each Material Lease has fulfilled all of its obligations thereunder in respect of tenant improvements and capital expenditures. Other than the tenants identified in the Rent Roll and Abstracts and parties to easement agreements which constitute Permitted Liens, no third party has any right to occupy or use any portion of any Buyer Property. The Rent Roll or Abstracts include a budget for all material tenant improvements and similar material work required to be performed by the lessor under each of the Material Leases. (g) Schedule 2.11(g) sets forth a complete and accurate list of all material commitments, letters of intent or written understandings made or entered into by Seller or any of the Subsidiaries as of the date hereof (i) to lease any space larger than 20,000 rentable square feet at any of the Buyer Properties, (ii) to sell, mortgage, or pledge any Buyer Property or to otherwise enter into a material transaction or arrangement in respect of the ownership or financing of any Buyer Property, or (iii) to purchase or acquire an option, right of first refusal or similar right in respect of any real property, which, in any such case has not yet been reduced to a written lease or contract, and sets forth with respect to each such commitment, letter of intent or other understanding the principal terms thereof. (h) Except as set forth in the Rent Roll or Abstracts, and except for certain rights of first refusal which are set forth in the sections of the partnership agreements referenced in Schedule 2.1(d) and which B-20 95 relate to partnerships in which Seller, directly or indirectly, owns less than a 100% interest, none of Seller or any of the Subsidiaries has granted any outstanding options or has entered into any outstanding contracts with others for the sale, mortgage, pledge, hypothecation, assignment, sublease, lease or other transfer of all or any part of any Buyer Property, and no person has any right or option to acquire, or right of refusal with respect to, Seller's or any Subsidiary's interest in any Buyer Property or any part thereof. Except as described in Schedule 2.11(h), none of Seller or any Subsidiary has any outstanding options or rights of first refusal or has entered into any outstanding contracts with others for the purchase of any real property. (i) Schedule 2.11(i) contains a complete and accurate description of any material noncompliance by any Property, to Seller's knowledge, with any law, ordinance, code, health and safety regulation or insurance requirement (except for the ADA, which is addressed in this respect in Section 2.11(e) above) other than such noncompliance as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Schedule 2.11(i) also sets forth Seller's and each Subsidiary's capital expenditure budget and schedule for each Buyer Property (the "Capital Expenditure Budget and Schedule"), which describes the capital expenditures which Seller or any Subsidiary has budgeted for such Property that was acquired prior to January 1, 2000 for the period from January 1, 2000 through December 31, 2000 and the expected capital expenditures from February 1, 2001 through May 31, 2001. To Seller's knowledge, the costs and time schedules for 2000 and 2001 (February through May 2001) set forth in the Capital Expenditure Budget and Schedule are reasonable estimates and projections. Except as described in Schedule 2.11(i), there are no outstanding, or to Seller's knowledge, threatened requirements of any insurance company which has issued an insurance policy covering any Buyer Property, or of any board of fire underwriters or other body exercising similar functions, requiring any repairs or alterations to be made to any Buyer Property. (j) Schedule 2.11(j) contains a list of each Buyer Property which consists of or includes undeveloped land or which is in the process of being developed or rehabilitated (each, a "Development Property," and collectively, the "Development Properties") and a brief description of the development or rehabilitation intended by Seller or any Subsidiary to be carried out or completed thereon (collectively, the "Projects"), including any budget and development or rehabilitation schedule therefor prepared by or for Seller or any Subsidiary (collectively, the "Development Budget and Schedule"). Except as disclosed in Schedule 2.11(j), each Development Property is zoned for the lawful development thereon of the applicable Project, and the Trust or a Subsidiary has obtained all permits, licenses, consents and authorizations required for the lawful development or rehabilitation thereon of such Project, except only for such failure to meet the foregoing standards as would not, individually or in the aggregate with all other such failures, reasonably be expected to have a Material Adverse Effect. Except as described in Schedule 2.11(j), to Seller's knowledge, there are no material impediments to or constraints on the development or rehabilitation of any Project in all material respects within the time frame and for the cost set forth in the Development Budget and Schedule applicable thereto. In the case of each Project, the development of which has commenced, to Seller's knowledge, the costs or expenses incurred in connection with such Project and the progress thereof are, except as described in Schedule 2.11(j), consistent and in compliance in all material respects with all aspects of the Development Budget and Schedule applicable thereto. All development and rehabilitation efforts with respect to the Development Properties and the Project have ceased. (k) Seller has disclosed to Buyer all adverse matters known to Seller with respect to or in connection with the Buyer Properties (including the Leases and the Tenancy Leases), which would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. (l) The ground leases underlying the leased Buyer Properties referenced in Schedule 2.11(a) (collectively, the "Tenancy Leases") are listed in Schedule 2.11(l). Each of the Tenancy Leases is valid, binding and in full force and effect against the applicable Subsidiary and, to Seller's knowledge, against the other party thereto. Except as indicated in Schedule 2.11(l), none of the Tenancy Leases is subject to any pledge, lien, sublease, assignment, license or other agreement granting to any third party any interest in or any right to the use or occupancy of any premises leased thereunder. To Seller's knowledge, except B-21 96 as described in Schedule 2.11(l), there is no pending or threatened proceeding which is reasonably likely to interfere with the quiet enjoyment of the tenant under any of the Tenancy Leases. Except as described in Schedule 2.11(l), no payments under any Tenancy Lease are delinquent and no notice of default thereunder has been sent or received by Seller or any of the Subsidiaries. There does not exist under any of the Tenancy Leases any default, and, to Seller's knowledge, no event has occurred which, with notice or lapse of time or both, would constitute such a default, except as would not, individually or in the aggregate with all other such defaults, be reasonably expected to have a Material Adverse Effect. (m) Each of Seller and each of the Subsidiaries has good and sufficient title to all the personal and other property and assets reflected in their books and records as being owned by them (including those reflected in the balance sheets of Seller and the Subsidiaries as of June 30, 2000, except as since sold or otherwise disposed of in the ordinary course of business), free and clear of all Liens, except for Permitted Liens which are not, individually or in the aggregate, reasonably expected to have a material adverse effect on any Property. 2.12 Environmental Matters. (a) Except as disclosed on Schedule 2.12(a), to Seller's knowledge, each of Seller and the Subsidiaries has obtained and now maintains as currently valid and effective all permits required to be possessed by Seller or its Subsidiaries under Environmental Laws (the "Environmental Permits") in connection with the operation of its businesses and properties, all of which are listed in Schedule 2.12(a), except where the failure to have such Environmental Permit would not individually or in the aggregate with all other failures to have a required Environmental Permit, reasonably be expected to result in a Material Adverse Effect. To Seller's knowledge, except as disclosed in the Environmental Reports (as defined below), each of Seller and the Subsidiaries, and each Property, is in compliance with all terms and conditions of the Environmental Permits and all Environmental Laws, except for any noncompliance that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Seller or a Subsidiary. Seller has no knowledge of any actually and currently existing circumstances that may prevent or interfere with such compliance in the future. (b) Each of Seller and the Subsidiaries has made available to Parent and Buyer all material written information and written communications (whether from a Government Authority, citizens' group, employee or other person) in its possession or control regarding (i) alleged or suspected noncompliance of any of the Properties with any Environmental Laws or Environmental Permits or (ii) alleged or suspected liability of Seller or any Subsidiary under any Environmental Law. (c) There are no environmental liens or encumbrances on any of the Properties and, to Seller's knowledge, no government actions have been taken or are in process which are reasonably likely to subject any Property to such liens or other encumbrances that would prevent the use of such Property as currently conducted. (d) No Environmental Claim (as defined below) with respect to the operations or the businesses of Seller or of any Subsidiary, or with respect to the Properties, has been asserted or, to Seller's knowledge, threatened, and, to Seller's knowledge, no circumstances exist with respect to Seller or any of the Subsidiaries or the Properties that would reasonably be expected to result in any Environmental Claim being asserted, in any such case, (i) against (x) Seller or any of the Subsidiaries, or (y) any person whose liability for any Environmental Claims Seller or any of the Subsidiaries has or may have retained or assumed either contractually or by operation of law, and (ii) which would reasonably be expected to have a Material Adverse Effect. (e) Except as disclosed in Schedule 2.12(e) or set forth in the Environmental Reports: (i) none of Seller or any of the Subsidiaries has been notified or has reason to believe that it will be notified of potential responsibility in connection with any site that has been placed on, or proposed to be placed on, the National Priorities List or its state or foreign equivalent pursuant to the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. sec. 9601, et seq., or analogous state or foreign laws, (ii) to Seller's knowledge, no Materials of Environmental Concern are present on, in or under B-22 97 any Property in a manner or condition that is reasonably likely to give rise to an Environmental Claim which would reasonably be expected to result in a Material Adverse Effect, (iii) and to Seller's knowledge, none of Seller, any Subsidiary or any tenant of any Property has Released or arranged for the Release of any Materials of Environmental Concern at any location to an extent or in a manner which would reasonably be expected to result in a Material Adverse Effect on the Property, (iv) to Seller's knowledge, no underground storage tanks, surface disposal areas, pits, ponds, lagoons, open trenches or equipment is present at any Property, (iv) to Seller's knowledge, no transformers, capacitors or other equipment containing fluid with more than 50 parts per million polychlorinated biphenyls are present at any Property, except for any such transformers, capacitation or other equipment owned by any utility company, and (vi) to Seller's knowledge, no employee, agent, contractor, subcontractor or tenant of Seller or any of the Subsidiaries is now or has in the past been exposed to friable asbestos or asbestos-containing material at any Property. (f) Seller has made available to Buyer the most recent Phase I environmental reports prepared for Seller or the Subsidiaries or otherwise in the possession of any of them with respect to the environmental condition of any Property (collectively, the "Environmental Reports"). (g) For purposes of this Section 2.12, the terms listed below have the following meanings: (i) "claim" means any action, cause of action, suit, controversy, trespass, judgment, execution, claim, liability or demand whatsoever, in law or equity. (ii) "Environmental Claim" means any notice of investigation or claim or notice (written or oral) by any person alleging potential liability (including potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries or fatalities, or penalties) arising out of, based on or resulting from (x) the presence, generation, transportation, treatment, use, storage, disposal or Release of Materials of Environmental Concern or the threatened Release of Materials of Environmental Concern at any location, or (y) activities or conditions forming the basis of any violation, or alleged violation of, or liability or alleged liability under, any Environmental Law. (iii) "Environmental Laws" means federal, state, local, provincial, municipal and foreign laws, ordinances, principles of common law, rules, orders, governmental policies, statutes, regulations, agreements with any Governmental Authority, and treaties, relating to the pollution or protection of the environment or of flora or fauna or their habitat or of effects of Materials of Environmental Concern upon human health and safety, or to the cleanup or restoration of the environment, including, but not limited to, any laws relating to (x) generation, treatment, storage, disposal or transportation of wastes, emissions or discharges or protection of the environment from the same, and (y) exposure of persons to, or Release or threat of Release, Materials of Environmental Concern. (iv) "Materials of Environmental Concern" means all chemicals, pollutants, contaminants, wastes, toxic substances, petroleum or any fraction thereof, petroleum products and hazardous substances (as defined in Section 101(14) of CERCLA, 42 U.S.C. sec. 9601(14)), or solid or hazardous wastes as now defined and regulated under any Environmental Laws. (v) "Release" means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration. 2.13 Employees and Benefit Plans. (a) Schedule 2.13(a) sets forth a complete and accurate list of all employment agreements with employees of Seller or of any of the Subsidiaries. Except for the employees who are parties to such employment agreements, all of the employees of Seller and of each of the Subsidiaries are employed in an at-will status (except for restrictions or limitations on the at-will status of such employees imposed by federal and state law and general principles of law or equity). (b) Schedule 2.13(b) sets forth a complete and accurate list of all Employee Benefit Plans (as defined below) and all material Benefit Arrangements (as defined below) which affect Employees (as B-23 98 defined below) maintained or contributed to, or required to be contributed to, by Seller or an ERISA Affiliate (as defined below) within the last six (6) years for the benefit of any Employees of Seller or of any of the Subsidiaries (each, a "Plan"). (c) With respect to each Plan, (i) Seller and each of the Subsidiaries is and always been in compliance in all material respects with the terms of that Plan and with the requirements prescribed by all applicable statutes, orders or governmental rules or regulations, (ii) Seller and each of the Subsidiaries has timely contributed to each Pension Plan not less than the amounts accrued for such plan for all plan periods for which payment is due, and (iii) none of Seller or any ERISA Affiliate has any funding commitment or other liabilities except as reserved for in the financial statements included in or incorporated by reference into the Reports, except, in the case of each of clauses (i) through (iii), for such matters as would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect. (d) None of Seller or any ERISA Affiliate has made any commitment to establish any new Employee Benefit Plan, to modify any Employee Benefit Plan, or to increase benefits or compensation of Employees of Seller or of any of the Subsidiaries (except for normal increases in compensation consistent with past practices), and to Seller's knowledge, no intention to do so has been communicated to Employees of Seller or of any of the Subsidiaries. (e) There are no pending or, to Seller's knowledge, anticipated claims, actions, suits, proceedings or investigations against or otherwise involving any of the Plans or any fiduciaries thereof with respect to their duties to the Plans and no suit, action or other litigation (excluding claims for benefits incurred in the ordinary course of Plan activities) has been brought against or with respect to any Plan. (f) Neither Seller nor any entity under "common control" with Seller within the meaning of Section 4001 of ERISA ("ERISA Affiliate") has contributed to, or been required to contribute to, any "multiemployer plan" (as defined in Section 3(37) and 4001(a)(3) of ERISA). (g) Except as described in Schedule 2.13(g), Seller and the Subsidiaries do not maintain or contribute to any plan or arrangement which provides or has any liability to provide life insurance, medical or other employee welfare benefits, except as otherwise required under Section 601, et seq., of ERISA, to any Employee after his retirement or termination of employment and, to Seller's knowledge, Seller and the Subsidiaries have never represented, promised or contracted (whether in oral or written form) to any Employee or former Employee that such benefits would be provided. (h) For purposes hereof, "Employee Benefit Plans" means each and all "employee benefit plans" as defined in Section 3(3) of ERISA maintained or contributed to by a party hereto or in which a party hereto participates or participated and which provides benefits to Employees, including (i) any such plans that are "employee welfare benefit plans" as defined in Section 3(1) of ERISA, including retirement medical and life insurance ("Welfare Plans"), and (ii) any such plans that constitute "employee pension benefit plans" as defined in Section 3(2) of ERISA ("Pension Plans"). "Benefit Arrangements" means life and health, hospitalization, savings, bonus, deferred compensation, incentive compensation, holiday, vacation, severance pay, sick pay, sick leave, disability, tuition refund, service award, company car, scholarship, relocation, patent award, fringe benefit, individual employment, consultation or severance and other polices or practices of a party hereto providing employee or executive compensation or benefits to Employees, other than Employee Benefit Plans. "Employees" means all current employees, former employees and retired employees of a party hereto or of any of the Subsidiaries, including employees on disability, layoff or leave status. "Controlled Group Liability" means any and all liabilities under (i) Title IV of ERISA, (ii) Section 302 of ERISA, (iii) Sections 412 and 4971 of the Code, (iv) the continuation coverage requirements of Section 601, et seq., of ERISA and Section 4980B of the Code, and (v) corresponding or similar provisions of foreign laws or regulations, other than such liabilities that arise solely out of, or relate solely to, the Plans. (i) To Seller's knowledge, with respect to each plan that is subject to Title IV or Section 302 of ERISA or Section 412 or 4971 of the Code: (i) there does not exist any accumulated deficiency within B-24 99 the meaning of Section 412 of the Code or Section 302 of ERISA, whether or not waived, (ii) the fair market value of the assets of such plan equals or exceeds the actuarial present value of all accrued benefits under the plan (whether or not vested), on a termination basis, (iii) no reportable event within the meaning of Section 4043(c) of ERISA has occurred, and the consummation of the transactions contemplated by this Agreement will not result in the occurrence of any such reportable event, and (iv) all premiums to the Pension Benefit Guaranty Corporation have been timely paid in full. (j) There does not now exist, nor do any circumstances exist that could result in, any Controlled Group Liability that would be a liability of Seller or the Surviving Corporation following the Closing. Without limiting the generality of the foregoing, neither Seller nor any ERISA Affiliate has engaged in any transaction described in Section 4069 or Section 4204 of ERISA. (k) Except as set forth in Schedule 2.13(k), neither the execution and delivery of this Agreement, the Lend Lease Agreement and the Manhattan Towers Agreement, nor the consummation of the transactions contemplated hereby and thereby (either alone or in conjunction with any other event) will result in, cause the accelerated vesting or delivery of, or increase the amount or value of any payment or benefit to any employee of Seller or of any Subsidiary. (l) Except as set forth in Schedule 2.13(l), each of the Plans has been operated and administered in all material respects in accordance with the terms of the Plan and all applicable laws. (m) Except as set forth on Schedule 2.13(m), with respect to each of the Plans, Seller or any ERISA Affiliate is not obligated to continue any such Plan beyond the Closing Date. (n) Each of the Pension Plans intended to be "qualified" within the meaning of Code Section 401(a) is so qualified. Each Plan that is intended to qualify for favorable tax treatment under Code Section 125 so qualifies and has been operated in material compliance with Code Section 125. (o) There is sufficient liquidity of assets in each of the funded Plans to promptly pay for the benefits earned and other liabilities owed under such Plan. With respect to each of the Plans, no insurance contract, annuity contract, or other agreement or arrangement with any financial or other organization would impose any penalty, discount or other reduction on account of the withdrawal of assets from such organization or the change in the investment of such assets. (p) All Form 5500s for each Plan required to be filed by Seller in the last six (6) years have been filed. 2.14 Labor Matters. None of Seller nor any of the Subsidiaries is a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor union organization. Except for the matters described in Schedule 2.14 (none of which matters would, individually or in the aggregate with all other such matters, reasonably be expected to have a Material Adverse Effect), there is no unfair labor practice or labor arbitration proceeding pending or, to the knowledge of Seller, threatened against Seller or any of the Subsidiaries. To the knowledge of Seller, there are no organizational efforts with respect to the formation of a collective bargaining unit presently being made or threatened involving employees of Seller or of any of the Subsidiaries. 2.15 No Payments to Employees, Officers or Directors. Schedule 2.15 contains a true and complete list of all cash and noncash payments which will become payable to each employee, officer or director of Seller or any Subsidiary as a result of or in connection with the Merger, the Lend Lease Transaction or the Manhattan Towers Transaction or those transactions taken as a whole. Except as set forth in Schedule 2.15, there is no employment or severance contract or other agreement requiring payments, cancellation of indebtedness or other obligations to be made or satisfied on a change of control or otherwise as a result of or in connection with the Merger, the Lend Lease Transaction or the Manhattan Towers Transaction or those transactions taken as a whole, with respect to any employee, officer or director of Seller or any Subsidiary. 2.16 Insurance. Seller maintains insurance policies covering the assets, business, equipment, properties, operations, employees, officers, managers, and directors of Seller and of each of the Subsidiaries B-25 100 (collectively, the "Insurance Policies") which are of a type and in amounts customarily carried by persons similar in size to Seller conducting businesses similar to those of Seller. There is no material claim by Seller or by any of the Subsidiaries pending under any of the Insurance Policies as to which coverage has been questioned, denied or disputed by any underwriter of such policy. 2.17 Proxy Statement; Additional Filings. The Proxy Statement and the Additional Filings (both as defined in Section 5.1(a)) and all of the information included or incorporated by reference therein (other than any information supplied or to be supplied by Parent or Buyer for inclusion or incorporation by reference therein) will not, as of the date such Proxy Statement is first made available to the shareholders of Seller or as of the date the Additional Filings are filed, and as of the time of the meeting of the shareholders of Seller in connection with the transactions contemplated hereby, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Proxy Statement and the Additional Filings will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations promulgated by the SEC thereunder, except that no representation is made by Seller with respect to the information supplied by Parent or Buyer for inclusion or incorporation by reference therein. 2.18 Takeover Statutes. No "fair price," "moratorium," "control share acquisition" or other antitakeover statute or similar statute or regulation enacted by the State of Texas applies to the transactions contemplated by this Agreement. 2.19 Opinion of Financial Advisor. Seller has received the opinion of Chase Securities Inc. dated the date of this Agreement, a signed copy of which will be provided to Parent and Buyer, to the effect that, on the date hereof, the Common Consideration to be received by the holders of Trust Common Shares pursuant to the Merger is fair to such holders from a financial point of view. 2.20 Knowledge Defined. As used herein, the phrase "to Seller's knowledge" (or words of similar import) means the knowledge of those individuals identified in Schedule 2.20, and includes any facts, matters or circumstances set forth in any written notice from any Government Authority or any other material notice received by any such individual with respect to Seller or any Subsidiary, and also includes any matter of which Parent or Buyer informs Seller in writing. 2.21 Investment Company Act of 1940. Neither Seller nor any of the Subsidiaries is, or at the Effective Time will be, required to be registered under the Investment Company Act of 1940, as amended (the "1940 Act"). ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PARENT AND BUYER Parent and Buyer hereby jointly and severally represent and warrant to Seller as follows: 3.1 Organization. Parent is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Ohio. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Texas. Each of Parent and Buyer has all requisite corporate power and authority to own, operate, lease and encumber its properties and carry on its business as now conducted, and to enter into this Agreement and to perform its obligations hereunder. 3.2 Due Authorization. The execution, delivery and performance of this Agreement and of all of the documents and instruments delivered in connection herewith by each of Parent and Buyer has been duly and validly authorized by all necessary corporate action on the part of Parent and Buyer. Assuming this Agreement and such other documents and instruments constitute binding obligations of Seller, this Agreement is, and the other documents and instruments required hereby will be, when executed and delivered by Parent and Buyer, the valid and binding obligations of each of Parent and Buyer, enforceable against Parent and Buyer in accordance with their respective terms subject only to bankruptcy, insolvency, reorganization, moratorium or similar laws at the time in effect affecting the enforceability or right of B-26 101 creditors generally and to general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). The Board of Directors of Buyer has approved this Agreement and the transactions contemplated hereby in accordance with Texas law. The Board of Directors of Parent has authorized and approved and declared advisable this Agreement and the transactions contemplated hereby in accordance with Ohio law. 3.3 No Conflicts: No Defaults, Required Filings and Consents. Neither the execution and delivery by Parent or Buyer of this Agreement, nor the consummation by Parent or Buyer of the transactions contemplated hereby and thereby in accordance with the terms hereof and thereof, will: (a) conflict with or result in a breach of any provision of the either the Parent's or Buyer's articles of incorporation, as amended, the Parent's code of regulations or the Buyer's bylaws; (b) violate or conflict with any statute, regulation, judgment, order, writ, decree or injunction applicable to Parent or Buyer or to any their subsidiaries; (c) except as described in Schedule 3.3(c), violate or conflict with or result in a breach of any provision of, or constitute a default (or any event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination or in a right of termination or cancellation of, or accelerate the performance required by, or result in the creation of any Lien upon any of the properties of Parent or Buyer or of any of their subsidiaries under, or result in being declared void, voidable or without further binding effect, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust or any franchise, permit, lease, contract, agreement or other instrument, commitment or obligation to which Parent or Buyer or any of their subsidiaries is a party, or by which Parent or Buyer or any of their subsidiaries or any of their properties is bound or affected; or (d) require any consent, approval or authorization of, or declaration, filing or registration with, any Government Authority, other than the Articles of Merger pursuant to Section 1.3 hereof and the Filings, and any filings required to be made with the Texas State Department of Assessments and Taxation, if any, or any national securities exchange on which the Parent's common shares are listed. 3.4 Proxy Statement; Additional Filings. None of the information supplied or to be supplied by Parent or Buyer for inclusion or incorporation by reference in the Proxy Statement or in the Additional Filings, as of the date the Proxy Statement is mailed to the shareholders of Seller or as of the date the Additional Filings are filed and as of the time of the meeting of the shareholders of Seller in connection with the transactions contemplated hereby, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. 3.5 Investment Company Matters. Neither Parent nor Buyer is, and after giving effect to the consummation of Merger neither Parent nor Buyer will be, an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. 3.6 Capital Structure. Immediately prior to the Effective Time, Parent will be the sole shareholder of Buyer and own 10,000 shares of Buyer's common stock. Other than as described in the immediately preceding sentence and except for Parent's understandings with approximately 100 employees of Parent with regard to the issuance to those employees of Surviving Company preferred stock immediately following the Effective Time, at the Effective Time, there will be no outstanding equity securities or other equity interests, debt securities or derivative securities of Buyer or any oral or written agreements regarding the issuance of same. There are no outstanding securities or assets convertible into, exercisable for or exchangeable for any debt, equity or derivative securities of Buyer or any oral or written agreements regarding the issuance of same. 3.7 Litigation; Compliance With Law. Except as disclosed in Schedule 3.7, there is no Action pending or, to Parent's or Buyer's knowledge, threatened against either Parent or Buyer or any of their subsidiaries that would question the validity of this Agreement or any action taken or to be taken in B-27 102 connection herewith, or that would, individually or in the aggregate, reasonably be expected to result in a Buyer or Parent Material Adverse Effect that would affect their ability to perform their obligations under this Agreement. 3.8 Funding. Parent and Buyer have cash or financing commitments (as described in Schedule 3.8) sufficient to enable them to perform their obligations hereunder. ARTICLE 4 COVENANTS 4.1 Acquisition Proposals. Prior to the Effective Time or the earlier termination of this Agreement in accordance with its terms, Seller agrees that: (a) neither it nor any of the Subsidiaries shall initiate, solicit or knowingly encourage, directly or indirectly, any inquiries or the making or implementation of any proposal or offer (including, without limitation, any proposal or offer to its shareholders) with respect to a merger, acquisition, tender offer, exchange offer, consolidation, sale of assets or similar transaction involving all or any significant portion of the assets or any equity securities of Seller or any of the Subsidiaries, other than the transactions contemplated by this Agreement, the Lend Lease Agreement and the Manhattan Towers Agreement (any such proposal or offer being hereinafter referred to as an "Acquisition Proposal") or engage in any negotiations concerning or provide any confidential information or data to, or have any discussions with, any person relating to an Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal; (b) it shall direct and use its reasonable best efforts to cause its officers, Board Managers, employees, agents and financial advisors not to engage in any of the activities described in Section 4.1(a) except to the extent expressly permitted by the proviso below; (c) it will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing; and (d) it will notify Buyer promptly if Seller receives any such inquiries or proposals, or any requests for such information, or if any such negotiations or discussions are sought to be initiated or continued with it; provided, however, that nothing contained in this Agreement shall prohibit the Board of Managers (or the officers, Board Managers, employees, agents or financial advisors of Seller acting at the direction of the Board of Managers) from (i) furnishing information to or entering into discussions or negotiations with, any person or entity that makes an unsolicited Acquisition Proposal, if, and only to the extent that (x) the Board of Managers (excluding Parent's designees) determines in good faith following consultation with counsel and with Seller's financial advisors that such action is required for the Board of Managers to comply with its duties to shareholders imposed by law or such proposal is or could reasonably be expected to result in, a Superior Acquisition Proposal (as hereinafter defined), (y) prior to furnishing such information to, or entering into discussions or negotiations with, such person or entity, Seller provides written notice to Parent and Buyer to the effect that it is furnishing information to, or entering into discussions with, such person or entity, and (z) subject to any confidentiality agreement with such person or entity, Seller keeps Parent and Buyer informed of the status (not the terms) of any such discussions or negotiations; or (ii) to the extent applicable, taking and disclosing to Seller's shareholders a position contemplated by Rules 14d-9 and 14e-2 promulgated under the Exchange Act with regard to an Acquisition Proposal. Nothing in this Section 4.1 shall (1) permit Seller to terminate this Agreement (except as specifically provided in Article 7 hereof), (2) permit Seller to enter into an agreement with respect to an Acquisition Proposal during the term of this Agreement (other than a confidentiality agreement in customary form executed as provided above) or (3) affect any other obligation of Seller under this Agreement; provided, however, that the Board of Managers may approve and recommend a Superior Acquisition Proposal and, in connection therewith, withdraw or modify its approval or recommendation of this Agreement and the Merger. Any disclosure that the Board of Managers may be B-28 103 compelled to make with respect to the receipt of an Acquisition Proposal in order to comply with its duties to shareholders of Seller or comply with applicable law will not constitute a violation of this Section 4.1. As used herein, "Superior Acquisition Proposal" means a bona fide Acquisition Proposal made by a third party which the Board of Managers (excluding Parent's designees) (or a duly constituted committee thereof charged with considering Acquisition Proposals) determines in good faith following consultation with counsel and with Seller's financial advisors to be more favorable to Seller's shareholders from a financial point of view than the Merger and which the Board of Managers (excluding Parent's designees) (or any such committee) determines is reasonably capable of being financed and consummated. 4.2 Conduct of Seller's Business Pending Merger. Prior to the Effective Time, except as consented to in writing by Parent and Buyer (which consent or withholding of consent shall be communicated by Parent and Buyer to Seller within seven (7) business days of the date of the request for such consent; provided, however, if Parent and Buyer do not respond to the request for consent within such seven (7) day period, they shall be deemed to have consented to such request), as expressly provided for in this Agreement, the Lend Lease Agreement or the Manhattan Towers Agreement, Seller shall, and shall cause each of the Subsidiaries to: (a) conduct its business only in the usual, regular and ordinary course and in substantially the same manner as heretofore and take all action necessary to continue to qualify as a REIT; (b) use its commercially reasonable efforts to preserve intact its business organization and goodwill and keep available the services of its officers and key employees; (c) confer on a regular basis with one or more representatives of Parent and Buyer to report operational matters of materiality and, subject to Section 4.1, any proposal to engage in material transactions; (d) promptly notify Parent and Buyer of any material emergency or other material change in the condition (financial or otherwise), business, properties, assets, liabilities or the normal course of its businesses or in the operation of its properties, or of any material governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated); (e) promptly deliver to Parent and Buyer true and correct copies of any report, statement or schedule filed with the SEC subsequent to the date of this Agreement and prior to the Closing; (f) maintain its books and records in accordance with GAAP consistently applied and not change in any material manner any of its methods, principles or practices of accounting in effect at December 31, 1999, except as may be required by the SEC, applicable law or GAAP; (g) duly and timely file all material reports, tax returns and other documents required to be filed with federal, state, local and other authorities, subject to extensions permitted by law, so long as Seller notifies Parent and Buyer that it is availing itself of such extensions and so long as such extensions do not adversely affect Seller's status as a qualified REIT under the Code; (h) not make or rescind any material express or deemed election relative to Taxes that would adversely affect Seller's status as a REIT or the status of any Subsidiary as a partnership for federal income tax purposes or as a qualified REIT subsidiary under Section 856(i) of the Code, as the case may be; (i) make reasonably budgeted capital expenditures in the ordinary course of business, but not acquire, enter into any option to acquire, or exercise an option or contract to acquire, additional real property, incur additional indebtedness except for working capital under its revolving lines of credit, encumber assets or commence construction of, or enter into any agreement or commitment to develop or construct, other real estate projects, except for activities necessary to proceed with the construction of the projects which have been budgeted and are disclosed in Schedule 2.11(i), in accordance with the agreements in existence on the date of this Agreement and previously furnished to Parent and Buyer (the "Development Agreements"); B-29 104 (j) not amend its Trust Declaration or Bylaws, or the articles or certificate of incorporation, bylaws, code of regulations, partnership agreement, operating agreement or joint venture agreement or comparable charter or organization document of any Subsidiary; (k) except as contemplated by this Agreement, make no change in the number of shares of beneficial interest, membership interests or units of limited partnership interest issued and outstanding, other than pursuant to the exercise of options disclosed in Schedule 2.3(b); (l) grant no option or other right or commitment relating to its or any Subsidiary's shares of beneficial interest (including annual grants to Board Managers), membership interests or units of limited partnership interest or any security convertible into its or any subsidiary's shares of beneficial interest, membership interests or units of limited partnership interest, or any security the value of which is measured by its or any Subsidiary's shares of beneficial interest, or any security subordinated to the claim of its or any Subsidiary's general creditors, and not amend or waive any rights under any outstanding Options; (m) except as provided in Section 5.8 and in connection with the use of Trust Common Shares to pay the exercise price or tax withholding in connection with equity-based employee benefit plans by the participants therein, not (i) authorize, declare, set aside or pay any dividend or make any other distribution or payment with respect to any Trust Common Shares except as may be required to preserve the status of Seller as a REIT under the Code or to prevent Seller from having to pay federal income tax, or (ii) directly or indirectly redeem, purchase or otherwise acquire any shares of capital stock, membership interests or units of partnership interest in Seller or any Subsidiary or any option, warrant or right to acquire, or security convertible into, shares of beneficial interest, membership interests, or units of partnership interest in Seller or any Subsidiary, except for redemptions of Trust Common Shares required under Article V of Seller's Trust Declaration in order to preserve the status of Seller as a REIT under the Code; (n) not sell, lease, mortgage, subject to Lien or otherwise dispose of any of the Properties, except for the sale of Properties which are the subject of binding contracts to sell in existence on the date of this Agreement and disclosed in Schedule 2.11(g) and except for leases approved by Buyer in accordance with this Section 4.2(n) (Buyer's approval not to be unreasonably withheld, conditioned or delayed); (o) not sell, lease, mortgage, subject to any material Lien or otherwise dispose of any of its personal property or intangible property; (p) not make any loans, advances or capital contributions to, or investments in, any other person, other than loans, advances and capital contributions to Subsidiaries in existence on the date hereof; (q) not pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise) which are material to Seller and the Subsidiaries taken as a whole, other than the payment, discharge or satisfaction, in the ordinary course of business consistent with past practice or in accordance with their terms, of liabilities reflected or reserved against in, or contemplated by, the most recent consolidated financial statements (or the notes thereto) furnished to Parent and Buyer or incurred in the ordinary course of business consistent with past practice; (r) not enter into any Commitment for the purchase of any real estate or which may result in total payments or liability by or to it in excess of $500,000 or aggregate Commitments in excess of $1,000,000 except (i) purchases of real estate necessary to complete a like kind exchange pursuant to Section 1031 of the Code, if such purchase has been previously approved by Parent and Buyer, such approval not to be unreasonably withheld or delayed, and (ii) capital expenditures disclosed in Schedule 2.11(i); (s) not guarantee the indebtedness of another person, enter into any "keep well" or other agreement to maintain any financial statement condition of another person or enter into any arrangement having the economic effect of any of the foregoing; (t) not enter into any Commitment with any officer, Board Manager, director or Affiliate of Seller or any of the Subsidiaries, other than as contemplated by Section 4.4(a) below; B-30 105 (u) not increase any compensation or enter into or amend any employment or other agreement with any of its officers, directors or employees, other than with respect to (i) incentive compensation payments to be paid to Seller's officers and employees relating to 2000 performance as contemplated by the agreements referenced in Section 4.4(a) below, and (ii) base pay increases and pro-rated incentive compensation payments to Seller's employees who do not hold dividend equivalent rights relating to 2001 performance. (v) not adopt any new employee benefit plan or amend any existing plans or rights, except for the changes set forth or reflected in the agreements referenced in Section 4.4(a) below or which are required by law and changes which are not more favorable to participants than provisions presently in effect; (w) not change the ownership of any of the Subsidiaries; (x) not agree, commit or arrange to take any action prohibited by this Section 4.2; and (y) not change the methods, principles, practices or procedures used to calculate the amount of the items set forth in Section 6.2(j)-(m). 4.3 Other Actions. Each of Seller on the one hand and Parent and Buyer on the other hand shall not knowingly take, and shall use commercially reasonable efforts to cause their subsidiaries not to take, any action that would result in (a) any of the representations and warranties of such party (without giving effect to any "knowledge" qualification) set forth in this Agreement that are qualified as to materiality becoming untrue, (b) any of such representations and warranties (without giving effect to any "knowledge" qualification) that are not so qualified becoming untrue in any material respect, or (c) except as contemplated by Section 4.1, any of the conditions to the Merger set forth in Article 6 not being satisfied. 4.4 Releases. (a) Prior to the Closing, Seller agrees to deliver to Parent and Buyer a Compromise, Settlement and Mutual Release, substantially in the form attached hereto as Exhibit C, from each officer and employee who is entitled to severance, change of control or other similar payments in connection with the transactions contemplated by this Agreement and who are listed in Schedule 4.4(a). (b) Prior to the Closing, Seller agrees to deliver to Parent and Buyer written agreements with Salomon Smith Barney Inc. ("SSB") and Prudential Securities Incorporated ("Prudential") regarding the settlement of all sums due and owing to SSB and Prudential in connection with the Merger, the Lend Lease Transaction and the Manhattan Towers Transaction. The agreements shall release Seller from any claims or obligations (excluding any ongoing indemnity obligations) arising from or relating to engagement letters or investment banking relationships between Seller or any Subsidiary and SSB or Prudential. (c) Prior to Closing, Seller agrees to deliver to Parent and Buyer final invoices from Locke Liddell & Sapp LLP, Ernst & Young LLP and any other professional advisors of Seller for services rendered in connection with the Merger, the Manhattan Towers Transaction and the Lend Lease Transaction, which invoices may include estimated amounts for Closing and post-closing matters, and agrees that the amounts invoiced will be accounted for in the calculation of the Transaction Expenses and will be paid on or prior to Closing by Seller. 4.5 DRIP. Seller agrees to terminate its DRIP as soon as practicable after the date of this Agreement. B-31 106 ARTICLE 5 ADDITIONAL COVENANTS 5.1 Preparation of the Proxy Statement; Seller Shareholders Meeting. (a) The parties shall cooperate and promptly prepare, and Seller shall file with the SEC as soon as practicable a proxy statement with respect to the meeting of the shareholders of Seller in connection with the Merger and the Lend Lease Transaction (the "Proxy Statement"). The parties shall cooperate and promptly prepare and the appropriate party shall file with the SEC as soon as practicable any other filings required under the Exchange Act ("Additional Filings"), including without limitation, a Rule 13e-3 Transaction Statement on Schedule 13E-3 with respect to the Merger to be filed jointly by Seller, Parent and Buyer, together with any required amendments thereto. Each of Seller, Parent and Buyer agrees that the information provided by it for inclusion in the Proxy Statement, the Additional Filings, and each amendment or supplement thereto, at the time of mailing or filing thereof and at the time of the meeting of shareholders of Seller, will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Seller will use its reasonable best efforts, and Parent and Buyer will cooperate with Seller, to (i) file a preliminary Proxy Statement with the SEC and (ii) cause the Proxy Statement to be mailed to Seller's shareholders, in each case, as promptly as practicable (including clearing the Proxy Statement with the SEC). The parties will notify one another promptly of the receipt of any comments from the SEC and of any request by the SEC for amendments or supplements to the Proxy Statement or the Additional Filings or for additional information and will supply one another with copies of all correspondence between such party or any of its representatives and the SEC with respect to the Proxy Statement or the Additional Filings. The parties shall cooperate to cause the Proxy Statement and any Additional Filings to comply in all material respects with all applicable requirements of law. Whenever any event occurs which is required to be set forth in an amendment or supplement to the Proxy Statement or the Additional Filings, Seller on the one hand, and Parent and Buyer on the other hand, shall promptly inform the other of such occurrence and cooperate in filing with the SEC and mailing to the shareholders of Seller, as applicable, such amendment or supplement to the Proxy Statement or Additional Filing. Seller shall use its reasonable best efforts to cause the other parties to the Lend Lease Agreement and the Manhattan Towers Agreement to take such actions and provide such cooperation as may be necessary to ensure that the Proxy Statement, the Additional Filings, and each amendment or supplement thereto, at the time of mailing or filing thereof and at the time of the meeting of shareholders of Seller, will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and to facilitate Seller's compliance with its obligations under this Section 5.1. (b) To the extent the Proxy Statement contains financial statements of Seller, it is a condition to the mailing of the Proxy Statement and the making of the Additional Filings that if they so request, Parent and Buyer shall have received a "comfort" letter or an "agreed upon procedures" letter from Ernst & Young LLP, independent public accountants for Seller, of the kind contemplated by the Statement of Auditing Standards with respect to Letters to Underwriters promulgated by the American Institute of Certified Public Accountants (the "AICPA Statement"), dated as of the date on which the Proxy Statement is to be mailed to the shareholders of Seller, addressed to Parent and Buyer, in form and substance reasonably satisfactory to Parent and Buyer, concerning the procedures undertaken by Ernst & Young LLP with respect to the financial statements and information of Seller and the Subsidiaries contained in the Proxy Statement and the Additional Filings and the other matters contemplated by the AICPA Statement and otherwise customary in scope and substance for letters delivered by independent public accountants in connection with transactions such as those contemplated by this Agreement. (c) Seller will, as soon as practicable following the date of this Agreement, duly call, give notice of, convene and hold a meeting of its shareholders, such meeting to be held no sooner than twenty (20) business days nor later than forty-five (45) days following the date the Proxy Statement is mailed to B-32 107 the shareholders of Seller (the "Seller Shareholders Meeting") for the purpose of obtaining Seller's shareholders' approval of the Merger and the Lend Lease Transaction. Seller shall be required to hold the Seller Shareholders Meeting, regardless of whether the Board of Managers has withdrawn, amended or modified its recommendation that its shareholders adopt this Agreement and approve the Merger and the Lend Lease Transaction, unless this Agreement has been terminated pursuant to Section 7.1. Seller will, through the Board of Managers, recommend that its shareholders adopt this Agreement and approve the transactions contemplated hereby, including the Merger, and approve the Lend Lease Transaction and the Manhattan Towers Transaction; however, prior to the Seller Shareholders Meeting, such recommendation may be withdrawn, modified or amended if Seller shall have received a Superior Acquisition Proposal, but only to the extent expressly permitted under Section 4.1. (d) If, on the date for the Seller Shareholders Meeting established pursuant to Section 5.1(c) of this Agreement, Seller has not received duly executed proxies which, when added to the number of votes represented in person at the meeting by persons who intend to vote to adopt this Agreement and approve the Lend Lease Transaction, will constitute a sufficient number of votes to adopt this Agreement and approve those transactions (but less than a majority of the outstanding Trust Common Shares have indicated their intention to vote against, or have submitted duly executed proxies voting against, the adoption of this Agreement and approval of those transactions), then Seller shall recommend the adjournment of its shareholders meeting until the date ten (10) days after the originally scheduled date of the shareholders meeting. 5.2 Access to Information: Confidentiality. Prior to the Effective Time, subject to the requirements of confidentiality agreements with third parties, Seller shall, and shall cause each of the Subsidiaries to, afford to Parent and Buyer and to their officers, employees, accountants, counsel, financial advisors and other representatives, upon reasonable advance notice, reasonable access during normal business hours to all of Seller's properties, books, contracts, commitments, personnel and records and, during such period, Seller shall, and shall cause each of the Subsidiaries to, furnish promptly to Parent and Buyer all other information concerning its business, properties and personnel as Parent and Buyer may reasonably request. Parent and Buyer will hold, and will use commercially reasonable efforts to cause their officers, employees and representatives to hold, any non-public information in confidence. 5.3 Reasonable Efforts; Notification. (a) Subject to the terms and conditions herein provided, Seller, on the one hand and Parent and Buyer on the other hand shall: (i) use all reasonable best efforts to cooperate with one another in (A) determining which filings are required to be made prior to the Effective Time with, and which consents, approvals, permits or authorizations are required to be obtained prior to the Effective Time from, governmental or regulatory authorities of the United States, the several states and foreign jurisdictions and any third parties in connection with the execution and delivery of this Agreement, and the consummation of the transactions contemplated hereby and (B) timely making all such filings and timely seeking all such consents, approvals, permits and authorizations; (ii) use all reasonable best efforts (other than the payment of money) to obtain in writing any consents required from third parties to effectuate the Merger, such consents to be in form reasonably satisfactory to Seller and Parent and Buyer; and (iii) use all reasonable best efforts to take, or cause to be taken, all other action and do, or cause to be done, all other things necessary, proper or appropriate to consummate and make effective the transactions contemplated by this Agreement. If at any time after the Effective Time any further action is necessary or desirable to carry out the purpose of this Agreement, the Surviving Company shall take all such necessary action. (b) Seller shall give prompt notice to Parent and Buyer, and Parent and Buyer shall give prompt notice to Seller, (i) if any representation or warranty made by it contained in this Agreement that is qualified as to materiality becomes untrue or inaccurate in any respect or any such representation or warranty that is not so qualified becomes untrue or inaccurate in any material respect or (ii) of the failure by it to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement, but no such notification shall affect the B-33 108 representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under this Agreement. 5.4 Public Announcements. Parent, Buyer and Seller will consult with each other before issuing, and provide each other the opportunity to review and comment upon, any press release or other written public statements with respect to the transactions contemplated by this Agreement, and shall not issue any such press release or make any such written public statement prior to such consultation, except as may be required by applicable law, court process or by obligations pursuant to any listing agreement with any national securities exchange. The parties agree that the initial press release to be issued with respect to the transactions contemplated by this Agreement will be in the form agreed to by the parties hereto prior to the execution of this Agreement. 5.5 Transfer and Gains Taxes. Parent, Buyer and Seller shall cooperate in the preparation, execution and filing of all returns, questionnaires, applications or other documents regarding any real property transfer or gains, sales, use, transfer, value added stock transfer and stamp taxes, any transfer, recording, registration and other fees and any similar taxes which become payable in connection with the transactions contemplated by this Agreement (together with any related interests, penalties or additions to tax, "Transfer and Gains Taxes"). 5.6 Benefit Plans and Other Employee Arrangements. (a) None of Parent, Buyer or the Surviving Company has any obligation to continue the employment of any employee of Seller after the Effective Time, other than any such obligation arising under any agreement other than this Agreement or imposed by law. (b) After the Effective Time, all employees of Seller who are not employed by the Surviving Company shall be eligible to receive health care continuation coverage, as provided pursuant to the continuation coverage under Section 601, et seq., of ERISA, under the group health plan maintained by Seller immediately prior to Closing; provided, however, that if such plan is terminated, the Surviving Company or the Parent shall provide healthcare continuation benefits under the terms of a group health plan maintained for employees of the Surviving Company or the Parent, as applicable, but only to the extent required by Section 601 et seq., of ERISA, under the group health plan maintained by Seller prior to Closing (the "Former Employees"). After the Effective Time, the Surviving Company or Parent shall fulfill Seller's responsibilities to provide continuation coverage for the Former Employees but only to the extent required under Section 601, et seq., of ERISA. 5.7 Indemnification From and After the Effective Time. (a) From and after the Effective Time, the Surviving Company shall provide exculpation and indemnification for each person who is now or has been at any time prior to the date hereof or who becomes prior to the Effective Time, an officer, employee, Board Manager or director of Seller or any Subsidiary (the "Indemnified Parties") which is the same as the exculpation and indemnification provided to the Indemnified Parties by Seller and the Subsidiaries (including advancement of expenses) immediately prior to the Effective Time in the Trust Declaration and Bylaws, in any separate indemnification agreements (each as listed on Schedule 5.7(a) hereto) between Seller and its officers and Board Managers, or in any Employee Benefit Plan or Pension Plan, in each case as in effect on the date hereof or pursuant to the REIT Act; provided, that such exculpation and indemnification covers only actions or omissions on or prior to the Effective Time, including, without limitation, all transactions contemplated by this Agreement. (b) In addition to the rights provided in Section 5.7(a) above, in the event of any threatened or actual claim, action, suit, proceeding or investigation, whether civil, criminal or administrative, including, without limitation, any action by or on behalf of any or all security holders of Seller, Surviving Company, Parent or Buyer, or any Subsidiary or Buyer Subsidiary, or by or in the right of Seller, Surviving Company, Parent or Buyer, or any Subsidiary or Buyer Subsidiary, or any claim, action, suit, proceeding or investigation in which any person who is now, or has been, at any time prior to the date hereof, or who becomes prior to the Effective Time, an officer, Board Manager, employee or director of Seller or any B-34 109 Subsidiary (the "Indemnified Parties") is, or is threatened to be, made a party based in whole or in part on, or arising in whole or in part out of, or pertaining to (i) the fact that he is or was an officer, employee, Board Manager or director of Seller, Surviving Company, or any of the Subsidiaries or any action or omission or alleged action or omission by such person in his capacity as an officer, employee, Board Manager or director of Seller, Surviving Company, or of any of the Subsidiaries, or (ii) this Agreement, the Lend Lease Agreement and the Manhattan Towers Agreement or the transactions contemplated hereby and thereby, whether in any case asserted or arising before or after the Effective Time, Parent, Buyer, Seller, Surviving Company and the Indemnified Parties hereby agree to cooperate in all reasonable respects in the defense of such claim, action, suit, proceeding or investigation. It is understood and agreed that, from and after the Effective Time, the Surviving Company shall indemnify and hold harmless, as and to the full extent permitted by applicable law, each Indemnified Party against any losses, claims, liabilities, expenses (including reasonable attorneys' fees and expenses), judgments, fines and amounts paid in settlement in accordance herewith in connection with any such threatened or actual claim, action, suit, proceeding or investigation. In addition, after the Effective Time, in the event of any such threatened or actual claim, action, suit, proceeding or investigation, the Surviving Company shall promptly pay in advance reasonable expenses and costs incurred by each Indemnified Person as they become due and payable in advance of the final disposition of the claim, action, suit, proceeding or investigation to the fullest extent and in the manner permitted by law. No Indemnified Party will be required to consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Notwithstanding the foregoing, the Surviving Company shall not be obligated to advance any expenses or costs prior to receipt of an undertaking by or on behalf of the Indemnified Party, such undertaking to be accepted without regard to the creditworthiness of the Indemnified Party, to repay any expenses advanced if it shall ultimately be determined that the Indemnified Party is not entitled to be indemnified against such expense. Notwithstanding anything to the contrary set forth in this Agreement, the Surviving Company (x) shall not be liable for any settlement effected without its prior written consent, and (y) shall not have any obligation hereunder to any Indemnified Party to the extent that a court of competent jurisdiction shall determine in a final and nonappealable order that such indemnification is prohibited by applicable law. In the event of a final and nonappealable determination by a court that any payment of expenses is prohibited by applicable law, the Indemnified Party shall promptly refund to the Surviving Company the amount of all such expenses theretofore advanced pursuant hereto. (c) Any Indemnified Party hereunder will (i) give prompt notice to the Surviving Company of any claim which arises from or after the Effective Time with respect to which it seeks indemnification and (ii) permit the Surviving Company to assume the defense of such claim with counsel reasonably satisfactory to a majority of the Indemnified Parties; provided, however, if the Indemnified Parties include the Parent's designees who serve or served as Board Managers, such Parent designees shall have no vote in the selection of or approval of counsel for all of the Indemnified Parties. In connection with the selection of counsel to represent the Indemnified Parties in connection with clause (ii) above, the Surviving Corporation shall propose counsel to represent the Indemnified Parties. The applicable Indemnified Parties shall have the right to approve such counsel, but such approval shall not be unreasonably withheld. If the proposed counsel is not approved, the Surviving Company shall continue to propose counsel until counsel for the Surviving Company is approved by the applicable Indemnified Parties. Any Indemnified Party shall have the right to employ separate counsel and to participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such person unless: (x) the Surviving Company has agreed, in writing, to pay such fees or expenses; (y) the Indemnifying Party shall have failed to assume the defense of such claim after the receipt of notice from the Indemnified Party as required above and failed to employ counsel reasonably satisfactory to a majority of the Indemnified Parties (other than the DDR designees that are or were Board Managers) or (z) based upon advice of counsel to such Indemnified Party and concurrence therewith by counsel for the group of Indemnified Parties in such matter, there shall be one or more defenses available to such Indemnified Party that are not available to the Surviving Company or there shall exist conflicts of interest between such Indemnified Party and the B-35 110 Surviving Company and/or the other Indemnified Parties (in which case, if the Indemnified Party notifies the Surviving Company in writing that such Indemnified Party elects to employ separate counsel at the expense of the Surviving Company, the Surviving Company shall not have the right to assume the defense of such claim on behalf of such Indemnified Party), in each of which events the reasonable fees and expenses of such counsel (which counsel shall be reasonably acceptable to the Surviving Company) shall be at the expense of the Surviving Company. (d) At or prior to the Effective Time, Seller shall purchase on or before the Effective Time and thereafter the Surviving Company shall maintain in effect until the sixth anniversary of the Effective Time, "run-off" directors' and officers' liability insurance policy coverage for Seller's Board Managers and officers which will provide the Board Managers and officers with coverage on substantially similar terms as currently provided by Seller to such Board Managers and officers. Seller and Buyer shall have the right to review and approve any such policy, which approval shall not be unreasonably withheld. (e) This Section 5.7 is intended for the irrevocable benefit of, and to grant third party rights to, the Indemnified Parties and their successors, assigns and heirs and shall be binding on the Indemnified Parties, Buyer, Seller and all successors and assigns of Buyer and Seller. Each of the Indemnified Parties shall be entitled to enforce the covenants contained in this Section 5.7 and Buyer and Seller acknowledge and agree that each Indemnified Party would suffer irreparable harm and that no adequate remedy at law exists for a breach of such covenants and such Indemnified Party shall be entitled to injunctive relief and specific performance in the event of any breach of any provision in this Section 5.7. (f) In the event that the Surviving Company or any of its respective successors or assigns consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, then, and in each such case, the successors and assigns of such entity shall assume the obligations set forth in this Section 5.7, which obligations are expressly intended to be for the irrevocable benefit of, and shall be enforceable by, each Board Manager, director and officer and their respective successors, assigns and heirs covered hereby. (g) Seller represents and warrants that it has not created an indemnification trust of the kind referred to in the indemnification agreements listed on Schedule 5.7(a) and agrees that it will not create such a trust at or prior to the Effective Time. (h) The rights granted to the Indemnified Parties in this Section 5.7 are in addition to any other rights to which the Indemnified Parties may be entitled. 5.8 Declaration of Dividends and Distributions. From and after the date of this Agreement, Seller shall not pay any dividend or make any distribution to its shareholders without the prior written consent of Parent and Buyer, but the written consent of Parent and Buyer shall not be required for the authorization and payment of the Final Dividend (if any). The foregoing restrictions shall not apply, however, to the extent a distribution by Seller is necessary for Seller to maintain REIT status or to prevent Seller from having to pay federal income tax; but, except with respect to the Final Dividend, in the event of such a distribution, the aggregate cash consideration payable to holders of Trust Common Shares in the Merger shall be reduced by the aggregate amount of such distribution, and the Common Consideration per share shall be reduced accordingly. 5.9 Outside Property Management Agreements. Seller will not, and will not permit any of the Subsidiaries to, amend any property management agreement with any party that is not an Affiliate of the Seller or the Subsidiaries (each, an "Outside Property Management Agreement"). Seller will not, and will not permit any of the Subsidiaries to, renew any Outside Property Management Agreement except on terms which are the same as the existing Outside Property Management Agreement or more favorable to Seller or the applicable Subsidiary than the existing Outside Property Management Agreement. 5.10 Lend Lease and Manhattan Towers Transactions. Seller shall comply with all of its obligations under the Lend Lease Agreement and under the Manhattan Towers Agreement and shall use all reasonable best efforts to take, or cause to be taken, all other action and do, or cause to be done, all B-36 111 other things necessary, proper or appropriate to consummate and make effective the Lend Lease Transaction and the Manhattan Towers Transaction. 5.11 Parent Guarantee. Parent hereby guarantees the performance of Buyer's and the Surviving Company's obligations under this Agreement, including, without limitation, any such obligation arising under Section 5.7 of this Agreement. 5.12 Share Purchase Agreement. If the Merger is not consummated by May 31, 2001 as a result of a breach by Parent or Buyer of any of its obligations hereunder, Parent's and Seller's rights and obligations under Section 6.6 of the Share Purchase Agreement dated July 30, 1998 between Parent and Seller, as amended by Amendment No. One to Share Purchase Agreement dated as of September 14, 1998 between Parent and Seller, will be extended from November 20, 2000 by the number of days between June 19, 2000 and the later of (i) the date on which that breach occurs or (ii) the first date on which any Board Manager that is not a designee of Parent becomes aware of the breach. 5.13 Lend Lease and Manhattan Towers Agreements. Seller shall not amend the Lend Lease Agreement or the Manhattan Towers Agreement in any manner whatsoever that affects the economic consequences or imposes any additional obligations on AIP or any AIP Affiliates thereunder without Parent's prior written consent. Seller shall provide Parent with immediate written notice of any modification or amendment, including a copy thereof, to the Lend Lease Agreement or the Manhattan Towers Agreement. 5.14 Voting Agreement by Parent. Parent hereby agrees that it shall vote all Trust Common Shares owned, directly or indirectly, of record or beneficially, by it and shall cause each of its Affiliates (excluding individuals, but including, but not limited, to Buyer to vote all Trust Common Shares owned, directly or indirectly, of record or beneficially, by them in favor of the Merger and in favor of the transactions contemplated by the Lend Lease Agreement. The parties agree that any breach of this Section 5.14 by Parent would result in irreparable damage to Seller inadequately compensable in damages; therefore, this Section 5.14 shall be specifically enforceable, and any breach or threatened breach of this Section 5.14 will be the proper subject of a temporary or permanent injunction or restraining order. Further, each party hereto and its successors, heirs, representatives and assigns waive any claim or defense that there is an adequate remedy at law for breach or threatened breach. 5.15 Settlement of Litigation. On or prior to the Effective Date, (i) if a party seeks indemnity from Seller, Seller shall give prompt notice thereof to Parent; and (ii) Seller shall not settle any litigation relating to the Merger, the Lend Lease Transaction or the Manhattan Towers Transaction or any other litigation initiated by or on behalf of any shareholder of Seller in his/her or its capacity as a shareholder, without the prior written consent of Parent, which shall not be unreasonably withheld or delayed. ARTICLE 6 CONDITIONS 6.1 Conditions to Each Party's Obligation to Effect the Merger. The obligations of each party to effect the Merger and to consummate the other transactions contemplated by this Agreement to occur on the Closing Date shall be subject to the fulfillment at or prior to the Closing Date of the following conditions: (a) Shareholder Approval. This Agreement, the Merger and the transactions contemplated by this Agreement shall have been approved and adopted by Seller's shareholders in accordance with the Exchange Act, the REIT Act, the Trust Declaration and the Bylaws. (b) No Injunctions or Restraints. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger or any of the other transactions contemplated hereby shall be in effect. B-37 112 (c) Lend Lease and Manhattan Towers Transactions. The Lend Lease Transaction and the Manhattan Towers Transaction shall have been consummated in accordance with the Lend Lease Agreement and the Manhattan Towers Agreement, respectively. (d) HSR Act. If a HSR filing was required in connection with the transactions contemplated by this Agreement, the waiting period (and any extension thereof) applicable to the Merger under the HSR Act shall have been terminated or shall have expired, and no restrictive governmental order or other governmental requirement shall be in effect preventing or making illegal the consummation of the Merger. 6.2 Conditions to Obligations of Parent and Buyer. The obligations of Parent and Buyer to effect the Merger and to consummate the other transactions contemplated to occur on the Closing Date are further subject to the following conditions, any one or more of which may be waived by Parent and Buyer: (a) Representations and Warranties. The representations and warranties of Seller set forth in this Agreement shall be true and correct in all material respects (except for representations having a materiality or Seller Material Adverse Effect qualification, which shall be correct in all respects) as of the date of this Agreement and as of the Closing Date, as though made on and as of the Closing Date, except to the extent the representation or warranty is expressly limited by its terms to another date, and Parent and Buyer shall have received a certificate (which certificate may be qualified by Knowledge to the same extent as the representations and warranties of Seller contained herein are so qualified) signed on behalf of Seller by the chief executive officer and the chief financial officer of Seller, in such capacities, to such effect. (b) Performance of Obligations of Seller. Seller shall have performed in all material respects each obligation required to be performed by it under this Agreement at or prior to the Effective Time, and Parent and Buyer shall have received a certificate signed on behalf of Seller by the chief executive officer and the chief financial officer of Seller, in such capacity, to such effect. (c) Material Adverse Effect. Since the date of this Agreement, there shall have been no Seller Material Adverse Effect and Parent and Buyer shall have received a certificate of the chief executive officer or chief financial officer of Seller, in such capacity, certifying to such effect. (d) Tax Opinions Relating to REIT Status of Seller. Parent and Buyer shall have received an opinion of Locke Liddell & Sapp LLP or other counsel to Seller reasonably satisfactory to Buyer, dated as of the Closing Date, that, commencing with its taxable year ended December 31, 1993, and ending immediately prior to the Effective Time, Seller was organized and has operated in conformity with the requirements for qualification as a REIT under the Code (with customary exceptions, assumptions and qualifications and based upon customary representations). (e) Consents; Estoppel Certificates. All consents and waivers (including, without limitation, waivers of rights of first refusal) from third parties necessary in connection with the consummation of the transactions contemplated by this Agreement shall have been obtained, other than such consents and waivers from third parties, which, if not obtained, would not result, individually or in the aggregate, in a Buyer Material Adverse Effect or a Seller Material Adverse Effect, and Seller shall have obtained estoppel certificates in the form attached hereto as Exhibit D from (i) each ground lessor identified in Schedule 2.11(l), (ii) nine of the 10 largest tenants in the properties identified on Exhibit B (measured by annual base rental obligations) and (iii) 75% of the remaining tenants in those properties (measured by rentable square footage, excluding the square footage rented to the nine tenants referred to in clause (ii), above (the estoppel certificates referred to in this sentence collectively, the "Estoppel Certificates"). (f) Resignations. Seller shall have delivered to Parent and Buyer the resignations referred to in Section 1.5. (g) Comfort Letter. If applicable, Buyer shall have received a comfort letter from Ernst & Young LLP, as described in Section 5.1(b). (h) Dissenting Shares. The number of Dissenting Shares shall constitute not more than 10% of the number of Trust Common Shares outstanding immediately prior to the Effective Time. B-38 113 (i) FIRPTA Certificate/Withholding. Seller shall have delivered to Parent and Buyer a certificate for each of the DDR Properties in the form attached hereto as Schedule 6.2(i). (j) Manhattan Towers. The cash proceeds to Seller from the sale of the Manhattan Towers Properties (assuming consummation thereof on or prior to the Effective Time) (less related closing costs, repayment of indebtedness for money borrowed secured by the Manhattan Towers Properties and related prepayment penalties and fees), shall not be less than $34,200,000. (k) Lend Lease. The cash proceeds to Seller from the sale of the Lend Lease Properties (assuming consummation thereof on or prior to the Effective Time) (less related closing costs, repayment of indebtedness for money borrowed secured by the Lend Lease Properties and related prepayment penalties and fees) shall not be less than $135,400,000. (l) Transaction Expenses. The Transaction Expenses shall not exceed $13,738,000. As used in this Section 6.2(l), "Transaction Expenses" means all of the following items not paid prior to Closing in connection with the Merger, the Manhattan Towers Transaction and the Lend Lease Transaction, (A) severance payments (including "gross-up" payments), payments to holders of restricted shares, options or dividend equivalent rights, and similar payments, (B) investment banking fees payable by Seller, (C) costs and expenses of Seller associated with the Proxy Statement, the Additional Filings and the Seller Shareholders Meeting, (D) real estate closing costs, in each case paid or payable by Seller, (E) all loan assumption or prepayment fees payable by Seller, (F) all costs and expenses related to obtaining the directors' and officers' liability insurance referred to in Section 5.7(d) hereof, and (G) all amounts payable under profit participation and similar agreements. The term Transaction Expenses does not include any of the foregoing expenses paid prior to Closing. Seller shall pay all remaining Transaction Expenses at the time of Closing. (m) Net Other Assets. The amount of Net Other Assets held by Seller immediately prior to the Effective Time shall not be less than $17,702,000. As used in this Section 6.2(m), the term "Net Other Assets" shall mean the net amount produced by (A) summing the amounts of unrestricted cash, restricted cash, accounts and notes receivable (excluding straight lining of rents), deposits and prepaid expenses (excluding the item described in Section 6.2(l)(F) and all unamortized loan costs (except for extension fees with Bank One, N.A. and Prudential Securities Credit Corp.) recorded by Seller in accordance with GAAP and historical Seller practices, (B) adding to the sum of (A) above, amounts expended by Seller in connection with any litigation (including any amounts paid in settlement thereof in accordance with Section 5.15) relating to this Agreement or the Merger and any amounts paid as dividends by Seller (excluding the Final Dividend) after the date of this Agreement in accordance with Section 5.8, (C) subtracting from the sum of items (A) and (B) above, the amounts of non-mortgage debt liabilities (including, but not limited to, tenant security deposits, accrued interest expense, property taxes payable, prepaid rents, accounts payable, and other liabilities) recorded by Seller in accordance with GAAP and (D) subtracting from the result of (C) Unincurred Capital Expenditures. "Unincurred Capital Expenditures" is defined as amounts on Schedule 2.11(i) not spent as of the Closing Date less amounts for Unbudgeted Capital Expenditures which have been approved by Buyer on or after October 19, 2000. For purposes of this Agreement, the term "Unbudgeted Capital Expenditures" means capital expenditures made by Seller in 2000 or 2001 that were not contemplated in the Capital Expenditure Budget and Schedule. For purposes of this Section 6.2(m), accounts receivable shall be valued as follows:
LENGTH OF VALUE AS A % OF DAYS OUTSTANDING BOOK AMOUNT - ---------------- --------------- 0-60................................................ 100% 61-90............................................... 80% 91-120.............................................. 65% Over 120............................................ 50%
Notwithstanding the foregoing, Seller shall be deemed to have satisfied the conditions of Section 6.2(j), (k), (l) and (m) if, based on calculations made no more than ten (10) days before the B-39 114 scheduled Proxy Statement mailing, with respect to a date two (2) business days after the scheduled date set forth in the Proxy Statement for the Seller Shareholders Meeting (the "Anticipated Closing Date"), the difference between (A) the sum of the actual amounts of the items described in Section 6.2(j), (k) and (m) minus the actual amount of Section 6.2(l) (the result of such calculation being referred to herein as the "Base Amount") and (B) $173,564,000, is $1,000,000 or less. The parties agree that Seller shall calculate the Base Amount in accordance with this Section 6.2(m) as of the Anticipated Closing Date and deliver such calculation (including supporting documentation) to Parent and Buyer no more than seven (7) days before the scheduled Proxy Statement mailing date. Seller agrees to provide Buyer and Parent with any additional supporting documentation for the calculation of the Base Amount that is reasonably requested by Buyer and Parent, within forty-eight (48) hours after the request therefor. Within four (4) business days after the receipt of Seller's calculation (assuming Seller has promptly provided all supporting documentation requested), Parent and Buyer shall provide Seller with a written notice of their agreement or dispute with Seller's calculation. Assuming Parent and Buyer have timely provided Seller with notice of their dispute, Seller agrees not to mail the Proxy Statement unless and until Parent and Buyer have agreed in writing with Seller's calculation of the Base Amount or the Base Amount is otherwise determined pursuant to this Section 6.2. The parties agree to negotiate in good faith to attempt to settle any disagreement or dispute in the calculation of the Base Amount. If, however, Seller, Parent and Buyer are unable to settle any disagreement or dispute within five (5) days after Parent and Buyer notify Seller in writing of a disagreement or dispute, the disagreement or dispute shall be submitted (along with any supporting documentation a party wishes to provide) within two (2) business days after the end of that five (5) day period to Deloitte & Touche LLP for resolution within ten (10) business days after submission thereof to that firm, and the decision of Deloitte & Touche LLP shall be final and binding on the parties. All costs incurred in connection with the resolution of any dispute by Deloitte & Touche LLP, including expenses and fees for services rendered, shall be borne equally by Buyer and Seller. If the Base Amount is more than $1,000,000 above $173,564,000, the Common Consideration shall be increased in an amount equal to the amount by which the Base Amount calculated in this Section 6.2(m) exceeds $173,564,000, divided by the number of Trust Common Shares outstanding immediately prior to the Effective Time (including, without limitation, the Trust Common Shares held, directly or indirectly, by Parent). (n) Debt. On the Anticipated Closing Date, the aggregate principal amount of the indebtedness for money borrowed by Seller and its Subsidiaries and available to them under lines of credit shall not exceed $137,400,000. (o) Voting Agreements. Each of ABKB/LaSalle Securities Limited Partnership, LaSalle Advisors Limited Partnership, Morgan Stanley Asset Management, Inc. and USAA Real Estate Company shall have voted for the Merger at the Seller Shareholders Meeting in accordance with the Voting Agreements executed by it at or prior to the execution of this Agreement. Notwithstanding anything to the contrary in this Agreement, Parent and Buyer may not terminate this Agreement because of the commencement after the date hereof of litigation that challenges the validity of this Agreement, the Lend Lease Agreement or the Manhattan Towers Agreement or of any action taken or to be taken in connection herewith or therewith, unless any such litigation has resulted in the granting of injunctive relief that prevents the consummation of the Merger, the Lend Lease Transaction or the Manhattan Towers Transaction or any of the other transactions contemplated hereby or thereby, and such injunctive relief has not been dissolved or vacated. 6.3 Conditions to Obligations of Seller. The obligation of Seller to effect the Merger and to consummate the other transactions contemplated to occur on the Closing Date is further subject to the following conditions, any one or more of which may be waived by Seller: (a) Representations and Warranties. The representations and warranties of Parent and Buyer set forth in this Agreement shall be true and correct in all material respects (except for representations having a materiality or Buyer Material Adverse Effect qualification, which shall be correct in all respects) as of the date of this Agreement and as of the Closing Date, as though made on and as of the Closing Date, B-40 115 except to the extent the representation or warranty is expressly limited by its terms to another date, and Seller shall have received a certificate (which certificate may be qualified by Knowledge to the same extent as the representations and warranties of Parent and Buyer contained herein are so qualified) signed on behalf of Parent by the chief executive officer and the chief financial officer of Parent, in such capacities, to such effect. (b) Performance of Obligations of Parent and Buyer. Parent and Buyer shall have performed in all material respects each obligation required to be performed by them under this Agreement at or prior to the Effective Time, and Seller shall have received a certificate of each of Parent and Buyer signed on behalf of Parent or Buyer, as applicable, by the chief executive officer or the chief financial officer of Parent or Buyer, as applicable, in such capacity, to such effect. (c) Material Adverse Effect. Since the date of this Agreement, there shall have been no Buyer or Parent Material Adverse Effect and Seller shall have received a certificate of the chief executive officer and chief financial officer of each of Buyer and Parent, in such capacities, certifying to such effect. (d) Consents. All consents and waivers (including, without limitation, waivers of rights of first refusal) from third parties necessary in connection with the consummation of the transactions contemplated hereby shall have been obtained, other than such consents and waivers from third parties, which, if not obtained, would not result, individually or in the aggregate, in a Buyer Material Adverse Effect or a Seller Material Adverse Effect, and Seller shall have obtained the Estoppel Certificates. (e) Common Consideration. The Common Consideration is $13.74 or more. Notwithstanding anything to the contrary in this Agreement, Seller may not terminate this Agreement because of the commencement after the date hereof of litigation that challenges the validity of this Agreement, the Lend Lease Agreement or the Manhattan Towers Agreement or of any action taken or to be taken in connection herewith, unless any such litigation has resulted in the granting of injunctive relief that prevents the consummation of the Merger or any of the other transactions contemplated hereby and such injunctive relief has not been dissolved or vacated. ARTICLE 7 TERMINATION, AMENDMENT AND WAIVER 7.1 Termination. This Agreement may be terminated at any time prior to the filing of the Articles of Merger with the County Clerk of Dallas County, Texas, and the Secretary of State of the State of Texas, whether before or after the approval of Seller's shareholders is obtained: (a) by mutual written consent duly authorized by the Board of Directors of Parent and of Buyer and the Board of Managers; (b) by Parent or Buyer, upon a breach of any representation, warranty, covenant, obligation or agreement on the part of Seller set forth in this Agreement, in any case such that the conditions set forth in Section 6.2(a) or Section 6.2(b), as the case may be, would be incapable of being satisfied by May 31, 2001 (subject to extension in accordance with this Agreement), or upon a failure of the Lend Lease Transaction or the Manhattan Towers Transaction to close in accordance with the Lend Lease Agreement or the Manhattan Towers Agreement, as applicable, because of a breach by Seller of its obligations thereunder; (c) by Seller, upon a breach of any representation, warranty, covenant, obligation or agreement on the part of Parent or Buyer set forth in this Agreement, in any case such that the conditions set forth in Section 6.3(a) or Section 6.3(b), as the case may be, would be incapable of being satisfied by May 31, 2001 (subject to extension in accordance with this Agreement); (d) by either Buyer or Seller, if any judgment, injunction, order, decree or action by any Governmental Entity of competent authority preventing the consummation of the Merger is issued on or B-41 116 before May 31, 2001 and remains in effect on May 31, 2001 (subject to extension in accordance with this Agreement); (e) by Parent, Buyer or Seller, if the Merger shall not have been consummated on or before May 31, 2001; but a party may not terminate this Agreement pursuant to this clause (e) if it shall have breached in any material respect its obligations under this Agreement in any manner that shall have proximately contributed to the occurrence of the failure referred to in this clause; (f) by either Seller (unless Seller is in breach of its obligations under Section 5.1) or Parent or Buyer if, upon a vote at the Seller Shareholders Meeting or any adjournment thereof, the approval of the Merger by Seller's shareholders shall not have been obtained as contemplated by Section 5.1; (g) by Seller, if prior to the Seller Shareholders Meeting, the Board of Managers shall have withdrawn or modified its approval or recommendation of the Merger or this Agreement in connection with, or approved or recommended, a Superior Acquisition Proposal; and (h) by Parent or Buyer if (i) prior to the Seller Shareholders Meeting, the Board of Managers shall have withdrawn or modified in any manner adverse to Buyer its approval or recommendation of the Merger or this Agreement in connection with, or approved or recommended, any Superior Acquisition Proposal, or (ii) Seller shall have entered into a definitive agreement with respect to any Acquisition Proposal. 7.2 Certain Fees and Expenses. If this Agreement shall be terminated pursuant to Section 7.1(b), 7.1(g) or 7.1(h), then Seller will pay Buyer (if Seller was not entitled to terminate this Agreement pursuant to Section 7.1(c) at the time of such termination) a fee equal to the Seller Break-Up Fee (as defined below). If this Agreement shall be terminated pursuant to Section 7.1(c), then Buyer will pay Seller (provided Parent and Buyer were not entitled to terminate this Agreement pursuant to Section 7.1(b) at the time of such termination) a fee equal to the Buyer Break-Up Fee (as defined below). Any payment of the Seller Break-Up Fee or the Buyer Break-Up Fee in accordance with this Section 7.2 shall be compensation for the loss suffered by the recipient as a result of the failure of the Merger to be consummated and to avoid the difficulty of determining damages under the circumstances, and neither party shall have any other liability to the other after the payment of the Seller Break-Up Fee or the Buyer Break-Up Fee, as applicable. The Seller Break-Up Fee or the Buyer Break-Up Fee, as applicable, shall be paid in immediately available funds within fifteen (15) days after the date the event giving rise to the obligation to make such payment occurred. As used in this Agreement, "Seller Break-Up Fee" shall be an amount equal to the lesser of (i) $4,500,000 (the "Seller Base Amount") and (ii) the sum of (A) the maximum amount that can be paid to the recipient without causing Parent or Buyer to fail to meet the requirements of Sections 856(c)(2) and (3) of the Code determined as if the payment of such amount did not constitute income described in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of the Code ("Qualifying Income"), as determined by independent accountants to Parent, and (B) if Parent receives an opinion from outside counsel (the "Seller Break-Up Fee Tax Opinion") indicating that Parent's or Buyer's receipt of the Seller Base Amount would either constitute Qualifying Income or would be excluded from gross income within the meaning of Sections 856(c)(2) and (3) of the Code (the "REIT Requirements") or that the receipt by Parent or Buyer of the remaining balance of the Seller Base Amount following the receipt of and in accordance with such opinion would not be deemed constructively received prior thereto, the Seller Base Amount less the amount payable under clause (A) above. As used in this Agreement, "Buyer Break-Up Fee" shall be an amount equal to the lesser of (i) the sum of (x) $4,500,000 plus (y) if the Lend Lease Agreement is terminated because of a breach by Parent or Buyer hereunder and, as a result thereof, Seller is obligated to pay Lend Lease Real Estate Investors, Inc. the fee under Section 7.5 of the Lend Lease Agreement an amount equal to that fee (the "Buyer Base Amount") and (ii) the sum of (A) the maximum amount that can be paid to Seller without causing Seller to fail to meet the requirements of Section 856(c)(2) and (3) of the Code determined as if the payment of such amount did not constitute Qualifying Income, as determined by independent B-42 117 accountants to Seller, and (B) if Seller receives an opinion from outside counsel (the "Buyer Break-Up Fee Tax Opinion") indicating that Seller's receipt of the Buyer Base Amount would either constitute Qualifying Income or would be excluded from gross income within the meaning of the REIT Requirements or that the receipt by Seller of the remaining balance of the Buyer Base Amount following the receipt of and pursuant to such opinion would not be deemed constructively received prior thereto, the Buyer Base Amount less the amount payable under clause (A) above. If the recipient is not able to receive the full Seller Base Amount or the Buyer Base Amount, as applicable, the payor shall place the unpaid amount in escrow and shall not release any portion thereof to the recipient unless and until the payor receives either one of the following: (i) a letter from the recipient's independent accountants indicating the maximum amount that can be paid at that time to the recipient without causing the recipient (or Parent, as applicable) to fail to meet the REIT Requirements or (ii) a Seller Break-Up Fee Tax Opinion or Buyer Break-Up Fee Tax Opinion, as applicable, in either of which events the payor shall pay to the recipient the lesser of the unpaid Seller Base Amount or the Buyer Base Amount, as applicable, or the maximum amount stated therein. 7.3 Effect of Termination. In the event of termination of this Agreement by either Seller, Parent or Buyer as provided in Section 7.1, this Agreement shall forthwith become void and have no effect, without any liability or obligation on the part of Parent, Buyer, or Seller, other than under the last sentence of Section 5.2, Section 7.2, this Section 7.3 and Article 8. 7.4 Amendment. This Agreement may be amended by the parties in writing by action of their respective Board of Managers and Board of Directors at any time before or after any shareholder approvals are obtained and prior to the filing of the Articles of Merger; however, after Seller's shareholders have approved the Merger, no such amendment, modification or supplement shall be made which by law requires the further approval of shareholders without obtaining such further approval. The parties agree to amend this Agreement in the manner provided in the immediately preceding sentence to the extent required to continue the status of Seller and Parent as REITs. 7.5 Extension; Waiver. At any time prior to the Effective Time, the parties may (a) extend the time for the performance of any of the obligations or other acts of the other party, (b) waive any inaccuracies in the representations and warranties of the other party contained in this Agreement or in any document delivered pursuant to this Agreement, or (c) subject to the first sentence of Section 7.4, waive compliance with any of the agreements of or conditions to be satisfied by the other party contained in this Agreement. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights. B-43 118 ARTICLE 8 GENERAL PROVISIONS 8.1 Nonsurvival of Representations and Warranties. None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement confirming the representations and warranties in this Agreement shall survive the Effective Time. This Section 8.1 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time. 8.2 Notices. All notices, requests, claims, demands and other communications under this Agreement shall be in writing and shall be delivered personally, sent by overnight courier (providing proof of delivery) to the parties or sent by telecopy (providing confirmation of transmission) at the following addresses or telecopy numbers (or at such other address or telecopy number for a party as shall be specified by like notice): (a) if to Parent or Buyer, to: Developers Diversified Realty Corporation 34555 Chagrin Blvd. Moreland Hills, Ohio 44022 Attention: Scott A. Wolstein Telecopy Number: (440) 247-0434 with a copy to (which copy shall Baker & Hostetler LLP not constitute notice): 3200 National City Center 1900 East 9th Street Cleveland, Ohio 44114-3485 Attention: Robert A. Weible Telecopy Number: (216) 696-0740 (b) if to the Trust: American Industrial Properties REIT 6210 North Beltline, Suite 170 Irving, Texas 75063 Attention: Charles W. Wolcott Telecopy Number: (972) 756-0704 With a copy to (which copy shall Locke Liddell & Sapp LLP not constitute notice): 2200 Ross Avenue Suite 2200 Dallas, Texas 75201 Attention: Bryan L. Goolsby Telecopy Number: (214) 740-8800 With a copy to (which copy shall Thompson & Knight not constitute notice): 1700 Pacific Avenue Suite 3300 Dallas, Texas 75201 Attention: Jack M. Little Telecopy Number: (214) 696-1363
All notices shall be deemed given only when actually received. 8.3 Interpretation. When a reference is made in this Agreement to a Section, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or Interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." B-44 119 8.4 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. 8.5 Entire Agreement; No Third-Party Beneficiaries. This Agreement, the Schedules and the other agreements entered into in connection with the Merger (a) constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter of this Agreement and (b) except as provided in Section 5.7 ("Third Party Provisions"), are not intended to confer upon any person other than the parties hereto any rights or remedies. The Third Party Provisions may be enforced by the beneficiaries thereof or on behalf of the beneficiaries thereof by the persons who had been members of the Board of Managers prior to the Effective Time. 8.6 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF TEXAS, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICT OF LAWS THEREOF. 8.7 Assignment. Neither this Agreement nor any of the rights, interests or obligations of any party under this Agreement shall be assigned or delegated, in whole or in part, by operation of law or otherwise without the prior written consent of the other parties. Subject to the immediately preceding sentence, this Agreement will be binding upon, inure to the benefit of, and be enforceable by the parties and their respective successors and assigns. 8.8 Enforcement. The parties agree that irreparable damage would occur if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any federal court located in Texas or Ohio, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (a) consents to submit itself (without making such submission exclusive) to the personal jurisdiction of any federal court located in Texas or Ohio if any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement and (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court. 8.9 Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. 8.10 Survival. The obligations of Buyer, Parent and the Surviving Corporation (other than their representations and warranties) shall survive the Closing in accordance with their terms until barred by the applicable statute of limitations. B-45 120 IN WITNESS WHEREOF, Parent, Buyer and Seller have caused this Agreement to be signed by their respective officers thereunto duly authorized all as of the date first written above. DDR TRANSITORY SUB INC., a Texas corporation By: /s/ JAMES A. SCHOFF ---------------------------------- Name: James A. Schoff Title: Vice President AMERICAN INDUSTRIAL PROPERTIES REIT, a Texas real estate investment trust /s/ CHARLES W. WOLCOTT ------------------------------------ Charles W. Wolcott, President and Chief Executive Officer DEVELOPERS DIVERSIFIED REALTY CORPORATION, an Ohio corporation By: /s/ JAMES A. SCHOFF ---------------------------------- Name: James A. Schoff Title: Vice Chairman and Chief Investment Officer B-46 121 APPENDIX C AGREEMENT OF PURCHASE AND SALE (AMERICAN INDUSTRIAL PROPERTIES REIT/LEND LEASE PORTFOLIO) This Agreement of Purchase and Sale ("Agreement") is made and entered into by and between Purchaser and Seller as of November 1, 2000 (the "Effective Date"). RECITALS A. Defined terms are indicated by initial capital letters. Defined terms shall have the meaning set forth herein, whether or not such terms are used before or after the definitions are set forth. B. Purchaser desires to purchase the Property and Seller desires to sell the Property, all upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual terms, provisions, covenants and agreements set forth herein, as well as the sums to be paid by Purchaser to Seller, and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged, Purchaser and Seller agree as follows: ARTICLE 1 BASIC INFORMATION 1.1 Certain Basic Terms. The following defined terms shall have the meanings set forth below: 1.1.1 Seller: Collectively, American Industrial Properties REIT, a Texas real estate investment trust ("AIP"), AIP/ Battlefield GP, Inc., a Texas corporation, AIP-SWAG Operating, L.P., a Texas limited partnership, AIP Properties #3, L.P., a Delaware limited partnership, AIP Operating, L.P., a Delaware limited partnership 1.1.2 Purchaser: Value Enhancement Fund IV, L.P., a Georgia limited partnership 1.1.3 Purchase Price: $292,200,000.00, less a credit for the principal amount of the Existing Loans assumed by Purchaser at Closing and as adjusted to reflect the prorations provided for herein, allocated between the Projects pursuant to a separate written agreement between the parties. 1.1.4 Earnest Money: Irrevocable Letters of Credit in the aggregate amount of $3,000,000.00 (the "Earnest Money") deposited in accordance with Section 3.1 below. 1.1.5 Title Company: Commonwealth Title Insurance Company 1700 Pacific Avenue, Suite 4740 Dallas, Texas 75201 Attention: Mr. David Payne and Ms. Amanda Johnson Telephone: (214) 855-8400 Facsimile: (214) 754-9066
C-1 122 1.1.6 Escrow Agent: Commonwealth Title Insurance Company 1700 Pacific Avenue, Suite 4740 Dallas, Texas 75201 Attention: Mr. David Payne and Ms. Amanda Johnson Telephone: (214) 855-8400 Facsimile: (214) 754-9066 1.1.7 Closing Date: The date which is fifteen (15) days after the date of the AIP shareholder meeting at which the requisite AIP Shareholder Approval is obtained, but not to be later than January 31, 2001; provided, however, either Seller or Purchaser may extend the Closing Date until May 31, 2001 (the "Outside Closing Date"), by giving written notice to the other party of such election no later than January 31, 2001, in the event the Shareholder Approval is not obtained and/or the Manhattan Towers Project Closing and/or the DDR Closing (all as further described in Article 7) have not occurred on or prior to January 31, 2001.
1.2 Closing Costs. Closing costs shall be allocated and paid as follows:
RESPONSIBLE COST PARTY - ---- ----------- Title Commitment required to be delivered pursuant to Section 5.1.................. Purchaser Premium for standard form Title Policy required to be delivered pursuant to Section 5.2.............................. Purchaser Premium for any upgrade of Title Policy for extended or additional coverage and any endorsements desired by Purchaser, any inspection fee charged by the Title Company, tax certificates, municipal and utility lien certificates, and any other Title Company charges.................... Purchaser Costs of Survey and/or any revisions, modifications or recertifications thereto.................................. Purchaser Costs for UCC Searches..................... Purchaser Recording Fees............................. Purchaser
C-2 123
RESPONSIBLE COST PARTY - ---- ----------- Any loan assumption and/or prepayment penalties, fees and costs required pursuant to the applicable loan documents................................ Purchaser, subject to a maximum cost of 1.25% of the aggregate principal amount of all the Existing Loans as of the date of Closing, with Seller paying any applicable costs in excess of such amount; provided, however, if Purchaser elects not to assume the Existing Loans payable to Aegon Life Insurance Company or Nationwide Life Insurance Company totaling approximately $118,183,000.00, Purchaser shall be fully responsible for the excess of any prepayment penalties, charges or yield maintenance amounts relating to those loans over the loan assumption fees and costs that would have been payable if Purchaser had assumed those loans, notwithstanding that maximum cost cap. Any deed taxes, documentary stamps, transfer taxes, intangible taxes, mortgage taxes or other similar taxes, fees or assessments...................... Purchaser Any escrow fee charged by Escrow Agent for holding the Earnest Money or conducting the Closing.............................. Purchaser All other closing costs, expenses, charges and fees................................. Purchaser Each party shall be responsible for all costs and expenses incurred by or on behalf of such party..................... Seller/Purchaser Cost of obtaining AIP Shareholder Approval................................. Seller Cost of Seller's Asset Manager's Fees through Closing.......................... Seller
1.3 Notice Addresses: Purchaser: c/o Lend Lease Real Estate Copy to: King & Spalding Investments, Inc. 191 Peachtree Street 3424 Peachtree Road, NE, Suite 800 Atlanta, Georgia 30303-1763 Atlanta, Georgia 30326 Attn: William B. Fryer, Esq. Attention: Mr. Mark Bratt Telephone: (404) 572-4911 Telephone: (404) 848-8600 Facsimile: (404) 572-5148 Facsimile: (404) 848-8930 and to: Lend Lease Real Estate Investments, Inc. 3424 Peachtree Road, N.E. Suite 800 Atlanta, Georgia 30326 Attn: Mr. James P. Ryan Telephone: (404) 848-8600 Facsimile: (404) 848-8925
C-3 124 Seller: c/o American Industrial Copy to: Locke Liddell & Sapp LLP Properties REIT 100 Congress Ave., Suite 300 6210 N. Beltline Road, Suite 170 Austin, Texas 78701 Irving, Texas 75063 Attention: Brad B. Hawley, Esq. Attention: Mr. Lew Friedland and Telephone: (512) 305-4706 Tony Koeijmans, Esq. Facsimile: (512) 305-4800 Telephone: (972) 756-6000 Facsimile: (972) 756-0704 and to: Thompson & Knight, P.C. 1700 Pacific Avenue, Suite 3300 Dallas, Texas 75201 Attention: Jack M. Little, Esq. Telephone: (214) 969-1363 Facsimile: (214) 969-1751
1.4 Index of Certain Additional Defined Terms: Acceptable Estoppel Certificate............................. Subsection 9.2.6 Acquisition Proposal........................................ Section 7.6 Agreement................................................... Preamble Asset Manager............................................... Section 14.17 Assignment.................................................. Subsection 9.3.2 Capital Expenditure Schedule................................ Subsection 6.1.3 Casualty Notice............................................. Section 6.2 CERCLA...................................................... Section 13.3 Chase....................................................... Section 14.17 Closing..................................................... Section 9.1 Commission Schedule......................................... Subsection 11.1.5 DDR......................................................... Section 7.4 Deed........................................................ Subsection 9.3.1 Designated Representative(s)................................ Section 14.17 Effective Date.............................................. Preamble Existing Loans.............................................. Subsection 4.1.2 Hazardous Materials......................................... Section 13.4 Improvements................................................ Subsection 2.1.1 Independent Consideration................................... Section 3.2 Intangible Personal Property................................ Subsection 2.1.4 Land........................................................ Subsection 2.1.1 Lease Files................................................. Subsection 4.1.15 Leases...................................................... Subsection 2.1.2 Lender Assumption Documents................................. Subsection 9.4.2 Loan Documents.............................................. Subsection 4.1.2 Major Tenants............................................... Subsection 9.2.6 Manhattan Towers Project.................................... Section 7.3 Material Damage............................................. Subsection 6.2.1 New Exceptions.............................................. Section 5.4 Operating Statements........................................ Subsection 4.1.3 Permitted Exceptions........................................ Section 5.3 Permitted Outside Parties................................... Section 4.6 Project..................................................... Subsection 2.1.1 Property; Properties........................................ Section 2.1 Property Information........................................ Section 4.1
C-4 125 Real Property............................................... Subsection 2.1.1 Reports..................................................... Section 4.4 SEC......................................................... Section 7.2 Service Contracts........................................... Subsection 4.1.8 Shareholder Approval........................................ Section 7.1 Shareholder Proposal........................................ Section 7.2 Subsidiaries................................................ Section 7.6 Superior Acquisition Proposal............................... Section 7.6 Survey...................................................... Section 5.2 Tangible Personal Property.................................. Subsection 2.1.3 Taxes....................................................... Section 10.1 Tenant Receivables.......................................... Subsection 10.1.3 Title Commitment............................................ Section 5.1 Title Policy................................................ Section 5.2 Unbilled Tenant Receivables................................. Subsection 10.1.3(a) Uncollected Delinquent Tenant Receivables................... Subsection 10.1.3(a)
ARTICLE 2 PROPERTY 2.1 Subject to the terms and conditions of this Agreement, Seller agrees to sell to Purchaser, and Purchaser agrees to purchase from Seller, the following property (collectively, the "Property" or the "Properties"): 2.1.1 Real Property. The parcels of land described in Exhibit A attached hereto (collectively, the "Land"), together with (i) all improvements located thereon (collectively, the "Improvements"), (ii) all and singular the rights, benefits, privileges, easements, tenements, hereditaments, and appurtenances thereon or in anywise appertaining thereto, and (iii) all right, title, and interest of Seller, if any, in and to all strips and gores and any land lying in the bed of any street, road or alley, open or proposed, adjoining such Land (collectively, the "Real Property"). The separately named facilities located on the Real Property are listed in Exhibit A-1 attached hereto (each a "Project"). 2.1.2 Leases. All of Seller's right, title and interest in all leases of the Real Property, including leases which may be made by Seller after the Effective Date and prior to Closing as permitted by this Agreement (the "Leases"), and also including Seller's rights under all guaranties, letters of credit or other instruments that guarantee or secure the performance of the obligations of tenants under the Leases. 2.1.3 Tangible Personal Property. All of Seller's right, title and interest in the equipment, machinery, furniture, furnishings, supplies and other tangible personal property, if any, owned by Seller and now or hereafter located on and used in connection with the operation, ownership or management of the Real Property including, without limitation, the items described on Exhibit B attached hereto and incorporated herein by reference, but specifically excluding any items of personal property owned by tenants at or on the Real Property and further excluding any items of personal property owned by third parties and leased to Seller (collectively, the "Tangible Personal Property"). 2.1.4 Intangible Personal Property. All of Seller's right, title and interest, if any, in all intangible personal property related to the Real Property and the Improvements, including, without limitation all of Seller's right, title and interest in: all trade names and trade marks associated with the Real Property and the Improvements, including Seller's rights and interests, if any, in the name of the Real Property; the plans and specifications and other architectural and engineering drawings for the Improvements, if any (to the extent assignable); warranties (to the extent assignable); contract rights related to the construction, operation, ownership or management of the Real Property, if any (but only to the extent assignable and Seller's obligations thereunder are expressly assumed by C-5 126 Purchaser pursuant to this Agreement); governmental permits, approvals and licenses, if any (to the extent assignable); and telephone exchange numbers (to the extent assignable) (collectively the "Intangible Personal Property"). ARTICLE 3 EARNEST MONEY 3.1 Deposit of Earnest Money. Purchaser has previously deposited a $1,000,000.00 letter of credit in escrow with Escrow Agent. Within two (2) business days after the Effective Date, Purchaser shall deposit an additional $2,000,000.00 letter of credit in the same form as the $1,000,000.00 letter of credit in escrow with Escrow Agent. 3.2 Independent Consideration. On the Effective Date, Purchaser shall pay to Seller One Hundred and No/100 Dollars ($100.00) as independent consideration for Seller's performance under this Agreement ("Independent Consideration"), which shall be retained by Seller in all instances, and shall not be applied against the Purchase Price. 3.3 Form; Failure to Deposit. The Independent Consideration shall be in the form of a certified or cashier's check or the wire transfer to Escrow Agent of immediately available U.S. federal funds. If Purchaser fails to timely deliver the Independent Consideration or the $2,000,000.00 letter of credit as required, Seller may terminate this Agreement by written notice to Purchaser, in which event the parties hereto shall have no further rights or obligations hereunder, except for rights and obligations which, by their terms, survive the termination hereof. 3.4 Disposition of Earnest Money. The Earnest Money shall not be applied as a credit to the Purchase Price at Closing, but shall be returned to Purchaser at Closing. In the event of a termination of this Agreement by either Seller or Purchaser for any reason, Escrow Agent is authorized to deliver the Earnest Money to the party hereto entitled to same pursuant to the terms hereof on or before the tenth (10th) business day following receipt by Escrow Agent and the non-terminating party of written notice of such termination from the terminating party, unless the other party hereto notifies Escrow Agent that it disputes the right of the other party to receive the Earnest Money. In such event, Escrow Agent may interplead the Earnest Money into a court of competent jurisdiction in the county in which the Earnest Money has been deposited. All attorneys' fees and costs and Escrow Agent's costs and expenses incurred in connection with such interpleader shall be assessed against the party against whom judgment is rendered in the action, or if judgment is rendered in part against both parties, then in the proportions the court determines. ARTICLE 4 DUE DILIGENCE 4.1 Due Diligence Materials Previously Delivered or Made Available. Purchaser acknowledges receipt of and/or access to what Purchaser understands to be the following (the "Property Information") on or before the Effective Date: 4.1.1 Rent Roll. Rent rolls including lists of security deposits (collectively, the "Rent Roll") for the Property current as of September 30, 2000; 4.1.2 Loan Documents. Copies of all documents (the "Loan Documents") which evidence or secure the loans (the "Existing Loans") encumbering the Property as identified on Exhibit F attached hereto and incorporated herein by references. 4.1.3 Financial Information. Copies of operating statements and a summary of capital expenditures pertaining to the Property for the twelve (12) months preceding the Effective Date of this Agreement or such lesser period as Seller has owned each applicable Property (the "Operating Statements"); C-6 127 4.1.4 Lease Form. Copies of Seller's current standard lease form for each Project; 4.1.5 Environmental Reports. Copies of all environmental reports or site assessments related to the Property prepared for the benefit of Seller or in Seller's possession; 4.1.6 Tax Statements. Copies of all ad valorem tax statements relating to the Property for the most current available tax period and for the last two (2) years; 4.1.7 Title and Survey. Copies of all of title insurance information and surveys of the Property in Seller's possession; 4.1.8 Service Contracts. A list, together with copies, of all service, supply, equipment rental, and other service contracts related to the operation of the Property ("Service Contracts"); 4.1.9 Personal Property. A list of Tangible Personal Property; 4.1.10 Engineering Reports. Copies of any engineering and other physical improvement inspection reports relating to the Property in the possession of Seller. 4.1.11 Brokerage Agreements. Copies of all leasing and other brokerage agreements relating to the Property in the possession of Seller. 4.1.12 Management Agreements. Copies of all management agreements relating to the Property in the possession of Seller. 4.1.13 Budget. A copy of Seller's budget for operations for the Property for the current year. 4.1.14 Insurance Documents. Certificates of insurance and copies of policies currently in effect with respect to each Project, and a description of claims in excess of $50,000.00 made within the last two (2) years and the status of such claims. 4.1.15 Lease Files. The lease files for all tenants, including the Leases, amendments, guaranties, any letter agreements and assignments which are in effect when made available ("Lease Files"); 4.1.16 Maintenance Records and Warranties. Maintenance work orders for the twelve (12) months preceding the Effective Date of this Agreement and warranties, if any, on roofs, air conditioning units, fixtures and equipment; 4.1.17 Plans and Specifications. Building plans and specifications relating to the Property; and 4.1.18 Licenses, Permits and Certificates of Occupancy. Licenses, permits and certificates of occupancy relating to the Property. 4.2 Physical Due Diligence. Until the Closing, Purchaser shall have reasonable access to the Property at all reasonable times during normal business hours, upon appropriate notice to tenants as permitted or required under the Leases, for the purpose of conducting reasonably necessary tests, including surveys and architectural, engineering, geotechnical and environmental inspections and tests, provided that (i) Purchaser must give Seller forty-eight (48) hours' prior telephone or written notice of any such inspection or test, and with respect to any intrusive inspection or test (e.g., core sampling) must obtain Seller's prior written consent (which consent may not be unreasonably withheld, conditioned or delayed), (ii) prior to performing any inspection or test, Purchaser must deliver a certificate of insurance to Seller evidencing that Purchaser and its contractors, agents or representatives have in place not less than $1,000,000.00 (on a per occurrence basis) of comprehensive general liability insurance for its activities on the Property covering any accident arising in connection with the presence of Purchaser, its contractors, agents and representatives on the Property, which insurance shall name AIP and Asset Manager as additional insureds thereunder, and (iii) all such tests shall be conducted by Purchaser in compliance with Purchaser's responsibilities set forth in Section 4.8 below. Purchaser shall bear the cost of all such inspections or tests and shall be responsible for and act as the generator with respect to any wastes generated by those tests. Subject to the provisions of Section 4.6 hereof, Purchaser or Purchaser's C-7 128 representatives may meet with any tenant with respect to such tenant's Lease; provided, however, Purchaser must contact Seller at least forty-eight (48) hours in advance by telephone or fax to inform Seller of Purchaser's intended meeting and to allow Seller the opportunity to attend such meeting if Seller desires. Subject to the provisions of Section 4.6 hereof, Purchaser or Purchaser's representatives may meet with any governmental authority for any good faith, reasonable purpose in connection with the transaction contemplated by this Agreement; provided, however, Purchaser must contact Seller at least forty-eight (48) hours in advance by telephone or fax to inform Seller of Purchaser's intended meeting and to allow Seller the opportunity to attend such meeting if Seller desires. 4.3 Due Diligence. Purchaser acknowledges that prior to the Effective Date, Purchaser has (i) examined, inspected, and investigated the Property Information and the Property and, in Purchaser's sole and absolute judgment and discretion based upon Purchaser's knowledge as of the Effective Date, has determined that the Property is acceptable to Purchaser, subject to the express terms and conditions of this Agreement, (ii) obtained all necessary internal approvals, and (iii) satisfied all other contingencies of Purchaser subject, however, to the conditions to Closing as set forth in this Agreement. Purchaser also acknowledges that, as far as Purchaser is aware, Purchaser has received or had access to all Property Information and Purchaser has conducted all inspections and tests of the Property that it considers important prior to the Effective Date. 4.4 Return of Documents and Reports. If this Agreement terminates for any reason, Purchaser shall promptly return and/or deliver to Seller all Property Information in Purchaser's possession and copies thereof. Additionally, if this Agreement terminates for any reason other than Seller's default, then Purchaser must deliver to Seller copies of all third party reports, investigations and studies, other than economic analyses, attorney work product or other legally privileged articles of information (collectively, the "Reports" and, individually, a "Report") prepared for Purchaser in connection with its due diligence review of the Property; provided, however, Purchaser shall not be required to make any such deliveries unless and until Purchaser has received all payments due from Seller, if any, pursuant to Section 7.5. The Reports shall be delivered to Seller without any representation or warranty as to the completeness or accuracy of the Reports or any other matter relating thereto, and Seller shall have no right to rely on any Report without the written consent of the party preparing same. Purchaser's obligation to deliver the Property Information and the Reports to Seller shall survive the termination of this Agreement. 4.5 Service Contracts. Purchaser has advised Seller in writing of which Service Contracts it will assume and which Service Contracts Purchaser requires that Seller deliver written termination at or prior to Closing. Seller agrees to cause all management agreements to provide for termination without cause and without penalties payable by Purchaser upon thirty (30) days' prior written notice. Seller shall deliver at Closing notices of termination of all Service Contracts required by Purchaser to be terminated. Purchaser must assume the obligations arising from and after the Closing Date under those Service Contracts that Purchaser has agreed to assume. 4.6 Proprietary Information; Confidentiality. Purchaser acknowledges that the Property Information is proprietary and confidential and has been delivered to Purchaser solely to assist Purchaser in determining the feasibility of purchasing the Property. Purchaser shall not use the Property Information for any purpose other than as set forth in the preceding sentence. Purchaser shall not disclose the contents to any person other than to those persons who are responsible for determining the feasibility of or are otherwise involved in Purchaser's acquisition of the Property and who have agreed to preserve the confidentiality of such information as required hereby (collectively, "Permitted Outside Parties"). Purchaser shall not divulge the contents of the Property Information or other information except in strict accordance with the confidentiality standards set forth in this Section 4.6. In permitting Purchaser to review the Property Information or any other information, Seller has not waived any privilege or claim of confidentiality with respect thereto, and no third party benefits or relationships of any kind, either express or implied, have been offered, intended or created. 4.7 No Representation or Warranty by Seller. Purchaser acknowledges that, except as expressly set forth in this Agreement, neither Seller nor Asset Manager has made nor makes any warranty or C-8 129 representation regarding the truth, accuracy or completeness of the Property Information or the source(s) thereof. Purchaser further acknowledges that some if not all of the Property Information was prepared by third parties other than Seller and Asset Manager. Except as expressly set forth in this Agreement, Seller expressly disclaims any and all liability for representations or warranties, express or implied, statements of fact and other matters contained in such information, or for omissions from the Property Information, or in any other written or oral communications transmitted or made available to Purchaser. Purchaser shall rely solely upon (i) satisfaction of Purchaser's conditions expressly set forth in this Agreement, (ii) Seller's compliance with the terms and provisions of this Agreement, and (iii) Purchaser's own investigation with respect to the Property, including, without limitation, the Property's physical, environmental or economic condition, compliance or lack of compliance with any ordinance, order, permit or regulation or any other attribute or matter relating thereto. Seller has not undertaken any independent investigation as to the truth, accuracy or completeness of the Property Information. 4.8 Purchaser's Responsibilities. In conducting any inspections, investigations or tests of the Property and/or Property Information after the Effective Date, Purchaser and its agents and representatives shall: (i) not unreasonably disturb the tenants or interfere with their use of the Property pursuant to or in breach of the terms of their respective Leases; (ii) not unreasonably interfere with the operation and maintenance of the Property; (iii) not damage any part of the Property or any personal property owned or held by any tenant or any third party; (iv) not injure or otherwise cause bodily harm to Seller, Asset Manager, or their respective agents, guests, invitees, contractors and employees or any tenants or their guests or invitees; (v) comply with all applicable laws; (vi) promptly pay when due the costs of all tests, investigations, and examinations done with regard to the Property; (vii) not permit any liens to attach to the Property by reason of the exercise of Purchaser's rights hereunder; (viii) repair any damage to the Property resulting directly or indirectly from any such inspection or tests; and (ix) not reveal or disclose prior to Closing any information obtained during Purchaser's inspection activities with respect to the Property prior to the Effective Date concerning the Property and the Property Information to anyone other than the Permitted Outside Parties, in accordance with the confidentiality standards set forth in Section 4.6 above, or except as may be otherwise required by law. 4.9 Purchaser's Agreement to Indemnify. Purchaser indemnifies and holds Seller and Asset Manager harmless from and against any and all liens, claims, causes of action, damages, liabilities and expenses (including reasonable attorneys' fees) arising out of Purchaser's inspections or tests permitted under this Agreement or the Exclusive Negotiation Agreement between AIP and Lend Lease Real Estate, Inc. dated June 27, 2000 or any violation of the provisions of Sections 4.2, 4.6 or 4.8; provided, however, the indemnity shall not extend to protect Seller from any pre-existing liabilities for matters merely discovered by Purchaser (e.g., latent environmental contamination) so long as Purchaser's actions are conducted with reasonable care in accordance with industry standards. Purchaser's obligations under this Section 4.9 shall survive the termination of this Agreement and shall survive the Closing. 4.10 Environmental Studies. As additional consideration for the transaction contemplated in this Agreement, Purchaser must provide to Seller, immediately following the receipt of same by Purchaser, copies of any and all reports, tests or studies involving contamination of or other environmental concerns relating to the Property; provided, however, Purchaser shall have no obligation to cause any such tests or studies to be performed on the Property. Seller acknowledges that Purchaser has not made and does not make any warranty or representation regarding the truth or accuracy of any such studies or reports. Notwithstanding Section 4.9 above, Purchaser shall have no liability or culpability of any nature as a result of having provided such information to Seller or as a result of Seller's reliance thereon or arising out of the fact that Purchaser merely conducted such tests or studies, so long as Purchaser's actions are conducted with reasonable care in accordance with industry standards. C-9 130 ARTICLE 5 TITLE AND SURVEY 5.1 Title Commitment. Purchaser has caused to be prepared and delivered to Seller on or before the Effective Date: (i) current commitment(s) for title insurance or preliminary title report (collectively, the "Title Commitment") issued by the Title Company, in the aggregate amount of the Purchase Price, with Purchaser as the proposed insured, and (ii) copies of all documents of record referred to in the Title Commitment as exceptions to title to the Property. 5.2 New or Updated Survey. Purchaser may elect to obtain new surveys or revise, modify, or re-certify any existing surveys (collectively, the "Survey") as necessary in order for the Title Company to delete the survey exception from any title policy (the "Title Policy") Purchaser elects to obtain from the Title Company or to otherwise satisfy Purchaser's objectives. 5.3 Title Review. Prior to the Effective Date, Purchaser has reviewed title to the Property as disclosed by the Title Commitment and the Survey. Seller shall have no obligation to cure title objections except financing liens created by, under or through Seller that are not being assumed by Purchaser, which liens Seller shall cause to be released at or prior to Closing (with Seller having the right to apply the Purchase Price or a portion thereof for such purpose), and Seller shall deliver the Property free and clear of any such financing liens. Seller further agrees to remove any exceptions or encumbrances to title which are created by, under or through Seller after the effective date of each applicable Title Commitment without Purchaser's prior written consent (if requested, such consent shall not be unreasonably withheld, conditioned or delayed). The term "Permitted Exceptions" shall mean: the specific exceptions (excluding exceptions that are part of the applicable promulgated title insurance form) in the Title Commitment that the Title Company has not agreed to remove from the Title Commitment as of the Effective Date and that Seller is not required to remove as provided above; matters created by, through or under Purchaser; items shown on the Survey; real estate taxes not yet due and payable; rights of tenants as tenants only under the Leases; and any licensees under any Service Contracts not terminated as of Closing in accordance with the provisions hereof. 5.4 New Exceptions. Purchaser may have Seller's title to the Property re-reviewed at any time and from time to time up to the Closing and may give Seller written notice of any additional title exceptions which first appear of record after the effective date of each applicable Title Commitment ("New Exceptions"). Seller shall, if requested by Purchaser, (i) cause any such exception created by, through or under Seller without Purchaser's written consent (in its sole discretion) to be removed prior to the Closing and (ii) use good faith, commercially reasonable efforts to remove any other New Exceptions prior to the Closing. If any such New Exception is not removed prior to Closing and will have a material adverse effect on the use and operation of the applicable Project, in Purchaser's reasonable judgment, Purchaser may elect either (a) in the case of an exception described in clause (i) above, to close and receive credit against the Purchase Price equal to the lesser of (A) the cost of curing such title objection or (B) any diminution in value, determined by an independent third party appraiser, resulting from or likely to result from such title objection, or (b) to terminate this Agreement as to the affected Project, in which event the Purchase Price will be reduced by the allocated Purchase Price of the affected Project, and the parties shall have no further rights, duties or obligations hereunder with respect to such Project except for those obligations which by their terms survive termination of this Agreement. In addition, if Purchaser elects to terminate this Agreement as to a certain Project as a result of one or more New Exceptions affecting such Project, and such affected Project is a part of a cross-collateralized debt pool and the relevant lender or lenders will not permit such Project to be removed from the pool at no cost to Purchaser, Purchaser may elect to terminate this Agreement as to all Properties, in which event the Earnest Money shall be returned to Purchaser and the parties shall have no further rights, duties or obligations hereunder except for those obligations which by their terms survive termination of this Agreement. C-10 131 ARTICLE 6 OPERATIONS AND RISK OF LOSS 6.1 Ongoing Operations. From the Effective Date through Closing, Seller hereby covenants and agrees that: 6.1.1 Leases Service Contracts and Loan Documents. Seller will perform its material obligations under the Leases, Service Contracts and Loan Documents, including payment of all accrued and outstanding tenant improvement and leasing commission costs relating to Leases in existence as of the Effective Date. 6.1.2 New Contracts. Except as provided in Subsection 6.1.4, Seller will not enter into any contract that will be an obligation affecting the Property subsequent to the Closing, except contracts entered into in the ordinary course of business that are terminable without cause and without the payment of any termination penalty on not more than thirty (30) days' prior notice, and which shall be terminated by Seller at Closing at no cost to Purchaser, unless assumed by Purchaser at Purchaser's election made in writing to Seller at least ten (10) days prior to Closing. 6.1.3 Maintenance of Improvements; Removal of Personal Property. Subject to Sections 6.2 and 6.3, Seller shall continue to make its budgeted capital expenditures with respect to the Improvements in a commercially reasonable manner in the ordinary course of Seller's business as provided in the schedule attached hereto as Exhibit H and incorporated herein by reference (the "Capital Expenditure Schedule"), and operate and maintain the Property in the ordinary course of business and consistent with past practice. Seller will not remove any Tangible Personal Property except as may be required for necessary repair or replacement, and replacement shall be of approximately equal quality and quantity as the removed item of Tangible Personal Property. 6.1.4 Leasing. Seller will continue to lease space in the Improvements in the ordinary course of business; provided Purchaser must approve any new Lease and will do so within five (5) business days of Seller's delivery of the material terms of any proposed new Lease and financial information on the proposed tenant that Seller is permitted to share with third parties, or Purchaser's approval thereof shall be deemed to have been given. Purchaser shall not unreasonably withhold or delay approval of any new Lease. With respect to any new Lease that is approved or deemed approved by Purchaser or with respect to the exercise by a tenant under an existing Lease of renewal or expansion rights currently provided for in the applicable Lease which renewal or expansion becomes effective after the Effective Date, Purchaser shall be responsible for all third party tenant improvement and leasing commission costs associated with such new Lease, renewal or expansion. For purposes hereof, a "new Lease" shall also mean a renewal of an existing Lease or expansion of space covered by an existing Lease that is not currently provided for in the Lease documents evidencing the existing Lease. 6.1.5 Maintenance of Insurance. Seller shall maintain the property insurance currently in effect with respect to the Property through the last day prior to the Closing Date at no cost to Purchaser. 6.2 Damage. If prior to Closing any Project is damaged by fire or other casualty, Seller shall promptly notify Purchaser of the casualty and estimate the cost to repair and the time required to complete repairs and will provide Purchaser written notice of Seller's estimation (the "Casualty Notice") as soon as reasonably possible after the occurrence of the casualty. 6.2.1 Material. In the event of any Material Damage to or destruction of at least four (4) Projects or any portion of at least four (4) Projects prior to Closing, Purchaser may, at its option, terminate this Agreement as to either all of the affected Projects or all of the Properties by delivering written notice to Seller on or before the expiration of thirty (30) days after the date Seller delivers the Casualty Notice to Purchaser (and if necessary, the Closing Date shall be extended to give the parties the full thirty-day period to make such election and to obtain insurance settlement agreements with Seller's insurers). Upon any termination as to the affected Projects instead of all of the Properties, the Purchase Price shall be reduced by the allocated portion of the Purchase Price for the C-11 132 applicable Projects, and the parties hereto shall have no further rights or obligations hereunder as to the affected Projects, other than those that by their terms survive the termination of this Agreement. If Purchaser elects to terminate as to all of the Properties, the Earnest Money shall be returned to Purchaser and the parties shall have no further rights, duties or obligations hereunder except for the obligations which by their terms survive termination of this Agreement. Notwithstanding the foregoing, in the event Purchaser elects to terminate this Agreement as to four (4) or more Projects due to Material Damage occurring to the Properties, Seller shall have the option to terminate this Agreement as to all Properties, in which event the Earnest Money shall be returned to Purchaser and the parties shall have no further rights, duties or obligations hereunder except for the obligations which by all of the terms survive termination of this Agreement. In the event of Material Damage or destruction of three (3) or fewer Projects or if Purchaser elects not to terminate this Agreement as to at least four (4) affected Projects as detailed above within said thirty (30) day period, then the parties shall proceed under this Agreement and close on schedule, and as of Closing Seller shall assign to Purchaser, without representation or warranty by or recourse against Seller, all of Seller's rights in and to any resulting insurance proceeds (including any rent loss insurance applicable to any period on and after the Closing Date) due Seller as a result of such damage or destruction, Purchaser shall assume full responsibility for all needed repairs, and Purchaser shall receive a credit at Closing for any deductible amount under such insurance policies. For the purposes of this Agreement, "Material Damage"and "Materially Damaged" means damage which, in Seller's reasonable estimation, exceeds $500,000.00 to repair or which, in Seller's reasonable estimation, will take longer than ninety (90) days to repair. 6.2.2 Not Material. If any Project is damaged but not Materially Damaged, then neither Purchaser nor Seller shall have the right to terminate this Agreement as to the affected Project, and Seller shall, at its option, either (i) repair the damage before the Closing in a manner reasonably satisfactory to Purchaser, or (ii) assign to Purchaser all of Seller's proceeds from insurance payable by reason of such damage, plus pay an amount to Purchaser for any deductible, less any amount expended by Seller for repairs made with Purchaser's approval (in which case Purchaser shall assume full responsibility for all needed repairs). 6.3 Condemnation. If proceedings in eminent domain are instituted with respect to any Project comprising the Property or any portion thereof which involves the taking of a portion of the Property exceeding $500,000.00 in value, Purchaser and Seller shall have the same rights and obligations as provided in Subsection 6.2.1 with respect to a casualty event affecting the Property. Provided, if Purchaser is obligated or, if applicable, elects to proceed under this Agreement, Seller shall, at the Closing, assign to Purchaser its entire right, title and interest in and to any condemnation award, and Purchaser shall have the sole right after the Closing to negotiate and otherwise deal with the condemning authority in respect of such matter. ARTICLE 7 SHAREHOLDER OBLIGATIONS; OTHER SELLER COVENANTS 7.1 Shareholder Approval. Purchaser acknowledges that the transactions contemplated by this Agreement are subject to the approval of the holders of a two-thirds majority of the outstanding common shares of AIP ("Shareholder Approval"). AIP agrees to use good faith and make commercially reasonable efforts to obtain such Shareholder Approval as soon as practicable. On the Effective Date, AIP shall deliver to Purchaser voting agreements from the institutional shareholder designated members of AIP's Board of Trust Managers who are eligible to vote and support the approval of the transaction contemplated herein who hold shares and their respective institutional affiliates which are shareholders of AIP, pursuant to which the signatories to such voting agreements have agreed to vote in favor of the transactions contemplated by this Agreement, subject to rights parallel to Seller's rights hereunder with respect to a Superior Proposal (defined below). C-12 133 7.2 Proxy Statement. In furtherance, and not in limitation of the foregoing, as soon as practicable after the execution of this Agreement using good faith and commercially reasonable efforts, Seller shall finalize and file with the United States Securities And Exchange Commission (the "SEC") a preliminary proxy statement in accordance with the applicable rules and regulations promulgated under the Securities Exchange Act of 1934 and thereafter shall file as soon as is practicable a definitive proxy statement. The proxy statement shall include a proposal to approve the transactions contemplated in this Agreement (the "Shareholder Proposal") and shall include the recommendation of AIP's Board of Trust Managers in favor of the proposal. Seller shall use good faith and commercially reasonable efforts to respond to any comments of the SEC and to cause the proxy statement to be mailed to AIP's shareholders as promptly as practicable. Purchaser shall furnish all information concerning Purchaser as AIP may reasonably request in connection with such actions and the preparation of the proxy statement. 7.3 Manhattan Towers. In connection with the transactions contemplated by this Agreement, Seller is attempting to sell as a project owned by Seller known as the Manhattan Towers Project and located in Manhattan Beach, California (the "Manhattan Towers Project") for a gross purchase price of at least $48,000,000.00. Seller shall use good faith and commercially reasonable efforts to cause the sale of the Manhattan Towers Project to occur on such terms and prior to or contemporaneously with Closing. 7.4 DDR Closing. In connection with the transactions contemplated by the Agreement, AIP intends to cause Developers Diversified Realty Corporation ("DDR") to acquire AIP, generally in accordance with the term sheet to which DDR and AIP are parties. Seller shall use good faith and commercially reasonable efforts to cause the merger with a subsidiary of DDR (or such other structure as agreed upon by DDR and AIP which results in DDR owning AIP) to occur contemporaneously with Closing. 7.5 Break Up Fee; Reimbursement. If (i) notwithstanding Seller's good faith efforts, Seller does not (A) obtain Shareholder Approval on or before the Outside Closing Date, or (B) cause the closing of the sale of the Manhattan Towers Project to occur prior to or contemporaneously with Closing, or (C) cause the closing of DDR's acquisition of the outstanding shares of AIP to occur contemporaneously with Closing, and as a result of (A) or (B) or (C), Seller elects or is required to terminate this Agreement; or (ii) following the Effective Date, Seller receives a Superior Acquisition Proposal and as a result of the fiduciary obligations of the board of trust managers of AIP, as determined in good faith in consultation with outside counsel, Seller determines to, and does, terminate this Agreement (which Seller shall hereby be entitled to do); or (iii) the transactions contemplated by this Agreement are not consummated because the conditions set forth in Section 9.2 are not satisfied as a result of a default by Seller hereunder; or (iv) Seller does not obtain Shareholder Approval on or before the Outside Closing Date, Seller shall pay to Purchaser a break up fee of $3,000,000.00, and will reimburse Purchaser for the actual and verifiable out-of-pocket costs, including legal fees actually incurred by Purchaser or its affiliates, including Lend lease Real Estate Investments, Inc., in connection with the transactions contemplated by this Agreement, not to exceed $450,000.00 in the aggregate. Seller agrees to make the election to terminate or not terminate this Agreement due to a termination of AIP's merger agreement with DDR outlined in (C) above within fourteen (14) days of any such termination of the merger agreement with DDR, or Seller shall be deemed to have elected to waive such termination right and proceed to Closing under the remaining applicable terms and conditions specified in this Agreement. This Section 7.5 shall survive termination of this Agreement. 7.6 Non-Solicitation. After the Effective Date and prior to the termination of this Agreement in accordance with its terms, Seller agrees that: (a) neither it nor any officer, director, employee, representative, advisor or agent of Seller or any business entity under its direct control (collectively, the "Subsidiaries") shall initiate, solicit or knowingly encourage, directly or indirectly, any inquiries or the making or implementation of any proposal or offer (including, without limitation, any proposal or offer to its shareholders) with respect to a merger, acquisition, tender offer, exchange offer, consolidation, sale of assets or similar transaction involving all or any significant portion of the assets or equity securities of Seller or any of C-13 134 the Subsidiaries, other than the transactions contemplated by this Agreement, the DDR merger agreement and the Manhattan Towers agreement (any such proposal or offer being hereinafter referred to as an "Acquisition Proposal") or engage in any negotiations concerning or provide any confidential information or data to, or have any discussions with, any person relating to an Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal; (b) it shall direct and use its reasonable best efforts to cause its officers, board of trust managers, employees, agents and financial advisors not to engage in any of the activities described in Section 7.6(a) except to the extent expressly permitted by the proviso below; (c) it will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing; and (d) it will notify Purchaser promptly if Seller receives any such inquiries or proposals, or any requests for such information, or if any such negotiations or discussions are sought to be initiated or continued with it; provided, however, that nothing contained in this Agreement shall prohibit the board of trust managers of AIP (or the officers, board of trust managers of AIP, employees, agents or financial advisors of Seller acting at the direction of the board of trust of managers of AIP) from (i) furnishing information to or entering into discussions or negotiations with, any person or entity that makes an unsolicited Acquisition Proposal, if, and only to the extent that (x) the board of trust managers of AIP determines in good faith following consultation with counsel and with Seller's financial advisors that such action is required for the board of trust managers of AIP to comply with its duties to shareholders imposed by law or such proposal is a Superior Acquisition Proposal (as hereinafter defined), (y) prior to furnishing such information to, or entering into discussions or negotiations with, such person or entity, Seller provides written notice to Purchaser to the effect that it is furnishing information to, or entering into discussions with, such person or entity, and (z) subject to any confidentiality agreement with such person or entity, Seller keeps Purchaser informed of the status (not the terms) of any such discussions or negotiations; or (ii) to the extent applicable, taking and disclosing to Seller's shareholders a position contemplated by Rules 14d-9 and 14e-2 promulgated under the Exchange Act with regard to an Acquisition Proposal. Nothing in this Section 7.6 shall (1) permit Seller to terminate this Agreement (except as specifically provided in Article 7 hereof), (2) permit Seller to enter into an agreement with respect to an Acquisition Proposal during the term of this Agreement (other than a confidentiality agreement in customary form executed as provided above) or (3) affect any other obligation of Seller under this Agreement; provided, however, that the board of trust managers of AIP may, subject to the provisions of Section 7.5, approve and recommend a Superior Acquisition Proposal and, in connection therewith, withdraw or modify its approval or recommendation of this Agreement. Any disclosure that the board of trust managers of AIP may be compelled to make with respect to the receipt of an Acquisition Proposal in order to comply with its duties to shareholders of Seller or comply with applicable law will not constitute a violation of this Section 7.6. As used herein, "Superior Acquisition Proposal" means a bona fide Acquisition Proposal made by a third party which the board of trust managers of AIP (or a duly constituted committee thereof charged with considering Acquisition Proposals) determines in good faith following consultation with counsel and with Seller's financial advisors to be more favorable to Seller's shareholders from a financial point of view than the transactions contemplated herein and which the board of trust managers of AIP (or any such committee) determines is reasonably capable of being financed and consummated. C-14 135 ARTICLE 8 EXISTING LOANS Subject to Section 9.2.4, Purchaser shall either (i) acquire the Properties subject to the Existing Loans, subject to the limitations on recourse set forth in the documents evidencing or securing such loans, in which case Purchaser shall assume such Existing Loans at Closing; or (ii) the Existing Loans shall be paid at Closing. Purchaser agrees to promptly notify Seller of Purchaser's election to not assume any Existing Loan for which Purchaser's assumption has been approved by the applicable lender. Purchaser and Seller shall cooperate in good faith and use their commercially reasonable efforts to negotiate with the relevant lenders prior to the Closing Date to: (i) obtain the required lender consents to Purchaser's proposed assumptions; (ii) minimize prepayment and assumption fees and charges; (iii) obtain favorable terms of assumption for any loans contemplated to be assumed; and (iv) obtain estoppel statements from applicable lenders. ARTICLE 9 CLOSING 9.1 Closing. The consummation of the transaction contemplated herein ("Closing") shall occur on the Closing Date at the offices of Locke Liddell & Sapp LLP, 2200 Ross Avenue, Suite 2200, Dallas, Texas 75201 (or such other location as may be mutually agreed upon by Seller and Purchaser). Funds shall be deposited into and held by Escrow Agent in a closing escrow account with a bank satisfactory to Purchaser and Seller. Upon satisfaction, completion or waiver of all closing conditions and deliveries, the parties shall direct Escrow Agent to immediately record and deliver the closing documents to the appropriate parties and make disbursements according to the closing statements executed by Seller and Purchaser. 9.2 Conditions to Parties' Obligation to Close. In addition to all other conditions set forth herein, the obligation of Seller, on the one hand, and Purchaser, on the other hand, to consummate the transactions contemplated hereunder are conditioned upon the following: 9.2.1 Representations and Warranties. The other party's representations and warranties contained herein shall be true and correct in all material respects as of the date of this Agreement and the Closing Date provided, however, the representation contained in Subsection 11.1.2 will be deemed satisfied at Closing provided no injunction is in place issued by a court of competent jurisdiction prohibiting the Closing from occurring; 9.2.2 Deliveries, Covenants, Obligations. As of the Closing Date, the other party shall have tendered all deliveries to be made at Closing and complied with all covenants and obligations herein to be complied with on or prior to Closing; 9.2.3 Actions, Suits, etc. There shall exist no pending action, suit, arbitration, claim, attachment, proceeding, assignment for the benefit of creditors, insolvency, bankruptcy, reorganization or other proceedings, that enjoins the Closing. 9.2.4 Loan Assumption. The obligations of Purchaser with regard to Closing under this Agreement are, at its option, subject to Purchaser's receipt of consent of lenders under the Existing Loans to Purchaser's assumption of at least $118,000,000.00 of the principal balances of the Existing Loans on terms that are the same in all material respects as those currently applicable to such Existing Loans. 9.2.5 Title Policy. The obligations of Purchaser with regard to Closing under this Agreement are, at its option, subject to Title Company having irrevocably committed in writing to issue to Purchaser an extended coverage owner's policy of title insurance in an amount at least equal to the Purchase Price on American Land Title Association (ALTA) Owner's Policy Form B-1970 or Form B-1992 with exception for creditor's rights deleted, and all conditions to such issuance having C-15 136 been met, insuring that, upon Closing, Purchaser is the owner of the fee simple title to the Property, without exception, whether standard or special, except for the Permitted Exceptions. 9.2.6 Estoppels. The obligations of Purchaser with regard to Closing under this Agreement are, at its option, subject to Seller having delivered to Purchaser, no more than fifteen (15) days prior to Closing, Acceptable Estoppel Certificates from at least (i) nine (9) of the ten (10) largest tenants (measured by annual base rental obligations) of all of the Properties, such tenants being identified on Exhibit I attached hereto and incorporated herein by this reference (the "Major Tenants"), and (ii) seventy-five percent (75%) of the remaining tenants (measured by rentable square footage, not including the square footage of the nine (9) Major Tenants for which Acceptable Estoppel Certificates have been delivered pursuant to clause (i) above). An "Acceptable Estoppel Certificate" means an executed Estoppel Certificate substantially in the form of Exhibit J attached hereto and incorporated herein by this reference or in the form provided in the applicable Lease, or with such modifications in form or substance as are approved by Purchaser in its reasonable discretion. 9.2.7 Leasing Commissions; Tenant Improvement Costs. The obligations of Purchaser with regard to Closing under this Agreement are, at its option, subject to Seller having paid, performed and/or provided appropriate credits to Purchaser at or prior to Closing with respect to tenant improvement and leasing commission obligations relating to each Lease in place as of the Effective Date that are accrued and outstanding as of the Closing Date. 9.2.8 Shareholder Approval. Shareholder Approval shall have been obtained, as well as shareholder approval of the transaction with DDR described in Section 7.14. So long as a party is not in default hereunder, if any condition to such party's obligation to proceed with the Closing hereunder has not been satisfied as of the Closing Date (or such earlier date as is provided herein), such party may, in its sole discretion, terminate this Agreement by delivering written notice to the other party on or before the Closing Date (or such earlier date as is provided herein), or elect to close (or to permit any such earlier termination deadline to pass) notwithstanding the non-satisfaction of such condition, in which event such party shall be deemed to have waived any such condition. In the event such party elects to close (or to permit any such earlier termination deadline to pass), notwithstanding the non-satisfaction of such condition, said party shall be deemed to have waived said condition, and there shall be no liability on the part of any other party hereto for nonintentional breaches of representations and warranties of which the party electing to close had knowledge at the Closing. 9.3 Seller's Deliveries in Escrow. As of or prior to the Closing Date, Seller shall deliver in escrow to Escrow Agent the following: 9.3.1 Deed. One or more special warranty or other limited warranty deeds (as Seller's local counsel or Title Company shall advise, warranting title only against any party claiming by, through or under Seller) in form acceptable for recordation under the law of the state where the Property is located and including a list of Permitted Exceptions to which the conveyance shall be subject, executed and acknowledged by Seller, conveying to Purchaser Seller's interest in the Real Property (collectively, the "Deed"); 9.3.2 Bill of Sale, Assignment and Assumption. One or more Bill of Sale, Assignment and Assumption of Leases and Contracts in the form of Exhibit C attached hereto (collectively, the "Assignment"), executed and acknowledged by Seller, vesting in Purchaser, without implied warranty, Seller's right, title and interest in and to the property described therein free of any claims, except for the Permitted Exceptions to the extent applicable; 9.3.3 Lender Assumption Documents. The applicable Lender Assumption Documents; 9.3.4 Estoppels. All Acceptable Estoppel Certificates received by Seller; C-16 137 9.3.5. Conveyancing or Transfer Tax Forms or Returns. Such conveyancing or transfer tax forms or returns, if any, as are required to be delivered or signed by Seller by applicable state and local law in connection with the conveyance of the Real Property; 9.3.6 FIRPTA. A Foreign Investment in Real Property Tax Act affidavit executed by Seller; 9.3.7 Authority. Evidence of the existence, organization and authority of Seller and of the authority of the persons executing documents on behalf of Seller reasonably satisfactory to the underwriter for the Title Policy; 9.3.8 Rent Roll. Updated Rent Rolls for the Property. 9.3.9 Additional Documents. Any additional documents that Escrow Agent or the Title Company may reasonably require for the proper consummation of the transaction contemplated by this Agreement, including, without limitation, the documents described on Exhibit L (Title Company Requirements) (provided, however, no such additional document shall expand any obligation, covenant, representation or warranty of Seller or result in any new or additional obligation, covenant, representation or warranty of Seller under this Agreement beyond those expressly set forth in this Agreement). 9.3.10 Closing Certificate. A certificate confirming the representations and warranties of Seller contained in Section 11.1 remain true and correct in all material respect as of Closing. 9.4 Purchaser's Deliveries in Escrow. As of or prior to the Closing Date, Purchaser shall deliver in escrow to Escrow Agent the following: 9.4.1 Bill of Sale, Assignment and Assumption. The Assignment, executed and acknowledged by Purchaser; 9.4.2 Lender Assumption Documents. Any and all documents reasonably required by Nationwide Life Insurance Company and Aegon Life Insurance Company for Purchaser to assume, at its election, the approximate indebtedness of $118,183,000.00 owing by Seller, to assume all obligations of Seller under the Loan Documents, and to confirm that the applicable assumed loans are not in default (the "Lender Assumption Documents"). In addition, Purchaser will use commercially reasonable efforts (without incurring additional expense) to cause Seller to be released from such indebtedness and obligations from and after the Closing Date. In the event Purchaser desires to and is able to cause National Realty Funding L.P. and/or Guaranty Federal Bank, F.S.B. to permit Purchaser to assume the approximate respective indebtedness of $23,630,000.00 and $7,893,000.00 owing by Seller, such lenders' assumption documentation shall be included in the definition of "Lender Assumption Documents" hereunder. 9.4.3 Conveyancing or Transfer Tax Forms or Returns. Such conveyancing or transfer tax forms or returns, if any, as are required to be delivered or signed by Purchaser by applicable state and local law in connection with the conveyance of Real Property; and 9.4.4. Indemnity. In the event Seller is not released from the indebtedness and obligations under the Loan Documents which are the subject of the Lender Assumption Documents, Purchaser shall execute an indemnity agreement in favor of Seller relating to claims occurring after Closing against Seller with respect to the Loan Documents. 9.4.5. Additional Documents. Any additional documents that Escrow Agent or the Title Company may reasonably require for the proper consummation of the transaction contemplated by this Agreement (provided, however, no such additional document shall expand any obligation, covenant, representation or warranty of Purchaser or result in any new or additional obligation, covenant, representation or warranty of Purchaser under this Agreement beyond those expressly set forth in this Agreement). C-17 138 9.4.6. Closing Certificate. A certificate confirming the representations and warranties of Purchaser contained Section 11.2 remain true and correct in all material respects as of Closing. 9.5 Closing Statements. As of or prior to the Closing Date, Seller and Purchaser shall deposit with Escrow Agent executed closing statements consistent with this Agreement in the form reasonably required by Escrow Agent. 9.6 Purchase Price. At or before 1:00 p.m. local time on the Closing Date, Purchaser shall deliver to Escrow Agent the Purchase Price, less the principal amount of indebtedness assumed by Purchaser pursuant to the Lender Assumption Documents, plus or minus applicable prorations in accordance with Article 10 hereof, in immediate, same-day U.S. federal funds wired for credit into Escrow Agent's escrow account, which funds must be delivered in a manner to permit Escrow Agent to deliver good funds to Seller or its designee on the Closing Date (and, if requested by Seller, by wire transfer). 9.7 Possession. Seller shall deliver possession of the Property to Purchaser at the Closing subject only to the Permitted Exceptions. 9.8 Delivery of Books and Records. At the Closing, Seller shall deliver to the offices of Purchaser's property manager or to the Real Property to the extent in Seller's or its property manager's possession or control: Lease Files; maintenance records and warranties; plans and specifications; licenses, permits and certificates of occupancy; copies or originals of all books and records of account, contracts, and copies of correspondence with tenants and suppliers; receipts for deposits, unpaid bills and other papers or documents which pertain to the Property; all advertising materials; booklets; keys; and other similar items, if any, used in the operation of the Property. 9.9 Notice to Tenants. Seller and Purchaser shall deliver to each tenant immediately after the Closing a notice regarding the sale in substantially the form of Exhibit E attached hereto, or such other form as may be required by applicable law. ARTICLE 10 PRORATIONS, DEPOSITS, COMMISSIONS 10.1 Prorations. At Closing, the following items shall be prorated as of the date of Closing with all items of income and expense for the Property being borne by Seller prior to the Closing and Purchaser from and after (but including) the date of Closing: Tenant Receivables and other income and rents; fees and assessments; prepaid expenses and obligations under Service Contracts; accrued operating expenses; accrued and unpaid interest on the Existing Loans assumed by Purchaser; real and personal ad valorem taxes ("Taxes"); and any assessments by private covenant for the then-current calendar year of Closing. Specifically, the following shall apply to such prorations: 10.1.1 Taxes. If Taxes for the year of Closing are not known or cannot be reasonably estimated, Taxes shall be prorated based on Taxes for the year prior to Closing. Any additional Taxes relating to the year of Closing arising out of a change in ownership shall be assumed by Purchaser effective as of Closing and paid by Purchaser when due and payable, and Purchaser shall indemnify Seller from and against any and all such Taxes, which indemnification obligation shall survive the Closing. 10.1.2 Utilities. Purchaser and Seller shall take all steps necessary to effectuate the transfer of all utilities to Purchaser's name as of the Closing Date, and where necessary, Purchaser shall post deposits with the utility companies. Seller shall ensure that all utility meters are read as of the Closing Date. Seller shall be entitled to recover any and all deposits held by any utility company as of the Closing Date. 10.1.3 Tenant Receivables. Rents due from tenants under Leases and operating expenses and/or taxes payable by tenants under Leases (collectively, "Tenant Receivables") shall be C-18 139 apportioned on the basis of the period for which the same is payable and if, as and when collected, as follows: (a) Purchaser shall apply rent and other income received from tenants under Leases after Closing in the following order of priority: (i) first, to payment of the current Tenant Receivables then due for the month in which the Closing Date occurs, which amount shall be apportioned between Purchaser and Seller as of the Closing Date as set forth in Section 10.1 hereof (with Seller's portion thereof to be delivered to Seller); (ii) second, to Tenant Receivables first coming due after Closing and applicable to the period of time after Closing, which amount shall be retained by Purchaser; (iii) third, to payment of Tenant Receivables first coming due after Closing but applicable to the period of time before Closing, including, without limitation, the Tenant Receivables described in Subsection 10.1.3(b) below (collectively, "Unbilled Tenant Receivables"), which amount shall be delivered to Seller; and (iv) thereafter, to delinquent Tenant Receivables which were due and payable as of Closing but not collected by Seller as of Closing (collectively, "Uncollected Delinquent Tenant Receivables"), which amount shall be delivered to Seller. Notwithstanding the foregoing, Seller shall have the right to pursue the collection of Uncollected Delinquent Tenant Receivables for a period of one (1) year after Closing without prejudice to Seller's rights or Purchaser's obligations hereunder, provided, however, Seller shall have no right to cause any such tenant to be evicted or to exercise any other remedies set forth in such tenant's Lease against such tenant other than to sue for collection. Any sums received by Purchaser to which Seller is entitled shall be held in trust for Seller on account of such past due rents payable to Seller, and Purchaser shall remit to Seller any such sums received by Purchaser to which Seller is entitled within ten (10) business days after receipt thereof less reasonable, actual costs and expenses of collection, including reasonable attorneys' fees, court costs and disbursements, if any. Seller expressly agrees that if Seller receives any amounts after the Closing Date which are attributable, in whole or in part, to any period after the Closing Date, Seller shall remit to Purchaser that portion of the monies so received by Seller to which Purchaser is entitled within ten (10) business days after receipt thereof. With respect to Unbilled Tenant Receivables, Purchaser covenants and agrees to (A) bill the same when billable pursuant to the applicable Lease and (B) cooperate with Seller to determine the correct amount of operating expenses and/or taxes due pursuant to the applicable Lease. The provisions of this Subsection 10.1.3(a) shall survive the Closing. (b) Without limiting the generality of the requirements of Subsection 10.1.3(a)(ii) above, if the final reconciliation or determination of operating expenses and/or taxes due under the Leases shows that a net amount is owed by Seller to Purchaser, Purchaser's pro rata portion shall be paid by Seller to Purchaser within ten (10) business days of such final determination under the Leases. If the final determination of operating expenses and/or taxes due under the Leases shows that a net amount is owed by Purchaser to Seller, Purchaser shall, within ten (10) business days of such final determination, remit to Seller Seller's portion of operating expenses and/or taxes for the period up to and including the Closing Date, if, as and when received. Purchaser agrees to receive and hold any monies received on account of such past due expenses and/or taxes in trust for Seller and to pay same promptly to Seller as aforesaid. The provisions of this Subsection 10.1.3(b) shall survive the Closing. 10.2 Closing Costs. Closing costs shall be allocated between Seller and Purchaser in accordance with Section 1.2. 10.3 Capital Expenditures. To the extent Seller did not fund all capital expenditures scheduled to be performed on or before the Closing Date (as set forth on the Capital Expenditure Schedule), Purchaser shall receive a credit against the Purchase Price in the estimated amount of such unfunded capital expenditures, as shown on the Capital Expenditure Schedule. 10.4 Final Adjustment After Closing. If final bills are not available or cannot be issued prior to Closing for any item being prorated under Section 10.1, then Purchaser and Seller agree to allocate such C-19 140 items on a fair and equitable basis as soon as such bills are available, final adjustment to be made as soon as reasonably possible after the Closing. Payments in connection with the final adjustment shall be due within thirty (30) days of written notice. All such rights and obligations shall survive the Closing. 10.5 Tenant Deposits. All tenant security deposits collected and not applied by Seller in accordance with the terms of the applicable Lease and applicable law (and interest thereon if required by law or contract) shall be transferred or credited to Purchaser at Closing. As of the Closing, Purchaser shall assume Seller's obligations related to tenant security deposits, but only to the extent they are credited or transferred to Purchaser. 10.6 No Commissions. Seller and Purchaser each represent and warrant to the other that no real estate brokerage commission is payable to any person or entity in connection with the transaction contemplated hereby, and each agrees to and does hereby indemnify and hold the other harmless against the payment of any commission to any other person or entity claiming by, through or under Seller or Purchaser, as applicable. This indemnification shall extend to any and all claims, liabilities, costs and expenses (including reasonable attorneys' fees and litigation costs) arising as a result of such claims and shall survive the Closing. ARTICLE 11 REPRESENTATIONS AND WARRANTIES 11.1 Seller's Representations and Warranties. Seller represents and warrants to Purchaser that: 11.1.1 Organization and Authority. Each entity comprising "Seller" has been duly organized, is validly existing, and is in good standing in the state in which it was formed. Subject to Shareholder Approval, Seller has the full right and authority to enter into this Agreement and to consummate or cause to be consummated the transactions contemplated hereby. This Agreement has been, and all of the documents to be delivered by Seller at the Closing will be, authorized and executed and constitute, or will constitute, as appropriate, the valid and binding obligation of Seller, enforceable in accordance with their terms, subject to the Shareholder Approval. Except as disclosed by Seller to Purchaser, the execution, delivery, and performance of this Agreement and the Closing Documents by Seller will not result in any violation of or default under, or require any notice, or consent under any of Seller's organizational documents, any other agreement to which Seller is a party or any law, judgment or order applicable to Seller. 11.1.2 Conflicts and Pending Actions. Except as disclosed by Seller to Purchaser, there is no agreement to which Seller is a party or, to Seller's knowledge, that is binding on Seller which is in conflict with this Agreement. There is no action or proceeding pending or, to Seller's knowledge, threatened against Seller or relating to the Property, which challenges or impairs Seller's ability to execute or perform its obligations under this Agreement, and no order or other relief has been entered that imposes any recorded lien or other encumbrance on any of the Property. 11.1.3 Service Contracts. To Seller's knowledge, the list of Service Contracts to be delivered to Purchaser pursuant to this Agreement will be correct and complete as of the date of its delivery. 11.1.4 Notices from Governmental Authorities. To Seller's knowledge, Seller has not received from any governmental authority written notice of any material violation of any laws applicable (or alleged to be applicable) to the Property, or any part thereof, that has not been corrected, except as may be reflected by the Property Information. 11.1.5 Leases. On or prior to the Effective Date, Seller has delivered to Purchaser or made available to Purchaser, true, and correct and complete copies of all leasing commissions and brokerage agreements currently in effect for each Property, all of which are listed on Exhibit K, attached hereto and incorporated herein by this reference (the "Commission Schedule"). Seller has delivered to the Purchaser or made available to Purchaser true and correct and complete copies of all existing Leases. The Commission Schedule lists tenant improvement costs, brokers' commissions and leasing fees for C-20 141 any tenant's prior space for which the landlord with respect to any of the Properties is obligated or subject and which are unpaid as of October 6, 2000, and (ii) all brokers' commissions and leasing fees which the landlord with respect to any of the Properties is contractually obligated to pay in the event any tenant exercises any renewal or expansion option. As of the Effective Date, no Lease has been modified except as shown in the Leases delivered to Purchaser. Each of the Leases is in full force and effect. To Seller's knowledge, no uncured event of material default on the part of Seller has occurred under any of the Leases and there exists no event which, with the giving of notice or the passage of time, or both, would constitute such a default. To Seller's knowledge, no uncured event of material default on the part of any tenant has occurred under any of the Leases and, to Seller's knowledge, there exists no event which, with the giving of notice or the passage of time, or both, would constitute such a default. No tenant has any defense, offset or claim against its obligation to pay rent or perform any of its other obligations under its Lease. Except with respect to the "Battlefield Property," no tenant has any right of right or first refusal or option to purchase any part of the Property. If the tenant at the Battlefield Property does elect to exercise its purchase option, the Battlefield Property shall no longer be subject to this Agreement and the Purchase Price will be reduced by the allocated Purchase Price thereof provided pursuant to a separate written agreement between Seller and Purchaser and the parties shall have no further rights, duties or obligations herewith respect to the Battlefield Property, except for those obligations which by their terms survive termination of this Agreement. 11.1.6 Loan Documents. On or prior to the Effective Date, Seller has delivered to the Purchaser or made available to Purchaser true and correct and complete copies of all existing Loan Documents. The Loan Documents have not been modified except as shown in the Loan Documents. There are no other documents or instruments which evidence, secure or otherwise govern the Existing Loans. Seller has not received any notice of any material breach or material default under the Loan Documents, and to Seller's knowledge, there is no existing or uncured material default or material breach by any party under the Loan Documents, and no facts or circumstances exist that, with the passage of time or the giving of notice, or both, would constitute such a default or breach by any party under the Loan Documents. To Seller's knowledge, the current mortgagees or beneficiaries of the Existing Loans are the lenders identified on Exhibit F. The outstanding principal balance of each of the Existing Loans estimated as of February 28, 2001 is set forth on Exhibit F. 11.1.7 Service Contracts. On or prior to the Effective Date, Seller has made available or delivered to the Purchaser true and correct and complete copies of all Service Contracts related to the operation of the Property. The Service Contracts have not been modified except as shown in the Service Contracts. Seller has not received any notice of any material breach or material default under the Service Contracts, and to Seller's knowledge, there is no existing or uncured material default or material breach by any party under the Service Contracts, and no facts or circumstances exist that, with the passage of time or the giving of notice, or both, would constitute a default or breach by any party under the Service Contracts. 11.1.8 Management Agreements. On or prior to the Effective Date, Seller has made available or delivered to the Purchaser true and correct and complete copies of all existing management agreements relating to the Property. The management agreements have not been otherwise modified except as shown in the management agreements delivered to Purchaser. Seller has not received any notice of any uncured material breach or material default under the management agreements, and to Seller's knowledge, there is no existing or uncured material default or material breach by any party under the management agreements, and no facts or circumstances exist that, with the passage of time or the giving of notice, or both, would constitute such a default or breach by any party under the management agreements. C-21 142 11.1.9 Condemnation. Seller has not received notice of, nor does Seller have knowledge of any pending or contemplated condemnation, eminent domain, or similar proceeding with respect to all or any portion of the Properties. 11.1.10 Property Taxes. Seller has provided Purchaser with copies of all notices and other documents relating to any and all property tax reassessment proceedings or contests relating to or affecting any of the Properties. 11.2 Purchaser's Representations and Warranties. Purchaser represents and warrants to Seller that: 11.2.1 Organization and Authority. Purchaser has been duly organized and is validly existing as a limited partnership in good standing in the State of Georgia and as of the Closing Date will be qualified to do business in each state in which the Real Property is located. Purchaser has the full right and authority and has obtained any and all consents required to enter into this Agreement and to consummate or cause to be consummated the transactions contemplated hereby. This Agreement has been, and all of the documents to be delivered by Purchaser at the Closing will be, authorized and properly executed and constitute, or will constitute, as appropriate, the valid and binding obligation of Purchaser, enforceable in accordance with their terms. The execution, delivery, and performance of this Agreement and the Closing Documents by Purchaser will not result in any violation of or default under, or require any notice, or consent under any of Purchaser's organizational documents, any other agreement to which Purchaser is a party or any law, judgment or order applicable to Purchaser. 11.2.2 Conflicts and Pending Action. There is no agreement to which Purchaser is a party or to Purchaser's knowledge binding on Purchaser which is in conflict with this Agreement. There is no action or proceeding pending or, to Purchaser's knowledge, threatened against Purchaser which challenges or impairs Purchaser's ability to execute or perform its obligations under this Agreement. 11.2.3. Adequate Funds. Purchaser currently has or on the Closing will have adequate funds to close on the purchase of the Projects in accordance with the terms hereof. 11.3 Survival of Representations and Warranties. The representations and warranties set forth in this Article 11 are made as of the date of this Agreement and remade as of the Closing Date, but shall be deemed to be merged into and waived by the instruments of Closing, and shall not survive the Closing. Terms such as "to Seller's knowledge," "to the best of Seller's knowledge," or like phrases do not include constructive knowledge, imputed knowledge, or knowledge Seller does not have but could have obtained through further investigation or inquiry. Terms such as "to Purchaser's knowledge," "to the best of Purchaser's knowledge," or like phrases do not include constructive knowledge, imputed knowledge, or knowledge Purchaser does not have but could have obtained through further investigation or inquiry. No broker, agent, or party other than Seller is authorized to make any representation or warranty for or on behalf of Seller. No broker, agent, or other party other than Purchaser is authorized to make any representation or warranty for or on behalf of Purchaser. C-22 143 ARTICLE 12 DEFAULT AND REMEDIES 12.1 Seller's Remedies. If Purchaser fails to perform its obligations pursuant to this Agreement at or prior to Closing for any reason except failure by Seller to perform hereunder, Seller shall be entitled, as its sole remedy (except as provided in Sections 4.9, 10.6, 12.3 and 12.4 hereof), to terminate this Agreement and recover the Earnest Money as liquidated damages and not as penalty, in full satisfaction of claims against Purchaser hereunder. Seller and Purchaser agree that Seller's damages resulting from Purchaser's default are difficult, if not impossible, to determine and the Earnest Money is a fair estimate of those damages which has been agreed to in an effort to cause the amount of such damages to be certain. Notwithstanding anything in this Section 12.1 to the contrary, in the event of Purchaser's default or a termination of this Agreement, Seller shall have all remedies available at law or in equity in the event Purchaser or any party related to or affiliated with Purchaser is asserting any claims or right to the Property that would delay or prevent Seller from having clear, indefeasible and marketable title to the Property. In all other events Seller's remedies shall be limited to those described in this Section 12.1 and Sections 4.9, 10.6, 12.3 and 12.4 hereof. IN NO EVENT SHALL PURCHASER'S DIRECT OR INDIRECT PARTNERS, SHAREHOLDERS, OWNERS OR AFFILIATES, ANY OFFICER, DIRECTOR, EMPLOYEE OR AGENT OF THE FOREGOING, OR ANY AFFILIATE OR CONTROLLING PERSON THEREOF HAVE ANY LIABILITY FOR ANY CLAIM, CAUSE OF ACTION OR OTHER LIABILITY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE PROPERTY, WHETHER BASED ON CONTRACT, COMMON LAW, STATUTE, EQUITY OR OTHERWISE. Seller's Initials /s/ CW Purchaser's Initials /s/ JR 12.2 Purchaser's Remedies. If Seller fails to perform its obligations pursuant to this Agreement for any reason except failure by Purchaser to perform hereunder, Purchaser shall elect, as its sole remedy (except as provided in Sections 10.6, 12.3, 12.4 and 12.5), either to (i) terminate this Agreement by giving Seller timely written notice of such election prior to or at Closing and recover the amounts specified under Section 7.5, or (ii) waive said failure or breach and proceed to Closing. IN NO EVENT SHALL SELLER'S DIRECT OR INDIRECT PARTNERS, SHAREHOLDERS, OWNERS OR AFFILIATES, ANY OFFICER, DIRECTOR, EMPLOYEE OR AGENT OF THE FOREGOING, OR ANY AFFILIATE OR CONTROLLING PERSON THEREOF HAVE ANY LIABILITY FOR ANY CLAIM, CAUSE OF ACTION OR OTHER LIABILITY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE PROPERTY, WHETHER BASED ON CONTRACT, COMMON LAW, STATUTE, EQUITY OR OTHERWISE. Seller's Initials /s/ CW Purchaser's Initials /s/ JR 12.3 Attorneys' Fees. In the event either party hereto employs an attorney in connection with claims by one party against the other arising from the operation of this Agreement, the non-prevailing party shall pay the prevailing party all reasonable, actual and verifiable fees and expenses, including attorneys' fees, incurred in connection with such claims. 12.4 Other Expenses. If this Agreement is terminated due to the default of a party, then the defaulting party shall pay any fees or charges due to Escrow Agent for holding the Earnest Money as well as any escrow cancellation fees or charges and any fees or charges due to the Title Company for preparation and/or cancellation of the Title Commitment. 12.5 Litigation Indemnity. Seller shall indemnify, save and hold harmless Purchaser from and against any and all costs, losses, liabilities, obligations, damages, lawsuits, deficiencies, claims, demands and expenses, including without limitation attorney's fees and all amounts paid in investigation, defense or settlement of any of the foregoing, incurred in connection with, arising out of, or resulting from any litigation against Seller, including without limitation, any shareholder litigation arising as a result of the transactions contemplated by this Agreement, but excluding any such item arising out of Purchaser's C-23 144 negligent or wrongful action or inaction. The provisions of this Section 12.5 shall survive termination of this Agreement or consummation of the transactions contemplated hereby. ARTICLE 13 DISCLAIMERS, RELEASE AND INDEMNITY 13.1 Disclaimers By Seller. (a) Except as expressly set forth in this Agreement, it is understood and agreed that Seller and Asset Manager have not at any time made and are not now making, and they specifically disclaim, any warranties or representations of any kind or character, express or implied, with respect to the Property, including, but not limited to, warranties or representations as to (i) matters of title, (ii) environmental matters relating to the Property or any portion thereof, including, without limitation, the presence of Hazardous Materials in, on, under or in the vicinity of the Property, (iii) geological conditions, including, without limitation, subsidence, subsurface conditions, water table, underground water reservoirs, limitations regarding the withdrawal of water, and geologic faults and the resulting damage of past and/or future faulting, (iv) whether, and to the extent to which the Property or any portion thereof is affected by any stream (surface or underground), body of water, wetlands, flood prone area, flood plain, floodway or special flood hazard, (v) drainage, (vi) soil conditions, including the existence of instability, past soil repairs, soil additions or conditions of soil fill, or susceptibility to landslides, or the sufficiency of any undershoring, (vii) the presence of endangered species or any environmentally sensitive or protected areas, (viii) zoning or building entitlements to which the Property or any portion thereof may be subject, (ix) the availability of any utilities to the Property or any portion thereof including, without limitation, water, sewage, gas and electric, (x) usages of adjoining property, (xi) access to the Property or any portion thereof, (xii) the value, compliance with the plans and specifications, size, location, age, use, design, quality, description, suitability, structural integrity, operation, title to, or physical or financial condition of the Property or any portion thereof, or any income, expenses, charges, liens, encumbrances, rights or claims on or affecting or pertaining to the Property or any part thereof, (xiii) the condition or use of the Property or compliance of the Property with any or all past, present or future federal, state or local ordinances, rules, regulations or laws, building, fire or zoning ordinances, codes or other similar laws, (xiv) the existence or non-existence of underground storage tanks, surface impoundments, or landfills, (xv) the merchantability of the Property or fitness of the Property for any particular purpose, (xvi) the truth, accuracy or completeness of the Property Information, (xvii) tax consequences, or (xviii) any other matter or thing with respect to the Property. (b) Section 25359.7 of the California Health and Safety Code requires owners of nonresidential property who know or have reasonable cause to believe that any release of hazardous substance has come to be located on or beneath real property to provide written notice of that condition to a buyer of such real property. There is a possibility that a release of a hazardous substance may have come to be located on or beneath one or more of the Projects as described in the environmental reports and documents which have been received and reviewed by Purchaser. By its execution of this Agreement, Purchaser acknowledges its receipt of the foregoing notice given pursuant to Section 25359.7 of the California Health and Safety Code. (c) Purchaser acknowledges that "Natural Hazards" described in the following California Code Sections (the "Natural Hazard Laws") may affect one or more of the Projects: Government Code Section 8589.3 (Special Flood Hazard); Government Code Section 8589.5 (Potential Flooding); Government Code Sections 51178 and 51179 (Very High Fire Hazard Severity Zone); Public Resources Code Section 2622 (Earthquake Fault Zone); Public Resources Code Section 2696 (Seismic Hazard Zone); and Public Resources Code Section 4125 (Wildland Forest Fire Risks and Hazards). Purchaser acknowledges and agrees that Purchaser is an experienced real estate investor, and has been advised that Purchaser should determine whether any lists or maps delineating properties affected by such Natural Hazards are available and otherwise determine whether any such Natural Hazards affect any of the Projects. Purchaser further represents and warrants that Purchaser has independently evaluated and C-24 145 investigated whether any or all of such Natural Hazards affect the one or more of the Projects. Based on the foregoing, Purchaser knowingly and intentionally waives any disclosures, obligations or requirements of Seller with respect to Natural Hazards, including, without limitation, any disclosure obligations or requirements under the following California Code Sections: Government Code Sections 8589.3, 8589.4 and 51183.5 and Public Resources Code Sections 2621.9, 2694 and 4136 (the "Natural Hazard Disclosure Requirements"). Purchaser acknowledges and agrees that this waiver has been specifically negotiated and is an essential aspect of the bargain between the parties. 13.2 SALE "AS IS, WHERE IS." PURCHASER ACKNOWLEDGES AND AGREES THAT UPON CLOSING, SELLER SHALL SELL AND CONVEY TO PURCHASER AND PURCHASER SHALL ACCEPT THE PROPERTY "AS IS, WHERE IS, WITH ALL FAULTS," EXCEPT TO THE EXTENT EXPRESSLY PROVIDED OTHERWISE IN THIS AGREEMENT AND ANY DOCUMENT EXECUTED BY SELLER AND DELIVERED TO PURCHASER AT CLOSING. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, PURCHASER HAS NOT RELIED AND WILL NOT RELY ON, AND SELLER HAS NOT MADE AND IS NOT LIABLE FOR OR BOUND BY, ANY EXPRESS OR IMPLIED WARRANTIES, GUARANTEES, STATEMENTS, REPRESENTATIONS OR INFORMATION PERTAINING TO THE PROPERTY OR RELATING THERETO (INCLUDING SPECIFICALLY, WITHOUT LIMITATION, PROPERTY INFORMATION PACKAGES DISTRIBUTED WITH RESPECT TO THE PROPERTY) MADE OR FURNISHED BY SELLER, THE ASSET MANAGER, OR ANY REAL ESTATE BROKER, AGENT OR THIRD PARTY REPRESENTING OR PURPORTING TO REPRESENT SELLER, TO WHOMEVER MADE OR GIVEN, DIRECTLY OR INDIRECTLY, ORALLY OR IN WRITING. PURCHASER REPRESENTS THAT IT IS A KNOWLEDGEABLE, EXPERIENCED AND SOPHISTICATED PURCHASER OF REAL ESTATE AND THAT, EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, IT IS RELYING SOLELY ON ITS OWN EXPERTISE AND THAT OF PURCHASER'S CONSULTANTS IN PURCHASING THE PROPERTY AND SHALL MAKE AN INDEPENDENT VERIFICATION OF THE ACCURACY OF ANY DOCUMENTS AND INFORMATION PROVIDED BY SELLER. PURCHASER WILL CONDUCT SUCH INSPECTIONS AND INVESTIGATIONS OF THE PROPERTY AS PURCHASER DEEMS NECESSARY, INCLUDING, BUT NOT LIMITED TO, THE PHYSICAL AND ENVIRONMENTAL CONDITIONS THEREOF, AND SHALL RELY UPON SAME. PURCHASER ACKNOWLEDGES THAT SELLER HAS AFFORDED PURCHASER A FULL OPPORTUNITY TO CONDUCT SUCH INVESTIGATIONS OF THE PROPERTY AS PURCHASER DEEMED NECESSARY TO SATISFY ITSELF AS TO THE CONDITION OF THE PROPERTY AND THE EXISTENCE OR NON-EXISTENCE OR CURATIVE ACTION TO BE TAKEN WITH RESPECT TO ANY HAZARDOUS MATERIALS ON OR DISCHARGED FROM THE PROPERTY, AND WILL RELY SOLELY UPON SAME. SELLER SHALL NOT BE DEEMED TO HAVE MADE ANY REPRESENTATION OR WARRANTY WITH RESPECT TO ANY INFORMATION PROVIDED BY OR ON BEHALF OF SELLER OR ITS AGENTS OR EMPLOYEES WITH RESPECT THERETO, OTHER THAN SUCH REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER AS ARE EXPRESSLY SET FORTH IN THIS AGREEMENT. UPON CLOSING, PURCHASER SHALL ASSUME THE RISK THAT ADVERSE MATTERS, INCLUDING, BUT NOT LIMITED TO, ADVERSE PHYSICAL OR CONSTRUCTION DEFECTS OR ADVERSE ENVIRONMENTAL, HEALTH OR SAFETY CONDITIONS, MAY NOT HAVE BEEN REVEALED BY PURCHASER'S INSPECTIONS AND INVESTIGATIONS. Purchaser's Initials /s/ JR 13.3 Seller Released from Liability. Purchaser acknowledges that it had the opportunity to inspect the Property prior to the Effective Date, and during such period, observe its physical characteristics and existing conditions and the opportunity to conduct such investigation and study on and of the Property and adjacent areas as Purchaser deems necessary, and Purchaser hereby FOREVER RELEASES AND DISCHARGES Seller and Asset Manager from all responsibility and liability to Purchaser, including without limitation, liabilities under the Comprehensive Environmental Response, Compensation and C-25 146 Liability Act Of 1980 (42 U.S.C. Sections 9601 et seq.), as amended ("CERCLA"), California Health and Safety Code Sections 25300, et seq. and other similar applicable state laws, directly or indirectly, regarding the condition (including the presence in the soil, air, structures and surface and subsurface waters, of Hazardous Materials or other materials or substances that have been or may in the future be determined to be toxic, hazardous, undesirable or subject to regulation and that may need to be specially treated, handled and/or removed from the Property under current or future federal, state and local laws, regulations or guidelines), valuation, salability or utility of the Property, or its suitability for any purpose whatsoever; provided, however, the foregoing release shall not include third party claims brought against Purchaser for which Seller may be liable otherwise than under this Agreement. By closing this transaction, Purchaser will be deemed to have waived any and all objections to or complaints regarding (including, but not limited to, federal, state and common law based actions), or any private right of action under, state and federal law to which the Property is or may be subject, including, but not limited to, CERCLA, physical characteristics and existing conditions, including, without limitation, structural and geologic conditions, subsurface soil and water conditions and solid and hazardous waste and Hazardous Materials on, under, adjacent to or otherwise affecting the Property. Purchaser further hereby assumes the risk of changes in applicable laws and regulations relating to past, present and future environmental conditions on the Property and the risk that adverse physical characteristics and conditions, including, without limitation, the presence of Hazardous Materials or other contaminants, may not have been revealed by its investigation. Purchaser expressly waives the provisions of Section 1542 of the California Civil Code (or any similar provision or principle of law which may apply in any other state where any Property is located) which provides: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR EXPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN TO HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR." Purchaser's Initials: /s/ JR 13.4 "Hazardous Materials" Defined. For purposes hereof, "Hazardous Materials" means "Hazardous Material," "Hazardous Substance," "Hazardous Waste," "Extremely Hazardous Waste," "Restricted Hazardous Waste," "Pollutant or Contaminant," and "Petroleum" and "Natural Gas Liquids," as those terms are defined or used in Section 101 of CERCLA or under any laws, ordinances, rules, requirements and regulations of any governmental authority having jurisdiction with respect to the Property, and any other substances regulated because of their effect or potential effect on public health and the environment, including, without limitation, PCBs, lead paint, asbestos, urea formaldehyde, radioactive materials, putrescible, petroleum and infectious materials. 13.5 Indemnity. Purchaser agrees to indemnify and hold Seller harmless of and from any and all liabilities, claims, demands, and expenses of any kind or nature which arise or accrue after Closing and relate to the ownership, maintenance, or operation of the Property by Purchaser and its successors and assigns, including, without limitation, in connection with Hazardous Materials at, on or under the Property, but excluding any matters as to which Seller has contractual liability. Such indemnity shall not apply to any Hazardous Materials existing as of the Closing Date unless Purchaser's activities cause the release and/or migration of any Hazardous Materials at, on or under the Property existing as of the Closing Date. 13.6 Survival. The terms and conditions of this Article 13 shall expressly survive the Closing, and not merge with the provisions of any closing documents. Purchaser acknowledges and agrees that the disclaimers and other agreements set forth herein are an integral part of this Agreement and that Seller would not have agreed to sell the Property to Purchaser for the Purchase Price without the disclaimers and other agreements set forth above. C-26 147 ARTICLE 14 MISCELLANEOUS 14.1 Parties Bound; Assignment. This Agreement, and the terms, covenants, and conditions herein contained, shall inure to the benefit of and be binding upon the heirs, personal representatives, successors, and assigns of each of the parties hereto. Purchaser may assign its rights under this Agreement to one or more assignees upon the following conditions: (i) the Assignee of Purchaser must be an entity controlling, controlled by, or under common control with Purchaser or an entity in which Value Enhancement Fund IV, L.P. is a direct or indirect investor, (ii) all of the Earnest Money must have been delivered in accordance herewith, (iii) the assignee of Purchaser shall assume all obligations of Purchaser hereunder, but Purchaser shall remain primarily liable for the performance of Purchaser's obligations, (iv) Purchaser shall notify Seller (which may be by telephone to Tony Koeijmans, Esq. at (972) 550-3204, and confirmed in writing within 24 hours) promptly following Purchaser's designation of one or more assignees and (v) a copy of the fully executed written assignment and assumption agreement shall be delivered to Seller at least five (5) days prior to Closing. 14.2 Headings. The article, section, subsection, paragraph and/or other headings of this Agreement are for convenience only and in no way limit or enlarge the scope or meaning of the language hereof. 14.3 Invalidity and Waiver. If any portion of this Agreement is held invalid or inoperative, then so far as is reasonable and possible the remainder of this Agreement shall be deemed valid and operative, and, to the greatest extent legally possible, effect shall be given to the intent manifested by the portion held invalid or inoperative. The failure by either party to enforce against the other any term or provision of this Agreement shall not be deemed to be a waiver of such party's right to enforce against the other party the same or any other such term or provision in the future. 14.4 Governing Law. This Agreement shall, in all respects, be governed, construed, applied, and enforced in accordance with the law of the State of Texas. 14.5 Survival. The provisions of this Agreement that contemplate performance after the Closing and the obligations of the parties not fully performed at the Closing shall survive the Closing and shall not be deemed to be merged into or waived by the instruments of Closing. 14.6 Entirety and Amendments. This Agreement embodies the entire agreement between the parties and supersedes all prior agreements and understandings relating to the Property. This Agreement may be amended or supplemented only by an instrument in writing executed by the party against whom enforcement is sought. 14.7 Time. Time is of the essence in the performance of this Agreement. 14.8 Confidentiality. Purchaser shall make no public announcement or disclosure of any information related to this Agreement to outside brokers or third parties, before or after the Closing, without the prior consent of Seller; provided, however, that Purchaser may, subject to the provisions of Section 4.6, make disclosure of this Agreement to its Permitted Outside Parties as necessary to perform its obligations hereunder and as may be required under laws or regulations applicable to Purchaser. Notwithstanding anything to the contrary hereinafter set forth, Purchaser may disclose such information (i) to its employees, members of professional firms serving it or potential lenders or investors who need such information for purposes of evaluating the transactions contemplated in this Agreement, provided any such persons or entities agree to and shall maintain the confidentiality thereof, (ii) if any court or governmental agency requires disclosure in order to comply with applicable laws, (iii) pursuant to any legal requirement, any reporting requirement pursuant to applicable law or the applicable rules by any securities exchange or any accounting or auditing disclosure requirement, (iv) in any legal action, to the extent necessary to enforce its rights under this Agreement, and (v) to the extent that such information is a matter of public record. The provisions of this Section 14.8 shall survive the termination of this Agreement. 14.9 Notices. All notices required or permitted hereunder shall be in writing and shall be served on the parties at the addresses set forth in Section 1.3. Any such notices shall, unless otherwise provided C-27 148 herein, be given or served (i) by depositing the same in the United States mail, postage paid, certified and addressed to the party to be notified, with return receipt requested, (ii) by overnight delivery using a nationally recognized overnight courier, (iii) by personal delivery, or (iv) by facsimile, evidenced by confirmed receipt. Notice deposited in the mail in the manner hereinabove described shall be effective on the third (3rd) business day after such deposit. Notice given in any other manner shall be effective only if and when received by the party to be notified. A party's address may be changed by written notice to the other party; provided, however, that no notice of a change of address shall be effective until actual receipt of such notice. Copies of notices are for informational purposes only, and a failure to give or receive copies of any notice shall not be deemed a failure to give notice. Notices given by counsel to the Purchaser shall be deemed given by Purchaser and notices given by counsel to the Seller shall be deemed given by Seller. 14.10 Construction. The parties acknowledge that the parties and their counsel have reviewed and revised this Agreement and agree that the normal rule of construction -- to the effect that any ambiguities are to be resolved against the drafting party -- shall not be employed in the interpretation of this Agreement or any exhibits or amendments hereto. 14.11 Calculation of Time Periods. Unless otherwise specified, in computing any period of time described herein, the day of the act or event after which the designated period of time begins to run is not to be included and the last day of the period so computed is to be included, unless such last day is a Saturday, Sunday or legal holiday for national banks in the location where the Property is located, in which event the period shall run until the end of the next day which is neither a Saturday, Sunday, or legal holiday. The last day of any period of time described herein shall be deemed to end at 5:00 p.m. Central Standard Time. 14.12 Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of such counterparts shall constitute one Agreement. To facilitate execution of this Agreement, the parties may execute and exchange by telephone facsimile counterparts of the signature pages, provided that executed originals thereof are forwarded to the other party on the same day by any of the delivery methods set forth in Section 14.9 other than facsimile. 14.13 No Recordation. Without the prior written consent of Seller, there shall be no recordation of either this Agreement or any memorandum hereof, or any affidavit pertaining hereto, and any such recordation of this Agreement or memorandum or affidavit by Purchaser without the prior written consent of Seller shall constitute a default hereunder by Purchaser, whereupon Seller shall have the remedies set forth in Section 12.1 hereof. 14.14 Further Assurances. In addition to the acts and deeds recited herein and contemplated to be performed, executed and/or delivered by either party at Closing, each party agrees to perform, execute and deliver, but without any obligation to incur any additional liability or expense, on or after the Closing any further deliveries and assurances as may be reasonably necessary to consummate the transactions contemplated hereby or to further perfect the conveyance, transfer and assignment of the Property to Purchaser. 14.15 Discharge of Obligations. The acceptance of the Deed by Purchaser shall be deemed to be a full performance and discharge of every representation and warranty made by Seller herein and every agreement and obligation on the part of Seller to be performed pursuant to the provisions of this Agreement, except those which are herein specifically stated to survive Closing. 14.16 No Third Party Beneficiary. The provisions of this Agreement and of the documents to be executed and delivered at Closing are and will be for the benefit of Seller and Purchaser only and are not for the benefit of any third party, and accordingly, no third party shall have the right to enforce the provisions of this Agreement or of the documents to be executed and delivered at Closing. 14.17 Asset Manager: Designated Representative. Seller has engaged the companies listed on Exhibit G (collectively, "Asset Manager") to provide certain asset management services with respect to the Property. One of the Asset Managers, Chase Realty Advisors, Inc. ("Chase") has been engaged to act as a liaison between Seller and Purchaser in connection with the Property and this Agreement. Chase has C-28 149 appointed Stan Levy and Tom Grier ("Designated Representative(s)") to deal with Purchaser. Whenever any approval, acceptance, consent, direction or action of Seller is required pursuant to this Agreement, Purchaser shall send to the Designated Representative a written notice requesting same, which notice shall: (i) describe in detail the matter for which such approval, acceptance, consent, direction or other action of Seller is requested; (ii) be accompanied by a copy of any contract, agreement or other document to be executed by Seller evidencing such approval, consent, acceptance, direction or action of Seller; and (iii) be accompanied by such other documents, written explanations and information as may be reasonably necessary to explain the request fully and completely. Chase will communicate Seller's response to any such requests to Purchaser. Whenever any approval, acceptance, consent, direction or action of Purchaser is required pursuant to this Agreement, Seller shall send to Purchaser a written notice requesting same, which notice shall: (i) describe in detail the matter for which such approval, acceptance, consent, direction or other action of Purchaser is requested; (ii) be accompanied by a copy of any contract, agreement or other document to be executed by Purchaser evidencing such approval, consent, acceptance, direction or action of Purchaser; and (iii) be accompanied by such other documents, written explanations and information as may be reasonably necessary to explain the request fully and completely. 14.18 REIT. Seller hereby advises Purchaser that Seller is qualified as a real estate investment trust under the provisions of the Internal Revenue Code of 1986, as amended, and that, by reason thereof, the maintaining of such status and the avoiding of any activity which might cause a penalty tax to be applied is of material concern to Seller. Accordingly, Purchaser agrees to make any modifications or amendments to this Agreement requested by Seller prior to Closing that may be necessary for Seller to maintain its status as a real estate investment trust or in order for it to avoid a penalty tax; provided, however, that Purchaser shall have no obligation to enter into any such modification or amendment that would materially alter or affect, in Purchaser's sole judgment, Purchaser's rights, duties, or obligations under this Agreement. If Purchaser declines to modify or amend this Agreement for any reason in a manner which Seller determines, in the good faith exercise of its reasonable business judgment, is necessary to maintain its status as a real estate investment trust or avoid a penalty tax, Seller shall have the right to terminate this Agreement by written notice delivered to Purchaser. In the event Seller exercises such termination right, neither party shall have any further rights or obligations hereunder (except with respect to provisions of this Agreement which recite that they survive termination), the Earnest Money shall be returned to Purchaser and all other funds and documents deposited in escrow shall be returned to the party depositing the same. 14.19 Exculpation. No present or future officer, director, trust manager, employee or agent of Seller shall have any personal liability, directly or indirectly, and recourse shall not be had against any such officer, director, trust manager, employee, or agent, under or in connection with this Agreement or any other document or instrument heretofore or hereafter executed in connection with this Agreement either before or after Closing. Purchaser hereby waives and releases any and all such personal liability and recourse. The limitations of liability provided in this Section are in addition to, and not in limitation of, any limitation on liability provided for elsewhere in this Agreement or otherwise provided by law or in any other contract, agreement or instrument. No present or future officer, director, trust manager, employee or agent of Purchaser shall have any personal liability, directly or indirectly, and recourse shall not be had against any such officer, director, trust manager, employee or agent, under or in connection with this Agreement either before or after Closing. Seller hereby waives and releases any and all such personal liability and recourse. The limitations of liability provided in this Section are in addition to, and not in limitation of any limitation on liability provided for elsewhere in this Agreement or otherwise provided by law or in any other contract, agreement or instrument. 14.20 Joint and Several Liability of Seller. Each entity comprising Seller shall be jointly and severally liable for all obligations of Seller hereunder. C-29 150 ARTICLE 15 ESCROW AGENT 15.1 Escrow Provisions; Payment at Closing. If the Closing takes place under this Agreement, Escrow Agent shall deliver the Earnest Money to Purchaser. 15.2 Payment on Demand. Upon receipt of any written certification from Seller or Purchaser claiming the Earnest Money pursuant to the provisions of this Agreement, Escrow Agent shall promptly forward a copy thereof to the other such party (i.e., Purchaser or Seller, whichever did not claim the Earnest Money pursuant to such notice) and, unless such other party within ten (10) days thereafter notifies Escrow Agent of any objection to such requested disbursement of the Earnest Money, Escrow Agent shall disburse the Earnest Money to the party demanding the same and shall thereupon be released and discharged from any further duty or obligation hereunder. 15.3 Exculpation of Escrow Agent. It is agreed that the duties of Escrow Agent are herein specifically provided and are purely ministerial in nature, and that Escrow Agent shall incur no liability whatsoever except for its willful misconduct or gross negligence, so long as Escrow Agent is acting in good faith. Seller and Purchaser do each hereby release Escrow Agent from any liability for any error of judgment or for any act done or omitted to be done by Escrow Agent in the good faith performance of its duties hereunder and do each hereby indemnify Escrow Agent against, and agree to hold, save, and defend Escrow Agent harmless from, any costs, liabilities, and expenses incurred by Escrow Agent in serving as Escrow Agent hereunder and in faithfully discharging its duties and obligations hereunder. 15.4 Stakeholder. Escrow Agent is acting as a stakeholder only with respect to the Earnest Money. If there is any dispute as to whether Escrow Agent is obligated to deliver the Earnest Money or as to whom the Earnest Money is to be delivered, Escrow Agent may refuse to make any delivery and may continue to hold the Earnest Money until receipt by Escrow Agent of an authorization in writing, signed by Seller and Purchaser, directing the disposition of the Earnest Money, or, in the absence of such written authorization, until final determination of the rights of the parties in an appropriate judicial proceeding. If such written authorization is not given, or a proceeding for such determination is not begun, within sixty (60) days of notice to Escrow Agent of such dispute, Escrow Agent may bring an appropriate action or proceeding for leave to deposit the Earnest Money in a court of competent jurisdiction pending such determination. Escrow Agent shall be reimbursed for all costs and expenses of such action or proceeding, including, without limitation, reasonable attorneys' fees and disbursements, by the party determined not to be entitled to the Earnest Money. Upon making delivery of the Earnest Money in any of the manners herein provided, Escrow Agent shall have no further liability or obligation hereunder. C-30 151 SIGNATURE PAGE TO AGREEMENT OF PURCHASE AND SALE IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year written below. SELLER: AMERICAN INDUSTRIAL PROPERTIES REIT, a Texas real estate investment trust By: /s/ CHARLES W. WOLCOTT ---------------------------------- Charles W. Wolcott, President and Chief Executive Officer Executed as of Nov. 1, 2000 AIP/BATTLEFIELD GP, INC., a Texas corporation By: /s/ CHARLES W. WOLCOTT ---------------------------------- Charles W. Wolcott, President and Chief Executive Officer Executed as of Nov. 1, 2000 AIP-SWAG OPERATING, L.P. a Texas limited partnership By: AIP-Swag GP, Inc. General Partner By:/s/ CHARLES W. WOLCOTT -------------------------------- Charles W. Wolcott, President and Chief Executive Officer Executed as of Nov. 1, 2000 C-31 152 AIP PROPERTIES #3, L.P., a Delaware limited partnership By: AIP Properties #3 GP, Inc. General Partner By: /s/ CHARLES W. WOLCOTT ---------------------------------- Charles W. Wolcott, President and Chief Executive Officer Executed as of Nov. 1, 2000 AIP OPERATING, L.P., a Delaware limited partnership By: American Industrial Properties REIT General Partner By: /s/ CHARLES W. WOLCOTT ---------------------------------- Charles W. Wolcott, President and Chief Executive Officer Executed as of Nov. 1, 2000 PURCHASER: VALUE ENHANCEMENT FUND IV, L.P., a Georgia limited partnership By: VEF IV GP, Inc. General Partner By: /s/ JAMES P. RYAN ---------------------------------- James P. Ryan, President Executed as of Nov. 1, 2000 C-32 153 JOINDER BY ESCROW AGENT Escrow Agent has executed this Agreement in order to confirm that Escrow Agent has received and shall hold the Earnest Money required to be deposited under this Agreement and the interest earned thereto, in escrow, and shall disburse the Earnest Money, and the interest earned thereon, pursuant to the provisions of this Agreement. COMMONWEALTH TITLE INSURANCE COMPANY By: /s/ AMANDA JOHNSON ---------------------------------- Name: Amanda Johnson --------------------------------- Title: Escrow Officer --------------------------------- Executed as of Nov. 7, 2000 C-33 154 APPENDIX D RIGHTS OF DISSENTING SHAREHOLDERS IN THE EVENT OF CERTAIN ACTIONS Sec. 25.10. (A) Any shareholder of a domestic real estate investment trust may dissent from any of the following actions: (1) any plan of merger to which the real estate investment trust is a party if shareholder approval is required by Section 23.30 of this Act and the shareholder holds shares of a class or series that was entitled to vote on the plan of merger as a class or otherwise; (2) any sale, lease, exchange, or other disposition (not including any pledge, mortgage, deed of trust, or trust indenture unless otherwise provided in the declaration of trust) of all, or substantially all, of the property and assets, with or without good will, of a real estate investment trust requiring the special authorization of the shareholders as provided by this Act; or (3) any plan of exchange pursuant to Section 23.20 of this Act in which the shares of the real estate investment trust of the class or series held by the shareholder are to be acquired. (B) Notwithstanding Subsection (A) of this Section, a shareholder may not dissent from any plan of merger in which there is a single surviving or new domestic or foreign corporation, real estate investment trust, partnership, or other entity, or from any plan of exchange, if: (1) the shares held by the shareholder are part of a class or series, and on the record date fixed to determine the shareholders entitled to vote on the plan of merger or plan of exchange, the shares are: (a) listed on a national securities exchange; (b) designated as a national market security on an interdealer quotation system by the National Association of Securities Dealers, Inc., or successor entity; or (c) held of record by not less than 2,000 holders; and (2) the shareholder is not required by the terms of the plan of merger or the plan of exchange to accept any consideration for the shareholder's shares other than: (a) shares of a domestic or foreign entity that, immediately after the effective date of the merger or exchange, will be part of a class or series, shares of which are (i) listed, or authorized for listing upon official notice of issuance, on a national securities exchange; (ii) approved for quotation as a national market security on an interdealer quotation system by the National Association of Securities Dealers, Inc., or successor entity; or (iii) held of record by not less than 2,000 holders; (b) cash in lieu of fractional shares otherwise entitled to be received; or (c) any combination of the securities and cash described in this Subdivision. PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO ACTIONS Sec. 25.20. (A) Any shareholder of any domestic real estate investment trust who has the right to dissent from any of the actions referred to in Section 25.10 of this Act may exercise that right to dissent only by complying with the following procedures: (1)(a) With respect to a proposed action that is submitted to a vote of shareholders at a meeting, the shareholder shall file with the real estate investment trust, before the meeting, a written objection to the action. The shareholder's objection must state that the shareholder will exercise the shareholder's right to dissent if the action is effective and must contain the shareholder's address, to which notice of the action shall be delivered or mailed in that event. If the action is effected and the D-1 155 shareholder did not vote in favor of the action, the real estate investment trust, in the case of action other than a merger, or the surviving or new entity that is liable in the case of a merger to discharge the shareholder's right of dissent, shall deliver or mail to the shareholder written notice that the action has been effected within 10 days after the action is effected. The shareholder may make a written demand on the existing, surviving, or new entity for payment of the fair value of the shareholder's shares within 10 days from the delivery or mailing of the notice. The fair value of the shares shall be the value of the shares on the day before the meeting, excluding any appreciation or depreciation in anticipation of the proposed action. The demand shall state the number and class of the shares owned by the shareholder and the fair value of the shares as estimated by the shareholder. A shareholder who fails to make a demand within the 10-day period is bound by the action. (b) With respect to a proposed action that is approved pursuant to Subsection (A) of Section 10.30 of this Act, the real estate investment trust, in the case of action other than a merger, and the surviving or new entity that is liable in the case of a merger to discharge the shareholder's right of dissent, within 10 days after the date the action takes effect, shall mail to each shareholder of record as of the date the action takes effect notice of the fact and date of the action and that the shareholder may exercise the shareholder's right to dissent from the action. The notice shall be accompanied by a copy of this Section and any articles or documents filed by the real estate investment trust with the secretary of state to effect the action. If the shareholder did not consent to the taking of the action, the shareholder may make written demand on the existing, surviving, or new entity for payment of the fair value of the shareholder's shares within 20 days after the mailing of the notice. The fair value of the shares shall be the value of the shares on the date the written consent authorizing the action was delivered to the real estate investment trust pursuant to Subsection (A) of Section 10.30 of this Act, excluding any appreciation or depreciation in anticipation of the action. The demand shall state the number and class of shares owned by the dissenting shareholder and the fair value of the shares as estimated by the shareholder. Any shareholder failing to make demand within the 20-day period is bound by the action. (2) Within 20 days after receipt by the existing, surviving, or new entity of a demand for payment made by a dissenting shareholder in accordance with Subdivision (1) of this Subsection, the entity shall deliver or mail to the shareholder a written notice that shall either set out that the entity accepts the amount claimed in the demand and agrees to pay that amount within 90 days after the date on which the action was effected, and, in the case of shares represented by certificates, on the surrender of the certificates duly endorsed, or shall contain an estimate by the entity of the fair value of the shares and an offer to pay the amount of that estimate within 90 days after the date on which the action was effected, on receipt of notice within 60 days after that date from the shareholder that the shareholder agrees to accept that amount and, in the case of shares represented by certificates, on the surrender of the certificates duly endorsed. (3) If, within 60 days after the date on which the real estate investment trust action was effected, the value of the shares is agreed on between the shareholder and the existing, surviving, or new entity, payment for the shares shall be made within 90 days after the date on which the action was effected and, in the case of shares represented by certificates, on surrender of the certificates duly endorsed. On payment of the agreed value, the shareholder ceases to have any interest in the shares or in the real estate investment trust. (B) If, within 60 days after the date on which the action was effected, the shareholder and the existing, surviving, or new entity do not agree on the value of the shares, the shareholder or entity, within 60 days after the expiration of the 60 -- day period, may file a petition in any court of competent jurisdiction in the county in which the principal office of the domestic real estate investment trust is located, asking for a finding and determination of the fair value of the shareholder's shares. On the filing of a petition by the shareholder, service of a copy of the petition must be made on the entity. The entity, within 10 days after receiving the service, shall file in the office of the clerk of the court in which the petition was filed a list containing the names and addresses of all shareholders of the domestic real estate D-2 156 investment trust who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the entity. If the petition is filed by the entity, the list described in this Subsection must be attached to the petition. The clerk of the court shall give notice of the time and place fixed for the hearing of the petition by registered mail to the entity and to the shareholders named on the list at the addresses stated in the list. The court shall approve the forms of notices sent by mail. All shareholders notified as required by this Subsection and the entity are bound by the final judgment of the court. (C) After the hearing of a petition filed under this Section, the court shall determine which shareholders have complied with the provisions of this Section and have become entitled to the valuation of and payment of their shares. The court shall appoint one or more qualified appraisers to determine that value. The appraisers may examine any books and records of the real estate investment trust that relate to the shares the appraisers are charged with the duty of valuing. The appraisers shall make a determination of the fair value of the shares after conducting an investigation. The appraisers shall also afford a reasonable opportunity to allow interested parties to submit to the appraisers pertinent evidence relating to the value of the shares. The appraisers also have the power and authority that may be conferred on masters in chancery by the Texas Rules of Civil Procedure. (D) The appraisers shall determine the fair value of the shares of the shareholders adjudged by the court to be entitled to payment for their shares and shall file their report of that value in the office of the clerk of the court. The clerk shall give notice of the filing of the appraisers report to interested parties. The appraisers report shall be subject to exceptions to be heard before the court both on the law and the facts. The court shall determine the fair value of the shares of the shareholders entitled to payment for their shares and shall order the existing, surviving, or new entity to pay that value, together with interest on the value of shares to the shareholders entitled to payment, beginning 91 days after the date on which the applicable action from which the shareholder elected to dissent was effected to the date of such judgment. The judgment shall be immediately payable to the holders of uncertificated shares. The judgment shall be payable to the holders of shares represented by certificates only on, and simultaneously with, the surrender to the existing, surviving, or new entity of duly endorsed certificates for those shares. On payment of the judgment, the dissenting shareholders cease to have any interest in those shares or in the real estate investment trust. The court shall allow the appraisers a reasonable fee as court costs, and all court costs shall be allocated between the parties in the manner that the court determines to be fair and equitable. (E) Shares acquired by the existing, surviving, or new entity, pursuant to the payment of the agreed value of the shares, to the payment of the agreed value of the shares, or to payment of the judgment entered for the value of the shares, as provided in this Section, in the case of a merger, shall be treated as provided in the plan of merger and, in all other cases, may be held and disposed of by the real estate investment trust as in the case of other treasury shares. (F) This Section does not apply to a merger if, on the date of the filing of the articles of merger, the surviving entity is the owner of all the outstanding shares of the other entities, domestic or foreign, that are parties to the merger. (G) In the absence of fraud in the transaction, the remedy provided by this Section to a shareholder objecting to any action referred to in Section 25.10 of this Act is the exclusive remedy for the recovery of the value of the shareholder's shares or money damages to the shareholder with respect to the action. If the existing, surviving, or new entity complies with the requirements of this Section, any shareholder who fails to comply with the requirements of this Section is not entitled to bring suit for the recovery of the value of the shareholder's shares or money damages to the shareholder with respect to the action. PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS Sec. 25.30. (A) Any shareholder who has demanded payment for the shareholder's shares in accordance with Section 25.20 of this Act is not entitled to vote or exercise any other rights of a shareholder except the right to receive payment for the shareholder's shares pursuant to the provisions of D-3 157 that Section and the right to maintain an appropriate action to obtain relief on the ground that the action would be or was fraudulent. The respective shares for which payment has been demanded may not be considered outstanding for the purposes of any subsequent vote of shareholders. (B) On receiving a demand for payment from any dissenting shareholder, the real estate investment trust shall make an appropriate notation of the demand in its shareholder records. Within 20 days after demanding payment for shares in accordance with Section 25.20 of this Act, each holder of certificates representing those shares shall submit the certificates to the real estate investment trust for notation on the certificates that such demand has been made. The failure of holders of certificated shares to submit the certificates to the real estate investment trust, at the option of the real estate investment trust, shall terminate the shareholder's rights under Section 25.20 of this Act unless a court of competent jurisdiction for good and sufficient cause shown directs otherwise. If uncertificated shares for which payment has been demanded or shares represented by a certificate on which the real estate investment trust has made a notation under this Subsection are transferred, any new certificate issued for those shares shall bear similar notation together with the name of the original dissenting holder of those shares, and a transferee of those shares shall acquire by the transfer no rights in the real estate investment trust other than those which the original dissenting shareholder had after making demand for payment of the fair value of the shares. (C) Any shareholder who has demanded payment for the shareholder's shares in accordance with Section 25.20 of this Act may withdraw that demand at any time before payment of those shares has been made or before any petition has been filed pursuant to Section 25.20 of this Act. The demand may not be withdrawn after the payment of the shares has been made or after any such petition has been filed, unless the real estate investment trust consents to the withdrawal of the demand. The shareholder and all persons claiming under the shareholder shall be conclusively presumed to have approved and ratified the action from which the shareholder dissented and shall be bound by the action, the rights of the shareholder to be paid the fair value of the shareholder's shares shall cease, and the shareholder's status as a shareholder shall be restored without prejudice to any proceedings that may have been taken during the interim, and the shareholder is entitled to receive any dividends or other distributions made to the shareholders in the interim if: (1) the demand is withdrawn as provided in this Subsection; (2) pursuant to Subsection (B) of this Section, the demand terminates the shareholder's rights under Section 25.20 of this Act; (3) no petition asking for a court finding and determination of fair value of such shares has been filed within the time provided in Section 25.20 of this Act; or (4) the court determines, after the hearing of a petition filed under Section 25.20, that the shareholder is not entitled to the relief provided by that Section. D-4 158 - -------------------------------------------------------------------------------- AMERICAN INDUSTRIAL PROPERTIES REIT Special Meeting Of Shareholders __________, 200_ This Proxy Is Solicited On Behalf Of The Board Of Trust Managers PROXY The undersigned hereby appoints Marc A. Simpson and Charles W. Wolcott, and each of them, jointly and severally, as proxies, each with full power of substitution, to vote all of the undersigned's common shares of beneficial interest held of record on _______, 2001, at the special meeting of shareholders and at any postponement or adjournment thereof. This proxy, when properly executed, will be voted in accordance with the directions made on the reverse side. If no direction is made, this proxy will be voted FOR proposals one and two, and with respect to the third proposal, according to the proxies' best judgment. See reverse side - -------------------------------------------------------------------------------- 159 - -------------------------------------------------------------------------------- 1. Approval of the agreement and plan of merger dated as of November 1, 2000 among American Industrial Properties REIT, DDR Transitory Sub Inc. and Developers Diversified Realty Corporation, and the transactions contemplated thereby. [ ] FOR [ ] AGAINST [ ] ABSTAIN - -------------------------------------------------------------------------------- 2. Approval of the agreement of purchase and sale dated as of November 1, 2000 between American Industrial Properties REIT and Value Enhancement Fund IV, L.P., and the transactions contemplated thereby. [ ] FOR [ ] AGAINST [ ] ABSTAIN - -------------------------------------------------------------------------------- 3. The aforementioned proxies are authorized to vote in their discretion on any other matters that may properly come before the special meeting or any postponement or adjournment thereof, subject to limitations set forth in applicable regulations under the Securities Exchange Act of 1934. - -------------------------------------------------------------------------------- Please sign exactly as name appears below. When shares are held in more than one name, all parties should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by an authorized officer. If a partnership, please sign in partnership name by an authorized person. Dated: , 200 ---------------------------------- - ---------------------------------------------- Signature ---------------------------------------------- Signature if shares held in more than one name - -------------------------------------------------------------------------------- EX-99.(B)(1) 3 d82307ex99-b1.txt CREDIT AGREEMENT DATED 1/28/99 1 EXHIBIT (b)(1) CREDIT AGREEMENT among AMERICAN INDUSTRIAL PROPERTIES REIT as Borrower BANK ONE, TEXAS, N.A. as Agent and THE LENDERS NAMED HEREIN as Lenders First Chicago Capital Markets, Inc., Arranger $150,000,000 As of January _____, 1999 2 TABLE OF CONTENTS
Page SECTION 1 DEFINITIONS AND TERMS...................................................................................1 1.1 Definitions.....................................................................................1 1.2 Time References................................................................................19 1.3 Other References...............................................................................19 1.4 Accounting Principles..........................................................................20 SECTION 2 COMMITMENT.............................................................................................20 2.1 Revolving Facility.............................................................................20 2.2 Borrowing Procedure............................................................................21 2.3 Letters of Credit..............................................................................22 SECTION 3 TERMS OF PAYMENT.......................................................................................25 3.1 Notes and Payments.............................................................................25 3.2 Interest and Principal Payments................................................................25 3.3 Interest Options...............................................................................26 3.4 Quotation of Rates.............................................................................26 3.5 Default Rate...................................................................................26 3.6 Interest Recapture.............................................................................27 3.7 Interest Calculations..........................................................................27 3.8 Maximum Rate...................................................................................27 3.9 Interest Periods...............................................................................28 3.10 Continuations; Conversions.....................................................................28 3.11 Order of Application...........................................................................29 3.12 Right of Setoff; Adjustments...................................................................29 3.13 Booking Borrowings.............................................................................30 3.14 Increased Costs and Reduced Return.............................................................30 3.15 Limitation on Types of Borrowings..............................................................32 3.16 Illegality.....................................................................................32 3.17 Treatment of Affected Loans....................................................................33 3.18 Compensation...................................................................................33 3.19 Taxes..........................................................................................34 3.20 Fees...........................................................................................36 3.21 Loan Documents.................................................................................37 SECTION 4 BORROWING BASE.........................................................................................38 4.1 Calculation of Borrowing Base..................................................................38 4.2 Admission of Qualified Properties into the Borrowing Base......................................38 4.3 Liens on Borrowing Base Properties.............................................................42 4.4 Collateral Documents...........................................................................42 4.5 Leases.........................................................................................42 4.6 Releases of Collateral.........................................................................44 4.7 Appraisals.....................................................................................44 SECTION 5 CONDITIONS PRECEDENT...................................................................................44 5.1 Conditions to Initial Borrowing................................................................44 5.2 Conditions to all Borrowings...................................................................47
3 5.3 Conditions Generally...........................................................................48 SECTION 6 REPRESENTATIONS AND WARRANTIES.........................................................................48 6.1 Purpose of Credit Facility.....................................................................48 6.2 Existence, Good Standing, Authority and Compliance.............................................48 6.3 Affiliates.....................................................................................48 6.4 Authorization and Contravention................................................................49 6.5 Binding Effect.................................................................................49 6.6 Financial Statements; Fiscal Year..............................................................49 6.7 Litigation.....................................................................................49 6.8 Taxes..........................................................................................49 6.9 Environmental Matters..........................................................................50 6.10 Employee Plans.................................................................................50 6.11 Properties; Liens..............................................................................50 6.12 Locations......................................................................................51 6.13 Government Regulations.........................................................................51 6.14 Transactions with Affiliates...................................................................51 6.15 Insurance......................................................................................51 6.16 Labor Matters..................................................................................51 6.17 Solvency.......................................................................................51 6.18 Full Disclosure................................................................................51 6.19 Exemption from ERISA; Plan Assets..............................................................52 6.20 Year 2000 Compliance...........................................................................52 6.21 DDR Indebtedness...............................................................................53 6.22 Ownership and Indebtedness.....................................................................53 6.23 Ownership of Consolidated Affiliates...........................................................53 6.24 DDR Equity.....................................................................................53 SECTION 7 AFFIRMATIVE COVENANTS..................................................................................53 7.1 Items to be Furnished..........................................................................53 7.2 Use of Proceeds................................................................................55 7.3 Books and Records..............................................................................55 7.4 Inspections....................................................................................55 7.5 Taxes..........................................................................................55 7.6 Payment of Obligations.........................................................................56 7.7 Expenses.......................................................................................56 7.8 Maintenance of Existence, Assets, and Business.................................................56 7.9 Insurance......................................................................................57 7.10 Preservation and Protection of Rights..........................................................57 7.11 Environmental Laws.............................................................................57 7.12 INDEMNIFICATION................................................................................57 7.13 REIT Status....................................................................................59 7.14 ERISA Exemptions...............................................................................59 7.15 Listed Company.................................................................................59 7.16 Properties.....................................................................................59 7.17 Quarterly Distributions........................................................................59 7.18 Year 2000 Compliance...........................................................................59 7.19 Repayment of Certain Unsecured Note............................................................60 7.20 Subordination of Indebtedness..................................................................60 7.21 Subsidiary Guaranty............................................................................60
4 7.22 Ownership of Consolidated Affiliates...........................................................60 SECTION 8 NEGATIVE COVENANTS.....................................................................................61 8.1 Payment of Obligations.........................................................................61 8.2 Employee Plans.................................................................................61 8.3 Transactions with Affiliates...................................................................61 8.4 Compliance with Governmental Requirements and Documents........................................61 8.5 Loans, Advances, and Investments...............................................................61 8.6 Dividends and Distributions....................................................................62 8.7 Sale of Assets.................................................................................62 8.8 Mergers and Dissolutions.......................................................................62 8.9 Assignment.....................................................................................62 8.10 Fiscal Year and Accounting Methods.............................................................62 8.11 New Businesses.................................................................................62 8.12 Government Regulations.........................................................................62 8.13 Interest Rate Agreements.......................................................................63 8.14 Indebtedness...................................................................................63 8.15 Book Value.....................................................................................63 8.16 Pledge.........................................................................................63 SECTION 9 FINANCIAL COVENANTS....................................................................................64 9.1 Total Indebtedness to Total Consolidated Value Ratio...........................................64 9.2 Debt Service Ratio.............................................................................64 9.3 Interest Coverage Ratio........................................................................64 9.4 Minimum Tangible Net Worth.....................................................................64 SECTION 10 DEFAULT...............................................................................................64 10.1 Events of Default..............................................................................64 (a) Payment of Obligation.................................................................64 (b) Covenants.............................................................................64 (c) Debtor Relief.........................................................................65 (d) Judgments and Attachments.............................................................65 (e) Government Action.....................................................................65 (f) Misrepresentation.....................................................................66 (g) Default Under Other Agreements........................................................66 (h) Validity and Enforceability of Loan Documents.........................................66 (i) Management Changes....................................................................66 (j) Change in Control.....................................................................66 (k) Plan Assets...........................................................................66 (l) Transfer of Borrowing Base Property...................................................66 (m) Grant of Easement, Etc................................................................67 (n) Abandonment...........................................................................67 (o) Default Under Other Lien..............................................................67 (p) Destruction...........................................................................67 (q) Condemnation..........................................................................67 (r) Liquidation, Etc......................................................................68 10.2 Notice and Cure................................................................................68
5 SECTION 11 RIGHTS AND REMEDIES...................................................................................68 11.1 Remedies Upon Default..........................................................................68 11.2 Waivers. .....................................................................................69 11.3 Performance by Agent...........................................................................69 11.4 Not in Control.................................................................................69 11.5 Course of Dealing..............................................................................69 11.6 Cumulative Rights..............................................................................69 11.7 Application of Proceeds........................................................................70 11.8 Certain Proceedings............................................................................70 SECTION 12 AGENT AND LENDERS.....................................................................................70 12.1 Agent..........................................................................................70 12.2 Expenses.......................................................................................72 12.3 Proportionate Absorption of Losses.............................................................73 12.4 Delegation of Duties; Reliance.................................................................73 12.5 Limitation of Agent's Liability................................................................74 12.6 Default........................................................................................75 12.7 Limitation of Liability........................................................................75 12.8 Relationship of Lenders........................................................................75 12.9 Benefits of Agreement..........................................................................75 12.10 Approval of Lenders............................................................................75 12.11 Collateral Matters.............................................................................76 SECTION 13 MISCELLANEOUS.........................................................................................78 13.1 Headings.......................................................................................78 13.2 Nonbusiness Days; Time.........................................................................78 13.3 Communications.................................................................................78 13.4 Form and Number of Documents...................................................................78 13.5 Survival.......................................................................................78 13.6 Governing Law..................................................................................79 13.7 Invalid Provisions.............................................................................79 13.8 Venue; Service of Process; Jury Trial..........................................................79 13.9 Amendments, Consents, Conflicts, and Waivers...................................................80 13.10 Multiple Counterparts..........................................................................81 13.11 Assignments and Participations.................................................................82 13.12 Discharge Only Upon Payment in Full; Reinstatement in Certain Circumstances....................84 13.13 Initial and Subsequent Lenders.................................................................84 13.14 Entirety.......................................................................................85
6 SCHEDULES AND EXHIBITS Schedule 1 Parties, Addresses, Commitments, and Wiring Information Schedule 4.2(h) Initial Borrowing Base Properties Schedule 4.2(i) Second Properties Schedule 6.2 Jurisdictions of Incorporation, Chief Executive Office, and Jurisdictions Schedule 6.7 Litigation Schedule 6.9 Environmental Matters Schedule 6.14 Affiliates Transactions Schedule 6.22 Consolidated Affiliates, Properties, Permitted Conduit Debt, and Ownership Interests Exhibit A Form of Borrowing Request Exhibit B Form of Compliance Certificate Exhibit C Form of LC Request Exhibit D Form of Note Exhibit E Form of Subsidiary Guaranty Exhibit F-1 Form of General Counsel Opinion Exhibit F-2 Form of Special Counsel Opinion Exhibit G Form of Deed of Trust, Assignment, Security Agreement and Financing Statement Exhibit H Form of Assignment of Leases and Rents Exhibit I Form of Assignment and Acceptance Exhibit J Form of Subordination, Non-Disturbance and Attornment Agreement Exhibit K Form of Borrowing Base Report 7 CREDIT AGREEMENT THIS CREDIT AGREEMENT is dated as of January ____, 1999, among AMERICAN INDUSTRIAL PROPERTIES REIT, a Texas real estate investment trust ("Borrower"), each of the lenders that are a signatory hereto or that becomes a signatory hereto as provided in Section 13.11(a) (individually, together with its successors and permitted assigns, a "Lender" and collectively, the "Lenders"), BANK ONE TEXAS, N.A., a national banking association, as Agent (in such capacity, together with its successors and permitted assigns, "Agent"), and certain Lenders, as Issuing Banks (individually, in such capacity, together with its successors and permitted assigns, "Issuing Bank" and collectively, the "Issuing Banks"). RECITALS: 1. Borrower has requested that Lenders extend to Borrower a revolving credit facility not to exceed the principal amount of $150,000,000. 2. Lenders are willing to extend the requested credit on the terms and subject to the conditions of this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1 DEFINITIONS AND TERMS 1.1 Definitions. Unless otherwise indicated, as used in the Loan Documents: "Adjusted Eurodollar Rate" means, for any Eurodollar Borrowing for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by Agent to be equal to the quotient obtained by dividing (a) the Eurodollar Rate for such Eurodollar Borrowing for such Interest Period by (b) one (1) minus the Reserve Requirement for such Eurodollar Borrowing for such Interest Period. "Adjusted NOI" means, for any Property as of any determination date the product of (i) (a) any cash rentals, proceeds, expense reimbursements or income received from such Property (but excluding security or other deposits, late fees, early lease termination or other penalties, and other charges deemed by Agent to be of a non-recurring nature), based upon existing leases where tenants are in occupancy of their respective space on the determination date, which are paying rent in accordance with the terms of such leases, and which are not in material default, less (b) all cash costs and expenses that Credit Agreement Page 1 8 the owner of the Property incurred as a result of, or in connection with, the development, operation or leasing of such Property (but excluding principal and interest payments during such period, tenant improvements costs, and commission expenses), less (c) to the extent exceeding the amounts for the applicable costs and expenses incurred by the owner of the Property pursuant to Clause (b) above, appropriate accruals for items such as taxes, insurance, or other expenses reasonably determined by the Agent, a management fee of at least five percent (5%) of rents and a reserve of at least $0.50 per square foot per year, in each case for the most recent fiscal quarter ending on or before the date of determination and, (ii) four (4), all as determined in accordance with accounting principles acceptable to Agent, consistently applied. "Affiliate" of a Person means any other individual or entity who directly or indirectly controls, or is controlled by, or is under common control with, that Person. For purposes of this definition "control," "controlled by," and "under common control with" mean possession, directly or indirectly, of power to direct (or cause the direction of) management or policies (whether through ownership of voting Stock, by contract, or otherwise). "Agent" is defined in the preamble. "Agreement" means this Credit Agreement, as modified, amended, supplemented, or restated from time to time. "Applicable Lending Office" means, for each Lender and for each Type of Borrowing, the "Lending Office" of such Lender (or of an Affiliate of such Lender) designated for such Type of Borrowing on Schedule 1 or such other office of such Lender (or an Affiliate of such Lender) as such Lender may from time to time specify to Agent and Borrower by written notice in accordance with the terms hereof as the office by which its Borrowings of such Type are to be made and maintained. "Applicable Margin" means, as of any date of determination, the interest margin over the Base Rate or the Adjusted Eurodollar Rate, as the case may be, based upon the Total Indebtedness to Total Consolidated Value Ratio, as stated in the table below: Credit Agreement Page 2 9
Total Indebtedness to Total Applicable Margin Applicable Margin Level Consolidated Value Ratio for Eurodollar Borrowings for Base Rate Borrowings - ----- ------------------------ ------------------------- ------------------------ 1 Equal to or greater than 60% 2.0% 1.0% 2 Less than 60% but greater 1.75% .75% than or equal to 50% 3 Less than 50% but greater 1.50% .50% than or equal to 40% 4 Less than 40% 1.40% .40%
The Applicable Margin determined above in effect at any time is based upon the Total Indebtedness to Consolidated Value Ratio as determined from the Current Financials and related Compliance Certificate then most-recently received by Agent, effective for any new or Base Rate Borrowing on the third (3rd) Business Day following receipt and for any existing Eurodollar Borrowings at the end of the applicable Interest Period. If Borrower fails to timely furnish to Agent any Financial Statements and related Compliance Certificate as required by this Agreement, then the maximum Applicable Margin applies from the date those Financial Statements and related Compliance Certificate are required to be delivered and remain in effect until Borrower furnishes them to Agent. Agent shall promptly notify each Credit Party and Borrower of any change in the Applicable Margin, provided that the failure to provide such notice shall not affect the effective date of any such change. "Appraised Value" means, with respect to any Property, as of any date, the appraised value of such Property pursuant to the most recent Required Appraisal. "Base Rate" means, for any day, the greater of (a) the sum of the Federal Funds Rate plus one-half of one percent (0.5%), and (b) the annual interest rate most recently announced by Agent as its prime rate (or, if the Person then acting as Agent under this Agreement is not a bank organized under the Governmental Requirements of the United States or any State, then the rate announced by Bank One, Texas, N.A., or any successor thereof, as its prime rate) in effect at its principal office, automatically fluctuating upward and downward with and as specified in each announcement without special notice to Borrower or any other Person (which prime rate may not necessarily represent the lowest or best rate actually charged to a customer). "Base Rate Borrowing" means a Borrowing bearing interest at the Base Rate plus the Applicable Margin. Credit Agreement Page 3 10 "Borrowing" means (without duplication) any amount disbursed by (a) Lenders to or on behalf of any Borrower under the Loan Documents, or (b) any Lender in accordance with, and to satisfy the obligations of any Borrower under, any Loan Document. "Borrowing Base" is defined in Section 4.1(b). "Borrowing Base Properties" means each of the Qualified Properties owned by an Obligor and approved for inclusion in the Borrowing Base in accordance with Section 4, and "Borrowing Base Property" means any one of the Borrowing Base Properties. "Borrowing Base Report" is defined in Section 7.1(c). "Borrowing Date" means (a) for any Borrowing (i) the date for which funds are requested by Borrower, or (ii) the date any Borrowing is Converted hereunder to another Type of Borrowing, and (b) for any LC, the date in which an LC is requested by Borrower. "Borrowing Request" means a request substantially in the form of Exhibit A and signed by a Responsible Officer of Borrower. "Business Day" means (a) for all purposes, any day other than Saturday, Sunday, and any other day that commercial banks are authorized by any Governmental Requirement to be closed in Texas or New York, and (b) for purposes of any Eurodollar Borrowing, a day that satisfies the requirements of Clause (a) and is a day when commercial banks are open for domestic or international business in London. "Capital Lease" means, for any Person, any capital lease or sublease that has been (or under GAAP should be) capitalized on a balance sheet of such Person. "Cash Equivalents" means (a) investments and direct obligations of the United States of America or any agency thereof, or obligations fully guaranteed by the United States of America or any agency thereof, provided that such obligations mature within one (1) year of the date of acquisition thereof, (b) commercial paper rated "A-1" or better according to S&P or "P-1" or better according to Moody's and maturing not more than one hundred and eighty (180) days from the date of acquisition thereof, (c) time deposits with, and certificates of deposit and bankers' acceptances issued by, any Agent or any United States bank having capital surplus and undivided profits aggregating at least $1,000,000,000, and (d) mutual funds whose investments are limited to the foregoing. "Change in Circumstances" is defined in SECTION 7.18. "Change in Control" means the occurrence of any one of the following: (a) any Person or group of related Persons shall have acquired beneficial ownership of more than twenty percent (20%) of the Credit Agreement Page 4 11 outstanding Stock of Borrower (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended, and the applicable rules and regulations thereunder); or (b) during any period of twelve (12) consecutive calendar months, individuals who were members of the Board of Directors of Borrower on the first (1st) day of such period shall cease to constitute at least eighty percent (80%) of the members of the Board of Directors of Borrower. "Closing Date" means the date this Agreement is fully executed and delivered. "Code" means the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. "Collateral" means the real and personal property comprising each Borrowing Base Property securing payment of the Obligation pursuant to the Collateral Documents. "Collateral Documents" means the deeds of trust, mortgages, assignments of rents and leases, security agreements, financing statements, subordination, attornment and non-disturbance agreements from major tenants and from other tenants as Agent may reasonably require, title insurance, opinions of counsel, and other loan and collateral documents creating, evidencing and perfecting Liens in the Collateral in favor of the Agent, for the benefit of the Lenders. The Collateral Documents for each Borrowing Base Property shall include, without limitation: (a) a Mortgage, (b) an Assignment of Leases and Rents substantially in the form of Exhibit H, (c) Uniform Commercial Code Financing Statements in forms acceptable for filing in the appropriate filing offices, (d) an opinion of counsel of Borrower or the Obligor executing the Collateral Documents in substantially the forms of Exhibit F-1 and Exhibit F-2, (e) the requisite Subordination, Attornment and Non-Disturbance Agreements in substantially the form of Exhibit J, and (f) a Borrowing Base Report and Compliance Certificate, in each case modified to the extent necessary to meet the substantive requirements of the laws of the state where the Borrowing Base Property is located. "Commitment" means, for a Lender, the amount (which is subject to reduction and cancellation as provided in this Agreement) stated beside such Lender's name on Schedule 1 as most recently amended under this Agreement, as the same may be terminated pursuant to Section 11.1, and as the same may be increased or decreased from time to time by further assignment pursuant to Section 13.11 and as the same may be increased pursuant to Section 13.13. "Commitment Usage" means, at any time, the sum of (a) the Total Principal Debt plus (b) the LC Exposure. Credit Agreement Page 5 12 "Companies" means, without duplication, (a) Borrower; (b) each of Borrower's Consolidated Affiliates, and (c) all Subsidiary Guarantors, and "Company" means any one of the Companies. "Compliance Certificate" means a certificate substantially in the form of Exhibit B and signed by a Responsible Officer of Borrower. "Consolidated Affiliate" means, in respect of any Person, any other Person in whom such Person holds Stock and whose financial results would be consolidated under GAAP with the financial results of such Person on the consolidated financial statements of such Person. "Constant Annual Percent" means the percent of a principal amount of a loan required to be paid each year in order to amortize such loan at maturity as well as to pay the amount of interest due at each installment, which installments shall be equal monthly installments of principal and interest. "Constituent Documents" means, with respect to any Person, its articles or certificate of incorporation, bylaws, partnership agreements, organizational documents, limited liability company agreements, trust agreement, or such other document as may govern such Person's formation, organization, and management. "Continue", "Continuation", and "Continued" refers to the continuation pursuant to Section 3.10 hereof of a Eurodollar Borrowing from one Interest Period to the next Interest Period. "Contract Rate" means (a) with respect to an Eurodollar Borrowing, the Adjusted Eurodollar Rate plus the Applicable Margin, and (b) with respect to a Base Rate Borrowing, the Base Rate plus the Applicable Margin. "Convert," "Conversion," and "Converted" shall refer to a conversion pursuant to SECTION 3.10 of one Type of Borrowing into another Type of Borrowing. "Credit Parties" means Agent, Lenders, and Issuing Banks, and "Credit Party" means any one of the Credit Parties. "Current Financials" means, at any time, the consolidated Financial Statements of the Companies most recently delivered to Agent under Section 7.1(a) or 7.1(b), as the case may be. "Customary Recourse Exceptions" means, with respect to any Non-Recourse Debt, exclusions from the exculpation provisions with respect to such Non-Recourse Debt for fraud, misapplication of cash, environmental claims, breach of representations or warranties, failure to pay taxes and insurance, and other circumstances customarily excluded by institutional lenders from exculpation provisions and/or Credit Agreement Page 6 13 included in separate indemnification agreements in non-recourse financings of real estate. "DDR" means Developers Diversified Realty Corporation and entities related thereto. "Debt Service" means, for any Person for any period, the sum of (a) all regularly scheduled principal payments (but excluding any balloon payments), (b) all Interest Expense, in each case that is paid or payable during such period in respect of all Liabilities of such Person, and (c) all Distributions in respect of any preferred Stock of such Person that, in each case, is paid or payable during such period. "Debtor Relief Laws" means Title 11 of the United States Code and all other applicable state or federal liquidation, conservatorship, bankruptcy, moratorium, rearrangement, receivership, insolvency, reorganization, suspension of payments, or similar Governmental Requirements affecting creditors' Rights in effect from time to time. "Default" is defined in Section 10. "Defaulting Lender" means, as of any date, any Lender that has defaulted on any of its obligations under this Agreement, which default has not been cured or waived as of such date. "Default Rate" means an annual rate of interest equal from day-to-day to the lesser of (a) the Contract Rate plus four (4%), and (b) the Maximum Rate. "Distribution" means, with respect to any Stock issued by a Person, (a) the retirement, redemption, purchase or other acquisition for value of such Stock by such Person, (b) the declaration or payment of any dividend on or with respect to such Stock by such Person, (c) any loan or advance by that Person to, or other investment by that Person in, the holder of any of such Stock, and (d) any other payment by that Person with respect to such Stock. "EBITDA" means, for any Person or any Borrowing Base Property for any period, the sum of (a) Net Income, plus (b) depreciation and amortization expense, plus (c) Interest Expense, plus (d) income taxes deducted from Net Income in accordance with GAAP, plus (e) extraordinary losses (and any unusual losses arising in or outside the ordinary course of business of such Person not included in extraordinary losses) determined in accordance with GAAP that have been reflected in the determination of Net Income, minus (f) extraordinary gains (and any unusual gains arising in or outside the ordinary course of business of such Person not included in extraordinary gains) determined in accordance with GAAP that have been reflected in the determination of Net Income, minus (g) a reserve of at least $0.50 per square foot per year. Agent may consent to Credit Agreement Page 7 14 Borrower's use of historical operating information for new Borrowing Base Properties until the applicable Obligor has sufficient operating history. For purposes of calculating EBITDA, Net Income shall be adjusted to reflect the straightline accruals of rents. "Eligible Assignee" means: (a) a Lender; (b) an Affiliate of a Lender; and (c) any other Person approved by Agent and, unless a Default exists at the time any assignment is effected in accordance with Section 13.11, Borrower, such approval by Borrower not to be unreasonably withheld or delayed by Borrower and such approval to be deemed given by Borrower if no objection is received by the assigning Lender and Agent from Borrower within five (5) Business Days after notice of such proposed assignment has been provided by Agent or the assigning Lender to Borrower; provided, however, that no Company or any Affiliate of any Company shall qualify as an Eligible Assignee. "Employee Plan" means an employee pension benefit plan covered by Title IV of ERISA and established or maintained by any Company. "Environmental Law" means any and all Governmental Requirements pertaining to health or the environment in effect in any and all jurisdictions in which any Company is conducting, or where any Property of any Company is located and which are applicable to any Company or any Property of any Company, including, without limitation, the Oil Pollution Act of 1990, as amended, ("OPA"), the Clean Air Act, as amended, the Comprehensive Environmental, Response, Compensation, and Liability Act of 1980, as amended, ("CERCLA"), the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act of 1970, as amended, the Resource Conservation and Recovery Act of 1976, as amended, ("RCRA"), the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendments and Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended, and other environmental conservation or protection Governmental Requirements. "Equity Issuance" means the issuance or sale by any Company of any Stock, or any options, warrants, or other rights to subscribe for or otherwise acquire Stock, of such Company. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder. "Eurodollar Rate" means, for any Eurodollar Borrowing for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Dow Jones Markets Page 3750 (or any successor page) as the London interbank offered rate (LIBOR) for deposits in Dollars at approximately 11:00 a.m. (London time) two (2) Business Days prior to the first (1st) day of such Interest Period for a term comparable to such Interest Period. If for Credit Agreement Page 8 15 any reason such rate is not available, then the term "Eurodollar Rate" shall mean, for any Eurodollar Borrowing for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two (2) Business Days prior to the first (1st) day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, then the applicable rate shall be the arithmetic mean of all such rates (rounded upwards, if necessary, to the nearest 1/100 of 1%). "Eurodollar Borrowing" means a Borrowing bearing interest at the sum of the Adjusted Eurodollar Rate plus the Applicable Margin. "Existing Consolidated Affiliates" means those Consolidated Affiliates in existence on the Closing Date. "Existing DDR Indebtedness" is defined in Section 6.21. "Existing Debt" means the Indebtedness of the Existing Excluded Subsidiaries as described on Schedule 2. "Existing Excluded Subsidiaries" means those Consolidated Affiliates identified on Schedule 2. "Federal Funds Rate" means, on any day, the annual rate (rounded upwards, if necessary, to the nearest 0.01%) determined by Agent (which determination is conclusive and binding, absent manifest error) to be equal to the weighted average of the rates on overnight federal funds transactions with member banks of the Federal Reserve System arranged by federal funds brokers as published by the Federal Reserve Bank of New York on the next successive Business Day; provided, however, that (a) if such determination date is not a Business Day, then the Federal Funds Rate for such day shall be the rate for such transactions on the next preceding Business Day as published on the next successive Business Day, or (b) if those rates are not published for any Business Day, then the Federal Funds Rate shall be the average of the quotations at approximately 10:00 a.m. on such Business Day received by Agent from three (3) federal funds brokers of recognized standing selected by Agent in its sole discretion. "Financial Statements" means, for any Person, balance sheets and statements of earnings, shareholders' equity, and cash flow prepared (a) according to GAAP, (b) except as stated in Section 1.4, in comparative form to prior year-end figures or corresponding periods of the preceding fiscal year, as applicable, and (c) on a consolidated basis if that Person had any Consolidated Affiliates during the applicable period. Credit Agreement Page 9 16 "Fixed Constant" means, as of any date, a fixed Constant Annual Percent utilizing (a) a rate of interest equal to eight and three fourths percent (8.75%), and (b) a twenty-five (25) year amortization. "Funding Loss" has the meaning set forth in Section 3.18. "Funds Available for Distribution" means Funds from Operations minus tenant improvements, commission expenses, and capital expenditures. "Funds from Operations" means, for any Person for any period, net income plus depreciation and amortization, all as determined in accordance with GAAP; provided that there shall not be included in such calculation (a) any proceeds of any insurance policy, (b) any gain or loss which is classified as "extraordinary" in accordance with GAAP, (c) any capital gains, or (d) net earnings of Unconsolidated Affiliates to the extent such earnings are not distributable to such Person after the request of such Person. "GAAP" means generally accepted accounting principles of the Accounting Principles Board of the American Institute of Certified Public Accountants and the Financial Accounting Standards Board that are applicable on the date of this Agreement, subject to changes permitted by Section 1.4. "Governmental Authority" means, with respect to any Person, property, or business, any (a) local, state, or federal judicial, executive, or legislative instrumentality, (b) private arbitration board or panel acting through binding arbitration or mediation, or (c) central bank having jurisdiction over such Person, property, or business. "Governmental Requirement" means all applicable statutes, laws, treaties, ordinances, rules, regulations, orders, writs, injunctions, decrees, judgments, opinions, and interpretations of any Governmental Authority. "Hazardous Substance" means any substance (a) the presence of which requires removal, remediation, or investigation under any Environmental Law, or (b) that is defined or classified as a hazardous waste, hazardous material, pollutant, contaminant, or toxic or hazardous substance under any Environmental Law and exists in amounts or uses that violate Environmental Law. "Increasing Lender" is defined in Section 13.13. "Indebtedness" means, for any Person, all Liabilities of such Person, excluding accounts payable and accrued expenses in each case incurred in the ordinary course of business and the payment of which is not past-due (unless payment is being contested in good faith by Credit Agreement Page 10 17 appropriate proceedings diligently conducted and for which reserves in accordance with GAAP or otherwise reasonably acceptable to Agent have been provided). "Individual Borrowing Base" is defined in Section 4.1(a). "Initial Borrowing Base Properties" is defined in Section 4.2(h). "Intangible Assets" means, for any Person, those assets of such Person which are (a) deferred assets, other than prepaid insurance and prepaid taxes, (b) patents, copyrights, trademarks, tradenames, franchises, goodwill, experimental expenses, and other similar assets which would be classified as intangible assets on a balance sheet of such Person, (c) unamortized debt discount and expense, and (d) assets located, and notes and receivables due from obligors domiciled, outside of the United States of America. "Interest Expense" means, for any Person for any period, all of such Person's paid, accrued, or amortized interest expense on such Person's Indebtedness (whether direct, indirect, or contingent, and including interest on all convertible Indebtedness). "Interest Period" has the meaning set forth in Section 3.9. "Interest Rate Agreement" means any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, or other similar agreement or arrangement designed to protect any Person against fluctuations in interest rates. "Issuing Bank" and "Issuing Banks" are defined in the preamble. "Joint Venture Categories" means Persons (including, without limitation, corporations, partnerships, joint ventures, and similar entities) that are not Consolidated Affiliates accounted for on an equity basis (determined in accordance with GAAP). "LC" means a documentary or standby letter of credit issued for the account of any Borrower by Issuing Bank under this Agreement and under an LC Agreement. "LC Agreement" means a letter of credit application and agreement (in form and substance satisfactory to Issuing Bank) executed by Borrower and submitted to Issuing Bank for an LC for the account of Borrower. "LC Exposure" means, without duplication, the sum of (a) the total face amount of all undrawn and uncancelled LCs plus (b) the total unpaid reimbursement obligations of Borrower under drawings under any LC. Credit Agreement Page 11 18 "LC Request" means a request substantially in the form of Exhibit C executed by a Responsible Officer of Borrower. "LC Sub-Facility" means a sub-facility of the Commitments for the issuance of LCs, as described in Section 2.3, under which the LC Exposure (a) may never collectively exceed $20,000,000, and (b) together with the Total Principal Debt may never exceed the Total Commitment. "Lenders" is defined in the preamble. "Liabilities" means (without duplication), for any Person, (a) any indebtedness, liabilities, or obligations required by GAAP to be classified upon such Person's balance sheet as liabilities, (b) any liabilities secured (or for which the holder of the Liability has an existing Right, contingent or otherwise, to be so secured) by any Lien existing on Property owned or acquired by that Person, (c) any obligations that have been (or under GAAP should be) capitalized for financial reporting purposes, including all Capital Leases, (d) any guaranties, endorsements, and other contingent obligations with respect to the principal of the Liabilities or obligations of others, and (e) the greater of (i) such Person's Share of any Liabilities of Unconsolidated Affiliates, and (ii) the amount of any Liabilities of Unconsolidated Affiliates in which the holder of such Liabilities has recourse against such Person for repayment, and "Liability" means any of the Liabilities. "Lien" means any lien, mortgage, security interest, pledge, assignment, charge, title retention agreement, or encumbrance of any kind and any other substantially similar arrangement for a creditor's claim to be satisfied from assets or proceeds prior to the claims of other creditors or the owners. "Litigation" means any action by or before any Governmental Authority. "Loan Documents" means (a) this Agreement, certificates, and reports delivered under this Agreement, and exhibits and schedules to this Agreement, (b) the Notes, (c) the Subsidiary Guaranty, (d) any Interest Rate Agreements with any Lender specifically relating to the Obligation, (d) all other agreements, documents, and instruments executed by Obligors in favor of any of the Credit Parties (or any Agent on behalf of the Credit Parties) ever delivered in connection with or under this Agreement, (f) all LCs and LC Agreements, and (g) all renewals, extensions, and restatements of, and amendments and supplements to, any of the foregoing. "Marketable Securities" means Stock that is (a) regularly traded on a nationally recognized United States public exchange or market acceptable to Agent on which securities, debt instruments, and/or Credit Agreement Page 12 19 mutual funds are regularly traded, and (b) not subject to any federal or state securities laws or other laws which restrict or limit its sale or transfer. "Material Adverse Event" means any circumstance or event that, individually or collectively with other circumstances or events, reasonably is expected to result in any (a) material impairment of the ability of any Obligor to perform any of its respective payment or other obligations under any Loan Document, (b) material impairment of the ability of any Credit Party to enforce (i) any of the obligations of any Obligor under this Agreement or the other Loan Documents, or (ii) any of their respective Rights under the Loan Documents, or (c) material and adverse effect on the financial condition of the Companies, taken as a whole, or any Obligor. "Material Title Defects" means defects, Liens, or encumbrances other than Liens for local real estate taxes and similar local governmental charges, and other encumbrances in the nature of easements, servitudes, restrictions, and rights-of-way that would customarily be deemed unacceptable title exceptions for a prudent lender (i.e., a prudent lender would reasonably determine that such exceptions, individually or in the aggregate, materially impair the value or use of the property in question). "Maturity Date" means January, ____, 2001. "Maximum Amount" and "Maximum Rate" respectively mean, for Agent or a Lender, the maximum non-usurious amount and the maximum non-usurious rate of interest that, under applicable Governmental Requirement, Agent or Lender is permitted to contract for, charge, take, reserve, or receive on the Obligation. "Moody's" means Moody's Investors Service, Inc., or, if Moody's no longer publishes ratings, then another ratings agency acceptable to Agent. "Mortgage" means a Deed of Trust, Assignment, Security Agreement and Financing Statement substantially in the form of Exhibit G, modified to the extent necessary to meet the substantive requirements of the laws of the state where the Borrowing Base Property is located. "Multi-Employer Plan" means a multi-employer plan as defined in Sections 3(37) or 4001(a)(3) of ERISA or Section 414(f) of the Code to which any Borrower or any of its Consolidated Affiliates (or any Person that, for purposes of Title IV of ERISA, is a member of any Borrower's controlled group or is under common control with any Borrower within the meaning of Section 414 of the Code) is making, or has made, or is accruing, or has accrued, an obligation to make contributions. Credit Agreement Page 13 20 "Net Income" means, for any Person or Borrowing Base Property for any period, the net earnings (or loss) after taxes of such Person or Borrowing Base Property determined in accordance with GAAP. "Net Proceeds" means, with respect to any Equity Issuance by any Company, the amount of cash received by such Company in connection with such transaction after deducting therefrom the aggregate, without duplication, of the following amounts to the extent properly attributable to such transaction: (a) reasonable brokerage commissions, attorneys' fees, finder's fees, financial advisory fees, accounting fees, underwriting fees, investment banking fees, and other similar commissions and fees (and expenses and disbursements of any of the foregoing), in each case, to the extent paid by such Company; (b) printing and related expenses and filing, recording, or registration fees or charges or similar fees or charges paid by such Company; and (c) taxes paid or payable by such Company to any Governmental Authority as a result of such transaction. "Non-Recourse Debt" means, for any Person, any Indebtedness of such Person in which the holder of such Indebtedness may not look to such Person personally for repayment, other than to the extent of any security therefor or pursuant to Customary Recourse Exceptions. "Notes" means one of the Revolving Credit Notes substantially in the form of EXHIBIT D, and "NOTE" means any one of the Notes. "NRA" means, for any Property, the net rentable area of such Property. "Obligation" means all present and future indebtedness and obligations, and all renewals, increases, and extensions thereof, or any part thereof, now or hereafter owed to any Credit Party by any Borrower under any Loan Document, together with all interest accruing thereon, fees, costs, and expenses (including all reasonable attorneys' fees and expenses incurred in the enforcement or collection thereof) payable under the Loan Documents or in connection with the protection of Rights under the Loan Documents. "Obligors" means Borrower and Subsidiary Guarantors, and "OBLIGOR" means any one of the Obligors. "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereof, established under ERISA. "Permitted Conduit Debt" means Indebtedness of Borrower or a Consolidated Affiliate (a) that is non-recourse, (b) that is secured by a single Property that is not a Borrowing Base Property and that is owned by Borrower or such Consolidated Affiliate, respectively, which is the owner of such Property, (c) that has an original term of not less than five (5) years, and (d) the original principal amount of Credit Agreement Page 14 21 which does not exceed seventy five percent (75%) of the book value of such Property or other similar Indebtedness approved by Agent as Permitted Conduit Debt. "Permitted Distributions" means: (a) for Borrower in any fiscal quarter of Borrower, the greater of (i) the lesser of (A) an amount not to exceed ninety percent (90%) of Borrower's Funds from Operations for the immediately preceding fiscal quarter, and (B) an amount not to exceed ninety-five percent (95%) of the Funds Available for Distribution for the immediately preceding fiscal quarter, and (ii) the amount of Distributions required to be paid during such fiscal quarter in order for Borrower to qualify as a REIT; and (b) for the Consolidated Affiliates in any fiscal quarter of the Partnership, the amount of Distributions required to be paid during such fiscal quarter in order for Borrower to qualify as a REIT. "Permitted Liens" means: (a) Liens, if any, granted to Agent, for the ratable benefit of the Credit Parties, to secure the Obligation; (b) pledges or deposits made to secure payment of worker's compensation (or to participate in any fund in connection with worker's compensation insurance), unemployment insurance, pensions, or social security programs; (c) encumbrances consisting of zoning restrictions, easements, or other restrictions on the use of real Property, provided that such items do not materially impair the use of such Property for the purposes intended and none of which is violated in any material respect by existing or proposed structures or land use; (d) Liens imposed by mandatory provisions of any Governmental Requirement such as for materialmen's, mechanic's, warehousemen's, and other like Liens arising in the ordinary course of business, securing payment of any Liability whose payment is not yet due or that is being contested in good faith by appropriate proceedings diligently conducted, and for which reserves in accordance with GAAP or other security (and otherwise reasonably acceptable to Agent) have been provided; (e) Liens for taxes, assessments, and governmental charges or assessments that are not yet due and payable or that are being contested in good faith by appropriate proceedings diligently conducted, and for which reserves in accordance with GAAP or other security (and otherwise reasonably acceptable to Agent) have been provided; and (f) Liens securing assessments or charges payable to a Property owner association or similar entity, which assessments are not yet due Credit Agreement Page 15 22 and payable or that are being contested in good faith by appropriate proceedings diligently conducted, and for which reserves in accordance with GAAP or other security (and otherwise reasonably acceptable to Agent) have been provided. "Person" means any individual, trust, corporation, partnership, limited liability company, joint venture, unincorporated organization, or other similar entity, or any Governmental Authority. "Post-Foreclosure Plan" is defined in Section 12.11(f). "Potential Default" means the occurrence of any event or the existence of any circumstance that could, upon notice or lapse of time or both, become a Default. "Principal Debt" means, for a Lender and at any time, the unpaid principal balance of all outstanding Borrowings from such Lender hereunder as of such date. "Property" means improved or unimproved real estate located in the United States. "Property Information" is defined in Section 4.2(a). "Pro Rata" and "Pro Rata Share" means, when determined for any Lender, the proportion (stated as a percentage) that (a) such Lender's Commitment, or, if the Total Commitments shall have been terminated, then of the sum of (without duplication) (i) the Principal Debt of such Lender's Note plus (ii) the LC Exposure of such Lender, bears to (b) the Total Commitment, or, if the Total Commitments have been terminated, then of the sum of (without duplication) (i) the Total Principal Debt of the Notes plus (ii) the LC Exposure of all Lenders. "Prudential Debt" means that certain any and all Indebtedness of Borrower to Prudential Securities Credit Corporation or a related entity, other than Permitted Conduit Debt. "Qualified Property" has the meaning set forth in Section 4.2(b). "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "REIT" means a "real estate investment trust" for purposes of the Code. "Removal Notice" is defined in Section 4.5(a). "Representatives" means representatives, officers, directors, employees, attorneys, and agents. Credit Agreement Page 16 23 "Required Appraisal" means an appraisal commissioned by and addressed to Agent (acceptable to Agent as to form, substance and appraisal date), prepared by a professional appraiser acceptable to Agent and having the minimum qualifications required under all applicable regulations governing the Credit Parties. "Required Lenders" means, as of any date, any combination of Lenders (other than Defaulting Lenders) who collectively hold sixty-six and two-thirds percent (66-2/3%) or more of the Total Commitments (excluding the Commitments of Defaulting Lenders), or if the Total Commitments have been terminated, then of the sum of (without duplication) (a) the Total Principal Debt of the Notes (other than of any Defaulting Lenders) plus (b) the LC Exposure of all Lenders (other than of any Defaulting Lenders). "Reserve Requirement" means, with respect to any Eurodollar Borrowing for the relevant Interest Period, the actual aggregate reserve requirements (including all basic, supplemental, emergency, special, marginal, and other reserves required by applicable Governmental Requirement) applicable to a member bank of the Federal Reserve System for eurocurrency fundings or liabilities. "Responsible Officer" means, for any Person, any chairman, president, chief executive officer, chief financial officer, controller, secretary, executive vice president, or senior vice president of such Person. "Rights" means rights, remedies, powers, privileges, and benefits. "Second Properties" is defined in Section 4.2(i). "Second Borrowing Base Properties" is defined in Section 4.2(i). "Share" means, for any Person, such Person's share of the assets, liabilities, revenues, income, losses, or expenses of an Unconsolidated Affiliate based upon such Person's percentage ownership of the Stock of such Unconsolidated Affiliate. "Solvent" means, as to a Person, that (a) the aggregate fair market value of its assets exceeds its Liabilities, and (b) such Person is able to pay and is paying its Liabilities as they mature. "S&P" means Standard & Poor's Ratings Group, a division of McGraw Hill, Inc., a New York corporation, or if S&P no longer publishes ratings, then another ratings agency acceptable to Agent. "Stock" means all shares, options, warrants, general or limited partnership interests, membership interests, or other ownership interests (regardless of how designated) of or in a corporation, Credit Agreement Page 17 24 partnership, limited liability company, trust, or other entity, whether voting or nonvoting, including common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended). "Subsequent Lender" is defined in Section 13.13. "Subsidiary Guarantors" means all existing and future Consolidated Affiliates that are not Existing Excluded Subsidiaries, and "Subsidiary Guarantor" means any one of the Subsidiary Guarantors. "Subsidiary Guaranty" means the Unconditional Guaranty of Payment dated of even date herewith, executed by each of the Subsidiary Guarantors in favor of the Credit Parties, and substantially in the form of Exhibit E. "Systems" is defined in Section 6.20. "Tangible Net Worth" means, as of any date, (a) Total Assets, minus (b) Intangible Assets, minus (c) all Liabilities of the Companies, on a consolidated basis, as of such date. "Taxes" means, for any Person, taxes, assessments, or other governmental charges or levies imposed upon it, its income, or any of its properties, franchises, or assets. "Termination Date" means the earlier of (a) the Maturity Date, and (b) the effective date that Lenders' commitments to lend hereunder are otherwise canceled or terminated in accordance with this Agreement. "Total Assets" means, for the Companies, on a consolidated basis, as of any date, all assets of such Person determined in accordance with GAAP. "Total Commitment" means, at any time, the sum of the Commitments of all Lenders, but in no event to exceed $150,000,000. "Total Consolidated Value" means, as of any date, (a) the aggregate amount of Adjusted NOI with respect to all Properties owned by the Companies as of such date, divided by (b) 9.5%. If any Company that owns any Property has any minority interests, then Total Consolidated Value calculated in the same manner shall be adjusted proportionally to reflect the minority interests' share of such Property. "Total Indebtedness to Total Consolidated Value Ratio" means, as of any date, the ratio of (a) all Indebtedness of the Companies, on a Credit Agreement Page 18 25 consolidated basis, as of such date, to (b) the Total Consolidated Value as of such date. "Total Principal Debt" means, at any time, the sum of the Principal Debt of all Lenders. "Type" means any type of Borrowing determined with respect to the applicable interest option. "Unconsolidated Affiliate" means, in respect of any Person, any other Person in whom such Person holds Stock and whose financial results would not be consolidated under GAAP with the financial results of such Person on the consolidated financial statements of such Person. "Unused Commitment" means, as of any date, (a) the Total Commitment minus (b) the Commitment Usage. "Variable Constant" means, as of any date, a variable Constant Annual Percent utilizing (i) a rate of interest equal to one and one-half percent (1.5%) in excess of the most recent rate published on such date in the United States Federal Reserve Statistical Release (H.15) for 10-year Treasury Constant Maturities, and (ii) a twenty-five (25) year amortization. "Y2K Notice" is defined in Section 7.18. "Year 2000 Compliant" is defined in Section 6.20. 1.2 Time References. Unless otherwise specified in the Loan Documents (a) time references are to time in Dallas, Texas, and (b) in calculating a period from one date to another, the word "from" means "from and including" and the word "to" or "until" means "to but excluding." 1.3 Other References. Unless otherwise specified in the Loan Documents (a) where appropriate, the singular includes the plural and vice versa, and words of any gender include each other gender, (b) headings and caption references may not be construed in interpreting provisions, (c) monetary references are to currency of the United States of America, (d) section, paragraph, annex, schedule, exhibit, and similar references are to the particular Loan Document in which they are used, (e) references to "telecopy," "facsimile," "fax," or similar terms are to facsimile or telecopy transmissions, (f) references to "including" mean including without limiting the generality of any description preceding that word, (g) the rule of construction that references to general items that follow references to specific items are limited to the same type or character of those specific items is not applicable in the Loan Documents, (h) references to any Person include that Person's heirs, personal representatives, Credit Agreement Page 19 26 successors, trustees, receivers, and permitted assigns, (i) references to any Governmental Requirement include every amendment or supplement to it, rule and regulation adopted under it, and successor or replacement for it, and (j) references to any Loan Document or other document include every renewal and extension of it, amendment and supplement to it, and replacement or substitution for it. 1.4 Accounting Principles. Under the Loan Documents, unless otherwise stated, (a) GAAP determines all accounting and financial terms and compliance with financial covenants, (b) GAAP in effect on the date of this Agreement determines compliance with financial covenants, (c) otherwise, all accounting principles applied in a current period must be comparable (except for changes in accounting principles adequately disclosed and in conformity with GAAP) in all material respects to those applied during the preceding comparable period, and (d) all accounting and financial terms and compliance with financial covenants must be for the Companies, on a consolidated basis, as applicable. If there is a change in GAAP after the date hereof, then each Compliance Certificate shall include calculations setting forth the adjustments from the relevant financial items as shown in the Current Financials, based on the then-current GAAP, to the corresponding financial items based on GAAP as used in the Current Financials delivered to Agent and Lenders on or prior to the date hereof, so as to demonstrate how such financial covenant compliance was derived from the Current Financials. SECTION 2 COMMITMENT 2.1 Revolving Facility. Subject to the provisions in the Loan Documents, each Lender severally and not jointly agrees to lend to Borrower such Lender's Pro Rata Share of one or more Borrowings hereunder which Borrower may borrow, repay, and reborrow under this Agreement, subject to the following conditions: (a) each Borrowing requested by Borrower hereunder must occur on a Business Day and no later than the Business Day immediately preceding the Termination Date; (b) each Borrowing requested by Borrower must be in an amount not less than $1,000,000 or a greater multiple of $100,000; (c) the Commitment Usage may not exceed the lesser of (i) the Borrowing Base, and (ii) the Total Commitment; (d) the sum of (i) each Lender's Principal Debt plus (ii) such Lender's Pro Rata Share of the LC Exposure may not exceed such Lender's Commitment; and Credit Agreement Page 20 27 (e) during the period between the Closing Date and the date on which the last of the Second Borrowing Base Properties is either admitted into the Borrowing Base or rejected by Agent or Lenders hereunder, all Borrowings may not exceed the aggregate amount of $13,000,000. 2.2 Borrowing Procedure. The following procedures apply to Borrowings: (a) Borrower may request a Borrowing by submitting to Agent a Borrowing Request; provided, however, that Borrower may not request more than three (3) Borrowings (other than a Continuation or Conversion of an existing Borrowing) in any calendar month. The Borrowing Request must be received by Agent no later than 11:00 a.m. on (i) the third (3rd) Business Day preceding the Borrowing Date for any Eurodollar Borrowing, or (ii) the Business Day preceding the Borrowing Date for any Base Rate Borrowing. Agent shall promptly notify each Lender of its receipt of any Borrowing Request and its contents. A Borrowing Request is irrevocable and binding on Borrower. (b) By 11:00 a.m. on the applicable Borrowing Date, each Lender shall remit its Pro Rata Share of each requested Borrowing by wire transfer to Agent pursuant to Agent's wire transfer instructions on Schedule 1 (or as otherwise directed by Agent) in funds that are available for immediate use by Agent. Subject to receipt of such funds, Agent shall make such funds available to Borrower in Dallas, Texas at 2:00 p.m. on such Borrowing Date (unless it has actual knowledge that any applicable condition precedent has not been satisfied by Borrower). (c) Absent contrary written notice from a Lender, Agent may assume that each Lender has made its Pro Rata Share of the requested Borrowing available to Agent on the applicable Borrowing Date, and Agent may, in reliance upon such assumption (but is not required to), make available to Borrower a corresponding amount. If a Lender fails to make its Pro Rata Share of any requested Borrowing available to Agent on the applicable Borrowing Date, then Agent may recover the applicable amount on demand (i) from such Lender, together with interest at the Federal Funds Rate for the period commencing on the date the amount was made available to Borrower by Agent and ending on (but excluding) the date Agent recovers the amount from such Lender, or (ii) if such Lender fails to pay its amount upon Agent's demand, then from Borrower, together with interest at an annual interest rate equal to the rate applicable to the requested Borrowing for the period commencing on the Borrowing Date and ending on (but excluding) the date Agent recovers the amount from Borrower. No Lender is responsible for the failure of any other Lender to make its Pro Rata Share of any Borrowing. Credit Agreement Page 21 28 2.3 Letters of Credit. (a) Conditions. Agent shall be an Issuing Bank, and upon the written approval of Agent and Borrower, a Lender may be an Issuing Bank. Subject to the terms and conditions of this Agreement, each Issuing Bank agrees, if requested by Borrower, to issue LCs upon Borrower's making or delivering an LC Request and delivering an LC Agreement, both of which must be received by Agent and such Issuing Bank no later than the third (3rd) Business Day before the Business Day on which the requested LC is to be issued, provided that (i) no LC may expire after a date that is one (1) month before the Maturity Date, (ii) the LC Exposure may not exceed the limitations in the definition of LC Sub-facility, (iii) each LC must expire no later than one (1) year following its issuance, (iv) the limitations in Sections 2.1(c) and (d) may not be exceeded, and (v) each LC must be in the minimum amount of $50,000. (b) Participation. Immediately upon an Issuing Bank's issuance of any LC, such Issuing Bank shall be deemed to have sold and transferred to each other Lender, and each other Lender shall be deemed irrevocably and unconditionally to have purchased and received from such Issuing Bank, without recourse or warranty, an undivided interest and participation to the extent of such Lender's Pro Rata Share in the LC and all applicable Rights of such Issuing Bank in the LC -- other than Rights to receive certain fees provided in Section 3.20(d) to be for the Issuing Bank's sole account. (c) Reimbursement Obligation. To induce the Issuing Banks to issue and maintain LCs, and to induce Lenders to participate in issued LCs, Borrower agrees to pay or reimburse each Issuing Bank: (i) on the second (2nd) Business Day after such Issuing Bank notifies Agent and Borrower that such Issuing Bank has made payment under a LC, the amount paid by such Issuing Bank; and (ii) within five (5) Business Days after demand, the amount of any additional fees such Issuing Bank customarily charges for amending LCs Agreements, for honoring drafts under LCs, and for taking similar action in connection with letters of credit. If Borrower has not reimbursed any Issuing Bank for any drafts paid by the date on which reimbursement is required under this Section, then Agent is irrevocably authorized to fund Borrower's reimbursement obligations as a Base Rate Borrowing if the conditions in this Agreement for such a Borrowing (other than any notice requirements or minimum funding amounts) have, to Agent's knowledge, been satisfied. The proceeds of that Borrowing shall be advanced directly to the applicable Issuing Bank to pay Borrower's unpaid reimbursement obligations. If funds cannot be advanced as a result of Borrower's failure to satisfy any condition precedent set forth in Section 5, then Borrower's reimbursement obligation shall constitute a demand obligation. Borrower's obligations under this Section are absolute Credit Agreement Page 22 29 and unconditional under any and all circumstances and irrespective of any setoff, counterclaim, or defense to payment that any Borrower may have at any time against any Issuing Bank or any other Person. From the date that an Issuing Bank pays a draft under a LC until Borrower either reimburses or is obligated to reimburse such Issuing Bank for that draft under this Section, the amount of that draft bears interest payable to such Issuing Bank at the rate then applicable to Base Rate Borrowings. From the due date of the respective amounts due under this Section, to the date paid (including any payment from proceeds of a Base Rate Borrowing), unpaid reimbursement amounts accrue interest that is payable on demand at the Default Rate. (d) General. Issuing Banks shall promptly notify Agent and Borrower of the date and amount of any draft presented for honor under any LC (but failure to give notice will not affect Borrower's obligations under this Agreement). The applicable Issuing Bank shall pay the requested amount upon presentment of a draft unless presentment on its face does not comply with the terms of the applicable LC. When making payment, such Issuing Bank may disregard (i) any default or potential default that exists under any other agreement, and (ii) obligations under any other agreement that have or have not been performed by the beneficiary or any other Person (and such Issuing Bank is not liable for any of those obligations). Borrower's reimbursement obligations to Issuing Banks and Lenders, and each Lender's obligations to Issuing Banks, under this Section are absolute and unconditional irrespective of, and Issuing Banks are not responsible for, (i) the validity, enforceability, sufficiency, accuracy, or genuineness of documents or endorsements (even if they are in any respect invalid, unenforceable, insufficient, inaccurate, fraudulent, or forged), (ii) any dispute by any Company with or any Company's claims, setoffs, defenses, counterclaims, or other Rights against any Credit Party or any other Person, or (iii) the occurrence of any Potential Default or Default. However, nothing in this Agreement constitutes a waiver of Borrower's Rights to assert any claim or defense based upon the gross negligence or willful misconduct of any Credit Party. Issuing Banks shall promptly pay to Agent for Agent to promptly distribute reimbursement payments received from any Borrower to all Lenders according to their Pro Rata Share. (e) Obligation of Lenders. If Borrower fails to reimburse any Issuing Bank as provided in Section 2.3(c) by the date on which reimbursement is due under that Section, and funds cannot be advanced under the Section 2.1 to satisfy the reimbursement obligations, then Agent shall promptly notify each Lender of Borrower's failure, of the date and amount paid, and of each Lender's Pro Rata Share of the unreimbursed amount. Each Lender shall promptly and unconditionally make available to Agent, for the account of the applicable Issuing Bank, in immediately available funds its Pro Rata Share of the unpaid reimbursement obligation, subject to the limitations of Section 2.1(d). Funds are due and payable to Agent before the close of Credit Agreement Page 23 30 business on the Business Day when Agent gives notice to each Lender of Borrower's reimbursement failure (if notice is given before 1:00 p.m.) or on the next succeeding Business Day (if notice is given after 1:00 p.m.). All amounts payable by any Lender accrue interest after the due date at the Federal Funds Rate from the day the applicable draft or draw is paid by Agent to (but not including) the date the amount is paid by such Lender to Agent. Upon receipt of any such funds, Agent shall make them available to the applicable Issuing Bank. (f) Duties of Issuing Bank. Each Credit Party and each Borrower agree that, in paying any draft under any LC, no Issuing Bank has any responsibility to obtain any document (other than any documents expressly required by the respective LC) or to ascertain or inquire as to any document's validity, enforceability, sufficiency, accuracy, or genuineness or the authority of any Person delivering it. Neither such Issuing Bank nor its Representatives will be liable to any Credit Party or any Company for any LC's use or for any beneficiary's acts or omissions (including, without limitation, any acts or omissions constituting ordinary negligence). Any action, inaction, error, delay, or omission taken or suffered by an Issuing Bank or any of its Representatives in connection with any LC, applicable drafts or documents, or the transmission, dispatch, or delivery of any related message or advice, if in good faith and in conformity with applicable Governmental Requirements and in accordance with the standards of care specified in the Uniform Customs and Practices for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 (as amended or modified), is binding upon the Companies and the Credit Parties and, except as provided in Section 2.3(e), does not place such Issuing Bank or any of its Representatives under any resulting liability to any Company or any Credit Party. No Issuing Bank shall be liable to any Company or any Credit Party for any action taken or omitted, in the absence of fraud, gross negligence or willful misconduct, by such Issuing Bank or its Representative in connection with any LC. (g) Cash Collateral. On the Termination Date and if requested by Required Lenders while a Default exists, Borrower shall provide Agent, for the benefit of the Issuing Banks and Lenders, cash collateral in an amount to equal the then-existing LC Exposure. (h) INDEMNIFICATION. BORROWER SHALL PROTECT, INDEMNIFY, PAY, AND SAVE EACH CREDIT PARTY, AND THEIR RESPECTIVE REPRESENTATIVES, HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS, LIABILITIES, DAMAGES, COSTS, CHARGES, AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES) WHICH ANY OF THEM MAY INCUR OR BE SUBJECT TO AS A CONSEQUENCE OF THE ISSUANCE OF ANY LC, ANY DISPUTE ABOUT IT, OR THE FAILURE OF ISSUING BANK TO HONOR A DRAW REQUEST UNDER ANY LC AS A RESULT OF ANY ACT OR OMISSION (WHETHER RIGHT OR WRONG) OF ANY PRESENT OR FUTURE GOVERNMENTAL AUTHORITY. ALTHOUGH EACH CREDIT PARTY, AND THEIR RESPECTIVE REPRESENTATIVES, HAVE THE RIGHT TO BE INDEMNIFIED UNDER THIS AGREEMENT FOR ITS OR THEIR OWN ORDINARY NEGLIGENCE, NO PERSON Credit Agreement Page 24 31 IS ENTITLED TO INDEMNITY UNDER THE FOREGOING FOR ITS OWN (OR ITS REPRESENTATIVES') FRAUD, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. (i) LC Agreements. Although referenced in any LC, terms of any particular agreement or other obligation to the beneficiary are not incorporated into this Agreement in any manner. The fees and other amounts payable with respect to each LC are as provided in this Agreement, drafts under each LC are part of the Obligation, only the events specified in this Agreement as a Default shall constitute a default under any LC or LC Agreement, and the terms of this Agreement control any conflict between the terms of this Agreement and any LC Agreement. SECTION 3 TERMS OF PAYMENT 3.1 Notes and Payments. (a) The Principal Debt shall be evidenced by the Notes, which Notes shall be payable by Borrower to Lenders in the aggregate stated principal amount of the Total Commitment, or so much thereof as shall be advanced prior to maturity. (b) Borrower must make each payment and prepayment on the Obligation, without offset, counterclaim, or deduction, to Agent's principal office in Dallas, Texas, in Dollars that will be available for immediate use by Agent by 2:00 p.m. on the day due. Payments received after such time shall be deemed received on the next Business Day. Agent shall pay to each Lender any payment to which such Lender is entitled on the same day Agent receives the funds from Borrower if Agent receives the payment or prepayment before 2:00 p.m., and otherwise before 2:00 p.m. on the following Business Day. If and to the extent that Agent does not make payments to any Lender when due, then Agent shall be obligated to pay to such Lender such unpaid amounts together with interest at the Federal Funds Rate from the due date until (but not including) the payment date. 3.2 Interest and Principal Payments. (a) Interest Payments. Subject to Section 13.2, accrued interest on each Borrowing is due and payable on the first day of each calendar month during the term of this Agreement, commencing on February 1, 1999, and on the Termination Date; provided, however, that interest with respect to any Base Rate Borrowing shall also be due and payable on the Conversion date of any such Borrowing to a Eurodollar Borrowing. (b) Principal Payments. The Total Principal Debt is due and payable on the Termination Date. Credit Agreement Page 25 32 (c) Voluntary Prepayment. Borrower may voluntarily repay or prepay all or any part of the Total Principal Debt at any time without premium or penalty, subject to the following conditions: (i) Agent must receive Borrower's written payment notice by (A) 11:00 a.m. on the Business Day preceding the date of payment of a Eurodollar Borrowing, and (B) 2:00 p.m. on the Business Day preceding the date of payment of a Base Rate Borrowing, which shall specify the payment date and the Type and amount of the Borrowing(s) to be paid, and which shall constitute an irrevocable and binding obligation of Borrower to make a repayment or prepayment on the designated date; (ii) each partial repayment or prepayment must be in a minimum amount of at least $500,000 and be an integral multiple of $100,000, or, if such repayment or prepayment is less than $500,000, then equal to the Total Principal Debt plus all accrued interest thereon; and (iii) Borrower shall pay any related Funding Loss upon demand. (d) Mandatory Prepayment. Notwithstanding anything contained herein or in the Loan Documents to the contrary, if at any time the outstanding Total Principal Debt exceeds the Borrowing Base, then Borrower shall immediately prepay in immediately available funds such excess balance, together with any related Funding Loss. 3.3 Interest Options. Except as specifically otherwise provided, Borrowings shall bear interest at an annual rate equal to the lesser of (a) the Base Rate plus the Applicable Margin, or the Adjusted Eurodollar Rate plus the Applicable Margin (in each case as designated or deemed designated by Borrower and, in the case of Eurodollar Borrowings, for the Interest Period designated by Borrower), and (b) the Maximum Rate. Each change in the Base Rate and Maximum Rate is effective, without notice to Borrower or any other Person, upon the effective date of change. 3.4 Quotation of Rates. A Representative of Borrower may call Agent before delivering a Borrowing Request to receive an indication of the interest rates then in effect, but the indicated rates do not bind Agent or Lenders or affect the interest rate that is actually in effect when Borrower delivers its Borrowing Request or on the Borrowing Date. 3.5 Default Rate. If permitted by applicable law, at the election of Required Lenders and notice from Agent to Borrower, all past-due Principal Debt and past-due interest accruing on any of the foregoing, bears interest from the date due (stated or by Credit Agreement Page 26 33 acceleration) at the Default Rate until paid, regardless of whether payment is made before or after entry of a judgment. 3.6 Interest Recapture. If the designated interest rate applicable to any Borrowing exceeds the Maximum Rate, then the interest rate on that Borrowing is limited to the Maximum Rate, provided that any subsequent reductions in the designated rate shall not reduce the interest rate thereon below the Maximum Rate until the total amount of accrued interest equals the amount of interest that would have accrued if that designated rate had always been in effect. If at maturity (stated or by acceleration), or at final payment of the Notes, the total interest paid or accrued is less than the interest that would have accrued if the designated rates had always been in effect, then, at that time and to the extent permitted by applicable law, Borrower shall pay an amount equal to the difference between (a) the lesser of the amount of interest that would have accrued if the designated rates had always been in effect and the amount of interest that would have accrued if the Maximum Rate had always been in effect, and (b) the amount of interest actually paid or accrued on the Notes. 3.7 Interest Calculations. (a) Interest shall be calculated on the basis of actual number of days elapsed (including the first day but excluding the last day) but computed as if each calendar year consisted of 360 days and 30-day months for all Borrowings (unless the calculation would result in an interest rate greater than the Maximum Rate, in which event interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be). All interest rate determinations and calculations by Agent are conclusive and binding absent manifest error. (b) The provisions of this Agreement relating to calculation of the Base Rate and the Adjusted Eurodollar Rate are included only for the purpose of determining the rate of interest or other amounts to be paid under this Agreement that are based upon those rates. Each Lender may fund and maintain its funding of all or any part of each Borrowing as it selects. 3.8 Maximum Rate. Regardless of any provision contained in any Loan Document or any document related thereto, it is the intent of the parties to this Agreement that no Credit Party may contract for, charge, take, reserve, receive or apply, as interest on all or any part of the Obligation any amount in excess of the Maximum Rate or the Maximum Amount or receive any unearned interest in violation of any applicable law, and, if any Credit Party ever does so, then any excess shall be treated as a partial repayment or prepayment of principal and any remaining excess shall be refunded to Borrower. In determining if the interest paid or payable exceeds the Maximum Rate, Borrower and the Credit Parties shall, to the maximum extent permitted under Credit Agreement Page 27 34 applicable law, (a) treat all Borrowings as but a single extension of credit (and the Credit Parties and Borrower agree that is the case and that provision in this Agreement for multiple Borrowings is for convenience only), (b) characterize any non-principal payment as an expense, fee, or premium rather than as interest, (c) exclude voluntary repayments or prepayments and their effects, and (d) amortize, prorate, allocate, and spread the total amount of interest throughout the entire contemplated term of the Obligation. If, however, the Obligation is paid in full before the end of its full contemplated term, and if the interest received for its actual period of existence exceeds the Maximum Amount, then the Credit Parties shall refund any excess (and the Credit Parties may not, to the extent permitted by applicable law, be subject to any penalties provided by any Governmental Requirements for contracting for, charging, taking, reserving or receiving interest in excess of the Maximum Amount). 3.9 Interest Periods. When Borrower requests any Eurodollar Borrowing, Borrower may elect the applicable interest period (each an "Interest Period"), which may be, at Borrower's option, one (1) month, two (2) months, three (3) months, or six (6) months, subject to the following conditions: (a) the initial Interest Period for a Eurodollar Borrowing commences on the applicable Borrowing Date or Conversion date, and each subsequent Interest Period applicable to any Borrowing commences on the day when the next preceding applicable Interest Period expires; (b) if any Interest Period for a Eurodollar Borrowing begins on a day for which there exists no numerically corresponding Business Day in the calendar month at the end of the Interest Period ("Ending Calendar Month"), then the Interest Period ends on the next succeeding Business Day of the Ending Calendar Month, unless there is no succeeding Business Day in the Ending Calendar Month in which case the Interest Period ends on the next preceding Business Day of the Ending Calendar Month; (c) no Interest Period for any portion of Total Principal Debt may extend beyond the scheduled repayment date for that portion of Principal Debt; and (d) there may not be in effect at any one time more than five (5) Interest Periods. 3.10 Continuations; Conversions. Borrower may (a) on the last day of the applicable Interest Period Convert all or part of a Eurodollar Borrowing to a Base Rate Borrowing, (b) at any time Convert all or part of a Base Rate Borrowing to a Eurodollar Borrowing, and (c) on the last day of an Interest Period, Continue a Eurodollar Borrowing for a new Interest Period. Any such Conversion or Continuation is subject to the dollar limits and denominations of Section 2.1 and may be accomplished by delivering a Borrowing Request to Agent no later than 11:00 a.m. (i) on the third (3rd) Business Day before (A) the Conversion date for Conversion to a Eurodollar Borrowing, and (B) the last day of the Interest Period, for the Continuation to a new Interest Period, and (ii) one (1) Business Day before the last day of the Interest Period for Conversion to a Base Rate Borrowing. Absent a Borrowing Notice, a Eurodollar Borrowing Credit Agreement Page 28 35 shall be Continued as a Eurodollar Borrowing having a one (1) month Interest Period (so long as the last day of such Interest Period does not extend beyond the Maturity Date in which case such Eurodollar Borrowing shall be Converted to a Base Rate Borrowing) when the applicable Interest Period expires. 3.11 Order of Application. (a) No Default. If no Default exists, then except as otherwise specifically provided in the Loan Documents, any payment shall be applied to the Obligation in the order and manner as Borrower directs. (b) Default. If a Default exists, any payment (including proceeds from the exercise of any Rights) shall be applied in the following order: (i) to all fees and expenses for which any Credit Party has not been paid or reimbursed in accordance with the Loan Documents (and if such payment is less than all unpaid or unreimbursed fees and expenses, then the payment shall be paid against unpaid and unreimbursed fees and expenses in the order of incurrence or due date); (ii) to accrued interest on the Principal Debt; (iii) to the Total Principal Debt and the remaining Obligation in the order and manner as the Required Lenders deem appropriate; and (iv) as a deposit with Agent, for the benefit of the Credit Parties, as security for and payment of any LC Exposure. (c) Pro Rata. Each payment or prepayment shall be distributed to each Lender in accordance with its Pro Rata Share of such payment or prepayment. 3.12 Right of Setoff; Adjustments. (a) Setoff. Upon the occurrence and during the continuance of any Default, each Lender (and each of its Affiliates) is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender (or any of its Affiliates) to or for the credit or the account of any Borrower against any and all of the obligations of any Borrower now or hereafter existing under this Agreement and the Note held by such Lender, irrespective of whether such Lender shall have made any demand under this Agreement or such Note and although such obligations may be unmatured. Each Lender agrees promptly to notify Borrower after any such setoff and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of such setoff and application. The Rights of each Lender under this Section are in addition to other Rights (including, without limitation, other Rights of setoff) that such Lender may have. Credit Agreement Page 29 36 (b) Adjustments. If any Lender (a "Benefitted Lender") shall at any time receive any payment of all or part of the Principal Debt owing to it, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by setoff, or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender's Principal Debt owing to it, or interest thereon, such Benefitted Lender shall purchase for cash from the other Lenders a participating interest in such portion of each such other Lender's Principal Debt owing to it, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefitted Lender to share the excess payment or benefits of such collateral or proceeds ratably with all Lenders; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefitted Lender, then such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. Borrower agrees that any Lender so purchasing a participation from a Lender pursuant to this Section may, to the fullest extent permitted by law, exercise all of its Rights of payment (including the Right of setoff) with respect to such participation as fully as if such Person were the direct creditor of Borrower in the amount of such participation. 3.13 Booking Borrowings. To the extent permitted by applicable law, any Lender may make, carry, or transfer its Borrowings at, to, or for the account of any of its branch offices or the office of any of its Affiliates. However, no Affiliate is entitled to receive any greater payment under Section 3.14 than the transferor Lender would have been entitled to receive with respect to those Borrowings, and a transfer may not be made if, as a direct result of it, Section 3.14 or 3.15 would apply to any of the Obligation. If any of the conditions of Sections 3.14, 3.15, or 3.16 ever apply to a Lender, then such Lender shall, to the extent possible, carry or transfer its Borrowings at, to, or for the account of any of its branch offices or the office or branch of any of its Affiliates so long as the transfer is consistent with the other provisions of this Section, does not create any burden or adverse circumstance for such Lender that would not otherwise exist, and eliminates or ameliorates the conditions of Sections 3.14, 3.15, or 3.16 as applicable. 3.14 Increased Costs and Reduced Return. (a) Change in Laws. If, after the date hereof, the adoption of any applicable Governmental Requirement, or any change in any applicable Governmental Requirement, or any change in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance by any Lender (or its Applicable Lending Office) with any Credit Agreement Page 30 37 request or directive (whether or not having the force of law) of any such Governmental Authority: (i) shall subject such Lender (or its Applicable Lending Office) to any tax, duty, or other charge with respect to any Eurodollar Borrowing, its Note, or its obligation to make Eurodollar Borrowings, or change the basis of taxation of any amounts payable to such Lender (or its Applicable Lending Office) under this Agreement or its Note in respect of any Eurodollar Borrowings (other than taxes imposed on the overall net income of such Lender by the jurisdiction in which such Lender has its principal office or such Applicable Lending Office); (ii) shall impose, modify, or deem applicable any reserve, special deposit, assessment, or similar requirement (other than the Reserve Requirement utilized in the determination of the Adjusted Eurodollar Rate) relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Lender (or its Applicable Lending Office), including the Commitment of such Lender hereunder; or (iii) shall impose on such Lender (or its Applicable Lending Office) or the London interbank market any other condition affecting this Agreement or its Note or any of such extensions of credit or liabilities or commitments; and the result of any of the foregoing is to increase the cost to such Lender (or its Applicable Lending Office) of making, Converting into, Continuing, or maintaining any Eurodollar Borrowings or to reduce any sum received or receivable by such Lender (or its Applicable Lending Office) under this Agreement or its Note with respect to any Eurodollar Borrowings, then Borrower shall pay to such Lender on demand such amount or amounts as such Lender reasonably determines will compensate such Lender for such increased cost or reduction. If any Lender requests compensation by Borrower under this Section 3.14, then Borrower may, by notice to such Lender (with a copy to Agent), suspend the obligation of such Lender to make or Continue Eurodollar Borrowings, or Convert all Eurodollar Borrowings into Base Rate Borrowings, until the event or condition giving rise to such request ceases to be in effect (in which case the provisions of Section 3.17 shall be applicable); provided that such suspension shall not affect the Right of such Lender to receive the compensation so requested. (b) Capital Adequacy. If, after the date hereof, any Lender shall have determined that the adoption of any applicable Governmental Requirement regarding capital adequacy or any change therein or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority, has or would Credit Agreement Page 31 38 have the effect of reducing the rate of return on the capital of such Lender or any corporation controlling such Lender as a consequence of such Lender's obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change, request, or directive (taking into consideration its policies with respect to capital adequacy), then from time to time upon demand Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction. (c) Notice. Each Lender shall promptly notify Borrower and Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Lender, be otherwise disadvantageous to it. Any Lender claiming compensation under this Section shall furnish to Borrower and Agent a statement setting forth the additional amount or amounts to be paid to it hereunder which shall be conclusive in the absence of manifest error. In determining such amount, such Lender may use any reasonable averaging and attribution methods. 3.15 Limitation on Types of Borrowings. If on or prior to the first (1st) day of any Interest Period for any Eurodollar Borrowing: (a) Agent determines (which determination shall be conclusive) that by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period; or (b) the Required Lenders determine (which determination shall be conclusive) and notify Agent that the Adjusted Eurodollar Rate will not adequately and fairly reflect the cost to Lenders of funding Eurodollar Borrowings for such Interest Period; then Agent shall give Borrower prompt notice thereof specifying the relevant amounts or periods, and so long as such condition remains in effect, Lenders shall be under no obligation to make additional Eurodollar Borrowings, Continue any Eurodollar Borrowings, or to Convert any Base Rate Borrowings to Eurodollar Borrowings and Borrower shall, on the last day(s) of the then-current Interest Period(s) for the outstanding Eurodollar Borrowings, either prepay such Borrowings or Convert such Borrowings into Base Rate Borrowings in accordance with the terms of this Agreement. 3.16 Illegality. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Lender or its Applicable Lending Office to make, maintain, or fund Eurodollar Borrowings hereunder, then such Lender shall promptly notify Agent and Borrower thereof and such Lender's obligation to make or Continue Eurodollar Borrowings and to Convert Base Rate Borrowings into Credit Agreement Page 32 39 Eurodollar Borrowings shall be suspended until such time as such Lender may again make, maintain, and fund Eurodollar Borrowings (in which case the provisions of Section 3.17 shall be applicable). 3.17 Treatment of Affected Loans. If the obligation of any Lender to make or Continue Eurodollar Borrowings or to Convert Base Rate Borrowings into Eurodollar Borrowings shall be suspended pursuant to Sections 3.14, 3.15, or 3.16, such Lender's Eurodollar Borrowings shall be automatically Converted into Base Rate Borrowings on the last day(s) of the then current Interest Period(s) for all Eurodollar Borrowings (or, in the case of a Conversion required by Section 3.16, on such earlier date as such Lender may specify to Borrower with a copy to Agent) and, unless and until such Lender gives notice as provided below that the circumstances specified in Sections 3.14, 3.15, or 3.16 that gave rise to such Conversion no longer exist: (a) to the extent that such Lender's Eurodollar Borrowings have been so Converted, all payments and prepayments of principal that would otherwise be applied to such Lender's Eurodollar Borrowings shall be applied instead to its Base Rate Borrowings; and (b) all Borrowings that would otherwise be made or Continued by such Lender as Eurodollar Borrowings shall be made or Continued instead as Base Rate Borrowings, and all Borrowings of such Lender that would otherwise be Converted into Eurodollar Borrowings shall be Converted instead into (or shall remain as) Base Rate Borrowings. If such Lender gives notice to Borrower (with a copy to Agent) that the circumstances specified in Sections 3.14, 3.15, or 3.16 that gave rise to the Conversion of such Lender's Eurodollar Borrowings pursuant to this Section 3.17 no longer exist (which such Lender agrees to do promptly upon such circumstances ceasing to exist) at a time when Eurodollar Borrowings made by other Lenders are outstanding, such Lender's Base Rate Borrowings shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding Eurodollar Borrowings, to the extent necessary so that, after giving effect thereto, all Eurodollar Borrowings held by Lenders are held Pro Rata (as to principal amounts, Types, and Interest Periods). 3.18 Compensation. Upon the request of any Lender, Borrower shall pay to such Lender such amount or amounts as shall be sufficient (in the reasonable opinion of such Lender) to compensate it for any loss, cost, or expense (herein called a "Funding Loss") incurred by it as a result of: (a) any payment, prepayment, or Conversion of a Eurodollar Borrowing for any reason (including, without limitation, the acceleration of the Obligation pursuant to Section 11.1) on a date other than the last day of the Interest Period for such Borrowing; or Credit Agreement Page 33 40 (b) any failure by Borrower for any reason (including, without limitation, the failure of any condition precedent specified in Section 5 to be satisfied) to borrow, Convert, Continue, or prepay a Eurodollar Borrowing on the date for such borrowing, Conversion, Continuation, or prepayment specified in the relevant Borrowing Notice. A Funding Loss shall include, without limitation, an amount equal to the excess, if any, of (i) the amount of interest which otherwise would have accrued on the principal amount so paid, Converted, or not borrowed, Converted, or Continued for the period from the date of such payment, Conversion, or failure to borrow, Convert, or Continue to the last day of the Interest Period for such Eurodollar Borrowing (or, in the case of a failure to borrow, Convert, or Continue, the Interest Period for such Eurodollar Borrowing which would have commenced on the date specified for such Borrowing) at the applicable rate of interest for such Eurodollar Borrowing provided for in this Agreement over (ii) the interest component of the amount such Lender would have bid in the London interbank market for Dollar deposits of leading banks and amounts comparable to such principal amount and with maturities comparable to such period. 3.19 Taxes. (a) Any and all payments by Borrower to or for the account of any Lender or Agent hereunder or under any other Loan Document shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and Agent, taxes imposed on its income, net receipts, gross income, gross receipts, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender (or its Applicable Lending Office) or Agent (as the case may be) is organized or any political subdivision thereof (all such non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings, and liabilities being hereinafter referred to as "Taxes"). If Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable under this Agreement or any other Loan Document to any Lender or Agent, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.19) such Lender or Agent receives an amount equal to the sum it would have received had no such deductions been made, (ii) Borrower shall make such deductions, (iii) Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law, and (iv) Borrower shall furnish to Agent, at its address referred to in Section 13.3, the original or a certified copy of a receipt evidencing payment thereof. Credit Agreement Page 34 41 (b) In addition, Borrower agrees to pay any and all present or future stamp or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under this Agreement or any other Loan Document or from the execution or delivery of, or otherwise with respect to, this Agreement or any other Loan Document (hereinafter referred to as "Other Taxes"). (c) Borrower agrees to indemnify each Lender and Agent for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 3.19) paid by such Lender or Agent (as the case may be) and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto. (d) Each Lender organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Lender listed on the signature pages hereof and on or prior to the date on which it becomes a Lender in the case of each other Lender, and from time to time thereafter if requested in writing by Borrower or Agent (but only so long as such Lender remains lawfully able to do so), shall provide Borrower and Agent with (i) Internal Revenue Service Form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Lender is entitled to benefits under an income tax treaty to which the United States is a party which reduces the rate of withholding tax on payments of interest or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States, (ii) Internal Revenue Service Form W-8 or W-9, as appropriate, or any successor form prescribed by the Internal Revenue Service, and (iii) any other form or certificate required by any taxing authority (including any certificate required by Sections 871(h) and 881(c) of the Code), certifying that such Lender is entitled to an exemption from or a reduced rate of tax on payments pursuant to this Agreement or any of the other Loan Documents. (e) For any period with respect to which a Lender has failed to provide Borrower and Agent with the appropriate form pursuant to Section 3.19(d) (unless such failure is due to a change in treaty, law, or regulation occurring subsequent to the date on which a form originally was required to be provided), such Lender shall not be entitled to indemnification under Section 3.19(a) or (b) with respect to Taxes imposed by the United States; provided, however, that should a Lender, which is otherwise exempt from or subject to a reduced rate of withholding tax, become subject to Taxes because of its failure to deliver a form required hereunder, at such Lender's expense, Borrower shall take such steps as such Lender shall reasonably request to assist such Lender to recover such Taxes. Credit Agreement Page 35 42 (f) If Borrower is required to pay additional amounts to or for the account of any Lender pursuant to this Section 3.19, then such Lender will agree to use reasonable efforts to change the jurisdiction of its Applicable Lending Office so as to eliminate or reduce any such additional payment which may thereafter accrue if such change, in the judgment of such Lender, is not otherwise disadvantageous to such Lender. (g) Without prejudice to the survival of any other agreement of Borrower hereunder, the agreements and obligations of Borrower contained in this Section 3.19 shall survive the termination of the Total Commitments and the payment in full of the Notes. 3.20 Fees. (a) Treatment of Fees. The fees described in this Section 3.20 (i) are not compensation for the use, detention, or forbearance of money, (ii) are in addition to, and not in lieu of, interest and expenses otherwise described in this Agreement, (iii) are payable in accordance with Section 3.1(b), (iv) are non-refundable, (v) to the fullest extent permitted by applicable law, bear interest, if not paid when due, at the Default Rate, and (vi) are calculated on the basis of actual number of days (including the first day but excluding the last day) elapsed, but computed as if each calendar year consisted of 360 days and 30-day months, unless computation would result in an interest rate in excess of the Maximum Rate in which event the computation is made on the basis of actual days elapsed and a year of 365 or 366 days, as the case may be. The fees described in this Section 3.20 are in all events subject to the provisions of Section 3.8. (b) Agent Fees. Borrower shall pay to Agent, the fees specified in the letter agreement between Agent and Borrower, which fee shall be for the account of Agent and for the account of Lenders as shall be agreed between Agent and each Lender. (c) Lenders' Fees. Borrower shall pay to Agent, for the ratable account of Lenders, a quarterly unused fee (prorated for partial quarters) equal to the sum of the amounts obtained by multiplying the average Unused Commitment times the applicable percentage set forth below:
Unused Commitment Applicable Percentage - ----------------- --------------------- Greater than or equal to $75,000,000 .25% Less than $75,000,000 .20%
Credit Agreement Page 36 43 Such commitment fee shall accrue commencing on the Closing Date, and shall be due and payable on the first day of each January, April, July, and October during the term hereof, commencing on April 1, 1999, and on the Termination Date, based upon the Unused Commitment for each day during the quarter ending on such date. Solely for purposes of this Section 3.20(c), "ratable" means, for any calculation period, with respect to any Lender, the proportion that (A) the average daily Unused Commitment of such Lender during the period bears to (B) the aggregate amount of the average daily Unused Commitment of all Lenders during the period. (d) LC Fees. As an inducement for the issuance (including, without limitation, the extension) of each LC, Borrower agrees to pay to Agent: (i) For the ratable account of each Lender, on the first day of each calendar month, an issuance fee, payable monthly in arrears, equal to the greater of (A) the product of (A) the average face amount of such LC during each applicable monthly period times (B) the Applicable Margin for Eurodollar Borrowings minus .125%; and (ii) For the account of Issuing Bank, payable on the date of issuance, an issuance fee, the product of (A) the face amount of such LC times (B) .125% per annum. 3.21 Loan Documents. Borrower shall pay and perform, or cause to be paid and performed, the indebtedness, obligations, and duties of each Subsidiary Guarantor under each Mortgage and each Assignment of Leases and Rents. Borrower hereby irrevocably and unconditionally agrees: (i) that it is jointly and severally liable to the Credit Parties for the full and prompt payment of the indebtedness of each Subsidiary Guarantor to the Credit Parties and the performance by each Subsidiary Guarantor of its obligations and duties under the applicable Mortgage and the Assignment of Leases and Rents; and (ii) has a primary obligation to indemnify each Credit Party on demand from and against any loss (excluding losses arising out of the fraud, gross negligence, or willful misconduct of such Credit Party) incurred by such Credit Party as a result of any of the obligations of any one or more Subsidiary Guarantors being or becoming void, voidable, unenforceable, or ineffective for any reason whatsoever, whether or not known to any Credit Party or any Person, the amount of such loss (excluding losses arising out of the fraud, gross negligence, or willful misconduct of such Credit Party) being the amount which the Credit Parties would otherwise have been entitled to recover from any one or more Subsidiary Guarantors. Credit Agreement Page 37 44 SECTION 4 BORROWING BASE 4.1 Calculation of Borrowing Base. (a) The "Individual Borrowing Base" for any Borrowing Base Property shall be, as of any date, the lesser of: (i) sixty percent (60%) of the Appraised Value; and (ii) the lesser of: (A) Adjusted NOI of such Borrowing Base Property divided by the product of (x) the Fixed Constant, and (y) 1.5; and (B) Adjusted NOI of such Borrowing Base Property divided by the product of (aa) the Variable Constant, and (bb) 1.5. (b) The "Borrowing Base" shall be, as of any date, the sum of the Individual Borrowing Bases for each of the Borrowing Base Properties. 4.2 Admission of Qualified Properties Into the Borrowing Base. (a) Request for Admission Into Borrowing Base. Borrower shall provide Agent (with copies for each of Lenders) with a written request for a Property to be admitted into the Borrowing Base. Such request shall be accompanied by information regarding such Property (collectively, the "Property Information"), including, without limitation, the following: (i) a general description of the Property's location, market, and amenities; (ii) a property description; (iii) purchase information (including any contracts of sale and closing statements); (iv) original and two (2) copies of a recent survey with appropriate certifications to Agent, for the benefit of Lenders, and one (1) copy for each of the other Lenders; (v) a Phase I environmental assessment and, if requested by Agent based upon issues identified in the Phase I assessment, additional environmental assessments; (vi) copies of title insurance and a mortgagee commitment of title insurance, with copies of all underlying title documents, in which a title company acceptable to Agent commits to ensure Agent's proposed first lien, for the benefit of Lenders, under a deed of trust or mortgage; Credit Agreement Page 38 45 (vii) operating statements as necessary to determine the Appraised Value of the Property, if required by Agent; (viii) engineering reports (including, without limitation, a structural engineering report); (ix) evidence of insurance, including, without limitation, hazard insurance; (x) copies of all tenant leases, if any; (xi) copies of all recent appraisals, if any; (xii) a Required Appraisal; (xiii) a current, accurate rent roll in a format acceptable to Agent; (xiv) history of the operation of the Property as may be reasonably requested by Agent; (xv) lease abstracts for each lease of the Property; (xvi) three year projected capital expenditures; and (xvii) such other information reasonably requested by Agent as shall be necessary to determine whether such Property is a Qualified Property. (b) Qualified Properties. In order for a Property to be eligible for inclusion in the Borrowing Base (a "Qualified Property"), such Property shall have the following characteristics: (i) Borrower or a Subsidiary Guarantor shall have good and indefeasible fee simple title to such Property, free and clear of all Liens (except for Permitted Liens); (ii) all Property Information shall be acceptable to Agent; (iii) if the Phase I environmental assessment indicates a material defect, then (A) the cost to repair such defect shall not be in excess of twenty percent (20%) of the cost of acquiring the Property, (B) the defect must be clearly defined in the Phase I, or if necessary, the Phase II, environmental report and an acceptable remedial budget must be attached thereto, and (C) a Borrower must provide satisfactory evidence that it has funds to mitigate such defect; Credit Agreement Page 39 46 (iv) if the structural engineering report indicates a material defect, then (A) the cost to repair such defect shall not be in excess of twenty percent (20%) of the cost of acquiring the Property, (B) the defect must be clearly defined in the structural engineering report and an acceptable remedial budget must be attached thereto, and (C) a Borrower must provide satisfactory evidence that it has funds to mitigate such defect); (v) no Material Title Defects shall exist; (vi) such Property, if admitted to the Borrowing Base, shall account for no more than fifteen percent (15%) of the Borrowing Base; (vii) the admission of such Property will not cause the NRA or the Adjusted NOI of the Borrowing Base Properties in any one state (except Ohio) to exceed twenty-five percent (25%) of the NRA or Adjusted NOI with respect to all Borrowing Base Properties in all states; provided that no Property in Ohio not listed as an Initial Property or a Second Property shall be eligible for inclusion as a Borrowing Base Property unless, following such addition to the Borrowing Base, the foregoing test shall also be met with respect to Ohio; (viii) the admission of such Property will not cause the leases that could reasonably be expected to contribute in excess of twenty-five percent (25%) of the annual aggregate NRA for all Borrowing Base Properties to expire in any one year; (ix) such Property shall be at least eighty percent (80%) leased and occupied by the tenants named in the applicable leases; (x) no more than sixty percent (60%) of the tenant leases for such Property (which percentage shall be calculated based upon rent contributed by each such lease) shall expire prior to the date two (2) years after such Property becomes a Borrowing Base Property; or (xi) the inclusion of the Property into the Borrowing Base shall not breach any obligation of an Obligor under any other third party agreements. (c) Approval. Each Property that is a Qualified Property shall be subject to the approval of Agent for admission to the Borrowing Base. Notwithstanding the foregoing sentence, Required Lenders shall have the Right to exclude a Property that is a Qualified Property from the Borrowing Base, if Required Lenders, in their sole discretion, determine that such Qualified Property shall not be included in the Borrowing Base. If Borrower requests that a Property that is not a Credit Agreement Page 40 47 Qualified Property be placed in the Borrowing Base and if Agent approves such Property, then such Property may be admitted to the Borrowing Base upon the approval of Required Lenders. Agent shall provide Borrower with written notice of whether a Property is approved for admission into the Borrowing Base within ten (10) Business Days after Agent's receipt of the applicable Required Appraisal. (d) Collateral Documents. A Property shall not be admitted into the Borrowing Base until Borrower or the appropriate Subsidiary Guarantor shall have executed and delivered to the Agent, for the ratable benefit of the Lenders, the Collateral Documents covering such Property, and the Agent shall have a perfected first priority Lien in such Property, for the ratable benefit of the Lenders. (e) Other Requirements Respecting the Borrowing Base. During the term hereof: (i) once six (6) Properties have been admitted into the Borrowing Base, at least six (6) Borrowing Base Properties shall be in the Borrowing Base; (ii) once six (6) Properties have been admitted into the Borrowing Base, the Adjusted NOI of all Borrowing Base Properties divided by 9.5% shall not be less than $25,000,000; (iii) the percentage of Borrowing Base Properties that are office Properties shall not exceed twenty percent (20%) of the net rentable area of the Borrowing Base Properties; (iv) the percentage of Borrowing Base Properties that are not industrial, light industrial, or office Properties shall not exceed ten percent (10%) of the net rentable area of the Borrowing Base Properties; and (v) the principal balance of the Obligation shall not be less than $1.00, in each case, unless otherwise consented to by Required Lenders. (f) Computation of Adjusted Net Operating Income. Borrower shall deliver to Agent quarterly computations of Adjusted NOI with the Borrowing Base Report required pursuant to Section 7.1(c). Agent shall notify Borrower in writing of any additional adjustments to Adjusted NOI required by Agent and corresponding adjustments to the Borrowing Base (if any). If a Property is admitted into the Borrowing Base prior to the last day of any fiscal quarter during the term of this Agreement, then Agent shall notify Borrower and Lenders in writing of any changes to the Borrowing Base as a result of the admission of such Property into the Borrowing Base. Credit Agreement Page 41 48 (g) Certain Events With Respect to Borrowing Base Properties. If any Borrowing Base Property that was a Qualified Property at the time of its admission into the Borrowing Base no longer satisfies the requirements set forth in Section 4.2(b), then Required Lenders shall have the right in their sole discretion at any time and from time to time to notify Borrower that, effective upon the giving of such notice, and for so long as such event or condition exists, such Borrowing Base Property shall no longer be considered a Borrowing Base Property for purposes of determining the Borrowing Base. If Agent delivers a notice with respect to a Borrowing Base Property as set forth in this SECTION, then at such time as such Borrowing Base Property is no longer subject to any of the conditions described above, Borrower may give Agent written notice thereof (together with reasonably detailed evidence of the cure of such condition) and such Borrowing Base Property shall, effective with the delivery by Borrower of the next Borrowing Base Report, be considered a Borrowing Base Property for purposes of calculating the Borrowing Base until such time as any of the conditions set forth above apply thereto. (h) Initial Borrowing Base Properties. As of the Closing Date, the Properties listed on Schedule 4.2 (collectively, the "Initial Borrowing Base Properties") are Qualified Properties, have been admitted into the Borrowing Base, and are Borrowing Base Properties as of the Closing Date. (i) Second Properties. On or before the date that is thirty (30) days after the Closing Date, all Property Information regarding the Properties listed on Schedule 4.2(i) (collectively, the "Second Properties") shall be submitted pursuant to Section 4.2(a). On or before the date that is ninety (90) days after the Closing Date, the Second Properties that have been approved for admission into the Borrowing Base shall be admitted into the Borrowing Base (collectively, the "Second Borrowing Base Properties"). 4.3 Liens on Borrowing Base Properties. As more fully described in the Collateral Documents, Borrower shall, and shall cause each Obligor to, grant to Agent, for the benefit of Credit Parties, as security for the payment and performance of the Obligation, a valid, enforceable, perfected, first priority and (except for Permitted Liens) only Lien in and to each Borrowing Base Property. 4.4 Collateral Documents. The Liens described in Section 4.3 shall be granted pursuant to, and more fully described in, the Collateral Documents. 4.5 Leases. (a) Unless Agent shall give Borrower written notice pursuant to Section 4.5(b), Borrower may (without the prior consent of Agent) execute leases covering all or any portion of a Borrowing Base Credit Agreement Page 42 49 Property after the date of this Agreement so long as such leases (i) are on forms that are customary and consistent with industrial or light industrial properties, and (ii) have provisions that provide for the same basic terms as Sections 5.1.2, 12.1, and 13.2 in the form of the Approved Lease Form. Borrower may (without the prior consent of Agent) enter into renewal, extension, or expansion agreements (which agreements shall be customary and consistent with industrial, light industrial, or office properties) with tenants under leases existing as of the date of admission of such Borrowing Base Property covering all or any portion of a Borrowing Base Property; provided, however, that if Agent shall determine, after an annual review of leasing activities by Borrower, that Borrower has engaged in significant leasing activities with respect to any Borrowing Base Property wherein the same basic terms as Sections 5.1.2, 12.1, and 13.2 in the Approved Lease Form have not been included, which in the sole discretion of Agent results in a Material Adverse Effect on the value of the Borrowing Base Property as Collateral hereunder, then Agent may, in its sole discretion, notify Borrower on or before October 1 of each year during the term of this Agreement that its has elected to remove such Borrowing Base Property from the Borrowing Base (a "Removal Notice"). If Agent shall have delivered a Removal Notice to Borrower, then Borrower may, on or before the immediately admission into the Borrowing Base, or (b) if necessary, prepay the excess of the Total Principal Debt over the Borrowing Base. Notwithstanding the foregoing, Borrower may (without the prior consent of Agent) execute agreements covering a Borrowing Base Property pursuant to renewal, extension, or expansion options set forth in leases existing as of the date of admission into the Borrowing Base, provided that the terms and conditions of such renewal agreements do not materially differ from the terms and conditions of the leases renewed or extended thereby. If Agent delivers a Removal Notice, then at such time as such Borrowing Base Property is no longer subject to any of the conditions described above, Borrower may give Agent written notice thereof (together with reasonably detailed evidence of the cure of such condition) and such Borrowing Base Property shall, effective with the delivery by Borrower of the next Borrowing Base Report, be reinstated as a Borrowing Base Property. (b) If Agent shall have given Borrower written notice (which notice may be delivered in Agent's sole discretion), then unless otherwise consented to by Agent in writing, all leases covering all or any portion of a Borrowing Base Property entered into after the date of such notice (i) shall be in substantially the form of the Approved Lease Form, (ii) shall have no material changes to Sections 5.1.2, 12.1, and 13.2 in the Approved Lease Form, (iii) shall be for terms not less than three (3) years, and (iv) may include other provisions specifically approved in writing by Agent or in other lease guidelines agreed to by Agent in writing from time to time. Credit Agreement Page 43 50 (c) Unless otherwise consented to by Agent in writing, all leases covering all or any portion of a Borrowing Base Property entered into after the date of this Agreement shall (i) be to third parties under market terms and, except as provided in (b) above, for primary terms not less than three (3) years, (ii) provide for uses and percentages that are consistent with Section 8.5, (iii) not provide for uses of the premises that would materially and adversely affect the fair market value of the Borrowing Base Property or its ability to qualify for permanent financing, and (iv) not include tenant self-help remedies or provide for Agent's or any subsequent mortgagee's non-disturbance of any tenant's occupancy. (d) Borrower shall send to Agent copies of all leases (and all renewals, extension, or modifications thereof) covering all or any portion of a Borrowing Base Property entered into after the date of this Agreement within thirty (30) days after the last day of each fiscal quarter immediately following the execution thereof. 4.6 Releases of Collateral. Agent shall have no obligation to release any Collateral without a written request from Borrower, together with a Borrowing Base Report and a Compliance Certificate as of the date of such request. Agent shall not release any Collateral unless, after giving effect to any such release (a) no Default or Potential Default exists, (b) the Borrowing Base exceeds the Obligation as of the date of such release, and (c) unless waived by Required Lenders, continue to satisfy all of the items and requirements set forth in Section 4.2(b) and Section 4.2(e). Agent shall not be required to partially release a portion of a Borrowing Base Property pursuant to this Section. 4.7 Appraisals. From time to time, Agent may obtain, at its option and at Borrower's expense but not more often than one (1) time during any calendar year unless a Default exists, a Material Adverse Event has occurred, or an appraisal is required more often under any Governmental Requirement, an appraisal of a Borrowing Base Property or any part thereof prepared in accordance with written instructions from Agent by a third-party appraiser engaged directly by Agent. Each such appraiser and appraisal shall be satisfactory to Agent. SECTION 5 CONDITIONS PRECEDENT 5.1 Conditions to Initial Borrowing. The obligations of Lenders to make the initial Borrowing and of Issuing Bank to issue the initial LC is subject to satisfaction of the following conditions precedent on or before the Closing Date: (a) Borrower Documents. Borrower shall deliver or cause to be delivered to Agent the following, each, unless otherwise noted, dated as of the Closing Date: Credit Agreement Page 44 51 (i) Certified copies of its Declaration of Trust, together with a good standing certificate, if available, from the Secretary of State of the State of Texas and each other state in which it is qualified to do business and a certificate or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such states, each dated a recent date prior to the Closing Date; (ii) An Officer's Certificate of Borrower certifying (A) its Constituent Documents, (B) resolutions of its trustees approving and authorizing the execution, delivery, and performance of this Agreement and the other Loan Documents, certified as of the Closing Date as being in full force and effect without modification or amendment, and (C) signatures and incumbency of its officers executing this Agreement and the other Loan Documents; (iii) Executed originals of this Agreement, the Notes, and the other Loan Documents to be executed by Borrower; and (iv) Such other documents as any Agent may reasonably request. (b) Opinions of Counsel. The Credit Parties and their respective counsel shall have received originally executed copies of a favorable written opinions of counsel for Borrower and/or Obligors, in form and substance reasonably satisfactory to Agent and its counsel, dated as of the Closing Date, and setting forth substantially the matters in the opinions designated in Exhibit F-1 and Exhibit F-2 and as to such other matters as any Agent, acting on behalf of the Credit Parties, may reasonably request. (c) Fees. Borrower shall have paid to Agent, for distribution (as appropriate) to the Credit Parties, the fees payable on the Closing Date referred to in Section 3.20. (d) Borrowing Base Report. Borrower shall have delivered an Borrowing Base Report dated as of the Closing Date. (e) Completion of Proceedings. All corporate, trust, and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incidental thereto not previously found acceptable by any Agent, acting on behalf of Lenders, and its counsel shall be satisfactory in form and substance to Agent and its counsel, and Agent and its counsel shall have received all such counterpart originals or certified copies of such documents as Agent may reasonably request. Credit Agreement Page 45 52 (f) No Material Adverse Event. No Material Adverse Event has occurred since September 30, 1998. (g) Initial Borrowing Base Properties. The Initial Borrowing Base Properties shall be admitted to the Borrowing Base, subject to the terms and conditions of this Credit Agreement. (h) Subsidiary Guarantor Documents. Borrower shall deliver or cause to be delivered to Agent the following regarding the Subsidiary Guarantors, each, unless otherwise noted, dated as of the Closing Date: (i) if a partnership or limited partnership, certified copies of each Subsidiary Guarantor's certificate of partnership, together with a good standing certificate from the applicable jurisdiction of formation and each other state in which it is qualified to do business, and a certificate or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such states, each dated a recent date prior to the Closing Date; (ii) if a partnership or limited partnership, certified copies of each Subsidiary Guarantor's general partner's certificate of incorporation, together with a good standing certificate from such general partner's jurisdiction of incorporation and each other state in which it is qualified to do business, and, to the extent generally available, a certificate or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such states, each dated a recent date prior to the Closing Date; (iii) if a corporation, certified copies of each Subsidiary Guarantor's certificate of incorporation, together with a good standing certificate from such Subsidiary Guarantor's jurisdiction of incorporation and each other state in which it is qualified to do business, and, to the extent generally available, a certificate or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such states, each dated a recent date prior to the Closing Date; (iv) if a partnership or limited partnership, an Officer's Certificate of its general partner certifying (A) its Constituent Documents, (B) resolutions of its Board of Directors approving and authorizing the execution, delivery, and performance of the Loan Documents to which it is a party, certified as of the Closing Date as being in full force and effect without modification or amendment, (C) signatures and incumbency of its officers executing the Loan Documents to which it is a party, and (D) the Constituent Documents of the applicable Subsidiary Guarantor; Credit Agreement Page 46 53 (v) if a corporation, an Officer's Certificate of the Subsidiary Guarantor certifying (A) its Constituent Documents, (B) resolutions of its Board of Directors approving and authorizing the execution, delivery, and performance of the Loan Documents to which it is a party, certified as of the Closing Date as being in full force and effect without modification or amendment, (C) signatures and incumbency of its officers executing the Loan Documents to which it is a party, and (D) the Constituent Documents of such Subsidiary Guarantor; (vi) Executed originals of this Agreement, the Notes, and the other Loan Documents to be executed by the Subsidiary Guarantor; and (vii) Such other documents as any Agent may reasonably request. 5.2 Conditions to all Borrowings. The obligations of each Lender on each Borrowing Date to make all Borrowings (including the initial Borrowing) and Issuing Bank to issue all LCs (including the initial LC) are subject to the following conditions precedent: (a) Notice of Borrowing; LC Request. Agent shall have received, (i) in the case of a Borrowing, in accordance with the provisions of Section 2.2, an originally executed Borrowing Request, and (b) in the case of an LC, in accordance with Section 2.3, an LC Request. (b) Representations and Warranties; Performance of Agreements. The representations and warranties in Loan Documents are true, correct, and complete in all material respects (unless they speak to a specific date or are based on facts which have changed by transactions expressly contemplated or permitted by this Agreement). (c) No Default. No Potential Default, Default, Non-Compliance Event, or Material Adverse Event exits or would be caused by the making of such Borrowing. (d) No Injunction or Restraining Order. No order, judgment, or decree of any Governmental Authority shall purport to enjoin or restrain such Lender from making the Borrowing to be made by it. (e) No Violation. The making of the Borrowing shall not violate any Governmental Requirement, including, without limitation, Regulation T, Regulation U, or Regulation X of the Board of Governors of the Federal Reserve System. Credit Agreement Page 47 54 5.3 Conditions Generally. Each condition precedent in this Agreement is material to the transactions contemplated by this Agreement, and time is of the essence with respect to each condition precedent. Lenders may fund any Borrowing and Issuing Bank may issue any LC without all conditions being satisfied, but, to the extent permitted by Governmental Requirements, such funding shall not be deemed to be a waiver of the requirement that each condition precedent be satisfied as a prerequisite for any subsequent funding or issuance, unless Lenders specifically waive each item in writing. SECTION 6 REPRESENTATIONS AND WARRANTIES Borrower represents and warrants to the Credit Parties as follows: 6.1 Purpose of Credit Facility. Borrower shall use proceeds of the Borrowings made and any LCs issued hereunder (i) to acquire industrial and light industrial and suburban office Properties, (ii) for capital improvements for the Properties, and (iii) for working capital requirements (but excluding the repurchase of any Stock of any Company). Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, as amended. No part of the proceeds of any Borrowing or any LC shall be used, directly or indirectly, for a purpose that violates any Governmental Requirement, including the provisions of Regulation U. 6.2 Existence, Good Standing, Authority and Compliance. Each Company is duly formed, validly existing and in good standing under the Governmental Requirements of the jurisdiction in which it is incorporated or formed as identified on Schedule 6.2 (as supplemented from time to time). Each Company (a) is duly qualified to transact business and is in good standing as a foreign trust, corporation, partnership, limited liability company, or other entity in each jurisdiction where the nature and extent of its business and properties require due qualification and good standing, which jurisdictions are identified on Schedule 6.2 (as supplemented from time to time to reflect changes as a result of transactions permitted by the Loan Documents), (b) possesses all requisite authority, permits, and power to conduct its business as is now being, or is contemplated by this Agreement to be, conducted, and (c) is in compliance with all applicable Governmental Requirements. 6.3 Affiliates. Borrower has no Consolidated Affiliates or Unconsolidated Affiliates except as disclosed on Schedule 6.2 (as supplemented from time to time to reflect changes as a result of transactions permitted by the Loan Documents). Credit Agreement Page 48 55 6.4 Authorization and Contravention. The execution and delivery by each Obligor of each Loan Document or related document to which it is a party, and the performance by it of its obligations thereunder, (a) are within its trust, corporate, limited liability company, or partnership power, (b) have been duly authorized by all necessary trust, corporate, limited liability company, or partnership action of such Person, (c) require no action by or filing with any Governmental Authority, (d) do not violate any provision of its Constituent Documents, (e) do not violate any provision of any Governmental Requirement or order of any Governmental Authority applicable to it, (f) do not violate any material agreements to which it is a party, or (g) do not result in the creation or imposition of any Lien on any asset of any Company, other than pursuant to the Loan Documents. 6.5 Binding Effect. Upon execution and delivery by all parties thereto, each Loan Document to which it is a party shall constitute a legal and binding obligation of each Obligor, enforceable against such Obligor in accordance with its terms, subject to applicable Debtor Relief Laws and general principles of equity. 6.6 Financial Statements; Fiscal Year. The Current Financials were prepared in accordance with GAAP and present fairly, in all material respects, the consolidated financial condition, results of operations, and cash flows of the Companies as of, and for the portion of the fiscal year ending on the date or dates thereof (subject only to normal audit adjustments). All material liabilities of the Companies as of the date or dates of the Current Financials are reflected therein or in the notes thereto. Except for transactions directly related to, or specifically contemplated by, the Loan Documents or disclosed in the Current Financials, no subsequent material adverse changes have occurred in the consolidated financial condition of the Companies from that shown in the Current Financials. The fiscal year of each Company ends on December 31. 6.7 Litigation. Except as disclosed on Schedule 6.7, no Company is subject to, nor is any Responsible Officer of any Company aware of the threat of, any Litigation that, if adversely determined, could result in a Material Adverse Event. No outstanding and unpaid final and non-appealable judgments against any Company exist which could result in a Material Adverse Event. 6.8 Taxes. (a) All Tax returns of each Company required to be filed have been filed (or extensions have been granted) before delinquency, and all Taxes imposed upon each Company that are due and payable have been paid before delinquency or are being contested in good faith by appropriate proceedings diligently conducted and for which reserves in accordance with GAAP or otherwise reasonably acceptable to Agent have been provided. Credit Agreement Page 49 56 (b) As of the date hereof, no United States federal income tax returns of the "affiliated group" (as defined in the Code) of which any Company is a member have been examined and closed. The members of such affiliated group have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by or any of them (except for taxes being contested in good faith by appropriate proceedings diligently conducted and for which reserves in accordance with GAAP or otherwise acceptable to Agent have been provided). The charges, accruals, and reserves on the books of the Companies in respect of taxes or other governmental charges are, in the opinion of the Companies, adequate. (c) Borrower qualifies as a REIT. 6.9 Environmental Matters. Except as disclosed on Schedule 6.9, (a) no environmental condition or circumstance exists that materially and adversely affects any Company's Properties or operations, (b) no Company has received any report of any Company's violation of any Environmental Law that has not been remedied, (c) no Company knows that any Company is under any obligation to remedy any violation of any Environmental Law, or (d) no facility of any Company is or has been used for storage, treatment, or disposal of any Hazardous Substance. Each Company has taken prudent steps to determine that its Properties and operations do not violate any Environmental Law. 6.10 Employee Plans. Except where occurrence or existence could not result in a Material Adverse Event, (a) no Employee Plan has incurred an "accumulated funding deficiency" (as defined in Section 302 of ERISA or Section 412 of the Code), (b) no Company has incurred liability under ERISA to the PBGC in connection with any Employee Plan (other than required insurance premiums, all of which have been paid), (c) no Company has withdrawn in whole or in part from participation in a Multi-employer Plan, (d) no Company has engaged in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code), and (e) no "reportable event" (as defined in Section 4043 of ERISA) has occurred, excluding events for which the notice requirement is waived under applicable PBGC regulations. 6.11 Properties; Liens. Each Company has good and marketable title to all of its Properties (notwithstanding the foregoing, for Properties in Texas, each Company shall have good and indefeasible title) reflected in the Current Financials (except for any Property that is obsolete or that has been disposed in the ordinary course of business or, after the date of this Agreement, as otherwise permitted by Section 8.7 or Section 8.8). Except for Permitted Liens, no Lien Credit Agreement Page 50 57 exists on any Borrowing Base Property, and the execution, delivery, performance, or observance of the Loan Documents shall not require or result in the creation of any Lien on any Borrowing Base Property. 6.12 Locations. Each Company's chief executive office is located at the address set forth on Schedule 6.2 (as supplemented from time to time). Each Company's books and records are located at its chief executive office. 6.13 Government Regulations. No Company is subject to regulation under the Investment Company Act of 1940, as amended, or the Public Utility Holding Company Act of 1935, as amended. 6.14 Transactions With Affiliates. Except as disclosed on Schedule 6.14 (as supplemented from time to time if the disclosures are approved by Agent), no Company is a party to a material transaction with any of its Affiliates, other than transactions in the ordinary course of business and upon fair and reasonable terms not materially less favorable than it could obtain or could become entitled to in an arm's-length transaction with a Person that was not its Affiliate. 6.15 Insurance. Each Company maintains with financially sound, responsible, and reputable insurance companies or associations (or, as to workers' compensation or similar insurance, with an insurance fund or by self-insurance authorized by the jurisdictions in which it operates) insurance concerning its properties and businesses against casualties and contingencies and of types and in amounts (and with co-insurance and deductibles) as is customary in the case of similar businesses. 6.16 Labor Matters. No actual or, to the knowledge of any Responsible Officer of any Company, threatened strikes, labor disputes, slow downs, walkouts, or other concerted interruptions of operations by the employees of any Company exist. All payments due from any Company for employee health and welfare insurance have been paid or accrued as a liability on its books. 6.17 Solvency. On each Borrowing Date, each Company is, and after giving effect to the requested Borrowing will be, Solvent. 6.18 Full Disclosure. Each material fact or condition relating to the financial condition or business of the Companies which could result in a Material Adverse Event has been disclosed to Agent. All information previously furnished, furnished on the date of this Agreement, and furnished in the future, by any Company to Agent in connection with the Loan Documents (a) was, is, and will be, true and accurate in all material respects or based on good faith estimates on the date the information is stated or certified, and (b) did not, does not, and will not, fail to state any material fact the existence of Credit Agreement Page 51 58 which or the omission of which could result in a Material Adverse Event 6.19 Exemption From ERISA; Plan Assets. Borrower is a "real estate operating company" within the meaning of 29 C.F.R. Section 2510.3-101(e) (or any successor regulation) and the assets of the Companies would not be deemed "plan assets" as defined in 29 C.F.R. Section 2510.3-101(a)(1) (or any successor regulation) of any Employee Plan or Multi-employer Plan. 6.20 Year 2000 Compliance. As of the date of any request for any Borrowing, as of the date of any renewal, extension or modification of this Agreement, and at all times during the term of this Agreement: (a) All devices, systems, machinery, information technology, computer software and hardware, and other date sensitive technology (jointly and severally the "Systems") necessary for Obligors to carry on their business as may be presently conducted and as contemplated to be conducted in the future are Year 2000 Compliant or will be Year 2000 Compliant within a period of time calculated to result in no material disruption of any of Obligors' business operations. "Year 2000 Compliant" means that the Systems are designed to be used prior to, during, and after the Gregorian calendar year 2000 A.D. and will operate during each such time period without error relating to date data, specifically including any error relating to, or the product of, date data which represents or references different centuries or more than one century. (b) Obligors have: (i) undertaken a detailed inventory, review, and assessment of all areas within their business and operations that could be adversely affected by the failure of Obligors to be Year 2000 Compliant on a timely basis; (ii) developed a detailed plan and time line for becoming Year 2000 Compliant on a timely basis, and (iii) to date, implemented that plan in accordance with that timetable in all material respects. (c) Obligors have made written inquiry of each of its key suppliers, vendors, and customers, and has obtained in writing confirmations from all such persons, as to whether such persons have initiated programs to become Year 2000 Compliant and on the basis of such confirmations, Obligors reasonably believe that all such persons will be or become so compliant. For purposes hereof, "key suppliers, vendors, and customers" refers to those suppliers, vendors, and customers of Obligors whose business failure would, with reasonable probability, result in a material adverse change in the business, properties, condition (financial or otherwise), or prospects of Obligors. For purposes of this paragraph, Agent confirms to Obligors that it has initiated a corporate-wide Year 2000 program with respect to its lending activities. Credit Agreement Page 52 59 (d) The fair market value of all Collateral is not and shall not be less than currently anticipated or subject to substantial deterioration in value because of the failure of such Collateral to be Year 2000 Compliant. 6.21 DDR Indebtedness. The aggregate outstanding Indebtedness to DDR of the Companies as of the Closing Date is $12,100,000 plus interest (collectively, the "Existing DDR Indebtedness"). 6.22 Ownership and Indebtedness. The Consolidated Affiliates listed on Schedule 6.22 constitute all of Borrower's Consolidated Affiliates as of the Closing Date and are the owners of the respective Properties listed on Schedule 6.22. Each Consolidated Affiliate except DDR Office Flex II, LLC is indebted to the respective lender shown on Schedule 6.22 pursuant to Permitted Conduit Debt which prohibits such Consolidated Affiliate from executing the Subsidiary Guaranty. 6.23 Ownership of Consolidated Affiliates. Borrower, directly or indirectly, owns the applicable ownership interest in each Consolidated Affiliate as shown on Schedule 6.22. 6.24 DDR Equity. As of January 14, 1999, DDR has contributed not less than $81,000,000 of equity to Borrower. SECTION 7 AFFIRMATIVE COVENANTS So long as Lenders are committed to fund any Borrowings or fund or issue any LCs under this Agreement and until the Obligation is paid in full, Borrower covenants and agrees as follows: 7.1 Items to be Furnished. Borrower shall cause the following to be furnished to Agent (with sufficient copies for each Lender): (a) Annual Financial Statements. Promptly after preparation, and no later than ninety (90) days after the last day of each fiscal year of the Companies, consolidated Financial Statements of the Companies showing the consolidated financial condition and results of operations of the Companies as of, and for the year ended on, that last day, accompanied by: (A) the unqualified opinion of the firm of an accounting firm of nationally-recognized independent certified public accountants, based on an audit using generally accepted auditing standards, that the Financial Statements of the Companies were prepared in accordance with GAAP and present fairly, in all material respects, the consolidated financial condition and results of operations of the Companies and (B) a Compliance Certificate. Credit Agreement Page 53 60 (b) Periodic Financial Statements. Promptly after preparation, and no later than forty-five (45) days after the last day of each fiscal quarter of the Companies: (i) Financial Statements of the Companies showing the consolidated financial condition and results of operations of the Companies for the fiscal quarter and for the period from the beginning of the current fiscal year to the last day of the fiscal quarter; and (ii) a Compliance Certificate. (c) Borrowing Base Report. Promptly after preparation, and no later than forty-five (45) days after the end of each fiscal quarter of Borrower and Subsidiary Guarantor, a Borrowing Base Report certified by a Responsible Officer, setting forth in reasonable detail the calculations required to establish the Individual Borrowing Base for each Borrowing Base Property and the Borrowing Base (the "Borrowing Base Report") as of the last day of such quarter, all in reasonable detail and satisfactory to the Agent; provided, however, that any change in the Borrowing Base reflected in such Borrowing Base Report shall not become effective until Agent notifies Borrower and the Lenders in writing. (d) Other Reports. (i) Promptly upon its becoming available, and no later than fifteen (15) days after the filing or receipt thereof, each regular or periodic report and any registration statement or prospectus in respect thereof filed by any Borrower with, or received by any Borrower in connection therewith from, any securities exchange or the Securities and Exchange Commission, or any successor agency thereof, including, without limitation, each Form 10-K, 10-Q, and S-8 filed with the Securities and Exchange Commission. (ii) Promptly after the mailing or delivery thereof, copies of all material reports or other information from any Borrower to holders of its Stock. (e) Borrowing Base Property and Other Property Information. (i) Promptly after the preparation thereof, and no later than forty-five (45) days after the last day of each fiscal quarter, quarterly operating statements for each of the Borrowing Base Properties with rent rolls and leasing status reports for each of the Borrowing Base Properties. (ii) Promptly after the preparation thereof, and no later than the last day of November of the preceding calendar year, capital expenditure budgets for each of the Borrowing Base Properties. Credit Agreement Page 54 61 (iii) Promptly after the preparation thereof, and no later than forty-five (45) days after the last day of each fiscal year, a summary detailing the rent revenues, expenses, Adjusted NOI, for each of the Properties owned by the Companies as of and for the period then ended and for the corresponding period in the prior fiscal year. (f) Notices. Notice, promptly after a Responsible Officer of any Borrower knows of (i) the existence and status of any Litigation that, if determined adversely to any Company, could result in a Material Adverse Event, (ii) any change in any material fact or circumstance represented or warranted by any Company in any Loan Document which could result in a Material Adverse Event, (iii) the receipt by any Company of notice of any violation or alleged violation of ERISA or any Environmental Law, or (iv) a Default or Potential Default, specifying the nature thereof and what action Borrower has taken, are taking, or propose to take. (g) Change in Control. Promptly upon any Change in Control, notice of such event together with a description of the transaction giving rise thereto. (h) Other Information. Promptly upon reasonable request by any Agent, information (not otherwise required to be furnished under the Loan Documents) respecting the business affairs, assets, and liabilities of the Companies (including, without limitation, cash flow information, asset business plans, market information, and tax returns) and opinions, certifications, and documents in addition to those mentioned in this Agreement. 7.2 Use of Proceeds. Borrower shall use the proceeds of Borrowings only for the purposes represented in this Agreement. 7.3 Books and Records. Borrower shall, and shall cause each Company to, maintain books, records, and accounts necessary to prepare all Financial Statements in accordance with GAAP. 7.4 Inspections. Upon reasonable notice and during normal business hours, Borrower shall, and shall cause each Company to, allow Agent (or its Representatives) to inspect any of their respective properties (subject to the inspection rights in any tenant leases), to review reports, files, and other records and to make and take away copies with Borrower's permission, such permission not to be unreasonably withheld), and to discuss in the presence of a Borrower or such other Company any of its affairs, conditions, and finances with its other creditors, directors, officers, employees, or representatives from time to time, during reasonable business hours. 7.5 Taxes. Borrower shall, and shall cause each Company to, promptly pay prior to delinquency any and all Taxes, other than Taxes that are being contested in good faith by lawful proceedings Credit Agreement Page 55 62 diligently conducted, against which reserves or other provisions required by GAAP have been made, and in respect of which levy and execution of any Lien have been, and continue to be, stayed. 7.6 Payment of Obligations. Borrower shall, and shall cause each Company to, promptly pay (or renew and extend) all of their respective obligations as they become due (unless any such obligations are being contested in good faith by appropriate proceedings and against which reserves or other provisions required by GAAP have been made). 7.7 Expenses. Borrower shall promptly pay following demand: (a) all reasonable costs, fees, and expenses paid or incurred by Agent in connection with the arrangement, syndication, and negotiation of the loan evidenced by this Agreement and the other Loan Documents and the negotiation, preparation, delivery, and execution of the Loan Documents and any related amendment, waiver, or consent (including in each case the reasonable fees and expenses of any Agent's counsel); (b) all reasonable costs, fees, and expenses paid or incurred by Agent in connection with review and addition of Properties for inclusion in the Borrowing Base, including, without limitation, appraisals, architectural inspections, environmental consultants, legal fees and expenses, and title, escrow, and recording fees; (c) all costs, fees, and expenses of Agent and, after a Default, Lenders incurred by any Agent or, after a Default, any Lender in connection with the enforcement of the obligations of Borrower arising under the Loan Documents or the exercise of any Rights arising under the Loan Documents (including reasonable attorneys' fees, expenses, and costs paid or incurred in connection with any workout or restructure and any action taken in connection with any Debtor Relief Laws). All of such costs, fees, and expenses shall be a part of the Obligation and shall bear interest, if not paid within five (5) days following demand, at the Default Rate until repaid. Without prejudice to the survival of any other agreement of Borrower hereunder, the agreements and obligations of Borrower contained in this Section shall survive the payment in full of the Total Principal Debt and all other amounts payable under this Agreement. 7.8 Maintenance of Existence, Assets, and Business. Each Company shall (a) maintain its trust, partnership, limited liability company, or corporate existence in good standing in its state of organization or formation, and (b) maintain (i) its authority to transact business in good standing in all other states, (ii) all licenses, permits, franchises, and Governmental Requirements necessary Credit Agreement Page 56 63 for its business, and (iii) all of its material assets that are useful in and necessary to its business in good working order and condition (ordinary wear and tear excepted) and make all necessary repairs and replacements. 7.9 Insurance. Borrower shall, and shall cause each Company to, maintain with financially sound, responsible, and reputable insurance companies or associations (or, as to workers' compensation or similar insurance, with an insurance fund or by self-insurance authorized by the jurisdictions in which it operates) insurance reasonably acceptable to Agent concerning its properties and businesses against casualties and contingencies and of types and in amounts (and with co-insurance and deductibles) as is customary in the case of similar businesses. At any Agent's request, Borrower shall, and shall cause each Company to, deliver to Agent evidence of insurance for each policy of insurance and evidence of payment of all premiums. 7.10 Preservation and Protection of Rights. Borrower shall, and shall cause each other Company to, perform the acts and duly authorize, execute, acknowledge, deliver, file, and record any additional writings as any Agent may reasonably deem necessary or appropriate to preserve and protect the Rights of the Credit Parties under any Loan Document. 7.11 Environmental laws. Borrower shall, and shall cause each Company to, (a) operate and manage its businesses and otherwise conduct its affairs in compliance with all Environmental Laws, (b) promptly deliver to Agent a copy of any written notice received from any Governmental Authority alleging that any Company is not in compliance with any Environmental Law, and (c) promptly deliver to Agent a copy of any written notice received from any Governmental Authority alleging that any Company has any potential environmental Liability. 7.12 INDEMNIFICATION. Credit Agreement Page 57 64 (a) AS USED IN THIS SECTION: (i) "INDEMNITOR" MEANS BORROWER; (ii) "INDEMNITEE" MEANS EACH CREDIT PARTY, EACH PRESENT AND FUTURE AFFILIATE OF EACH CREDIT PARTY, EACH PRESENT AND FUTURE REPRESENTATIVE OF EACH CREDIT PARTY OR ANY OF SUCH AFFILIATES, AND EACH PRESENT AND FUTURE SUCCESSOR AND ASSIGN OF EACH CREDIT PARTY OR ANY OF SUCH AFFILIATES OR REPRESENTATIVES; AND (iii) "INDEMNIFIED LIABILITIES" MEANS ALL PRESENT AND FUTURE, KNOWN AND UNKNOWN, FIXED AND CONTINGENT, ADMINISTRATIVE, INVESTIGATIVE, JUDICIAL, AND OTHER CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, INVESTIGATIONS, SUITS, PROCEEDINGS, AMOUNTS PAID IN SETTLEMENT, DAMAGES, JUDGMENTS, PENALTIES, COURT COSTS, LIABILITIES, AND OBLIGATIONS -- AND ALL PRESENT AND FUTURE COSTS, EXPENSES, AND DISBURSEMENTS (INCLUDING, WITHOUT LIMITATION, ALL REASONABLE ATTORNEYS' FEES AND EXPENSES WHETHER OR NOT SUIT OR OTHER PROCEEDING EXISTS OR ANY INDEMNITEE IS PARTY TO ANY SUIT OR OTHER PROCEEDING) IN ANY WAY RELATED TO ANY OF THE FOREGOING -- THAT MAY AT ANY TIME BE IMPOSED ON, INCURRED BY, OR ASSERTED AGAINST ANY INDEMNITEE AND IN ANY WAY RELATING TO OR ARISING OUT OF ANY (A) LOAN DOCUMENT, TRANSACTION CONTEMPLATED BY ANY LOAN DOCUMENT, OR ANY PROPERTY, (B) ENVIRONMENTAL LIABILITY IN ANY WAY RELATED TO ANY COMPANY, ANY PROPERTY, OR ANY ACT, OMISSION, STATUS, OWNERSHIP, OR OTHER RELATIONSHIP, CONDITION, OR CIRCUMSTANCE CONTEMPLATED BY, CREATED UNDER, OR ARISING PURSUANT TO OR IN CONNECTION WITH ANY LOAN DOCUMENT, OR (C) ANY INDEMNITEE'S SOLE OR CONCURRENT ORDINARY NEGLIGENCE. AS USED IN THIS SECTION, "ENVIRONMENTAL LIABILITY" MEANS ANY AND ALL LOSSES, CLAIMS, COST RECOVERY ACTIONS, ADMINISTRATIVE ORDERS OR PROCEEDINGS, DAMAGES, AND LIABILITIES TO WHICH ANY SUCH PERSON MAY BECOME SUBJECT (I) UNDER ANY ENVIRONMENTAL LAW APPLICABLE TO ANY OBLIGOR OR ANY OF ITS PROPERTIES, INCLUDING WITHOUT LIMITATION THE TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON ANY OF ITS PROPERTIES AND RESULTING FROM THE FACT THAT AGENT OR LENDERS ARE A PARTY TO ANY LOAN DOCUMENT, (II) AS A RESULT OF THE BREACH OR NON-COMPLIANCE BY ANY OBLIGOR WITH ANY ENVIRONMENTAL LAW APPLICABLE TO SUCH OBLIGOR, (III) DUE TO PAST OWNERSHIP BY ANY OBLIGOR OF ANY OF ITS PROPERTIES OR PAST ACTIVITY ON ANY OF ITS PROPERTIES THAT, THOUGH LAWFUL AND FULLY PERMISSIBLE AT THE TIME, COULD RESULT IN PRESENT LIABILITY, (IV) THE PRESENCE, USE, RELEASE, STORAGE, TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON OR AT ANY OF THE PROPERTIES OWNED OR OPERATED BY ANY OBLIGOR, OR (V) ANY OTHER ENVIRONMENTAL, HEALTH OR SAFETY CONDITION IN CONNECTION WITH THE LOAN DOCUMENTS. (b) EACH INDEMNITOR SHALL JOINTLY AND SEVERALLY INDEMNIFY EACH INDEMNITEE FROM AND AGAINST, PROTECT AND DEFEND EACH INDEMNITEE FROM AND AGAINST, HOLD EACH INDEMNITEE HARMLESS FROM AND AGAINST, AND ON DEMAND PAY OR REIMBURSE EACH INDEMNITEE FOR, ALL INDEMNIFIED LIABILITIES. (c) THE FOREGOING PROVISIONS (i) ARE NOT LIMITED IN AMOUNT EVEN IF THAT AMOUNT EXCEEDS THE OBLIGATION, (ii) INCLUDE, WITHOUT LIMITATION, REASONABLE FEES AND EXPENSES OF ATTORNEYS AND OTHER COSTS AND EXPENSES OF LITIGATION OR PREPARING FOR LITIGATION AND DAMAGES OR INJURY TO PERSONS, PROPERTY, OR NATURAL RESOURCES ARISING UNDER ANY STATUTORY OR COMMON LAW, PUNITIVE DAMAGES, FINES, AND OTHER PENALTIES, AND (iii) ARE NOT AFFECTED BY THE SOURCE OR ORIGIN OF ANY HAZARDOUS SUBSTANCE, AND (iv) ARE NOT AFFECTED BY ANY INDEMNITEE'S INVESTIGATION, ACTUAL OR CONSTRUCTIVE KNOWLEDGE, COURSE OF DEALING, OR WAIVER. (d) NO INDEMNITEE IS ENTITLED TO BE INDEMNIFIED UNDER THE LOAN DOCUMENTS FOR ITS OWN FRAUD, GROSS NEGLIGENCE, OR WILLFUL MISCONDUCT. Credit Agreement Page 58 65 (e) THE PROVISIONS OF AND INDEMNIFICATION AND OTHER UNDERTAKINGS UNDER THIS SECTION SURVIVE THE SATISFACTION OF THE OBLIGATION AND THE FORECLOSURE, RELEASE, AND TERMINATION OF THE LOAN DOCUMENTS. 7.13 REIT Status. At all times, Borrower (including its organization and method of operations and those of its Consolidated Affiliates) shall qualify as a REIT. 7.14 ERISA Exemptions. At all times, Borrower shall qualify as a "real estate operating company" under the 29 C.F.R. Section 2510.3-101(e) (or any successor regulation) or other appropriate exemption such that its assets shall not be deemed "plan assets" as defined in 29 C.F.R. Section 2510.3-101(a)(1) (or any successor regulation) of any Employee Plan or Multi-employer Plan. 7.15 Listed Company. The common Stock of Borrower shall at all times be listed for trading and be traded on the New York Stock Exchange, the American Stock Exchange, or the NASDAQ Stock Market. 7.16 Properties. (a) Borrower shall cause all of the Companies' Properties to be operated, maintained, and managed at all times in a professional manner (including all marketing, advertising, and promotional programs). Borrower shall keep in effect (or cause to be kept in effect) at all times all permits and contractual arrangements as may be necessary to meet the standards of operation described in the foregoing sentence. (b) Borrower shall cause construction, renovation, and rehabilitation work with respect to all of the Companies' Properties to be performed in a good and workmanlike manner substantially in accordance with all Governmental Requirements and restrictions affecting such Properties. 7.17 Quarterly Distributions. All Consolidated Affiliates shall distribute all Funds Available for Distribution to Borrower at least quarterly. 7.18 Year 2000 Compliance. Borrower shall, and shall cause each Obligor to: (a) Furnish such additional information, statements and other reports with respect to Obligor's activities, course of action and progress towards becoming Year 2000 Complaint as Bank One may request from time to time; (b) In the event of any change in circumstances that causes or will likely cause Obligor's representations and warranties with Credit Agreement Page 59 66 respect to its being or becoming Year 2000 Compliant to no longer be true (hereinafter, referred to as a "Change in Circumstances") then Obligor shall promptly, and in any event within ten (10) days of receipt of information regarding a Change in Circumstances, provide Agent with written notice (the "Y2K NOTICE") that describes in reasonable detail the Change in Circumstances and how such Change in Circumstances caused or will likely cause Obligor's representations and warranties with respect to being or becoming Year 2000 Compliant to no longer be true. Obligor shall, within ten (10) days of a request, provide Agent with any additional information Agent requests of Obligor in connection with the Y2K Notice or a Change in Circumstances; and (c) Provide Agent access during business hours to, and permit Agent to examine, copy, or make excerpts from, any and all books, records and documents in the possession of Obligor and relating to whether such Obligor is Year 2000 Compliant, and to inspect and test any of the Properties and Systems of Obligor to determine if they are Year 2000 Compliant in an integrated environment. 7.19 Repayment of Certain Unsecured Note. With the proceeds of the initial advance under this Agreement, Borrower shall, contemporaneously with Closing, repay all Existing DDR Debt and provide satisfactory evidence of such repayment to Agent within two (2) Business Days thereafter. 7.20 Subordination of Indebtedness. Prior to incurring any Indebtedness to DDR other than the Existing DDR Indebtedness, Borrower shall cause DDR to subordinate such Indebtedness in favor of DDR by Borrower and its Consolidated Affiliates to the Obligation by instrument satisfactory to Agent in form and substance. 7.21 Subsidiary Guaranty. Upon the first to occur of, (i) for each Existing Subsidiary Guarantor, the Closing Date, and (ii) for each Consolidated Affiliate created subsequent to the Closing Date, the date of formation of such Consolidated Affiliate, Borrower shall cause each Subsidiary Guarantor to guarantee the Obligation pursuant to the Subsidiary Guaranty; provided that no Existing Excluded Subsidiary shall be required to execute the Subsidiary Guaranty as long as the Existing Debt of such Existing Excluded Subsidiary or any Permitted Conduit Debt of such Existing Excluded Subsidiary entered into to refinance such Existing Debt prohibits such Existing Excluded Subsidiary from executing the Subsidiary Guaranty. 7.22 Ownership of Consolidated Affiliates. Without the prior written consent of Agent, Borrower shall not create or permit to be created any Consolidated Affiliate (except for the Existing Consolidated Affiliates) unless either (a) Borrower is the sole legal and beneficial owner of all ownership interests in such Consolidated Affiliates, or (b) such Consolidated Affiliate is a Subsidiary Guarantor. Credit Agreement Page 60 67 SECTION 8 NEGATIVE COVENANTS So long as Lenders are committed to fund any Borrowings or fund or issue any LCs under this Agreement and until the Obligation is paid in full, Borrower covenants and agrees as follows: 8.1 Payment of Obligations. Borrower shall not, and shall not permit any Company to, voluntarily prepay principal of, or interest on, any Liabilities other than the Obligation, if a Default has occurred and is continuing at the time of such voluntary prepayment. 8.2 Employee Plans. Borrower shall not, and shall not permit any Company to, permit any of the events or circumstances described in Section 6.10 to exist or occur. 8.3 Transactions With Affiliates. Except as disclosed on Schedule 6.14 (as supplemented from time to time to reflect changes as a result of transactions permitted by this Agreement or approved by Required Lenders), Borrower shall not, and shall not permit any Company to, enter into any material transaction with any of its Affiliates, other than transactions in the ordinary course of business and upon fair and reasonable terms not materially less favorable than it could obtain or could become entitled to in an arm's-length transaction with a Person that was not its Affiliate. 8.4 Compliance With Governmental Requirements and Documents. Borrower shall not, and shall not permit any Company to, (a) violate the provisions of any Governmental Requirements applicable to it or of any material agreement to which it is a party, (b) violate the provisions of its Constituent Documents, or (c) repeal, replace, or amend any provision of its Constituent Documents, in each case where any of the foregoing could result in a Material Adverse Event. 8.5 Loans, Advances, and Investments. Borrower shall not permit the Companies to have or make any investments in: (a) Unimproved land exceeding in the aggregate five percent (5%) of Total Consolidated Value; or (b) Joint Venture Categories exceeding in the aggregate five percent (5%) of Total Consolidated Value; or (c) The Marketable Securities of Persons (including corporations, partnerships, joint ventures, and similar entities) that Credit Agreement Page 61 68 are not Consolidated Affiliates exceeding in the aggregate five percent (5%) of Total Consolidated Value; or (d) Properties other than industrial, light industrial, or office Properties exceeding in the aggregate ten percent (10%) of Total Consolidated Value; (e) Office Properties exceeding in the aggregate twenty percent (20%) of Total Consolidated Value; (f) The investments described in Clauses (a) through (c) above exceeding in the aggregate ten percent (10%) of Total Consolidated Value; or (g) Properties under construction or development in an amount with exceeds ten percent (10%) of Total Consolidated Value. 8.6 Dividends and Distributions. Borrower shall not, and shall not permit any Company to, declare, make or pay any Distribution, other than Permitted Distributions. Borrower shall not, and shall not permit any Company to, enter into or permit to exist any arrangement or agreement (other than this Agreement) that prohibits it from paying Distributions to the holders of its Stock. 8.7 Sale of Assets. Borrower shall not, and shall not permit any Company to, sell, assign, lease, transfer, or otherwise dispose of any of its assets or any interest therein, other than sales of assets not to exceed in the aggregate fifteen percent (15%) of Total Consolidated Value in a fiscal year of the Companies. 8.8 Mergers and Dissolutions. Borrower shall not, and shall not permit any Company to, merge or consolidate with any other Person or liquidate, wind up, or dissolve (or suffer any liquidation or dissolution). 8.9 Assignment. Borrower shall not, and shall not permit any Company to, assign or transfer any of its Rights, duties, or obligations under any of the Loan Documents. 8.10 Fiscal Year and Accounting Methods. Borrower shall not, and shall not permit any Company to, change its fiscal year or its method of accounting (other than changes required or allowed by GAAP). 8.11 New Businesses. Borrower shall not, and shall not permit any Company to, engage in any type of business except the types of businesses in which they are presently engaged and any other reasonably related business. 8.12 Government Regulations. Borrower shall not, and shall not permit any Company to, conduct its business in a way that it becomes Credit Agreement Page 62 69 regulated under the Investment Company Act of 1940, as amended, or the Public Utility Holding Company Act of 1935, as amended. 8.13 Interest Rate Agreements. Borrower shall not permit, as of any date, the amount of Indebtedness that is not either subject to a fixed interest rate or hedged pursuant to an Interest Rate Agreement acceptable to Agent ("Variable Rate Debt") to exceed the lesser of $160,000,000 or fifty percent (50%) of all Indebtedness. 8.14 Indebtedness. The Companies shall not create, incur, assume, guarantee, or suffer to exist any Liabilities, other than (a) the Obligation, (b) trade payables created in the ordinary course of business, (c) endorsements of negotiable instruments in the ordinary course of business, (d) contingent Liabilities covered by reserves or insurance, (e) equipment leases incurred in the ordinary course of business, (f) Interest Rate Agreements in the ordinary course of business, (g) Non-Recourse Debt secured by Properties other than the Borrowing Base Properties, (h) Permitted Conduit Debt, (i) with respect to Indebtedness to DDR only, Indebtedness with a principal amount in excess of $10,000,000. For at least thirty (30) consecutive days of any twelve (12) month period, all Indebtedness of any Company in favor of DDR must be repaid. The principal of the Prudential Debt shall be repaid and reduced according to the following chart within the following specified time periods:
Within this number of months after the Closing Date: Amount of principal to be repaid - ----------------------- -------------------------------- Nine (9) months Fifty percent (50%) Twelve (12) months Seventy five percent (75%) Eighteen (18) months One hundred percent (100%)
8.15 Book Value. Borrower shall not permit any Consolidated Affiliate that is not a Subsidiary Guarantor to acquire any Property if, following such acquisition, the total number of Properties owned by Borrower's Consolidated Affiliates (but excluding the Existing Excluded Subsidiaries) exceeds five percent (5%) of the Properties owned directly by Borrower or any Consolidated Affiliates that are Subsidiary Guarantors as of such date, which percentage shall be calculated based on the cost of such Properties. 8.16 Pledge. Neither Borrower nor any Consolidated Affiliate of Borrower shall pledge any of its respective interests in any Consolidated Affiliate of Borrower except to secure Permitted Conduit Debt of such Consolidated Affiliate of Borrower. Credit Agreement Page 63 70 SECTION 9 FINANCIAL COVENANTS So long as Lenders are committed to fund Borrowings or fund or issue any LCs under this Agreement and until the Obligation is paid and performed in full, Borrower covenants and agrees that Borrower shall not directly or indirectly permit: 9.1 Total Indebtedness to Total Consolidated Value Ratio. As of the last day of any fiscal quarter, the Total Indebtedness to Total Consolidated Value Ratio to exceed sixty-five percent (65%). 9.2 Debt Service Ratio. As of the last day of any fiscal quarter, the ratio of (a) EBITDA to (b) Debt Service in each case for the Companies on a consolidated basis and for the twelve (12) month period ending on the date of determination to be less than 1.25 to 1.0. 9.3 Interest Coverage Ratio. As of the last day of any fiscal quarter, the ratio of (a) EBITDA, to (b) Interest Expense, in each case for the Companies, on a consolidated basis and for the twelve (12) month period ending on the date of determination, to be less than 1.5 to 1.0. 9.4 Minimum Tangible Net Worth. As of the last day of any fiscal quarter, Tangible Net Worth to be less than the sum of (a) $200,000,000, and (b) fifty percent (50%) of the amount of Net Proceeds of any Equity Issuances subsequent to the Closing Date. SECTION 10 DEFAULT 10.1 Events of Default. The term "Default" means the occurrence of any one or more of the following events: (a) Payment of Obligation. The failure of any Obligor to pay any principal of or any interest on the Obligation when it becomes due and payable under the Loan Documents. (b) Covenants. The failure of any Obligor to punctually and properly perform, observe, and comply with: (i) any covenant or agreement contained in Section 7.1, Section 4, or Section 9; or (ii) any other covenant or agreement contained in any Loan Document (other than the covenants to pay the principal of and interest on the Obligation and the covenants in Clause (i) preceding) and if such failure is susceptible to being cured within the appropriate time, then such failure shall continue for Credit Agreement Page 64 71 thirty (30) days after the earlier to occur of the date (A) any Obligor knows of, or (B) any Obligor receives notice from Agent of, such failure. (c) Debtor Relief. Any Company (i) is not Solvent, (ii) fails to pay its Liabilities generally as they become due, (iii) voluntarily seeks, consents to, or acquiesces in the benefit of any Debtor Relief Law, (iv) becomes a party to or is made the subject of any proceeding provided for by any Debtor Relief Law, other than as a creditor or claimant, that could suspend or otherwise adversely affect the Rights of any Credit Party granted in the Loan Documents (unless, if the proceeding is involuntary, the applicable petition is dismissed within sixty (60) days after its filing), or (v) conceals, removes, or permits to be concealed or removed, any part of its property, with intent to hinder, delay or defraud its creditors or any of them, or makes or suffers a transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or makes any transfer of its property to or for the benefit of a creditor at a time when other creditors similarly situated have not been paid; or suffers or permits, while insolvent, any creditor to obtain a lien upon any of its property through legal proceedings which are not vacated and such lien discharged prior to enforcement thereof and in any event within ninety (90) days from the date thereof. (d) Judgments and Attachments. Any Company fails, within sixty (60) days after entry, to pay, bond, or otherwise discharge any judgment or order for the payment of money in excess of $5,000,000 (individually or collectively) or any warrant of attachment, sequestration or similar proceeding against any Company's assets having a value (individually or collectively) of $5,000,000 which is neither (i) stayed on appeal nor (ii) diligently contested in good faith by appropriate proceedings and adequate reserves have been set aside on its books in accordance with GAAP. (e) Government Action. (i) A final non-appealable order is issued by any Governmental Authority (including the United States Justice Department) requiring any Company to divest all or a substantial portion of its assets under any antitrust, restraint of trade, unfair competition, industry regulation, or similar Governmental Requirements, or (ii) Any Governmental Authority seizes or otherwise appropriates, or takes custody or control of, all or any substantial portion of the assets of any Company, other than through condemnation proceeding. Credit Agreement Page 65 72 (f) Misrepresentation. Any material representation or warranty made by any Company contained in any Loan Document at any time proves to have been incorrect in any material respect when made. (g) Default Under Other Agreements. (i) Any Company shall fail to make any payment in respect of any Indebtedness when due or within any applicable grace period, if any; or (ii) A default shall occur in respect of any credit agreement, note, mortgage, indenture, or other agreement or document evidencing, securing, or otherwise relating to any Indebtedness of any Company (other than a failure to make any payment when due in respect of any such Indebtedness) and such default shall continue for more than the period of grace, if any, specified therein or otherwise granted by the lender thereof; or (iii) A default shall occur under any other Loan Document which is not cured within the applicable cure period, if any, expressly granted therein. (h) Validity and Enforceability of Loan Documents. Any Loan Document at any time after its execution and delivery ceases to be in full force and effect in any material respect or is declared by a Governmental Authority to be null and void or its validity or enforceability is contested by any Company, or any Company denies that it has any further liability or obligations under any Loan Document to which it is a party; or the liens, rights, interests, mortgages or security interests of Agent in any Borrowing Base Property become unenforceable in whole or in part, or cease to be of the priority herein required, or the validity or enforceability thereof, in whole or in part, shall be challenged or denied by any Obligor. (i) Management Changes. Charles Wolcott or Scott Wolstein shall cease to be active in the management of the Trust and a replacement satisfactory to Agent is not appointed within 120 days of such cessation. (j) Change in Control. A Change in Control shall occur. (k) Plan Assets. The assets of any Company at any time constitute assets, within the meaning of ERISA, the Code, and the respective regulations promulgated thereunder, of any Employee Plan or Multi-employer Plan. (l) Transfer of Borrowing Base Property. Any sale, lease, conveyance, assignment, pledge, encumbrance, or transfer of all or any part of any Borrowing Base Property or any interest therein, voluntarily or involuntarily, whether by operation of law or Credit Agreement Page 66 73 otherwise, except: (i) sales or transfers of items of the Accessories (as defined in the Mortgage) which have become obsolete or worn beyond practical use and which have been replaced by adequate substitutes, owned by the applicable Obligor, having a value equal to or greater than the replaced items when new; and (ii) the grant, in the ordinary course of business, of a leasehold interest in a part of the Improvements (as defined in the Mortgage) to a tenant for occupancy, not containing a right or option to purchase and not in contravention of any provision of this Agreement or of any other Loan Document. Agent may, in its sole discretion, waive a default under this paragraph, but it shall have no obligation to do so, and any waiver may be conditioned upon such one or more of the following (if any) which Agent may require: the grantee's integrity, reputation, character, creditworthiness and management ability being satisfactory to Agent in its sole judgment and grantee executing, prior to such sale or transfer, a written assumption agreement containing such terms as Agent may require, a principal paydown on the Note, an increase in the rate of interest payable under the Note, a transfer fee, a modification of the term of the Note, and any other modification of the Loan Documents which Holder may require. (m) Grant of Easement, Etc. Without the prior written consent of Agent, any Obligor grants any easement or dedication, files any plat, condominium declaration, or restriction, or otherwise encumbers any Borrowing Base Property, or seeks or permits any zoning reclassification or variance, unless such action is expressly permitted by the Loan Documents or does not affect any Borrowing Base Property. (n) Abandonment. Any Obligor abandons any Borrowing Base Property. (o) Default Under Other Lien. A default or event of default occurs under any lien, security interest or assignment covering any Borrowing Base Property or any part thereof (whether or not Agent has consented, and without hereby implying Agent's consent, to any such lien, security interest or assignment not created hereunder), or the holder of any such lien, security interest or assignment declares a default or institutes foreclosure or other proceedings for the enforcement of its remedies thereunder. (p) Destruction. Any Borrowing Base Property is so demolished, destroyed or damaged that, in the reasonable opinion of Agent, it cannot be restored or rebuilt with available funds to a profitable condition within a reasonable period of time and in any event prior to the final maturity date of the Note. (q) Condemnation. (i) Any governmental authority shall require, or commence any proceeding for, the demolition of any building or structure comprising a part of any Borrowing Base Credit Agreement Page 67 74 Property, or (ii) there is commenced any proceeding to condemn or otherwise take pursuant to the power of eminent domain, or a contract for sale or a conveyance in lieu of such a taking is executed which provides for the transfer of, a material portion of any Borrowing Base Property, including but not limited to the taking (or transfer in lieu thereof) of any portion which would result in the blockage or substantial impairment of access or utility service to the Improvements (as defined in the Mortgage) or which would cause any Borrowing Base Property to fail to comply with any Governmental Requirement. (r) Liquidation, Etc. The liquidation, termination, dissolution, merger, consolidation or failure to maintain good standing in the applicable state of its formation and the state in which its Property is located of any Company. 10.2 Notice and Cure. If any provision of this Agreement or any other Loan Document provides for Agent to give to Borrowers any notice regarding a Default or Potential Default, then if Agent shall fail to give such notice to Borrowers as provided, the sole and exclusive remedy of Borrowers for such failure shall be to seek appropriate equitable relief to enforce the agreement to give such notice and to have any acceleration of the maturity of the Note and the Obligation postponed or revoked and foreclosure proceedings in connection therewith delayed or terminated pending or upon the curing of such Default in the manner and during the period of time permitted by such agreement, if any, and Borrowers shall have no right to damages or any other type of relief not herein specifically set out against Agent, all of which damages or other relief are hereby waived by Borrowers. Nothing herein or in any other Loan Document shall operate or be construed to add on or make cumulative any cure or grace periods specified in any of the Loan Documents. SECTION 11 RIGHTS AND REMEDIES 11.1 Remedies Upon Default. (a) Debtor Relief. If a Default (i) occurs under Section 10.3(c) or (ii) occurs and is continuing under Section 10.3(a), (b) or (d), the commitment to extend credit under this Agreement automatically terminates and the entire unpaid balance of the Obligation automatically becomes due and payable without any action of any kind whatsoever. (b) Other Defaults. If a Default occurs and is continuing, subject to the terms of Section 13.9(b), then Agent, upon the request of the Required Lenders, may do any one or more of the following: (i) if the maturity of the Obligation has not already been accelerated under Section 11.1(a), then declare the entire unpaid balance of all Credit Agreement Page 68 75 or any part of the Obligation immediately due and payable, whereupon it is due and payable; (ii) terminate the commitments of Lenders to extend credit under this Agreement; (iii) reduce any claim to judgment; and (iv) exercise any and all other legal or equitable Rights afforded by the Loan Documents, or by the Governmental Requirements of the State of Texas, or any other applicable jurisdiction. 11.2 Waivers. To the extent permitted by applicable law, each Company waives presentment and demand for payment, protest, notice of intention to accelerate, notice of acceleration, and notice of protest and nonpayment, and agrees that its liability with respect to all or any part of the Obligation is not affected by any renewal or extension in the time of payment of all or any part of the Obligation, by any indulgence, or by any release or change in any security for the payment of all or any part of the Obligation. 11.3 Performance by Agent. If any covenant, duty, or agreement of any Obligor is not performed in accordance with the terms of the Loan Documents, Agent may, while a Default exists, at its option, perform, or attempt to perform that covenant, duty, or agreement on behalf of such Obligor (and any amount expended by Agent in its performance or attempted performance is payable by to Agent on demand, becomes part of the Obligation, and bears interest at the Default Rate from the date of Agent's expenditure until paid). However, neither Agent nor any Lender assumes or shall have, except by its express written consent, any liability or responsibility for the performance of any covenant, duty, or agreement of such Obligor. 11.4 Not in Control. None of the covenants or other provisions contained in any Loan Document shall, or shall be deemed to, give Agent or Lenders the Right to exercise control over the assets (including real Property), affairs, or management of any Company. 11.5 Course of Dealing. The acceptance by Agent or any Lender of any partial payment on the Obligation shall not be deemed to be a waiver of any Default then existing. No waiver by any Credit Party of any Default shall be deemed to be a waiver of any other then-existing or subsequent Default. No delay or omission by any Credit Party in exercising any Right under the Loan Documents will impair that Right or be construed as a waiver thereof or any acquiescence therein, nor will any single or partial exercise of any Right preclude other or further exercise thereof or the exercise of any other Right under the Loan Documents or otherwise. 11.6 Cumulative Rights. All Rights available to the Credit Parties under the Loan Documents are cumulative of and in addition to all other Rights granted to the Credit Parties at law or in equity, whether or not the Obligation is due and payable and whether or not Credit Agreement Page 69 76 Agent or Lenders have instituted any suit for collection, foreclosure, or other action in connection with the Loan Documents. 11.7 Application of Proceeds. Any and all proceeds ever received by any Credit Party from the exercise of any Rights pertaining to the Obligation shall be applied to the Obligation according to Section 3.11. 11.8 Certain Proceedings. Borrower shall promptly execute and deliver, or cause the execution and delivery of, all applications, certificates, instruments, and all other documents and papers any Agent reasonably requests in connection with the obtaining of any consent, approval, registration, qualification, permit, license, or authorization of any Governmental Authority or other Person necessary or appropriate for the effective exercise of any Rights under the Loan Documents. Because Borrower agrees that Agent's and Lenders' remedies at law for failure of Borrower to comply with the provisions of this paragraph would be inadequate and that failure would not be adequately compensable in damages, Borrower agrees that the covenants of this Section 11.8 may be specifically enforced. SECTION 12 AGENT AND LENDERS 12.1 Agent. (a) Appointment. Each Lender appoints Agent (including, without limitation, each successor Agent in accordance with this Section 12) as its nominee and agent to act in its name and on its behalf (and Agent and each such successor accepts that appointment): (i) to act as its nominee and on its behalf in and under all Loan Documents; (ii) to arrange the means whereby its funds are to be made available to Borrower under the Loan Documents; (iii) to take any action that it properly requests under the Loan Documents (subject to the concurrence of other Lenders as may be required under the Loan Documents); (iv) to receive all documents and items to be furnished to it under the Loan Documents; (v) to be the secured party, mortgagee, beneficiary, recipient, and similar party in respect of any collateral, for the benefit of Lenders; (vi) to promptly distribute to it all Financial Statements, Borrowing Base Reports, notices received hereunder, and other items specifically required to be delivered to it hereunder, and, upon request, such other material information, requests, documents, and items received under the Loan Documents; (vii) to promptly distribute to it its ratable part of each payment or prepayment (whether voluntary, as proceeds of collateral upon or after foreclosure, as proceeds of insurance thereon, or otherwise) in accordance with the terms of the Loan Documents; and (viii) to deliver to the appropriate Persons requests, demands, approvals, and consents received from it. However, Agent may not be required to take any Credit Agreement Page 70 77 action that exposes it to personal liability or that is contrary to any Loan Document or applicable Governmental Requirement. (b) Successor. Agent may assign all of its Rights and obligations as Agent under the Loan Documents to any of its Affiliates, which Affiliate shall then be the successor Agent under the Loan Documents. Agent may also voluntarily resign by giving thirty (30) days' prior written notice to Borrower and Lenders, and shall resign upon the request of the Required Lenders for cause (i.e., Agent is continuing to fail to perform its responsibilities as Agent under the Loan Documents). If the initial or any successor Agent ever ceases to be a party to this Agreement or if the initial or any successor Agent ever resigns (whether voluntarily or at the request of the Required Lenders), then the Required Lenders shall (which, if no Default or Potential Default exists, is subject to Borrower's approval that may not be unreasonably withheld) appoint the successor Agent from among Lenders (other than the resigning Agent). If the Required Lenders fail to appoint a successor Agent within thirty (30) days after the resigning Agent has given notice of resignation or the Required Lenders have removed the resigning Agent, then the resigning Agent may, on behalf of Lenders, appoint a successor Agent (which, if no Default or Potential Default exists, is subject to Borrower's approval that may not be unreasonably withheld), which must be a commercial bank having a combined capital and surplus of at least $1,000,000,000 (as shown on its most recently published statement of condition) and whose debt obligations (or whose parent's debt obligations) are rated not less than Baa1 by Moody's or BBB+ by S&P. Upon its acceptance of appointment as successor Agent, the successor Agent succeeds to and becomes vested with all of the Rights of the prior Agent, and the prior Agent is discharged from its duties and obligations of Agent under the Loan Documents, and each Lender shall execute the documents that any Lender, the resigning or removed Agent, or the successor Agent reasonably request to reflect the change. After any Agent's resignation or removal as Agent under the Loan Documents, the provisions of this Section inure to its benefit as to any actions taken or not taken by it while it was Agent under the Loan Documents. If Borrower fails to respond to any written request for any consent required in this Section 12.1(b) within five (5) Business Days after the date that Borrower receives such request, then Borrower shall be deemed to have given its consent to such request. (c) Rights as Lender. Agent, in its capacity as a Lender, has the same Rights under the Loan Documents as any other Lender and may exercise those Rights as if it were not acting as Agent. The term "Lender," unless the context otherwise indicates, includes Agent. Agent's resignation or removal does not impair or otherwise affect any Rights that it has or may have in its capacity as an individual Lender. Lenders and Borrower agree that Agent is not a fiduciary for Lenders or for Borrower but are simply acting in the capacities described in this Agreement to alleviate administrative burdens for Credit Agreement Page 71 78 Borrower and Lenders, that Agent has no duties or responsibilities to Lenders or Borrower except those expressly set forth in the Loan Documents, and that Agent in its capacity as a Lender has the same Rights as any other Lender. (d) Other Activities. Any Credit Party may now or in the future be engaged in one or more loan, letter of credit, leasing, or other financing transactions with Borrower or another Company, act as trustee or depositary for Borrower or another Company, or otherwise be engaged in other transactions with Borrower (collectively, the "Other Activities") not the subject of the Loan Documents. Without limiting the Rights of Lenders specifically set forth in the Loan Documents, no Credit Party is responsible to account to the other Credit Parties for those other activities, and no Credit Party shall have any interest in any other Credit Party's activities, any present or future guaranties by or for the account of Borrower that are not contemplated by or included in the Loan Documents, any present or future offset exercised by any Credit Party in respect of those other activities, any present or future Property taken as security for any of those other activities, or any Property now or hereafter in any Credit Party's possession or control that may be or become security for the obligations of Borrower arising under the Loan Documents by reason of the general description of indebtedness secured or of Property contained in any other agreements, documents, or instruments related to any of those other activities (but, if any payments in respect of those guaranties or that Property or the proceeds thereof is applied by any Credit Party to reduce the Obligation, then each Lender is entitled to share ratably in the application as provided in the Loan Documents). 12.2 Expenses. Should Agent commence any proceeding or in any way seek to enforce its Rights under the Loan Documents, irrespective of whether as a result thereof Agent shall acquire title to any collateral, either through foreclosure, deed in lieu of foreclosure, or otherwise, each Lender, upon demand therefor from time to time, shall contribute its share (based on its Pro Rata Share) of the reasonable costs and/or expenses of any such enforcement or acquisition, including, but not limited to, fees of receivers or trustees, court costs, title company charges, filing and recording fees, appraisers' fees and fees and expenses of attorneys to the extent not otherwise reimbursed by Borrower. Without limiting the generality of the foregoing, each Lender shall contribute its share (based on its Pro Rata Share) of all reasonable costs and expenses incurred by Agent (including reasonable attorneys' fees and expenses) if Agent employs counsel for advice or other representation (whether or not any suit has been or shall be filed) with respect to any collateral or any part thereof, or any of the Loan Documents, or the attempt to enforce any Lien in any of the collateral, or to enforce any Rights of Agent or any of Borrower's or any other Company's obligations under any of the Loan Documents, but not with respect to Credit Agreement Page 72 79 any dispute between Agent and any other Lender(s). Any loss of principal and interest resulting from any Default shall be shared by Lenders in accordance with their respective Pro Rata Share. It is understood and agreed that if Agent determines that it is necessary to engage counsel for Lenders from and after the occurrence of a Potential Default or Default, then said counsel shall be selected by Agent and written notice of the same shall be delivered to Lenders. 12.3 Proportionate Absorption of Losses. Except as otherwise provided in the Loan Documents, nothing in the Loan Documents gives any Lender any advantage over any other Lender insofar as the Obligation is concerned or relieves any Lender from ratably absorbing any losses sustained with respect to the Obligation (except to the extent unilateral actions or inactions by any Lender result in Borrower or any other Company on the Obligation having any credit, allowance, setoff, defense, or counterclaim solely with respect to all or any part of that Lender's Pro Rata Share of the Obligation). 12.4 Delegation of Duties; Reliance. Lenders may perform any of their duties or exercise any of their Rights under the Loan Documents by or through Agent, and Lenders and Agent may perform any of their duties or exercise any of their Rights under the Loan Documents by or through their respective Representatives. Agent, Lenders, and their respective Representatives (a) are entitled to rely upon (and shall be protected in relying upon) any written or oral statement believed by it or them to be genuine and correct and to have been signed or made by the proper Person and, with respect to legal matters, upon opinion of counsel selected by Agent or that Lender (but nothing in this clause (a) permits Agent to rely on (i) oral statements if a writing is required by this Agreement or (ii) any other writing if a specific writing is required by this Agreement), (b) are entitled to deem and treat each Lender as the owner and holder of its portion of the Obligation for all purposes until written notice of the assignment or transfer is given to and received by Agent (and any request, authorization, consent, or approval of any Lender is conclusive and binding on each subsequent holder, assignee, or transferee of or Participant in that Lender's portion of the Obligation until that notice is given and received), (c) are not deemed to have notice of the occurrence of a Default unless a Responsible Officer of Agent, who handles matters associated with the Loan Documents and transactions thereunder, has actual knowledge or Agent has been notified by a Lender or Borrower, and (d) are entitled to consult with legal counsel (including counsel for Borrower), independent accountants, and other experts selected by Agent and are not liable for any action taken or not taken in good faith by it in accordance with the advice of counsel, accountants, or experts. Credit Agreement Page 73 80 12.5 Limitation of Agent's Liability. (a) Exculpation. No Agent nor any of their Affiliates or Representatives will be liable for any action taken or omitted to be taken by it or them under the Loan Documents in good faith and believed by it or them to be within the discretion or power conferred upon it or them by the Loan Documents or be responsible for the consequences of any error of judgment (except for fraud, gross negligence, or willful misconduct), and no Agent nor any of its Affiliates or Representatives has a fiduciary relationship with any Lender by virtue of the Loan Documents (but nothing in this Agreement negates the obligation of Agent to account for funds received by it for the account of any Lender). (b) Indemnity. Unless indemnified to its satisfaction against loss, cost, liability, and expense, Agent shall not be compelled to do any act under the Loan Documents or to take any action toward the execution or enforcement of the powers thereby created or to prosecute or defend any suit in respect of the Loan Documents. If Agent requests instructions from Lenders, or the Required Lenders, as the case may be, with respect to any act or action in connection with any Loan Document, then Agent is entitled to refrain (without incurring any liability to any Person by so refraining) from that act or action unless and until it has received instructions. In no event, however, may Agent or any of its Representatives be required to take any action that it or they determine could incur for it or them criminal or onerous civil liability. Without limiting the generality of the foregoing, no Lender has any Right of action against Agent as a result of Agent's acting or refraining from acting under this Agreement in accordance with instructions of the Required Lenders. (c) Reliance. Agent is not responsible to any Lender or any Participant for, and each Lender represents and warrants that it has not relied upon Agent in respect of, (i) the creditworthiness of any Company and the risks involved to that Lender, (ii) the effectiveness, enforceability, genuineness, validity, or the due execution of any Loan Document (except by Agent), (iii) any representation, warranty, document, certificate, report, or statement made therein (except by Agent) or furnished thereunder or in connection therewith, (iv) the adequacy of any collateral now or hereafter securing the Obligation or the existence, priority, or perfection of any Lien now or hereafter granted or purported to be granted on any collateral under any Loan Document, or (v) observation of or compliance with any of the terms, covenants, or conditions of any Loan Document on the part of any Company. EACH LENDER AGREES TO INDEMNIFY AGENT AND ITS REPRESENTATIVES AND HOLD THEM HARMLESS FROM AND AGAINST (BUT LIMITED TO SUCH LENDER'S PRO RATA SHARE OF) ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, REASONABLE EXPENSES, AND REASONABLE DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER THAT MAY BE IMPOSED ON, ASSERTED AGAINST, OR INCURRED BY THEM IN ANY WAY RELATING TO OR ARISING OUT OF THE LOAN DOCUMENTS OR ANY ACTION TAKEN OR OMITTED BY THEM UNDER THE LOAN DOCUMENTS IF AGENT AND ITS REPRESENTATIVES ARE NOT REIMBURSED FOR SUCH AMOUNTS BY ANY COMPANY. ALTHOUGH AGENT AND ITS REPRESENTATIVES HAVE THE RIGHT Credit Agreement Page 74 81 TO BE INDEMNIFIED UNDER THIS AGREEMENT FOR ITS OR THEIR OWN ORDINARY NEGLIGENCE, AGENT AND ITS REPRESENTATIVES DO NOT HAVE THE RIGHT TO BE INDEMNIFIED UNDER THIS AGREEMENT FOR ITS OR THEIR OWN FRAUD, GROSS NEGLIGENCE, OR WILLFUL MISCONDUCT. 12.6 Default. While a Default exists, Lenders agree to promptly confer in order that the Required Lenders or Lenders, as the case may be, may agree upon a course of action for the enforcement of the Rights of Lenders. Agent is entitled to act or refrain from taking any action (without incurring any liability to any Person for so acting or refraining) unless and until it has received instructions from the Required Lenders. In actions with respect to any Company's Property, Agent is acting for the ratable benefit of each Lender. 12.7 Limitation of Liability. No Lender or any Participant will incur any liability to any other Lender or Participant except for acts or omissions in bad faith, and neither Agent nor any Lender or Participant will incur any liability to any other Person for any act or omission of any other Lender or any Participant. 12.8 Relationship of Lenders. The Loan Documents do not create a partnership or joint venture among the Credit Parties. 12.9 Benefits of Agreement. None of the provisions of this Section inure to the benefit of any Company or any other Person except the Credit Parties. Therefore, no Company nor any other Person is responsible or liable for, entitled to rely upon, or entitled to raise as a defense -- in any manner whatsoever -- the failure of any Credit Party to comply with these provisions. 12.10 Approval of Lenders. (a) All communications from Agent to Lenders requesting Lenders' determination, consent, approval, or disapproval (i) shall be given in the form of a written notice to each Lender, (ii) shall be accompanied by a description of the matter or thing as to which such determination, approval, consent, or disapproval is requested, or shall advise each Lender where such matter or thing may be inspected, or shall otherwise describe the matter or issue to be resolved, (iii) shall include, if reasonably requested by a Lender and to the extent not previously provided to such Lender, written materials and a summary of all oral information provided to Agent by Borrower in respect of the matter or issue to be resolved, and (iv) shall include Agent's recommended course of action or determination in respect thereof. Each Lender shall reply promptly, but in any event (x) within thirty (30) days (or such lesser period as may be required under the Loan Documents for Agent to respond) for those matters requiring the consent by all Lenders, and (y) within fifteen (15) Business Days (or such lesser period as may be required under the Loan Documents for Agent to respond) for those matters requiring the consent by Required Lenders, in each instance, after receipt of the request therefore by Agent (in either event, the "Lender Reply Period"). Credit Agreement Page 75 82 (b) Unless a Lender shall give written notice to Agent that it objects to the recommendation or determination of Agent within the Lender Reply Period, such Lender shall be deemed to have approved of or consented to such recommendation or determination. 12.11 Collateral Matters. (a) Each Lender authorizes and directs Agent to enter into the Loan Documents and agrees that any action taken by Agent concerning any Collateral (with the consent or at the request of Required Lenders) in accordance with any Loan Document, that Agent's exercise (with the consent or at the request of Required Lenders) of powers concerning the Collateral in any Loan Document, and that all other reasonably incidental powers are authorized and binding upon all Lenders. (b) Agent is authorized on behalf of all Lenders, without the necessity of any notice to or further consent from any Lender, from time-to-time before a Default or Potential Default, to take any action with respect to any Collateral or Loan Documents related to Collateral that may be necessary to perfect and maintain Agent's Liens in the Collateral including, without limitation, making Protective Advances; provided, however, Agent shall not, without the consent of Required Lenders, make any Protective Advances during any one (1) calendar year in excess of the sum of (i) amounts expended to pay real estate taxes, assessments, and governmental charges or levies imposed upon the Collateral, (ii) amounts expended to pay insurance premiums for policies of insurance related to the Collateral, and (iii) $250,000.00. (c) Except to use the same standard of care that it ordinarily uses for collateral for its sole benefit, Agent has no obligation whatsoever to any Lender or to any other Person to assure that the Collateral exists or is owned by any Company or is cared for, protected, or insured or has been encumbered or that Agent's Liens have been properly or sufficiently or lawfully created, perfected, protected, or enforced or are entitled to any particular priority. (d) Agent shall exercise the same care and prudent judgment with respect to the Collateral and the Loan Documents as it normally and customarily exercises in respect of similar collateral and security documents. (e) Lenders irrevocably authorize Agent, at its option and in its discretion, to release any Liens upon any Collateral (i) in accordance with Section 4.5, (ii) constituting property being disposed of as permitted under any Loan Document, or (iii) if approved, Credit Agreement Page 76 83 authorized, or ratified in writing by the Required Lenders. Upon request by Agent at any time, Lenders shall confirm in writing the Agent's authority to release particular types or items of Collateral under this Clause (e). (f) In the event that all or any portion of the Collateral is acquired by Agent as the result of a foreclosure or the acceptance of a deed or assignment in lieu of foreclosure, or is retained in satisfaction of all or any part of the Obligation, title to any such Collateral or any portion thereof shall be held in the name of the Agent or a nominee or subsidiary of Agent (which in any case is authorized to do business in the state in which such Collateral is located), as agent, for the ratable benefit of Agent and Lenders. Agent shall prepare a recommended course of action for such Collateral (the "Post-Foreclosure Plan"), which shall be subject to the approval of Required Lenders, or shall take such action as directed by the Required Lenders. Agent shall manage, operate, repair, administer, complete, construct, restore or otherwise deal with the Collateral acquired and administer all transactions relating thereto, including, without limitation, employing a management agent and other agents, contractors and employees, including agents of the sale of such Collateral, and the collecting of rents and other sums from such Collateral and paying the expenses of such Collateral. Upon demand therefor from time to time, each Lender will contribute its share (based on its Pro Rata Part) of all reasonable costs and expenses incurred by Agent pursuant to the Post-Foreclosure Plan in connection with the construction, operation, management, maintenance, leasing and sale of such Collateral. In addition, Agent shall render or cause to be rendered by the managing agent, to each of the Lenders, monthly, an income and expense statement for such Collateral, and each of the Lenders shall promptly contribute its Pro Rata Part of any operating loss for such Collateral, and such other expenses and operating reserves as Agent shall deem reasonably necessary pursuant to and in accordance with the Post-Foreclosure Plan. To the extent there is net operating income from such Collateral, Agent shall, in accordance with the Post-Foreclosure Plan, determine the amount and timing of distributions to the Lenders. All such distributions shall be made to the Lenders in accordance with their respective Pro Rata Parts. The Lenders acknowledge that if title to any Collateral is obtained by Agent or its nominee, such Collateral will not be held as a permanent investment but will be liquidated as soon as practicable. Agent shall undertake to sell such Collateral, at such price and upon such terms and conditions as the Required Lenders shall reasonably determine to be most advantageous. Any purchase money mortgage or deed of trust taken in connection with the disposition of such Collateral in accordance with the immediately preceding sentence shall name Agent, as agent for the Lenders, as the beneficiary or mortgagee. In such case, Agent and the Lenders shall enter into an agreement with respect to such purchase money mortgage defining the rights of the Lenders in the same Pro Rata Parts as provided hereunder, which agreement shall Credit Agreement Page 77 84 be in all material respects similar to this Agreement insofar as this Agreement is appropriate or applicable. SECTION 13 MISCELLANEOUS 13.1 Headings. The headings, captions and arrangements used in any of the Loan Documents are, unless specified otherwise, for convenience only and shall not be deemed to limit, amplify, or modify the terms of the Loan Documents, nor affect the meaning thereof. 13.2 Nonbusiness Days; Time. Any payment or action that is due under any Loan Document on a non-Business Day may be delayed until the next-succeeding Business Day (but interest shall continue to accrue on any applicable payment until payment is in fact made) unless the payment concerns a Eurodollar Borrowing, in which case if the next-succeeding Business Day is in the next calendar month, then such payment shall be made on the next-preceding Business Day. 13.3 Communications. Unless otherwise specifically provided, whenever any Loan Document requires or permits any consent, approval, notice, request, demand, or other communication from one party to another, communication must be in writing (which may be by telex or telecopy) to be effective and shall be deemed to have been given (a) if by telex, when transmitted to the appropriate telex number and the appropriate answer back is received, (b) if by telecopy, when transmitted to the appropriate telecopy number (and all communications sent by telecopy must be confirmed promptly thereafter by telephone; but any requirement in this parenthetical shall not affect the date when the telecopy shall be deemed to have been delivered), (c) if by mail, on the fifth (5th) Business Day after it is enclosed in an envelope and properly addressed, stamped, sealed, certified mail, return receipt requested, and deposited in the appropriate official postal service, or (d) if by any other means, when actually delivered; provided that service of a notice in connection with a foreclosure that is given in accordance with applicable state law shall be effective if given in accordance with such applicable state law. Until changed by notice pursuant to this Agreement, the address (and telecopy number) for each party to a Loan Document is set forth on Schedule 1. 13.4 Form and Number of Documents. The form, substance, and number of counterparts of each writing to be furnished under this Agreement must be satisfactory to Agent and its counsel. 13.5 Survival. All covenants, agreements, undertakings, representations, and warranties made in any of the Loan Documents survive all closings under the Loan Documents and, except as otherwise indicated, are not affected by any investigation made by any party. Credit Agreement Page 78 85 13.6 Governing Law. Except as expressly provided in a Loan Document, the Governmental Requirements (other than conflict-of-laws provisions) of the State of Texas and of the United States of America govern the Rights and duties of the parties to the Loan Documents and the validity, construction, enforcement, and interpretation of the Loan Documents. 13.7 Invalid Provisions. Any provision in any Loan Document held to be illegal, invalid, or unenforceable is fully severable; the appropriate Loan Document shall be construed and enforced as if that provision had never been included; and the remaining provisions shall remain in full force and effect and shall not be affected by the severed provision. Agent, Lenders, and Borrower agrees to negotiate, in good faith, the terms of a replacement provision as similar to the severed provision as may be possible and be legal, valid and enforceable. However, if the provision held to be illegal, invalid, or unenforceable is a material part of this Agreement, such invalid, illegal, or unenforceable provision shall be, to the extent permitted by applicable law, replaced by a clause or provision judicially construed and interpreted to be as similar in substance and content to the original terms of such illegal, invalid, or unenforceable clause or provision as the context thereof would reasonably allow, so that such clause or provision would thereafter be legal, valid, and enforceable. 13.8 Venue; Service of Process; Jury Trial. EACH PARTY TO ANY LOAN DOCUMENT, IN EACH CASE FOR ITSELF, ITS SUCCESSORS AND ASSIGNS (AND IN THE CASE OF BORROWER, FOR EACH OF ITS CONSOLIDATED AFFILIATES), (a) IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS OF THE STATE OF TEXAS, (b) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY LITIGATION ARISING OUT OF OR IN CONNECTION WITH THE LOAN DOCUMENTS AND THE OBLIGATION BROUGHT IN DISTRICT COURTS OF DALLAS COUNTY, TEXAS, OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION, (c) IRREVOCABLY WAIVES ANY CLAIMS THAT ANY LITIGATION BROUGHT IN ANY OF THE AFOREMENTIONED COURTS HAS BEEN BROUGHT IN AN INCONVENIENT FORUM, (d) IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THOSE COURTS IN ANY LITIGATION BY THE MAILING OF COPIES THEREOF BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, POSTAGE PREPAID, BY HAND-DELIVERY, OR BY DELIVERY BY A NATIONALLY RECOGNIZED COURIER SERVICE, AND SERVICE SHALL BE DEEMED COMPLETE UPON DELIVERY OF THE LEGAL PROCESS AT ITS ADDRESS SET FORTH IN THIS AGREEMENT, (e) IRREVOCABLY AGREES THAT ANY LEGAL PROCEEDING AGAINST ANY PARTY TO ANY LOAN DOCUMENT ARISING OUT OF OR IN CONNECTION WITH THE LOAN DOCUMENTS OR THE OBLIGATION MAY BE BROUGHT IN ONE OF THE AFOREMENTIONED COURTS, AND (f) VOLUNTARILY, KNOWINGLY, IRREVOCABLY, AND UNCONDITIONALLY WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW, ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY LOAN DOCUMENT. The scope of each of Credit Agreement Page 79 86 the foregoing waivers is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Borrower (for itself and on behalf of each of its Consolidated Affiliates) acknowledges that these waivers are a material inducement to each Credit Party's agreement to enter into a business relationship, that each Credit Party has already relied on these waivers in entering into this Agreement, and that each Credit Party will continue to rely on each of these waivers in related future dealings. Borrower (for itself and on behalf of each of its Consolidated Affiliates) further warrants and represents that it has reviewed these waivers with its legal counsel, and that it knowingly and voluntarily agrees to each waiver following consultation with legal counsel. THE WAIVERS IN THIS SECTION 13.8 ARE IRREVOCABLE, MEANING THAT THEY MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THESE WAIVERS SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, SUPPLEMENTS, OR REPLACEMENTS TO OR OF THIS OR ANY OTHER LOAN DOCUMENT. In the event of Litigation, this Agreement may be filed as a written consent to a trial by the court. 13.9 Amendments, Consents, Conflicts, and Waivers. (a) Required Lenders. Unless otherwise specifically provided, the provisions of this Agreement may be amended, modified, or waived, only by an instrument in writing executed by Borrower and the Required Lenders and supplemented only by documents delivered or to be delivered in accordance with the express terms of this Agreement. (b) All Lenders. Except as specifically otherwise provided in this Section 13.9, any amendment to or consent or waiver under this Agreement or any Loan Document that purports to accomplish any of the following must be by an instrument in writing executed by Borrower and executed (or approved, as the case may be) by each Lender (other than any Defaulting Lender): (i) extends the Maturity Date or the Termination Date; (ii) extends the due date or decreases the amount of any scheduled payment or amortization of the Obligation or any fees or other amounts payable hereunder beyond the date specified in the Loan Documents; (iii) decreases any rate or amount of interest, fees, principal, or other sums payable to the Credit Parties under this Agreement (except such reductions as are contemplated by this Agreement); (iv) changes the definition of "Adjusted NOI," "Change in Control," "Commitment," "Eligible Assignee," "Total Consolidated Value," "Pro Rata," "Pro Rata Share," "Required Lenders," "Qualified Property," "Total Commitment," or "Total Indebtedness to Total Consolidated Value Ratio;" or (v) increases any one or more Lenders' Commitment; (vi) waives compliance with, amends, or fully or partially releases (or waives the requirement of) any guaranty, or any collateral, except to the extent expressly required by the Loan Documents; (vii) permits Borrower to assign any of its Rights Credit Agreement Page 80 87 hereunder; (viii) amends Section 4.1; (ix) change the percentage of the Commitments or of the unpaid principal amount of the Notes, or the number of Lenders, which shall be required for Lenders or any of them to take any action under this Section or any other provision of this Agreement; or (x) changes this Section 13.9(b) or any other matter specifically requiring the consent of all Lenders under this Agreement. (c) Agent or Issuing Bank. Any amendment or supplement to, or waiver or consent under, any Loan Document that purports to accomplish any of the following must be by a writing executed by Borrower and executed (or approved in writing, as the case may be) by the affected Agent or Issuing Bank, as the case may be (in addition to the Required Lenders or all Lenders, as the case may be, as required by this Section 13.9): (i) extends the due date for, decreases the amount or rate of calculation of, or waives the late or non-payment of, any fees payable to Agent or Issuing Bank under any Loan Document, except, in each case, any adjustments or reductions that are contemplated by any Loan Document; (ii) increases Agent's or Issuing Bank's, as the case may be, obligations beyond its commitments under any Loan Document; or (iii) changes this Clause (c) or any other matter specifically requiring the consent of Agent or Issuing Bank, as the case may be, under any Loan Document. (d) LCS. Any LC may be renewed, extended, amended, replaced, or canceled consistent with the terms of this Agreement by a writing executed by Issuing Bank and Borrower if such writing is first approved in writing by Agent. (e) Conflicts. Any conflict or ambiguity between the terms and provisions of this Agreement and terms and provisions in any other Loan Document is controlled by the terms and provisions of this Agreement. (f) Course of Dealing. No course of dealing or any failure or delay by any Credit Party or any of its Representatives with respect to exercising any Right of any Credit Party under this Agreement operates as a waiver thereof. A waiver must be in writing and signed by the Required Lenders or Lenders, as appropriate, to be effective, and a waiver will be effective only in the specific instance and for the specific purpose for which it is given. 13.10 Multiple Counterparts. Any Loan Document may be executed in a number of identical counterparts, each of which shall be deemed an original for all purposes and all of which constitute, collectively, one agreement; but, in making proof of thereof, it shall not be necessary to produce or account for more than one counterpart. Each Lender need not execute the same counterpart of this Agreement so long as identical counterparts are executed by Borrower and each Credit Party. This Agreement shall become effective when counterparts Credit Agreement Page 81 88 of this Agreement have been executed and delivered to Agent by each Credit Party and Borrower, or, in the case only of Lenders, when Agent has received telecopied, telexed, or other evidence satisfactory to it that each Lender has executed and is delivering to Agent a counterpart of this Agreement. 13.11 Assignments and Participations. (a) Assignments. Each Lender may assign to one or more Eligible Assignees all or a portion of its Rights and obligations under this Agreement (including, without limitation, all or a portion of its Borrowings, its Note, and its Commitment); provided, however, that: (i) each such assignment shall be to an Eligible Assignee; (ii) except in the case of an assignment to an Affiliate of such Lender to another Lender or an assignment of all of a Lender's Rights and obligations under this Agreement, any such partial assignment shall be in an amount at least equal to $5,000,000 or a greater integral multiple of $1,000,000; (iii) each such assignment by a Lender shall be of a constant, and not varying, percentage of all of its Rights and obligations under this Agreement and the Note; and (iv) the parties to such assignment shall execute and deliver to Agent for its acceptance an Assignment and Acceptance (herein so called) in the form of Exhibit I, together with any Note subject to such assignment and a processing fee of $3,500. Upon execution, delivery, and acceptance of such Assignment and Acceptance, the assignee thereunder shall be a party hereto and, to the extent of such assignment, have the obligations, Rights, and benefits of a Lender hereunder and the assigning Lender shall, to the extent of such assignment, relinquish its Rights and be released from its obligations under this Agreement. Upon the consummation of any assignment pursuant to this Section, the assignor, Agent, and Borrower shall make appropriate arrangements so that, if required, new Notes are issued to the assignor and the assignee. If the assignee is not incorporated under the laws of the United States of America or a state thereof, it shall deliver to Borrower and Agent certification as to exemption from deduction or withholding of Taxes in accordance with Section 3.19. (b) Register. Agent shall maintain at its address referred to in Section 13.3, a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of Lenders and the Commitment of, and principal amount of the Borrowings owing to, each Lender from time to time (the Credit Agreement Page 82 89 "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and Borrower and the Credit Parties may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by Borrower or any Credit Party at any reasonable time and from time to time upon reasonable prior notice. (c) Acceptance of Assignment. Upon its receipt of an Assignment and Acceptance executed by the parties thereto, together with any Note subject to such assignment and payment of the processing fee, Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit I, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, and (iii) give prompt notice thereof to the parties thereto. (d) Participations. Each Lender may sell participations to one or more Persons in all or a portion of its Rights and obligations under this Agreement (including all or a portion of its Commitment and its Borrowings); provided, however, that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participant shall be entitled to the benefit of the yield protection provisions contained in Section 3.14 and the Right of setoff contained in Section 3.12, and (iv) Borrower shall continue to deal solely and directly with such Lender in connection with such Lender's Rights and obligations under this Agreement, and such Lender shall retain the sole Right to enforce the obligations of Borrower relating to its Borrowings and its Note and to approve any amendment, modification, or waiver of any provision of this Agreement (other than amendments, modifications, or waivers decreasing the amount of principal of or the rate at which interest is payable on such Borrowings or Note, waiving or decreasing any fees payable to such Lender, extending any scheduled principal payment date or date fixed for the payment of interest on such Borrowings or Note, or extending its Commitment). (e) Collateral Assignments. Notwithstanding any other provision set forth in this Agreement, any Lender may at any time assign and pledge all or any portion of its Borrowings and its Note to any Federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank. No such assignment shall release the assigning Lender from its obligations hereunder. Credit Agreement Page 83 90 (f) Information. Any Lender may furnish any information concerning the Companies in the possession of such Lender from time to time to assignees and participants (including prospective assignees and participants). 13.12 Discharge Only Upon Payment in Full; Reinstatement in Certain Circumstances. Borrower's obligations under the Loan Documents remain in full force and effect until the Total Commitment is terminated and the Obligation is paid in full (except for provisions under the Loan Documents which by their terms expressly survive payment of the Obligation and termination of the Loan Documents). If at any time any payment of the principal of or interest on any Note or any other amount payable by Borrower or any other obligor on the Obligation under any Loan Document is rescinded or must be restored or returned upon the insolvency, bankruptcy, or reorganization of Borrower or otherwise, then the obligations of Borrower under the Loan Documents with respect to that payment shall be reinstated as though the payment had been due but not made at that time. 13.13 Initial and Subsequent Lenders. (a) Initial Lenders. The Lenders on the Closing Date shall be the Lender set forth on Schedule 1 attached hereto on the Closing Date. (b) Subsequent Lenders. After the Closing Date, Agent may, from time to time, admit additional Lenders hereunder (each a "Subsequent Lender"), or, at the request of any Lender, increase the Commitment of such Lender (each an "Increasing Lender"), subject to the following conditions: (i) Each Subsequent Lender is an Eligible Assignee; (ii) Borrower executes (A) a new Note payable to the order of the Subsequent Lender, or (B) a replacement Note payable to the order of an Increasing Lender; (iii) Borrower pays all fees described in this Agreement and any fee letter(s); (iv) Each Subsequent Lender executes a signature page to this Agreement; (v) After giving effect the admission of any Subsequent Lender or the increase in the Commitment of any Increasing Lender, the Total Commitment does not exceed $150,000,000; and (vi) No admission of any Subsequent Lender shall increase the Commitment of any existing Lender. Credit Agreement Page 84 91 Borrower shall pay any commitment fees required by a Subsequent Lender in connection with the admission of such Subsequent Lender. After the admission of any Subsequent Lender or the increase in the Commitment of any Increasing Lender, Agent shall provide to each Lender a new Schedule 1 to this Agreement. Agent shall use reasonable efforts, but shall not be obligated, to obtain Subsequent Lenders or Increasing Lenders. Borrower agrees to indemnify and defend Agent and its directors, officers, agents, attorneys, employees and affiliates from, and hold each of them harmless against, any and all losses, liabilities, claims, damages or expenses incurred by them or any of them, arising out of or by reason of any investigation, litigation or other proceeding brought or threatened relating to any loan made or proposed to be made to any Obligor in connection with the matters herein referred to (including, without limitation, any use made or proposed to be made by any Obligor of the Borrowings), or any commitment or proposed commitment relating to the Borrowings, including, without limitation, amounts paid in settlement, court costs, and fees and disbursements of counsel incurred in connection with any such investigation, litigation or other proceeding, but excluding any such losses, liabilities, claims, damages or expenses incurred solely by reason of the fraud, gross negligence, or willful misconduct of Agent. 13.14 ENTIRETY. THIS AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS (EACH AS AMENDED IN WRITING FROM TIME TO TIME) EXECUTED BY BORROWER AND/OR ANY CREDIT PARTY REPRESENT THE FINAL AGREEMENT AMONG BORROWER AND THE CREDIT PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. [Remainder of Page Intentionally Left Blank; Signature Page Follows.] Credit Agreement Page 85 92 SIGNATURE PAGE TO CREDIT AGREEMENT BETWEEN AMERICAN INDUSTRIAL PROPERTIES REIT, BANK ONE, TEXAS, N.A., AS AGENT, AND THE LENDERS DEFINED THEREIN EXECUTED as of the day and year first mentioned. BORROWER: AMERICAN INDUSTRIAL PROPERTIES REIT, a Texas real estate investment trust, as a Borrower By: /s/ MARC A. SIMPSON ----------------------------------- Name: Marc A. Simpson ------------------------------ Title: Senior Vice President ----------------------------- Credit Agreement Page 86 93 SIGNATURE PAGE TO CREDIT AGREEMENT BETWEEN AMERICAN INDUSTRIAL PROPERTIES REIT, BANK ONE, TEXAS, N.A., AS AGENT, AND THE LENDERS DEFINED THEREIN AGENT: BANK ONE, TEXAS, N.A., a national banking association By: /s/ JEFF ETTER --------------------------------------- Name: Jeff Etter ---------------------------------- Title: Vice President --------------------------------- LENDERS: BANK ONE, TEXAS, N.A., a national banking association By: /s/ JEFF ETTER --------------------------------------- Name: Jeff Etter ---------------------------------- Title: Vice President --------------------------------- Credit Agreement Page 87 EX-99.(B)(2) 4 d82307ex99-b2.txt 1ST AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT (b)(2) FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is dated as of April 12, 1999, among AMERICAN INDUSTRIAL PROPERTIES REIT, a Texas real estate investment trust ("BORROWER"), each of the Lenders (as defined in the Credit Agreement), BANK ONE TEXAS, N.A., a national banking association, as Agent (in such capacity, together with its successors and permitted assigns, "AGENT"), and certain Lenders, as Issuing Banks (individually, in such capacity, together with its successors and permitted assigns, "ISSUING BANK" and collectively, the "ISSUING BANKS"). RECITALS: A. Borrower, Lenders, Agent, and Issuing Banks executed that certain Credit Agreement dated as of January 28, 1999 (the "CREDIT AGREEMENT"). B. Borrower, Lenders, Agent, and Issuing Banks have agreed to amend the Credit Agreement as provided herein. C. Except as otherwise expressly provided for herein, capitalized terms used herein shall have the same meaning as set forth in the Credit Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. SECTION 8.5(g) is hereby deleted in its entirety and replaced with the following: (g) Properties under construction or development for which the total cost of such Properties (including the anticipated or budgeted costs to complete such construction or development) exceeds ten percent (10%) of Total Consolidated Value. 2. SECTION 4.2(b)(vii) is hereby deleted in its entirety and replaced with the following: (vii) the admission of such Property will not cause the NRA or the Adjusted NOI of the Borrowing Base Properties in any one metropolitan area (as defined by the United States Office of Management and Budget) (an "MA") (except the MA in which Cleveland, Ohio is located (the "CLEVELAND MA")) to exceed twenty-five percent (25%) of the NRA or Adjusted NOI with respect to all Borrowing Base Properties in all MA's; further, the admission of such Property will not cause the NRA or the Adjusted NOI of the Borrowing Base Properties in the Cleveland MA to exceed forty percent (40%) of the NRA or Adjusted NOI with respect to all Borrowing Base Properties in all MA's; provided that no Property in the Cleveland MA that is not listed as an Initial Property or a Second Property shall be eligible for inclusion as a Borrowing Base Property unless, following such addition to the Borrowing Base, the NRA or the Adjusted NOI of the Borrowing Base Properties in the Cleveland MA does not exceed twenty-five (25%) of the NRA or Adjusted NOI with respect to all Borrowing Base in all MA's; First Amendment to Credit Agreement Page 1 2 3. That certain Second Property located in Mentor, Lake County, Ohio known as "Steris" (the "STERIS PROPERTY") shall be admitted as a Borrowing Base Property as of the date hereof, provided however, that Borrower shall not include the Individual Borrowing Base for the Steris Property in the calculation of the Borrowing Base until the following conditions have been satisfied: a. Borrower shall have complied with SECTION 4.5 with regard to the tenant(s) that occupy the Steris Property; b. Borrower shall have delivered to Agent, for the ratable benefit of Lenders, an original of the Subordination, Attornment and Non-Disturbance Agreement in substantially the form of EXHIBIT J attached to the Credit Agreement and executed by each tenant of the Steris Property; and c. The Steris Property shall meet the requirements of SECTION 4.2(b)(viii)-(x). 4. The language "1.25" in SECTION 9.2 is hereby amended and replaced with the language "1.35." 5. The language "1.5" in SECTION 9.3 is hereby amended and replaced with the language "1.65." 6. EXHIBIT B of the Credit Agreement is hereby deleted in its entirety and replaced with EXHIBIT B attached to this Amendment. 7. Borrower and Agent hereby approve Wells Fargo N.A. as an Eligible Assignee. 8. Solely for purposes of determining stamp taxes and intangibles tax due to the State of Florida upon filing of the Mortgage secured by that certain property located in Volusia County, Florida known as "Volusia Building One" (the "VOLUSIA PROPERTY"), Borrower and Agent agree that the collateral value of the Volusia Property shall be $4,410,000; provided, however, that Agent may, at any time and in its sole discretion, increase the collateral value of the Volusia Property to $7,350,000 in which event Borrower shall immediately, upon Agent's request, (a) execute all necessary documentation to increase the collateral valuation, including without limitation, an amendment of the existing Mortgage secured by the Volusia Property, (b) pay all taxes, mortgage fees, and other related fees and costs of such increased collateral valuation, and (c) cause the applicable title company to increase the amount of the Mortgagee Policy of Title Insurance covering the Volusia Property to the collateral value of $7,350,000. 9. Any and all of the terms and provisions of the Loan Documents are hereby amended and modified wherever necessary, and even though not specifically addressed herein, so as to conform to the amendments and modifications set forth herein. Each reference to the Credit Agreement and any other Loan Documents shall henceforth refer to the Credit Agreement, as modified herein, and as it may from time to time be subsequently amended, restated or supplemented. First Amendment to Credit Agreement Page 2 3 10. The parties hereto acknowledge and confirm that this Amendment shall in no manner affect or impair any of the rights, benefits, security interests, liens, or assignments securing or governing the Obligation, and such rights, liens, benefits, security interests and assignments shall not in any manner be waived, the purpose of this Amendment being to amend certain provisions of the Credit Agreement as described herein, and to carry forward all rights, benefits, security interests, liens and assignments which are acknowledged by the parties hereto to be valid and subsisting rights, liens, benefits, security interests and assignments. 11. Each Subsidiary Guarantor hereby consents to the terms of this Amendment and acknowledges and confirms that the Subsidiary Guaranty executed by it is in full force and effect as originally written, except as expressly modified herein, and that the indebtedness and obligations evidenced by the Notes and the Loan Documents, as modified herein, are and shall continue to constitute a portion of the "Guaranteed Debt," as such term is defined in such Subsidiary Guaranty. Each Subsidiary Guarantor further covenants and warrants to Agent that (i) there are no defenses, counterclaims, or offsets to the Subsidiary Guaranty executed by it, as modified herein, or its obligations thereunder, and (ii) such Subsidiary Guaranty, as modified and confirmed herein, is in full force and effect. The foregoing confirmation is given as an accommodation to Agent and not as a right of any Subsidiary Guarantor. 12. DDR Office Flex II, LLC, a Subsidiary Guarantor, hereby confirms that it has or will change its name to "AIP Office Flex II, LLC," and that, notwithstanding such name change, DDR Office Flex II, LLC confirms and acknowledges Section 6 above. 13. Borrower and Subsidiary Guarantors hereby represent, warrant, and certify to the Credit Parties that, as of the date of, and after giving effect to, this Amendment: a. There exists no Potential Default, Default, or Material Adverse Event. b. Each Company has performed and complied with all agreements and conditions contained in the Credit Agreement that are required to be performed or complied with by such Company. c. The representations and warranties contained in the Credit Agreement and each of the other Loan Documents are true and correct in all respects, with the same force and effect as though made on and as of the date of this Amendment. 14. This Amendment shall be governed by the laws of the State of Texas or the laws of the United States as applicable. 15. The execution and delivery by each party to this Amendment and the performance by it of its obligations hereunder, (a) are within its trust, corporate, limited liability company, or partnership power, (b) have been duly authorized by all necessary trust, corporate, limited liability company, or partnership action of such Person, (c) require no action by or filing with any Governmental Authority, (d) do not violate any provision of its Constituent Documents, (e) do not violate any provision of any Governmental Requirement or order of any Governmental Authority applicable to it, (f) do not violate any material agreements to which it is a party, or (g) First Amendment to Credit Agreement Page 3 4 do not result in the creation or imposition of any Lien on any asset of any Company, other than pursuant to the Loan Documents. 16. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and legal representatives. 17. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 18. This Amendment may be executed in a number of identical counterparts, and a telecopy or facsimile transmission shall be binding on the party or parties whose signatures appear thereon. If so executed, each of such counterparts is to be deemed an original for all purposes, and all such counterparts shall, collectively, constitute one amendment, but in making proof of this Amendment, it shall not be necessary to produce or account for more than one such counterpart. [Remainder of Page Intentionally Left Blank; Signature Page Follows.] First Amendment to Credit Agreement Page 4 5 SIGNATURE PAGE TO FIRST AMENDMENT TO CREDIT AGREEMENT BETWEEN AMERICAN INDUSTRIAL PROPERTIES REIT, BANK ONE, TEXAS, N.A., AS AGENT, AND THE LENDERS DEFINED THEREIN EXECUTED as of the day and year first mentioned. BORROWER: AMERICAN INDUSTRIAL PROPERTIES REIT, a Texas real estate investment trust, as Borrower By: /s/ MARC A. SIMPSON ------------------------------------ Name: Marc A. Simpson ------------------------------ Title: Sr. V.P. ----------------------------- SUBSIDIARY GUARANTORS: DDR OFFICE FLEX II, LLC, an Ohio limited liability company By: American Industrial Properties REIT, a Texas real estate investment trust, its Manager By: /s/ MARC A. SIMPSON --------------------------- Name: Marc A. Simpson ---------------------- Title: Sr. V.P. --------------------- First Amendment to Credit Agreement Page 5 6 SIGNATURE PAGE TO FIRST AMENDMENT TO CREDIT AGREEMENT BETWEEN AMERICAN INDUSTRIAL PROPERTIES REIT, BANK ONE, TEXAS, N.A., AS AGENT, AND THE LENDERS DEFINED THEREIN AGENT: BANK ONE, TEXAS, N.A., a national banking association By: /s/ JEFF ETTER ------------------------------------ Name: Jeff Etter ------------------------------ Title: Vice President ----------------------------- LENDERS: BANK ONE, TEXAS, N.A., a national banking association By: /s/ JEFF ETTER ------------------------------------ Name: Jeff Etter ------------------------------ Title: Vice President ----------------------------- First Amendment to Credit Agreement Page 6 -----END PRIVACY-ENHANCED MESSAGE-----