-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, cRW00dFKvaJc5xh+6ZzLTqurMZeCC3WzyGvR+HQK9XoMdvg6SXgxs6ivL0fDCKsS zoqLRoWH0PRqZViVvIDGEA== 0000950134-94-000059.txt : 19940201 0000950134-94-000059.hdr.sgml : 19940201 ACCESSION NUMBER: 0000950134-94-000059 CONFORMED SUBMISSION TYPE: S-4 CONFIRMING COPY: PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19940131 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN INDUSTRIAL PROPERTIES REIT INC CENTRAL INDEX KEY: 0000778437 STANDARD INDUSTRIAL CLASSIFICATION: 6798 IRS NUMBER: 756335572 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 33 SEC FILE NUMBER: 033-74292 FILM NUMBER: 00000000 BUSINESS ADDRESS: STREET 1: 6220 N BELTLINE STE 205 STREET 2: 2001 ROSS AVE CITY: IRVING STATE: TX ZIP: 75063 BUSINESS PHONE: 2145506053 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 S-4 1 FORM S-4 1 THIS DOCUMENT IS A COPY OF THE FORM S-4 FILED ON JANUARY 21, 1994 PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION. AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 21, 1994 REGISTRATION NO. 33-74292 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- AMERICAN INDUSTRIAL PROPERTIES REIT, INC. (Exact name of registrant as specified in its charter) MARYLAND 6798 75-6335572 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code No.) Identification No.)
6220 NORTH BELTLINE, SUITE 205, DALLAS, TEXAS 75063 (214) 550-6053 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------------- CHARLES W. WOLCOTT 6220 NORTH BELTLINE, SUITE 205 DALLAS, TEXAS 75063 (214) 550-6053 (Name, address, including zip code, and telephone number of agent for service of process) --------------------- Copies to: BRYAN L. GOOLSBY GINA E. BETTS LIDDELL, SAPP, ZIVLEY, HILL & LABOON, L.L.P. 2200 ROSS AVENUE, SUITE 900 DALLAS, TEXAS 75201 (214) 220-4800 --------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after the Registration Statement becomes effective. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / --------------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM AMOUNT AGGREGATE PROPOSED MAXIMUM TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE - ------------------------------------------------------------------------------------------------- Common Stock, par value $0.01 per share.......... 1,915,080 $10.65 $20,395,602 $7,035.00 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) Based upon the maximum number of shares of Common Stock to be issued pursuant to the Merger, which is equal to 1/5 of the number of Shares of Beneficial Interest issued and outstanding as of January 17, 1994, plus an additional 100,000 shares to cover shares that may be issued to holders of fractional shares and holders of fewer than 10 shares of Common Stock. (2) Estimated solely for the purpose of calculating the registration fee. --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 AMERICAN INDUSTRIAL PROPERTIES REIT, INC. CROSS REFERENCE SHEET (PURSUANT TO ITEM 501(B) OF REGULATION S-K)
ITEM NUMBER AND CAPTION OF FORM S-4 LOCATION IN PROXY STATEMENT/PROSPECTUS ----------------------------------------------- ---------------------------------------- A. INFORMATION ABOUT THE TRANSACTION 1. Forepart of the Registration Statement and Outside Front Cover Page of Proxy Statement/Prospectus......................... Outside Front Cover of Registration Statement; Cross Reference Sheet; Front Cover Page 2. Inside Front and Outside Back Cover Pages of Proxy Statement/Prospectus................... Inside Front and Outside Back Cover Pages; Available Information; Table of Contents 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information................ Outside Front Cover of Registration Statement; Proxy Statement/Prospectus Summary; Risk Factors; The Special Meeting 4. Terms of the Transaction....................... Outside Front Cover Page of Proxy Statement/Prospectus; Proxy Statement/Prospectus Summary; The Proposal; The Company's Securities; Certain Statutory and Charter Provisions; Summary Comparison of Shares of Beneficial Interest and Common Stock; Federal Income Tax Considerations 5. Pro Forma Financial Information................ Financial Statements 6. Material Contacts With the Company Being Acquired..................................... * 7. Additional Information Required For Reoffering by Persons and Parties Deemed to be Underwriters................................. * 8. Interests of Named Experts and Counsel......... * 9. Disclosure of Commission Position on Indemnification For Securities Act Liabilities.................................. * B. INFORMATION ABOUT THE REGISTRANT 10. Information With Respect to S-3 Registrants.... * 11. Incorporation of Certain Information by Reference.................................... * 12. Information With Respect to S-2 or S-3 Registrants.................................. * 13. Incorporation of Certain Information by Reference.................................... *
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ITEM NUMBER AND CAPTION OF FORM S-4 LOCATION IN PROXY STATEMENT/PROSPECTUS ----------------------------------------------- ---------------------------------------- 14. Information With Respect to Registrants Other Than S-3 or S-2 Registrants.................. Proxy Statement/Prospectus Summary; The Company; The Properties; Management's Discussion and Analysis of Financial Condition and Results of Operations C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED 15. Information With Respect to S-3 Companies...... * 16. Information With Respect to S-2 or S-3 Companies.................................... * 17. Information With Respect to Companies Other Than S-3 or S-2 Companies.................... Proxy Statement/Prospectus Summary; The Company; The Properties; Management's Discussion and Analysis of Financial Condition and Results of Operations; Financial Statements D. VOTING AND MANAGEMENT INFORMATION 18. Information if Proxies, Consents or Authorizations Are to be Solicited........... Front Cover Page of Proxy Statement/Prospectus; Proxy Statement/Prospectus Summary; The Proposal; The Special Meeting; The Company's Securities; Management; Conflicts of Interest 19. Information if Proxies, Consents or Authorizations Are not to be Solicited, or in an Exchange Offer............................ *
- --------------- * Not Applicable 4 PROXY STATEMENT AMERICAN INDUSTRIAL PROPERTIES REIT SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 28, 1994 PROSPECTUS AMERICAN INDUSTRIAL PROPERTIES REIT, INC. 1,915,080 SHARES OF COMMON STOCK This Proxy Statement/Prospectus is being furnished to the holders ("Shareholders") of shares of Beneficial Interest ("Shares") of American Industrial Properties REIT, a Texas real estate investment trust (the "Trust") in connection with the solicitation of proxies by the Trust Managers on behalf of the Trust for use at a special meeting of Shareholders of the Trust (the "Special Meeting") which has been called to consider and vote on a proposal (the "Proposal") to approve and adopt an Agreement and Plan of Merger (the "Merger Agreement") between the Trust and American Industrial Properties REIT, Inc., a Maryland corporation and wholly-owned subsidiary of the Trust (the "Company") and, as contemplated thereby, the merger of the Trust with and into the Company (the "Merger"). Pursuant to the Merger Agreement (a) every five Shares will be converted into one share of Common Stock of the Company, par value $0.01 per share ("Common Stock"); (b) persons that will hold a fractional share in the Company after the Merger must either (i) pay to the Company an amount equal to the fraction necessary to round upward to a whole share of Common Stock times the opening price of the Company's Common Stock on the first trading date after the consummation of the Merger (the "Opening Price") and the fractional share shall be rounded upward to the nearest whole share of Common Stock or (ii) permit the Company to purchase the fractional share at a price equal to the fraction owned times the Opening Price; (c) persons holding fewer than 10 shares of Common Stock after the Merger will have the right to either (i) be paid by the Company for such Shares at a price equal to the number of shares of Common Stock owned times the Opening Price or (ii) purchase from the Company the number of shares of Common Stock necessary to bring the Stockholder's ownership up to 10 shares of Common Stock, at a purchase price per share equal to the Opening Price; (d) all rights and obligations of the Trust will be assumed by the Company; and (e) the executive officers of the Trust immediately prior to the Merger shall become the executive officers of the Company and Messrs. Bricker and Wolcott will serve as directors of the Company. See "THE PROPOSAL" and the Merger Agreement, a copy of which is attached hereto as Appendix A. This Proxy Statement/Prospectus is first being mailed or delivered to Shareholders on or about February 25, 1994. This Proxy Statement/Prospectus also constitutes the Prospectus of the Company with respect to its Common Stock to be issued in connection with the Merger. Only Shareholders of record on February 28, 1994 are entitled to notice of and to vote at the Special Meeting. The consummation of the Merger is subject to receipt of the approval of holders of 66 2/3% of the outstanding Shares. Neither the Declaration of Trust nor Texas law provide for dissenters' rights. The sole stockholder of the Company, which is the Trust, acting through the Trust Managers, and the Board of Directors of the Company have unanimously approved the Merger. THE TRUST MANAGERS HAVE UNANIMOUSLY APPROVED THE PROPOSAL AND RECOMMEND THAT THE SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT AND THE MERGER. SEE "RISK FACTORS" FOR CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK, INCLUDING: - Real estate investment risks, such as the effect of economic and other conditions on the ability of the Properties to generate sufficient cash flow to meet operating expenses and debt service requirements. - Absence of a provision in the Company's organizational documents limiting the amount of debt that the Company may incur. - Dependence on the Texas market. - Ability of the Board of Directors to change the investment, financing, borrowing and other policies of the Company at any time without Stockholder approval. - Taxation of the Company as a corporation if it fails to qualify as a REIT. - Certain provisions in the Company's Articles which may limit a change in control of the Company. --------------------- THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. THE SHARES OF COMMON STOCK OF THE COMPANY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMIS- SION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCU- RACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS , 1994. 5 AVAILABLE INFORMATION The Trust is presently subject to the information requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports and other information with the Commission. Such reports, proxy statements and other information are available for inspection and copying at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following regional offices of the Commission: Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois, 60601, and New York Regional Office, 7 World Trade Center, New York, New York 10048. Copies of such material may be obtained upon payment of the Commission's customary charges by writing to the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, reports and other information concerning the Trust may be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. 2 6 TABLE OF CONTENTS
HEADING PAGE ------- ---- PROXY STATEMENT/PROSPECTUS SUMMARY.................................................... 5 The Company......................................................................... 5 The Proposal and the Merger......................................................... 5 The Special Meeting; Voting......................................................... 7 Comparative Rights of Shareholders Before and After the Merger...................... 7 Risk Factors........................................................................ 7 Market Price and Distribution Data.................................................. 9 Selected Historical Financial Data.................................................. 10 Distribution Policy................................................................. 11 Federal Income Tax Consequences of the Merger....................................... 11 Tax Status of the Company........................................................... 11 RISK FACTORS.......................................................................... 12 Real Estate Investment Considerations............................................... 12 Uninsured Loss...................................................................... 12 No Limitation on Debt............................................................... 13 Dependence on Texas Market.......................................................... 13 Changes in Policies................................................................. 13 Adverse Consequences of a Failure to Qualify as a REIT.............................. 13 Certain Anti-takeover Provisions; Ownership Limits.................................. 14 Adverse Effect of Market Interest Rates on Price of Common Stock.................... 14 Possible Environmental Liabilities.................................................. 14 Possible Future Dilution............................................................ 15 Texas Franchise Taxes............................................................... 15 Employment Agreements............................................................... 16 Risks of Development and Acquisition Activities..................................... 16 Market Illiquidity.................................................................. 16 THE PROPOSAL.......................................................................... 16 General............................................................................. 16 Benefits............................................................................ 17 Detriments.......................................................................... 18 Recommendation of the Trust Managers................................................ 19 THE SPECIAL MEETING................................................................... 19 General............................................................................. 19 Record Date; Outstanding Shares; Voting............................................. 19 Quorum.............................................................................. 19 Dissenters' Rights.................................................................. 19 Proxy............................................................................... 19 Solicitation of Proxies............................................................. 20 THE COMPANY........................................................................... 20 Company History..................................................................... 20 Investment Policies................................................................. 21 Operating Policies.................................................................. 21 Distribution Policy................................................................. 22 THE PROPERTIES........................................................................ 23 Additional Information Regarding Certain Properties................................. 24 Other Encumbrances on Real Estate................................................... 25 Terms of Mortgage Indebtedness...................................................... 26 Competition......................................................................... 26 Insurance........................................................................... 26 POLICIES WITH RESPECT TO CERTAIN ACTIVITIES........................................... 27 Disposition......................................................................... 27 Conflict of Interest Policy......................................................... 27 Affiliate Transaction Policy........................................................ 27 Policies With Respect to Other Activities........................................... 28
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HEADING PAGE ------- ---- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................................................... 29 Results of Operations............................................................... 29 Liquidity and Capital Resources..................................................... 30 Other Matters....................................................................... 32 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS.......................... 33 MANAGEMENT............................................................................ 33 Directors and Executive Officers.................................................... 33 Compensation of Directors and Executive Officers.................................... 34 Employment Agreements............................................................... 35 Stock Option Plan................................................................... 36 401(k) Plan......................................................................... 37 Limitation of Liability and Indemnification......................................... 37 SUMMARY COMPARISON OF SHARES OF BENEFICIAL INTEREST AND COMMON STOCK.................. 38 THE COMPANY'S SECURITIES.............................................................. 40 Capital Stock....................................................................... 40 The Notes........................................................................... 42 CERTAIN STATUTORY AND CHARTER PROVISIONS.............................................. 44 Classification of the Board of Directors............................................ 44 Limitation of Liability and Indemnification......................................... 45 Business Combinations............................................................... 45 Control Share Acquisition........................................................... 46 Amendment to the Articles of Incorporation and Bylaws............................... 46 Dissolution of the Company.......................................................... 47 Director Nominations and New Business............................................... 47 Meetings of Stockholders............................................................ 47 FEDERAL INCOME TAX CONSIDERATIONS..................................................... 47 Effect of the Merger................................................................ 47 Taxation............................................................................ 47 Taxation of the Company............................................................. 48 Taxation of the Stockholders of a REIT.............................................. 50 Withholding on Dividends and Sale Proceeds.......................................... 50 Foreign Stockholders................................................................ 50 Tax Exempt Stockholders............................................................. 51 EXPERTS............................................................................... 52 LEGAL MATTERS......................................................................... 52 STOCKHOLDER PROPOSALS................................................................. 52 ADDITIONAL INFORMATION................................................................ 52 GLOSSARY.............................................................................. 53 INDEX TO FINANCIAL STATEMENTS......................................................... F-1 AGREEMENT AND PLAN OF MERGER.......................................................... A-1
4 8 PROXY STATEMENT/PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the more detailed information contained elsewhere in this Proxy Statement/Prospectus, the Exhibits hereto and the Merger Agreement attached hereto as Appendix A. Each Shareholder is urged to read this Proxy Statement/Prospectus in its entirety. Capitalized terms used in this Proxy Statement/Prospectus shall have the meanings set forth in the Glossary. THE COMPANY The Company is a newly-formed Maryland corporation which is a wholly-owned subsidiary of the Trust. The Company was incorporated for the purpose of reorganizing the Trust into a Maryland corporation. See "THE PROPOSAL." The Company, like the Trust, will operate as a self-administered REIT and expects to continue to qualify as a REIT for federal income tax purposes. The Company does not intend to engage a separate REIT advisor. If the Proposal is approved and adopted, the Company will own and operate real estate properties consisting of 14 industrial developments and one enclosed specialty retail mall (collectively, the "Properties"). The Properties contain 1,592,880 net rentable square feet and are located in eight states. For the twelve-month period ended December 31, 1993, the Properties had an average occupancy rate of 88%. At December 31, 1993, the Properties were 90% occupied. As of December 31, 1993, the Properties had average monthly rental from a low of $2.80 to a high of $14.43 per square foot. See "THE PROPERTIES." As with the Trust, industrial properties will be the primary focus of the Company's acquisition policy. The Company will seek to invest in industrial properties in major mid-American markets such as Dallas, Chicago and Atlanta, which are located at the key rail and highway intersects controlling the distribution of goods in the United States. See "THE COMPANY -- Investment Objectives." The principal executive offices of the Trust and the Company are located at 6220 N. Beltline, Suite 205, Irving, Texas 75063, and their telephone number is (214) 550-6053. THE PROPOSAL AND THE MERGER General. The Shareholders are being asked to consider and approve the Merger Agreement and the Merger thereunder pursuant to which the Trust will merge with and into the Company, a wholly-owned subsidiary of the Trust. The purpose of the Merger is to reorganize the Trust into a Maryland corporation that intends to continue to qualify as a REIT for federal income tax purposes. The affirmative vote of the holders of 66 2/3% of the outstanding Shares (at least 6,060,267 Shares) and the Trust Managers are required to approve the Proposal. The Trust Managers and the executive officers of the Trust own a total of 18,000 Shares (.20%). The percentage ownership of the Trust Managers and executive officers of the Trust will not be materially affected by the Merger. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS." The Trust Managers have unanimously approved the Proposal, subject to the approval of the Shareholders. The Board of Directors and the sole Stockholder of the Company have unanimously approved the Merger. There are no statutory rights of dissent or appraisal available under Texas law to the Shareholders who object to the Proposal. No federal or state regulatory approvals must be obtained in connection with the Merger. Certain filings will be required in Texas and Maryland in order to consummate the Merger. If the Merger is approved, each Shareholder will receive one share of Common Stock for every five Shares surrendered. Persons that will hold a fractional share in the Company after the Merger must either (i) pay to the Company an amount equal to the fraction necessary to round upward to a whole share of Common Stock times the Opening Price and the fractional share shall be rounded upward to the nearest whole share of Common Stock or (ii) permit the Company to repurchase the fractional share at a price equal to the fraction owned times the Opening Price. Persons holding fewer than 10 shares of Common Stock after the Merger will have the right to either (i) be paid by the Company for such Shares at a price equal to the number of shares of Common Stock owned times the Opening Price or (ii) purchase from the Company the 5 9 number of shares of Common Stock necessary to bring the Stockholder's ownership up to 10 shares of Common Stock, at a purchase price per share equal to the Opening Price. Each Shareholder will be entitled to receive, upon surrender of certificates previously representing Shares, certificates representing the number of full shares of Common Stock to which such Shareholder is entitled pursuant to the Merger Agreement. Stockholders holding fractional shares of Common Stock and Stockholders holding fewer than 10 shares of Common Stock will be contacted by the Company or its Transfer Agent after the Effective Date to determine whether the Stockholder desires to pay the necessary funds to be rounded upward to the nearest whole share or to 10 shares, as applicable, or if the Stockholder desires to receive cash for his or her shares of Common Stock as described above. Two of the Trust Managers (Messrs. Bricker and Wolcott) shall serve on the Board of Directors of the Company along with Mr. Raymond H. Hay, and the executive officers of the Trust shall serve as the executive officers of the Company. See "MANAGEMENT -- Directors and Executive Officers." Benefits and Detriments. The Trust Managers believe the Proposal has the following potential benefits for the Trust and its Shareholders: - Improved Capital and Organizational Structure. Consistent with recent Shareholder action approving the removal of the finite life limitation on the Trust, the Proposal provides a capital and organizational structure under the Articles which is expected to allow the Company improved access to the capital markets. - Established Body of Law. A substantial body of law has developed around the interpretations of the Maryland General Corporation Law (the "MGCL") while the Texas REIT Act has been subject to relatively little judicial interpretation. - Properties No Longer Subject to Mandatory Sale or Improvement. The Texas REIT Act mandates the sale of real property owned by the Trust unless major capital improvements are made to the Property within 15 years of its acquisition. There is no statutory guidance or judicial interpretation as to what constitutes a major capital improvement. The Proposal alleviates the risk of a statutorily mandated sale at a time which is not beneficial to the Shareholders. - Limited Liability of Stockholders. Although the Texas REIT Act specifically provides that the shareholders of a trust formed under the Texas REIT Act are not liable for the debts of the trust, it is unclear as to whether such protection would be afforded to the shareholders by courts outside Texas. It is well accepted as a general matter in all jurisdictions that stockholders in a corporation are not personally liable for the debts of a corporation. - Purchase of Property With Stock. The Articles provide for a sufficient number of authorized shares to permit the Company to acquire property for Common Stock, thereby giving the Company more flexibility in negotiating purchases of additional properties. - Marginability. The exchange rate of five shares in the Trust for one share in the Company is anticipated to permit the Common Stock to be marginable under the requirements of most established brokerage firms, which management believes should improve the liquidity and marketability of the Common Stock. See "THE PROPOSAL -- Benefits." The Trust Managers believe the Proposal has the following possible detriments for the Trust and its Shareholders: - Dilution. The Proposal will result in additional authorized shares which may be offered in future capital raising transactions on behalf of the Company without Stockholder approval. Such transactions may result in dilution to then-current Stockholders. See "RISK FACTORS -- Dilution." - Ownership Limitations and Staggered Board. Provisions in the Articles limiting ownership of Common Stock and Preferred Stock by a single person to 9.8%, requiring a staggered Board of Directors and 6 10 authorizing the issuance of Preferred Stock may discourage a change in control of the Company and thus limit the opportunity for Stockholders to receive a premium over the then-current market price for their Common Stock. - Texas Franchise Taxes. As a corporation doing business in Texas, the Company will be subject to Texas franchise taxes. The Trust is not currently subject to Texas franchise taxes as a REIT formed under the Texas REIT Act. Such amount is not expected to be material for fiscal 1994 (less than $50,000). See "THE PROPOSAL -- Detriments." THE SPECIAL MEETING; VOTING The Special Meeting will be held at 9:00 a.m., Dallas time on April 28, 1994 at the , Dallas, Texas. See "THE SPECIAL MEETING -- General". Only Shareholders of record at the close of business on February 28, 1994 (the "Record Date") will be entitled to notice of and to vote at the Special Meeting or any adjournments thereof. As of January 7, 1994, 9,075,400 Shares were issued and outstanding. See "THE SPECIAL MEETING -- Record Date; Outstanding Shares; Voting." The presence either in person or by properly executed proxy of a majority of the outstanding Shares (4,537,701 Shares) is necessary to constitute a quorum at the Special Meeting. See "THE SPECIAL MEETING -- Quorum." Accompanying this Proxy Statement/Prospectus is a proxy card ("Proxy") that may be used to indicate a Shareholder's vote on the Proposal. All Proxies that are properly completed, signed and returned to the Trust prior to the Special Meeting, and which have not been revoked, will be voted at the Special Meeting as indicated on the Proxy. If the Proxy is signed and returned, but no vote is indicated thereon, the Proxy will be voted FOR the Proposal. A Shareholder may revoke his or her Proxy at any time before it is voted by (i) executing a subsequently dated Proxy; (ii) filing a written request to revoke or amend his or her Proxy with the President of the Trust at the principal executive office of the Trust; or (iii) attending the Special Meeting and revoking the Proxy prior to the start of the Special Meeting. Failure to return the Proxy is the same as voting against the Proposal. See "THE SPECIAL MEETING -- Proxy." COMPARATIVE RIGHTS OF SHAREHOLDERS BEFORE AND AFTER THE MERGER The rights of the Shareholders are currently governed by the Texas REIT Act and by the Declaration of Trust and the By-Laws of the Trust. On the Effective Date, the Shareholders will become Stockholders of the Company, a Maryland corporation, and their rights as Stockholders will be governed by Maryland law and by the Articles and Bylaws of the Company. There are various differences between the rights of Company Stockholders and Trust Shareholders. See "SUMMARY COMPARISON OF SHARES OF BENEFICIAL INTEREST AND COMMON STOCK." RISK FACTORS There are numerous risk factors relating to the receipt of Common Stock in connection with the Merger and the operation of the Company which the Shareholders should carefully consider before voting on the Proposal. See "RISK FACTORS." Such risks include, among other things: - real estate investment risks, such as the effect of economic and other conditions on property values (including the dependency of the Properties on the economies of the metropolitan areas where they are located), the ability of tenants to make rent payments, the ability of the Properties to generate revenues sufficient to meet operating expenses, including future debt service, and the illiquidity of real estate investments; - risks associated with the acquisition or development of industrial properties, including lease-up and financing risks and the risk that such properties may not perform as expected; 7 11 - risk of potential losses in the event of a casualty or other liability that is not insured, uninsurable or not economically insurable; - the risk of potential increases in leverage due to the absence of a provision in the organizational documents of the Company that limits the amount of debt that the Company may incur, which may result in increases in debt service requirements that could adversely affect the Company's Funds from Operations and the ability to pay dividends to Stockholders and an increase of default in the obligations of the Company; - risks associated with the location of seven of the Company's Properties in Texas, which account for 834,521 leasable square feet of the 1,592,880 total leasable square feet of the Properties (52%); therefore, the Company's performance is largely dependent upon economic conditions in the Texas areas in which the Properties are located; - risks associated with the ability of the Board of Directors of the Company to change the investment, financing, borrowing, distribution and other policies of the Company at any time without Stockholder approval; - the risk of the failure of the Company to qualify as a REIT and therefore be taxed as a corporation and the liability of the Company for certain federal, state and local income taxes in such event; - risks associated with the potential anti-takeover effect of limiting ownership of Common Stock and Preferred Stock by a single person to 9.8% of the outstanding Common Stock and of certain other provisions contained in the organizational documents of the Company, such as a staggered Board of Directors and the ability to issue Preferred Stock, any of which may discourage a change in control and limit the opportunity for Stockholders to receive a premium over then-current market prices for their Common Stock; - risk of increases in market interest rates, which may lead prospective purchasers of the Common Stock to demand a higher anticipated annual yield from future dividends, which in turn may adversely affect the market price of the Common Stock; - risks of potential liability of the Company for unknown or future environmental liabilities; - risks of potential dilution to then-existing Stockholders as a result of the Company's ability to issue additional shares of Common Stock; - risks associated with the Company being subject to Texas franchise taxes; - risks associated with the severance compensation to the executive officers of the Company in the event of a change in control of the Company, which may discourage a potential acquiror from seeking control of the Company thereby affecting the ability of Stockholders to receive a premium for their stock over then-existing market prices; and - risks associated with the effect of REIT distribution requirements (mandating that 95% of a REIT's net ordinary taxable income be distributed currently) on the Company's ability to finance future developments, acquisitions and capital improvements. 8 12 MARKET PRICE AND DISTRIBUTION DATA The Trust's Shares are listed and traded on the New York Stock Exchange (the "NYSE"). The following table sets forth for the periods indicated the high and low per Share closing sale price of the Trust's Shares, and the cash distributions declared per Share:
QUARTER ENDED: HIGH LOW DISTRIBUTIONS -------------- ---- --- ------------- December 31, 1993............................................. 3 1/4 2 .04 September 30, 1993............................................ 2 3/8 1 7/8 .04 June 30, 1993................................................. 2 1/2 2 .04 March 31, 1993................................................ 3 1 3/4 .04 December 31, 1992............................................. 2 1 1/2 .04 September 30, 1992............................................ 2 1/8 1 3/4 .04 June 30, 1992................................................. 2 1/4 1 7/8 .04 March 31, 1992................................................ 2 5/8 1 3/4 .08
At January 20, 1994, the last trading day prior to the public announcement of the proposed Merger, the closing sale price per Share as reported on the NYSE Composite Tape was $2.13. On such date, there were 9,075,400 outstanding Shares held by approximately 2,341 holders. 9 13 SELECTED HISTORICAL FINANCIAL DATA (IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) The following table sets forth historical financial information for the Trust and should be read in conjunction with the Financial Statements of the Trust and the Notes thereto which are contained elsewhere in the Proxy Statement/Prospectus. There is not expected to be any material impact to the historical operations of the Trust as a result of the proposed Merger with the Company.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------------------------------ ------------------------ 1988 1989 1990 1991(A) 1992(B) 1992 1993(C) ---------- ---------- ---------- ---------- ---------- ---------- ---------- OPERATING DATA: Revenues................... $ 18,110 $ 17,824 $ 17,744 $ 16,488 $ 15,139 $ 11,461 $ 7,802 Loss before gain (loss) on sales of real estate and extraordinary gains(d)... (904) (2,708) (4,484) (13,786) (18,719) (5,846) (3,921) Net loss(d)................ (904) (2,708) (2,626) (9,162) (17,593) (6,090) (4,126) BALANCE SHEET DATA: Total assets............... $178,370 $173,143 $169,465 $147,877 $110,446 $110,446 $101,086 Total long-term debt, net of unamortized discount................. 82,633 90,343 94,666 87,141 68,578 68,578 64,746 Shareholders' equity....... 91,088 79,486 70,507 57,579 38,171 38,171 32,954 OTHER DATA: Funds from Operations(e)... $ 10,250 $ 9,522 $ 9,032 $ 8,308 $ 2,852 $ 2,861 $ (551) PER SHARE DATA: Loss before gain (loss) on sales of real estate and extraordinary gains...... $ (0.10) $ (0.30) $ (0.49) $ (1.52) $ (2.06) $ (0.64) $ (0.43) Net loss................... (0.10) (0.30) (0.29) (1.01) (1.94) (0.67) (0.45) Book value................. 10.04 8.76 7.77 6.34 4.21 4.21 3.63 Distributions paid......... 1.33 0.98 0.70 0.42 0.20 0.16 0.12 Number of shares outstanding................ 9,075,400 9,075,400 9,075,400 9,075,400 9,075,400 9,075,400 9,075,400
- --------------- (a) On December 30, 1990, the Trust sold two of its 19 original properties, thus operating with only 17 properties during 1991. (b) The Trust sold two of its properties in the fourth quarter of 1992, thus operating with only 15 properties for the remainder of the year. (c) The Trust sold one of its properties in the first quarter of 1993, thus operating with only 14 properties through the end of the third quarter. (d) Loss before gain (loss) on sales of real estate and extraordinary gains and net loss for 1991, 1992 and for the nine months ended September 30, 1992, include provisions for writedowns of real estate due to permanent impairments in value of $9,371, $14,094 and $2,836, respectively. (e) Funds from Operations is computed based on the definition adopted by the National Association of Real Estate Investment Trusts, which is net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Funds from Operations should not be considered by the reader as an alternative to net income as an indicator of the Trust's operating performance or to cash flows from operations as a measure of liquidity. The 1991-1992 changes in the Trust's debt structure from primarily zero coupon debt to current pay debt negatively impacts Funds from Operations as the amortization of the zero coupon debt has been previously added back to net income in computing Funds from Operations, whereas the current pay interest incurred on the notes replacing the zero coupon debt is not added back. 10 14 DISTRIBUTION POLICY On December 15, 1993, the Trust announced its intent to redirect its cash resources to the ultimate elimination of the Zero Coupon Notes Due 1997 (the "Notes") through a complete defeasance of the remaining Notes in 1994. For this reason, the Trust determined that it was in the best interest of the Trust and its Shareholders to suspend quarterly distributions (which had been at $.04 per quarter, equivalent to $.20 per quarter for the Company) until such time as the remaining Notes are fully defeased and distributions can be supported from the positive cash flow of the Trust, as measured by its Funds from Operations. See "-- Market Price and Distribution Data." Management intends to pursue a recapitalization and refinancing of the Company which would allow the Company to reinstate a dividend sometime in the near future. The Company's dividend policy is to review operating results, capital requirements and working capital reserves on a quarterly basis and to declare dividends based on the Board of Directors' and management's determination of distributable cash flow. Generally, the Company intends to maintain a dividend equal to approximately 85% of Funds from Operations within these parameters. No dividends on Common Stock are anticipated while the Company pursues a recapitalization and refinancing strategy. In order to satisfy the requirement to distribute 95% of the Company's taxable income, it is management's intent to make sufficient distributions necessary in order to maintain the Company's REIT status. So long as there is no REIT taxable income, suspension of cash distributions will not result in a disqualification of the Company's status as a REIT. For a further discussion of the amount of distributions that must be made in order for the Company to retain REIT status, see "FEDERAL INCOME TAX CONSIDERATIONS -- Taxation of the Company." FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER The Trust and the Company will receive an opinion from counsel, Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., to the effect that the Merger as contemplated by the Merger Agreement will constitute a reorganization within the meaning of Section 368(a) of the Code, thus neither the Company nor the Trust will recognize any gain or loss upon the Merger and no gain or loss will be recognized by the Shareholders on the receipt of shares of Common Stock in exchange for their Shares pursuant to the Merger Agreement. See "FEDERAL INCOME TAX CONSIDERATIONS." TAX STATUS OF THE COMPANY The Company intends to continue to be taxed as a REIT, like the Trust, under Sections 856 through 860 of the Code. As a REIT, the Company generally will not be subject to federal income tax if it distributes at least 95% of its REIT taxable income (which does not include capital gains) to its Stockholders. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. See "RISK FACTORS -- Failure to Qualify as a REIT" for a more detailed discussion of the consequences of the failure of the Company to qualify as a REIT. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed income. See "FEDERAL INCOME TAX CONSIDERATIONS." The legality of Common Stock to be issued in connection with the Merger and the qualification of the Company as a REIT for federal income tax purposes will be passed upon by Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. in an opinion to be issued to the Company. 11 15 RISK FACTORS An investment in the Common Stock involves various risks. Prospective investors should consider carefully the risk factors, in addition to the other information set forth in this Proxy Statement/Prospectus, in connection with an investment in the Common Stock offered hereby. REAL ESTATE INVESTMENT CONSIDERATIONS Effect of Economic and Real Estate Conditions. Investments in real estate typically involve a high level of risk. One of the risk of investing in real estate is the possibility that the Properties will not generate income sufficient to meet operating expenses or will generate income and capital appreciation, if any, at rates lower than those anticipated or available through investment in comparable real estate or other investments. Income from properties and yields from investments in properties may be affected by many factors, including the type of property involved, the form of investment, conditions in financial markets, over-building, a reduction in rental income as the result of the inability to maintain occupancy levels, adverse changes in applicable tax laws, changes in general economic conditions, adverse local conditions (such as changes in real estate zoning laws that may reduce the desirability of real estate in the area) and acts of God, such as earthquakes or floods. Some or all of the foregoing conditions may affect the Properties. Renewal of Leases and Reletting of Space. The Company will be subject to the risks that, upon expiration of leases of the Properties, the leases may not be renewed, the space may not be relet or the terms of renewal or reletting (including the costs of required renovation or concessions to tenants) may be less favorable than current lease terms. If the Company were unable to promptly relet or renew the leases for all or a substantial portion of the space, if the rental rate upon such renewal or reletting were significantly lower than expected or if its reserves proved inadequate, then the Company's Funds from Operations and ability to make expected dividend payments to Stockholders may be adversely affected. Leases on approximately 20% of the total Property owned by the Company will expire in 1994. The expiring leases represent approximately 19% of the total Property annualized base rent received by the Company. Management will attempt to negotiate renewals with certain of the tenants with expiring leases; however, no assurance can be given that such negotiations will be successful. Market Illiquidity. Equity real estate investments are relatively illiquid. Such illiquidity will tend to limit the ability of the Company to vary its portfolio promptly in response to changes in economic or other conditions. In addition, federal income tax provisions applicable to REITs limit the Company's ability to sell Properties held for fewer than four years, which may affect the Company's ability to sell Properties at a time which would be in the best interest of the Stockholders. Operating Risks. The Properties will be subject to all operating risks common to real estate developments in general, any or all of which might adversely affect occupancy or rental rates. In addition, increases in operating costs due to inflation and other factors may not necessarily be offset by increased rents. If operating expenses increase, the local rental market for industrial properties may limit the extent to which rents may be increased to meet increased expenses without decreasing occupancy rates. If any of the above occur, the Company's ability to make expected payments of dividends to Stockholders could be adversely affected. Competition. All of the Properties are located in areas that include competing properties. The number of competitive properties in a particular area could have a material effect on both the Company's ability to lease space at the Property or at any newly developed or acquired properties and the rents charged. The Company may be competing with other owners that have greater resources than the Company. UNINSURED LOSS The Company will seek to maintain comprehensive liability, fire and extended coverage insurance of the type and in the amount customarily obtained for similar properties. There are, however, certain types of losses (generally of a catastrophic nature, such as earthquakes, floods and wars) that either may be uninsurable or not economically insurable. Should an uninsurable loss occur, the Company could lose both its invested capital and anticipated future revenues related to the affected Property (and may also be required to defease a certain 12 16 percentage of the Notes), and would continue to be obligated on any mortgage indebtedness or other obligations related to the affected Property. Any such loss could adversely affect the Company. Management believes the Properties are currently adequately insured in accordance with industry standards. NO LIMITATION ON DEBT The Company's current financial capitalization policy is to seek to limit its debt-to-asset value ratio to 50% or less. As a general practice, management expects to maintain the Company's debt-to-market capitalization ratio at or below the REIT industry average. However, the Company's organizational documents do not contain any limitation on the amount or percentage of indebtedness the Company can incur. Accordingly, the Company could alter its current debt policy. If this policy were changed, the Company could become more highly leveraged, resulting in an increase in debt service that could adversely affect the Company's ability to make dividend payments to its Stockholders and would not result in an increased risk of default on its obligations. Subject to the Indenture and other existing loan documents, the Company may borrow funds in the future and secure such loans with mortgages on the Properties. In the event such mortgage loans require balloon payments, the ability of the Company to make such payments will depend upon its ability to sell or refinance the Properties for amounts sufficient to repay such loans. In addition, the payment of debt service in connection with any borrowings may adversely affect cash flow and the value of the Common Stock. DEPENDENCE ON TEXAS MARKET Seven of the Properties, containing 834,521 leasable square feet (approximately 52% of the total leasable square feet of the Properties owned by the Company), are located in Texas. The Company's performance is, therefore, largely dependent upon economic conditions in the Texas metropolitan areas in which the Properties are located. A decline in the Texas markets may adversely affect the ability of the Company to pay dividends to its Stockholders. CHANGES IN POLICIES The investment and financing policies of the Company and its policies with respect to all other activities, including its growth, debt, capitalization, dividends and operating policies, will be determined by the Board of Directors of the Company. Although the Board of Directors has no present intention to do so, these policies may be amended or revised at any time and from time to time at the discretion of the Board of Directors without a vote of the Stockholders of the Company. See "THE COMPANY -- Investment Objectives -- Operating Strategies." A change in these policies could adversely affect the Company's financial condition or results of operations or the market price of the Common Stock. ADVERSE CONSEQUENCES OF A FAILURE TO QUALIFY AS A REIT The Trust has historically operated as a REIT and maintained its qualification as a REIT under the Code. The Company intends to operate so as to qualify as a REIT under the Code. Although management of the Company believes that the Company will be organized and will operate in such a manner, no assurance can be given that the Company will qualify or remain qualified as a REIT. Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations. The determination of various factual matters and circumstances not entirely within the Company's control may affect the Company's ability to qualify as a REIT. If in any taxable year the Company were to fail to qualify as a REIT, it would be taxed as a corporation and distributions to Stockholders would not be deductible by the Company in computing its taxable income. Failure to qualify for even one taxable year could result in the Company incurring indebtedness (to the extent that borrowings are feasible and permitted by limitations relating to the Notes and other indebtedness of the Trust assumed by the Company) or liquidating investments should the Company not have sufficient funds to pay the resulting federal income tax liabilities, and the Company would also be disqualified from taxation as a REIT for the next four taxable years. As a result, the funds available for distribution to the Company's Stockholders would be reduced for each of the years involved. In addition, dividends would no longer be required to be paid. To the 13 17 extent the dividends to Stockholders would have been paid in anticipation of the Company's qualification as a REIT, the Company might be required to borrow funds or to liquidate certain of its investments to pay the applicable tax. Although the Company currently intends to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause the Company's Board of Directors to revoke the REIT election. See "FEDERAL INCOME TAX CONSIDERATIONS." CERTAIN ANTI-TAKEOVER PROVISIONS; OWNERSHIP LIMITS Charter Provisions. Certain provisions of the Company's Articles may have the effect of discouraging a third party from making an acquisition proposal for the Company and may thereby inhibit a change in control of the Company under circumstances that could give the holders of shares of Common Stock the opportunity to realize a premium over the then-prevailing market prices. Furthermore, the ability of the Company's Stockholders to effect a change in management control of the Company would be substantially impeded by such anti-takeover provisions. Moreover, in order for the Company to maintain its qualification as a REIT, not more than 50% in value of its outstanding shares of Common Stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities). For the purpose of preserving the Company's REIT qualification, the Articles prohibit ownership either directly or under the applicable attribution rules of the Code of more than 9.8% of the shares of Common Stock and Preferred Stock by any Stockholder, subject to certain exceptions. Such ownership limit may have the effect of preventing an acquisition of control of the Company without the approval of the Board of Directors. See "THE COMPANY'S SECURITIES -- Capital Stock," "CERTAIN STATUTORY AND CHARTER PROVISIONS" and "FEDERAL INCOME TAX CONSIDERATIONS." Staggered Board. The Board of Directors will be divided into three classes. The terms of the first, second and third classes will expire in 1995, 1996 and 1997, respectively. Directors of each class will be elected for a three-year term upon the expiration of the term of the current class. See "MANAGEMENT." The staggered terms for directors may affect the ability of the Stockholders to effect a change in control of the Company even if a change of control were in the Stockholders' best interest. See "CERTAIN STATUTORY AND CHARTER PROVISIONS -- Classification of the Board of Directors." Preferred Stock. The Articles authorize the Board of Directors to issue up to 10,000,000 shares of Preferred Stock and to establish the preference and rights of any such shares issued. See "THE COMPANY'S SECURITIES -- Preferred Stock." The issuance of Preferred Stock could have the effect of delaying or preventing a change in control of the Company even if a change in control were in the best interests of the Stockholders. No shares of Preferred Stock will be issued or outstanding upon consummation of the Merger. Business Combination Provision. Certain provisions of the MGCL regarding business combinations require approval of the holders of 80% of the outstanding voting shares of the Company. See "CERTAIN STATUTORY AND CHARTER PROVISIONS -- Business Combinations." These statutory provisions may discourage a change in control and limit the opportunity for Stockholders to receive a premium over the then-current market prices for their Common Stock. ADVERSE EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK One of the factors that may influence the price of the Common Stock in the public markets will be the annual yield from dividend payments by the Company on the price paid for the Common Stock. Thus, an increase in market interest rates may lead prospective purchasers of Common Stock to demand a higher anticipated annual yield from future dividends. Such an increase in the required anticipated dividend yield may adversely affect the market price of the Common Stock. POSSIBLE ENVIRONMENTAL LIABILITIES Under various federal, state and local environmental laws, ordinances and regulations, an owner or operator of real estate may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property. Such laws typically impose cleanup responsibility and liability without regard to whether the owner knew of or was responsible for the presence of the contaminants. The 14 18 costs of investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such property, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is owned or operated by such person. Finally, the owner of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. Management has been notified of the possible existence of underground contamination at Tamarac Square, the Trust's Denver retail Property. The source of the possible contamination is apparently related to underground storage tanks located on an adjacent property. This adjacent property was placed on Colorado's list of leaking underground storage tanks. A second potential source of contamination is a nearby tract on which a service station was formerly operated. The owner of the adjacent property is currently conducting studies under the direction of the Colorado Department of Health in an attempt to define the contamination and institute an appropriate plan to address the situation. At this time, management does not anticipate any exposure to the Trust relative to this issue. Certain federal, state and local laws, regulation and ordinances govern the removal, encapsulation or disturbance of asbestos-containing materials ("ACMs") when such materials are in poor condition or in the event of building remodeling, renovation or demolition. Such laws may impose liability for release of ACMs and may provide for third parties to seek recovery from owners or operators of real estate for personal injuries associated with ACMs. In connection with its ownership, management and operation of the Properties, the Company may be potentially liable for such costs. Except as described above, the Company has not been notified by any governmental authority or any other third party of any noncompliance, liability or other claim in connection with any of the Properties. Management believes that the Properties are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances or petroleum products. The Company has not been notified (except with respect to Tamarac Square), and is not otherwise aware, of any material non-compliance, liability or claim relating to hazardous or toxic substances in connection with any of the Properties. POSSIBLE FUTURE DILUTION The Company has a substantially greater number of authorized shares than the Trust. The Company's authorized Common Stock may be offered in capital raising transactions on behalf of the Company. Such transactions may result in dilution to then-current Stockholders. The authorized but unissued capital stock of the Company may be issued for any corporate purpose, including the purchase of additional properties and the investment in, or acquisition of, interests in other entities, including other REITs or limited partnerships whose assets consist of investments suitable for the Company. Authorized and unissued capital stock could also be issued in one or more transactions which would make it more difficult, and therefore less likely, to effect a takeover of the Company. See "THE COMPANY'S SECURITIES" and "CERTAIN STATUTORY AND CHARTER PROVISIONS." Any such issuance of additional Common Stock or other capital stock could have the effect of diluting the earnings per share, book value per share, voting power of existing shares of Common Stock and the ownership of persons seeking to obtain control of the Company. See "-- Certain Anti-Takeover Provisions; Ownership Limits." TEXAS FRANCHISE TAXES By doing business as a corporation rather than as a trust, the Company may become subject to certain state taxes that it would not have been subject to as a trust. As a corporation doing business in Texas, the Company will be subject to Texas franchise taxes. Based upon the Company's current portfolio and the current franchise tax rates, the Company estimates its franchise tax liability for 1994 at $30,000. There can be no assurance that the Company's franchise tax liability will not increase due to additional purchases of Texas properties, increases in the capital base subject to Texas franchise tax or changes in Texas law which would 15 19 increase the scope and amount of tax. As a trust organized under the Texas REIT Act, the Trust is not currently subject to Texas franchise taxes; however, there can be no assurance that the State of Texas will not expand the scope of persons subject to franchise taxes to include trusts. EMPLOYMENT AGREEMENTS Effective January 12, 1994, the Company entered into Employment Agreements with its executive officers (Messrs. Wolcott, O'Brien and Warner) which provide for severance payments in the event of a change of control of the Company. See "MANAGEMENT -- Employment Agreements." These Employment Agreements may discourage a potential acquiror from seeking control of the Company thereby affecting the ability of Stockholders to receive a premium for their Common Stock over then-existing market prices. RISKS OF DEVELOPMENT AND ACQUISITION ACTIVITIES The Company will incur risks associated with any development activities it undertakes, including the risks that (i) occupancy rates and rents at a newly completed project may not be sufficient to make the project profitable; (ii) financing may not be available on favorable terms for the project; (iii) construction and lease-up may not be completed on schedule, resulting in increased debt service expense and construction costs; (iv) construction costs of a project may exceed original estimates, possibly making the project uneconomical; (v) zoning, occupancy and other required governmental approvals or authorizations may not be granted and development costs associated therewith may not be recovered; and (vi) development opportunities explored by the Company may be abandoned. Acquisitions of properties entail risks that investments will fail to perform in accordance with expectations and that judgments with respect to the costs of improvements to bring an acquired property up to standards established for the market position intended for that property will prove inaccurate, as well as general investment risks associated with any new real estate investment. The Company anticipates that its new developments and acquisitions will be financed under lines of credit or other interim forms of secured or unsecured financing. There is no assurance that permanent financing for such newly developed or acquired projects will be available or might be available only on disadvantageous terms. In addition, the fact that the Company must distribute 95% of its taxable income in order to maintain its qualification as a REIT will limit the ability of the Company to rely upon income from operations or cash flow from operations to finance new development or acquisitions. As a result, if permanent debt or equity financing is not available on acceptable terms to refinance new developments or acquisitions undertaken without permanent financing, further development activities or acquisitions might be curtailed or cash available for distribution might be adversely affected. In the case of an unsuccessful development or acquisition, the Company's loss could exceed its investment in the project. See "THE COMPANY." MARKET ILLIQUIDITY Real estate investments are relatively illiquid. Such illiquidity will tend to limit the ability of the Company to vary its portfolio promptly in response to changes in economic or other conditions. In addition, provisions of the Code relating to REIT qualification limit the Company's ability to sell Properties held for fewer than four years, which may affect the Company's ability to sell Properties. See "FEDERAL INCOME TAX CONSEQUENCES -- Taxation of the Company." THE PROPOSAL The following discussion summarizes certain aspects of the Proposal. This summary is not intended to be complete and is subject to, and qualified in its entirety by, reference to the Merger Agreement, a copy of which is attached hereto as Appendix A. GENERAL Shareholders are being asked to consider and approve the Merger Agreement and the Merger thereunder pursuant to which the Trust will merge with and into the Company, a wholly-owned subsidiary of the Trust 16 20 which intends to qualify as a REIT for federal income tax purposes. The Company will be the surviving entity. If the Merger is approved, the Trust's Shareholders will receive one share of the Company's Common Stock for every five Trust Shares owned by the Shareholder. Persons that will hold a fractional share in the Company after the Merger must either (i) pay to the Company an amount equal to the fraction necessary to round upward to a whole share of Common Stock times the Opening Price and the fractional share shall be rounded upward to the nearest whole share of Common Stock or (ii) permit the Company to cash out the fractional share at a price equal to the fraction owned times the Opening Price. Persons holding fewer than 10 shares of Common Stock after the Merger will have the right to either (i) be cashed out by the Company at a price equal to the number of shares of Common Stock owned times the Opening Price or (ii) purchase from the Company the number of shares of Common Stock necessary to bring the Stockholder's ownership up to 10 shares of Common Stock, at a purchase price per share equal to the Opening Price. Stockholders holding fractional shares of Common Stock and Stockholders holding fewer than 10 shares of Common Stock will be contacted by the Company or its Transfer Agent after the Effective Date to determine whether the Stockholder desires to pay the necessary funds to be rounded upward to the nearest whole share or to 10 shares, as applicable, or if the Stockholder desires to receive to cash for his or her shares of Common Stock, as described above. Pursuant to the Merger Agreement, the Company will assume all rights and obligations of the Trust, including, without limitation, the Trust's obligations under the Notes. The Trust Managers have unanimously approved the Proposal subject to Shareholder approval. Shareholder approval is the only condition precedent to the consummation of the Merger. The Board of Directors and the sole Stockholder (the Trust acting through the Trust Managers) of the Company have unanimously approved the Merger. BENEFITS The Trust Managers believe it is in the best interests of the Trust and its Shareholders for the Shareholders to vote in favor of the Proposal. The Trust Managers believe that the Proposal should be adopted at this time in order to continue the Trust's strategy of pursuing the opportunities available in today's real estate and capital markets. These opportunities include the ability to acquire and develop industrial properties at investment yields in excess of the Company's cost of capital, in order to achieve positive spread investing and increased cash flow to the Company. In addition, current interest rates could provide the Company the opportunity to refinance its existing debt at reduced rates. The Trust Managers also believe that the Proposal offers several potential benefits for the Trust and its Shareholders and few detriments. These benefits include the following: Improved Capital and Organizational Structure. On October 23, 1993, the Shareholders of the Trust approved a modification to the Declaration of Trust which had the effect of converting the Trust from a finite life entity with a maximum term of 15 years of existence into an infinite life entity with no predetermined date of termination. The finite life status of the Trust limited the Trust's access to more competitively priced sources of capital. Consistent with the removal of the finite life limitation on the Trust, the Proposal provides a capital and organizational structure under the Articles which is expected to allow the Company improved access to the capital markets which should enable it to adapt to changing capital market conditions while expanding and diversifying its investment portfolio. The Declaration of Trust authorizes the issuance of 10,000,000 Shares, all such Shares to be equal in rights and preferences. As of January 20, 1994, 9,075,400 Shares were outstanding. In contrast to the relatively small number of authorized Shares, the Company is authorized to issue 50,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock. This greater number of authorized shares of Common Stock and Preferred Stock provides the Company with greater flexibility to issue stock, options or warrants to raise capital for the Company without having to amend the Articles to increase the authorized capital stock of the Company. See "-- Purchase of Property With Stock" below. Maryland Corporate Law. In recent years, the State of Maryland has adopted a policy of encouraging incorporation in that state and, in furtherance of that policy, has adopted comprehensive, modern and flexible corporate laws which are periodically updated and revised to meet changing business needs. As a result, many corporations, including numerous recently formed REITs, have chosen 17 21 Maryland for their domicile. Maryland courts have developed a body of case law construing Maryland law and establishing public policies with respect to corporations incorporated in Maryland. In contrast, a body of case law construing the Texas REIT Act has not developed. Consequently, reorganization of the Trust into a Maryland corporation should provide greater predictability with respect to the Company's corporate affairs. Properties No Longer Subject to Mandatory Sale or Improvement. The Declaration of Trust, as required by the Texas REIT Act, provides that with respect to any real property owned by the Trust, major capital improvements must be made within 15 years of purchase of the property or the property must be sold. If the property was purchased as unimproved property or the property is outside the city, town or village limits, the major capital improvements must be equal to or exceed the purchase price of the property. While these provisions of the Declaration of Trust were unobjectionable when the Trust was a finite-life entity with a maximum term of 15 years of existence, the subsequent conversion of the Trust to infinite-life status has rendered such provisions potentially contrary to the best interests of the Trust and of its Shareholders. These requirements, which are unique to the Texas REIT Act, could potentially force the Trust Managers and officers to either (i) sell the property without regard to economic conditions existing at such time, or (ii) make "major capital improvements" regardless of whether such improvements are needed. Such action may not be in the best interests of the Trust or its Shareholders. If the property at issue was not unimproved property on the date of purchase or the property is located within city limits, there are no statutory guidelines or judicial interpretations as to what constitute "major capital improvements." Neither Maryland corporate law nor the Articles impose such a requirement on the Company. Limited Liability. Although the Texas REIT Act specifically provides that the shareholders of a trust formed under the Texas REIT Act are not liable for the debts of the trust, it is unclear as to whether such protection would be afforded to the shareholders by courts outside Texas. It is well accepted as a general matter of law that stockholders in a corporation are not personally liable for the debts of the corporation. Purchase of Property With Stock. The Company has a greater number of authorized shares than the Trust which could be used by the Company to acquire additional properties which meet the investment objectives and policies of the Company. The availability of these shares allows for additional flexibility in negotiating and structuring an acquisition from a potential seller. Marginability. The exchange rate of five shares in the Trust for one share of Common Stock in the Company is anticipated to permit the Common Stock to be marginable under the requirements of most established brokerage firms, which should improve the liquidity and marketability of the Common Stock. DETRIMENTS The Trust Managers believe the Proposal presents the following potential detriments for the Trust and its Shareholders: Dilution. The Proposal will result in additional authorized shares which may be offered in capital raising transactions on behalf of the Company. Such transactions may result in dilution to then current Stockholders. See "RISK FACTORS -- Dilution." Ownership Limitations and Staggered Board. Provisions in the Articles limiting ownership of Common Stock by a single person to 9.8%, requiring a staggered Board of Directors and authorizing the issuance of Preferred Stock may discourage a change in control and thus limit the opportunity for Stockholders to receive a premium over the then-current market price for their Common Stock. Texas Franchise Taxes. By doing business as a corporation rather than as a trust, the Company may become subject to certain state taxes that it would not have been subject to as a trust. As a foreign corporation engaged in business in Texas, the Company will be subject to the payment of Texas franchise taxes. Had the Trust been subject to Texas franchise taxes in fiscal 1993, the Trust would have paid approximately $50,000 in franchise taxes to the State of Texas. Based on the existing franchise tax rates 18 22 and the existing property portfolio, it is estimated that the Company's Texas franchise tax liability will not be material for fiscal 1994 (less than $50,000). There can be no assurance that the Company's franchise tax liability would not increase due to additional purchases of Texas properties, increases in the capital base subject to the Texas franchise tax or changes in Texas law which could increase the scope and amount of tax. RECOMMENDATION OF THE TRUST MANAGERS THE TRUST MANAGERS RECOMMEND THAT THE SHAREHOLDERS VOTE FOR THE PROPOSAL. THE SPECIAL MEETING GENERAL The Special Meeting will be held on April 28, 1994, at 9:00 Dallas time, at (or such other time and place to which such meeting is adjourned), to consider and vote on the Proposal. See "THE PROPOSAL." In order for the Proposal to be adopted, it must be approved by the holders of 66 2/3% of the outstanding Shares (6,050,569 Shares). Shareholder approval is the only condition to the consummation of the Merger. RECORD DATE; OUTSTANDING SHARES; VOTING The Trust Managers have fixed the close of business on February 28, 1994 as the Record Date. As of the Record Date, there were 9,075,400 Shares outstanding held of record by approximately 2,341 Shareholders. Shareholders are entitled to cast one vote per Share. The affirmative vote of Shareholders holding at least 66 2/3% of the outstanding Shares (6,050,569 Shares) is necessary to approve the Proposal. The Trust Managers and the executive officers of the Trust own .20% of the issued and outstanding Shares (18,000 Shares). QUORUM In accordance with the By-Laws of the Trust, Shareholders holding at least a majority of the issued and outstanding Shares (4,537,701 Shares) must be present or represented by properly executed proxies at the Special Meeting to constitute a quorum. If a quorum is not present or represented at the Special Meeting, the meeting may be adjourned from time to time, without further notification, until a quorum is obtained. DISSENTERS' RIGHTS Under Texas law, Shareholders objecting to the Proposal and the Merger thereunder do not have any statutory rights of dissent or appraisal. PROXY The Proxy, which is enclosed with this Proxy Statement/Prospectus, contains a space where each Shareholder may indicate whether such Shareholder chooses to vote his or her Shares in favor of or against the Proposal or to abstain from voting. If the Proxy is duly completed and returned to the Trust, the Proxy will be voted in accordance with this instruction. If a Shareholder returns the Proxy duly executed, but does not indicate the manner in which the Proxy is to be voted, the Proxy will be voted in favor of the Proposal. FAILURE TO RETURN THE PROXY OR TO VOTE AT THE SPECIAL MEETING OR ABSTAINING FROM VOTING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE PROPOSAL. BROKER NON-VOTES HAVE THE SAME EFFECT AS A VOTE AGAINST THE PROPOSAL. A Shareholder may revoke his or her Proxy at any time before it is voted by (i) executing a subsequently dated Proxy; (ii) filing a written request to revoke or amend his or her Proxy with the President of the Trust at 19 23 the principal executive office of the Trust; or (iii) attending the Special Meeting and revoking the Proxy prior to the start of the Special Meeting. SOLICITATION OF PROXIES This Proxy Statement/Prospectus is submitted, and Proxies are being solicited by, the Trust Managers on behalf of the Trust in support of the Proposal. The expense of solicitation of Proxies will be borne by the Trust. See "FEES AND EXPENSES." The Trust will enlist the help of banks and brokerage houses in soliciting Proxies from their customers. The Trust will reimburse these institutions for out-of-pocket expenses. In addition to being solicited through the mails, Proxies may also be solicited personally or by telephone by officers and employees of the Trust. These officers and employees will not receive compensation for such services other than their regular salaried compensation. The Trust has engaged the firms of D.F. King & Co., Inc. and Proveaux, Stephen & Spencer, Inc. to assist in soliciting Proxies for the Special Meeting for fees of approximately $10,000 and $40,000, respectively, plus reasonable out-of-pocket expenses. THE COMPANY The Company is a newly-organized Maryland corporation which was incorporated on January 12, 1994 as a wholly-owned subsidiary of the Trust. The Trust was originally organized on September 26, 1985, and currently owns and operates 15 commercial real estate Properties consisting of 14 industrial Properties and one retail Property. The Company intends to operate as a self-administered REIT. The Company has been formed to succeed to and continue the property ownership and acquisition activities of the Trust. If the Merger is approved, the Company will own and operate the Properties. It is anticipated that industrial properties will continue to be the primary focus for investment by the Company. The Company intends to qualify as a REIT for federal income tax purposes and will be operated by the management of its predecessor in interest, the Trust. Approximately six officers and employees will be involved in the administration of the Company. The executive officers will be responsible for the day to day administration of the Company and the Board of Directors will be responsible for the overall direction and supervision of the Company. The investment and financing policies of the Company and its policies with respect to certain activities, including its growth, capitalization, distributions, REIT status and investment and operating policies will be determined by the Board of Directors. See "MANAGEMENT." The Trust and the Company maintain their principal executive offices at 6220 North Beltline, Suite 205, Irving, Texas 75063, and their telephone number is (214) 550-6053. COMPANY HISTORY The Trust was formed in September, 1985, as Trammell Crow Real Estate Investors, a finite-life real estate investment trust due to liquidate by December 31, 1997. The Trust's initial portfolio consisted of 19 properties, including 18 industrial properties and one retail mall, located throughout the United States. The Trust was advised initially by Trammell Crow Ventures, Ltd., an affiliate of Trammell Crow Company, under an advisory agreement that provided for the payment of an annual advisory fee and reimbursements for certain expenses as well as transaction fees for asset acquisitions and dispositions. As part of its initial capitalization, the Trust issued approximately $180 million of Notes. Beginning in 1991, the Trust commenced a program designed to reposition the Trust in order to participate in the growth taking place in the real estate investment trust industry. The first part of this process was to reduce the amount of Notes outstanding. By December 1992, approximately $160 million of the Trust's outstanding Notes were repurchased by the Trust in part through the proceeds of the sales of five of the Trust's 19 properties, and through the issuance of a $53.2 million unsecured note. With the completion of the acquisitions of the Notes described above, the Trust commenced the second part of its repositioning program with a transition to self-administration, which was concluded in June 1993, 20 24 with the establishment of a new management team for the Trust and the termination of the advisory agreement with Trammell Crow Ventures. As part of this change, the Trust adopted the new name, American Industrial Properties REIT, and changed its ticker symbol on the New York Stock Exchange to "IND." In July 1993, the Trust presented its Shareholders with a set of proposals related to the Trust's change to self-administration, and a proposal to make the life of the Trust perpetual through the removal of a limited term restriction in the Trust's Declaration of Trust and By-Laws. This second proposal, which required an affirmative vote of 80% of the Trust's outstanding Shares for approval, was passed on October 22, 1993, by 81.2% of the Trust's outstanding Shares. With these changes, and the prospective completion of its reorganization as a Maryland corporation and the other proposed changes, management believes the Company will be well positioned to attract new investment capital to increase its asset base, its cash flow and its value for the Company Stockholders. INVESTMENT POLICIES The Company's primary business objective is to maximize the total return to Stockholders through the acquisition, leasing, management and eventual disposition of its Properties. In doing so, the Company will seek to provide quarterly distributions and achieve long-term appreciation through increases in cash flow and in the values of its Properties. The Company's investment program will focus on industrial properties, both through the acquisition of existing properties and the development of build-to-suit properties for credit worthy tenants, primarily in the major mid-American markets. These markets, such as Dallas, Chicago and Atlanta, are located at the key rail and highway intersects that control the distribution of goods throughout the United States. The secondary markets within the Mid-American region will also be considered if the investment otherwise meets the business objectives of the Company. Industrial properties consist of distribution warehouses, service centers, office/showroom properties, research and development properties and light manufacturing facilities. Industrial properties are generally characterized by relatively simple configurations, thus allowing for a high degree of flexibility to meet the changing needs of tenants. As a result, management believes that industrial properties are generally more resistant to obsolescence than other types of real estate property. Industrial properties typically have limited amounts of office finish-out and other customized improvements. For this reason, the capital requirements of bringing in new tenants are relatively small. Finally, industrial properties are highly location sensitive, requiring direct access to major transportation arteries which are well known. For this reason and others, industrial properties have tended not to attract the speculative overbuilding characteristic of other types of real estate property. The Company will focus on markets characterized by steady economic growth rates, positive demographic trends and locations at the key highway and rail intersects in the middle part of the United States. It will be the Company's goal, over time, to establish dominant market positions in selective sub-markets of each of these large, super-regional distribution centers. Short term leases of three to five years, which are typical for industrial properties, will provide the Company with the flexibility to adjust rents to meet changing market conditions, and often to increase rents as leases roll-over at maturity. While the Company intends to focus its efforts on multi-tenanted properties, it will also seek to invest selectively in the development of single-tenant, build-to-suit properties for credit worthy companies. The Company believes that the scarcity of capital from traditional sources in this important sector of the industrial property market provides significant opportunities to achieve above market returns on investments at relatively moderate levels of risk. The Company's investment policies, as described above, do not differ from the policies of the Trust. OPERATING POLICIES A key element of the Company's investment strategy is to acquire properties which provide significant opportunities to add value through effective operating programs. Such properties generally under perform their 21 25 true economic potential as a result of deferred maintenance and cosmetic deficiencies. In many cases, the strategic application of capital, property improvements and intense management can substantially increase the appeal of the property to prospective tenants, thus increasing the revenue potential of the property. A significant advantage of industrial properties is that recurring internal capital requirements tend to be moderate. Industrial tenant spaces are typically used for the storage and handling of intermediary and finished products, and as such, spaces are configured in simple, efficient layouts with relatively little space, generally no more than 5-10% of the total, finished out for offices or other customized applications. The Company will establish annual business plans for each property that will include operating objectives, budgets, resource allocations and financial performance objectives. Management of the Company believes that such a formal planning process increases portfolio performance in that operating strategies are reviewed regularly and adjusted as needed to meet changing market conditions. In addition, the use of such a planning process in conjunction with a performance based compensation program ensures greater accountability among the asset managers, property managers and leasing personnel responsible for each property. The Company intends to continue the Trust's policy of maintaining very low direct overhead by employing third-party property managers and leasing personnel to manage the Company's Properties. The level of competition in the marketplace today for providers of such services is very intense. As a result, the quality of service is typically very high while operating costs are low in that they can be spread over many millions of square feet of property under management. The Company will continue to evaluate the merits of providing its own leasing and management services to the Company's Properties; however, it is management's belief that these services can be acquired currently at much lower costs though the marketplace than if the Company were to attempt to provide these services internally. The Company's operating policies, as described above, do not differ from the operating policies of the Trust. DISTRIBUTION POLICY On December 15, 1993, the Trust announced its intent to redirect its cash resources to the ultimate elimination of the Notes through a complete defeasance of the remaining Notes in 1994. For this reason, the Trust determined that it was in the best interest of the Trust and its Shareholders to suspend quarterly distributions (which had been at $.04 per quarter, equivalent to $.20 per quarter for the Company) until such time as the remaining Notes are fully defeased and distributions can be supported from the positive cash flow of the Trust, as measured by its Funds from Operations. Management intends to pursue a recapitalization and refinancing of the Company which would allow the Company to reinstate a dividend sometime in the future. The Company's dividend policy is to review operating results, capital requirements and working capital reserves on a quarterly basis and to declare dividends based on the Board of Directors' and management's determination of distributable cash flow. Generally, the Company intends to maintain a dividend equal to approximately 85% of Funds from Operations within these parameters. No dividend payments on Common Stock are anticipated while the Company pursues a recapitalization and refinancing strategy. In order to satisfy the requirement to distribute 95% of the Company's taxable income, it is management's intent to make sufficient distributions necessary in order to maintain the Company's REIT status. So long as there is no REIT taxable income, suspension of cash distributions will not result in a disqualification of the Company's status as a REIT. For a further discussion of the amount of distributions that must be made in order for the Company to retain REIT status, see "FEDERAL INCOME TAX CONSIDERATIONS -- Taxation of the Company." 22 26 THE PROPERTIES The Trust currently owns and manages 15 industrial and retail Properties in eight states. Set forth below is a brief description of each of the Properties.
NUMBER OCCUPANCY LEASABLE CONSTRUCTION OF AT REGION PROPERTY NAME LOCATION SQ. FT. PHYSICAL DESCRIPTION DATE TENANTS 9/30/93 - --------------- ------------- -------------- --------- ------------------------------ ------------ ------- --------- Baltimore Patapsco Linthicum 95,151 Five building, two-phase 1980-1984 23 83% Industrial Center(2) Heights, industrial park on 8.3 acres Maryland Dallas Beltline Irving, Texas 60,526 Three industrial office 1984 22 73% Industrial Center buildings on 5.0 acres in Las Colinas Gateway 5 & 6 Irving, Texas 78,786 Two industrial buildings 1984-1985 8 79% within a six-building industrial park on 5.0 acres in Las Colinas Northgate II Dallas, Texas 235,827 Four industrial buildings on 1982-1983 13 94% 12.5 acres within a 21 building office and industrial park Northview Dallas, Texas 174,793 Two industrial buildings on 1980 6 100% Distribution 9.42 acres Center(3) Denver Retail Tamarac Denver, 197,152 An enclosed specialty retail 1976-1979 (4) 55 88% Square Colorado mall, convenience center and four restaurant pad sites on 18.9 acres Ft. Lauderdale Quadrant Deerfield 73,597 Two industrial buildings on 1986 9 96% Industrial Beach, 5.4 acres within a Florida seven-building industrial park Houston Plaza Houston, Texas 149,680 Five industrial buildings on 1970-1974 36 89% Industrial Southwest 10.3 acres Commerce Park Houston, Texas 87,279 Two-building industrial 1984 7 61% complex on 5.5 acres Westchase Houston, Texas 47,630 Two-building industrial park 1983 8 100% Park on 4.2 acres Los Angeles Huntington Monrovia, 62,218 A two-story office building 1985 6 84% Industrial Drive Center California and an industrial building on 4.0 acres Milwaukee Northwest Milwaukee, 143,120 Three industrial buildings on 1983 17 89% Industrial Business Wisconsin 10.7 acres Park Minneapolis Burnsville Burnsville, 46,066 One industrial building on 3.8 1985 4 68% Industrial Minnesota acres Cahill Edina, 60,082 One industrial building on 3.9 1981 4 100% Minnesota acres Seattle Springbrook Kent, 80,973 One industrial building on 5.5 1984 11 94% Industrial Washington acres comprising Phase II of the two-phased Springbrook Industrial Park --------- -- -- Totals 1,592,880 229 87% --------- -- -- --------- -- --
AVERAGE ANNUALIZED BASE FIRST BASE RENT MORTGAGE RENTAL PER SQ. DEBT REGION REVENUE FT. 9/30/93(1) - --------------- ---------- ------- ---------- Baltimore $ 541,000 $6.85 $1,437,000 Industrial Dallas 263,000 5.95 None Industrial 276,000 4.43 None 641,000 2.89 None 490,000 2.80 None Denver Retail 2,264,000 13.05 1,222,000 (5) Ft. Lauderdale 321,000 4.54 1,200,000 Industrial Houston 565,000 4.24 None Industrial 314,000 5.90 None 190,000 3.99 None Los Angeles 754,000 14.43 None Industrial Milwaukee 737,000 5.79 1,346,000 (6) Industrial Minneapolis 199,000 6.35 2,037,000 (7) Industrial 283,000 4.71 None Seattle 487,000 6.40 None Industrial ---------- ------- ---------- Totals $8,325,000 $6.01 $7,242,000 ---------- ------- ---------- ---------- ------- ----------
- --------------- (1) All properties are subject to either a first or second mortgage lien arising from the Zero Coupon Notes due November 1997. Mortgages reflected above are only those which encumber individual properties as a first mortgage other than the lien and mortgage associated with the Zero Coupon Notes. (2) The Trust owns 99.99% of the limited partnership interests in a limited partnership that owns Patapsco Center. This interest entitles the Trust to 100% of the income generated by Patapsco Center, 100% of any appreciation in the value of Patapsco Center, and 99.99% of the return of capital in any sale of Patapsco Center. The remaining interest in the limited partnership is a limited partner's interest held by Trammell Crow Ventures, Ltd., the former Advisor to the Trust. The limited partner has no rights to participate in the management of Patapsco Center. (3) Northview Distribution Center was acquired by the Trust in December 1993. (4) Tamarac Square underwent a $2.1 million renovation during 1992-1993. (5) The first mortgage debt encumbers the convenience center only. (6) Only one building of Northwest Business Park is subject to the first mortgage. (7) The Burnsville mortgage is also recourse to the Trust. 23 27 The following table shows as of September 30, 1993 scheduled lease expirations commencing with the fourth quarter of 1993 and for the next nine years, assuming that no tenants exercise renewal options.
AVERAGE EXPIRATION AS A RENT ----------------- PER % OF ANNUALIZED SQ. % OF TOTAL NO. SQ. FT. BASE RENT FT. TOTAL PROPERTY OF OF OF OF PROPERTY ANNUALIZED LEASES EXPIRING EXPIRING EXPIRING SQ. BASE EXPIRING LEASES LEASES LEASES FT. RENT --- ------- --------- ------ ------ ------ Three months ended December 31, 1993.............. 6 32,018 $ 273,000 $ 8.53 2.01% 3.28% YEAR ENDING DECEMBER 31, - --------------------------------- 1994.......................... 57 313,572 1,574,000 5.02 19.69% 18.91% 1995.......................... 48 300,543 1,422,224 4.73 18.87% 17.08% 1996.......................... 49 251,631 1,492,000 5.93 15.80% 17.92% 1997.......................... 23 154,426 813,000 5.26 9.69% 9.77% 1998.......................... 30 202,732 1,300,000 6.41 12.73% 15.62% 1999.......................... 5 56,668 279,000 4.92 3.56% 3.35% 2000.......................... 4 31,622 305,000 9.65 1.99% 3.66% 2001.......................... 2 20,850 157,000 7.53 1.31% 1.89% 2002.......................... 2 5,630 73,000 12.97 0.35% 0.88%
ADDITIONAL INFORMATION REGARDING CERTAIN PROPERTIES One of the Trust's Properties has rental revenues and a book value in excess of 10% of the Trust's total rental revenues and total assets, respectively. Information concerning this Property is set forth below. Tamarac Square. Tamarac Square is an approximately 134,000 square-foot two-level enclosed specialty retail mall with an adjacent approximately 33,000-square-foot convenience center and four free-standing restaurant sites totaling 29,800 square feet. Tamarac Square is located at 7777 and 7293 East Hampden Avenue and 3333 South Tamarac Drive, approximately 11 miles southeast of downtown Denver, in a commercial retail district. The mall and convenience center feature a contemporary design of all brick exteriors, skylights and landscaping. The initial occupancy of Tamarac Square commenced in December 1976 and the property was one of the Trust's initial acquisitions in connection with its formation in 1985. Tamarac's federal income tax basis was approximately $31,000,000 (net of approximately $6,500,000 in accumulated depreciation) at September 30, 1993. Annualized minimum rentals are approximately $2,065,000 based on leases currently in effect. An approximate $2.5 million renovation of the specialty retail mall was completed during 1992 and 1993 which created new entryways, replaced stairs with escalators and enhanced the mall's interiors with paint and other new amenities and new signage. No significant additional renovations are currently planned for this property. The following tables sets forth information with respect to the occupancy of this Property for each of the five years ending December 31, 1992 and for the nine months ended September 30, 1993, and the average effective annual base rental per square foot for each of such periods:
AVERAGE RENT PER PHYSICAL SQ. PERIOD ENDING OCCUPANCY FT. ----------------------------------------------------------- --------- ------ September 30, 1993......................................... 88% $13.05 December 31, 1992.......................................... 92% $12.69 December 31, 1991.......................................... 80% $14.26 December 31, 1990.......................................... 83% $13.72 December 31, 1989.......................................... 94% $13.27
24 28 Tamarac Square is currently leased to 55 tenants. The following table sets forth certain information with respect to the expiration of leases at this Property:
AVERAGE EXPIRATIONS AS A RENT ----------------- PER % OF ANNUALIZED SQ. % OF TOTAL NO. SQ. BASE FT. TOTAL PROPERTY OF FT. OF RENT OF OF PROPERTY ANNUALIZED LEASES EXPIRING EXPIRING EXPIRING SQ. BASE EXPIRING LEASES LEASES LEASES FT. RENT --- ------ -------- ------ ------ ------ Three months ended December 31, 1993............... 0 0 0 0 0 0 YEAR ENDING DECEMBER 31, - ---------------------------------- 1994........................... 7 15,646 $270,000 $17.26 7.94% 11.93% 1995........................... 11 29,474 359,000 12.18 14.95% 15.86% 1996........................... 12 35,775 400,000 11.18 18.15% 17.67% 1997........................... 6 19,247 192,000 9.98 9.76% 8.48% 1998........................... 9 20,158 262,000 13.00 10.22% 11.57% 1999........................... 1 4,090 73,000 17.85 2.07% 3.22% 2000........................... 3 8,927 144,000 16.13 4.53% 6.36% 2001........................... 1 8,000 98,000 12.25 4.06% 4.33% 2002........................... 2 5,630 73,000 12.97 2.86% 3.22%
One Tenant's lease is in excess of 10% of the gross leasable area of Tamarac Square. Mann Theatres, a national movie theatre concern, leases 19,934 square feet for a six screen theatre running first-run films. The lease provides for minimum base rents at $5.70 per square foot ($113,624 annually) and expires in December 1996. The tenant has three five-year options to renew upon expiration. Property taxes are assessed on Tamarac based on 29% of assessed value at the applicable tax rate (estimated at 8.379% in 1993). Property taxes paid in 1993 with respect to Tamarac were approximately $415,000. OTHER ENCUMBRANCES ON REAL ESTATE Each of the Properties is subject to a mortgage securing the Notes (a "Mortgage"), as required by the Indenture. In the case of Tamarac Square, Burnsville, Northwest Business Park and Quadrant, the Mortgage is a second mortgage; in the case of Patapsco, the Mortgage is a first lien on the Trust's partnership interest; and for all other Properties, the Mortgage is a first lien. 25 29 TERMS OF MORTGAGE INDEBTEDNESS
PRINCIPAL AMOUNT AMOUNT OUTSTANDING DUE AT SEPT. MATURITY INTEREST AT PAYMENT PREPAYMENT PROPERTY 30, 1993 DATE RATE MATURITY TERMS TERMS - -------------- --------- ---------- -------- --------- -------------- ---------------------------- Tamarac $1,222,737 July 9.63% $ 0 Monthly Prepayable after Aug. 1989 Convenience 2006 payments with a 5% penalty which Center of principal declines 1/2 of 1% each and interest year until penalty reaches to maturity 1%, which continues in of $13,905 effect to maturity Northwest $1,346,328 March 11.00% $1,227,676 Monthly Prepayable in March 1994 at Business 1999 payments 100% of principal. Park of principal Subsequent to March 1994, and interest prepayment is at 105% of to maturity principal, declining by 1% of $13,811 annually until maturity. Patapsco $1,439,630 September 10.00% $ 0 Monthly Prepayable after Sept. 1992 2010 payments with a 5% penalty which of principal declines 1/2 of 1% each and interest year until penalty reaches to maturity 1%, which continues in of $14,279. effect to maturity Quadrant $1,200,000 October 9.63% $1,200,000 Monthly Prepayable at any time prior 1996 payments to maturity subject to yield of interest maintenance based on current only to Treasury yield maturity Burnsville $1,976,000 May Prime + $1,948,800 Monthly Prepayable at any time with 1995 2% payments no penalty of principal and interest based on variable rate and a 30 year amortization of principal. Payments as of 9/30/93 were $14,994
COMPETITION All of the Properties are located in areas that include numerous other industrial and retail properties, many of which may be deemed to be more suitable to a potential tenant than the Properties. The resulting competition could have a material adverse effect on the Company's ability to lease the Properties and to increase rentals charged under existing leases. The Company may be competing with others that have greater resources than the Company. INSURANCE The Company will seek to maintain comprehensive liability, fire and extended coverage insurance of the type and in the amount customarily obtained for similar properties. There are, however, certain types of losses (generally of a catastrophic nature, such as earthquakes, floods and wars) that either may be uninsurable or not economically insurable. Should an uninsurable loss occur, the Company could lose both its invested capital and anticipated future revenues related to the affected Property (and may also be required to defease a certain percentage of the Notes), and would continue to be obligated on any mortgage indebtedness or other obligations related to the affected Property. Any such loss could adversely affect the Company. Management believes the Properties are currently adequately insured in accordance with industry standards. See "RISK FACTORS -- Uninsured Loss." 26 30 POLICIES WITH RESPECT TO CERTAIN ACTIVITIES The Company's policies with respect to the following activities have been determined by the Board of Directors of the Company and may be amended or revised from time to time at the discretion of the Board of Directors without a vote of the Stockholders if they determine in the future that such a change is in the best interest of the Company and its Stockholders. See "RISK FACTORS -- Changes in Policies." While the Company has emphasized equity real estate investments, it may, in its discretion, invest in mortgage and other real estate interests, including securities of other real estate investment trusts, consistent with its qualification as a REIT. The Company has not previously invested in mortgages or securities of other entities, including other REITs, and does not presently intend to invest to a significant extent in mortgages or securities of other entities, including other REITs. The Company may invest in participating or convertible mortgages if it concludes that it may benefit from the cash flow or any appreciation in the value of the subject property. Such mortgages are similar to equity participation. The mortgages in which the Company may invest may be either first mortgages or junior mortgages and may or may not be insured by a governmental agency. Subject to the percentage of ownership limitations and gross income tests necessary for qualification as a REIT (see "FEDERAL INCOME TAX CONSIDERATIONS"), the Company also may invest in securities of concerns engaged in real estate activities or securities of other issuers. The Company may also invest in the securities of other issuers in connection with acquisitions of indirect interests in properties (normally general or limited partnership interests in special purpose partnerships owning properties). The Company may in the future acquire all or substantially all of the securities or assets of other REITs or similar entities where such investments would be consistent with the Company's investment policies. The Company will not be limited as to the percentage of securities of any one issuer it may acquire. However, the Company does not anticipate investing in issuers of securities (other than REITs and to acquire interests in real property) for the purpose of exercising control or acquiring any investments primarily for sale in the ordinary course of business or holding any investments with a view to making short-term profits from their sale. In any event, the Company does not intend that its investments in securities will require the Company to register as an "investment company" under the Investment Company Act of 1940, and the Company intends to divest securities before any such registration would be required. The Company does not intend to underwrite the securities of other issuers. The Company may, but has no present intention to, make investments other than as previously described. At all times, the Company intends to make investments in a manner consistent with the requirements of the Code to qualify as a REIT unless, because of circumstances or changes in the applicable law, the Board of Directors determines that it is no longer in the best interests of the Company to qualify as a REIT. See "FEDERAL INCOME TAX CONSIDERATIONS." DISPOSITION Management will periodically review the assets comprising the Company's portfolio. The Company has no current intention to dispose of any of the Properties unless the sale of Properties is necessary or appropriate because of liquidity problems. The Company reserves the right to dispose of any of the Properties or any property that may be acquired in the future if the Board of Directors, based in part upon management's periodic reviews, determines that the disposition of such property is in the best interests of the Company. CONFLICT OF INTEREST POLICY Each of Messrs. Wolcott, Warner and O'Brien are prohibited from engaging in any real estate acquisitions, development or management activities, except on behalf of the Company, during their employment with the Company. AFFILIATE TRANSACTION POLICY The Company will not enter into any transactions, including without limitation, loans, acquisitions or sales of property, joint ventures and partnerships, in which the Company or a subsidiary is a party and in which 27 31 any Director, officer, principal security holder or affiliate has any direct or indirect pecuniary interest, unless such transaction is approved by a majority of the disinterested Directors after full disclosure of such interests to the disinterested members of the Board of Directors. In determining whether to approve the transaction, the Board of Directors will condition such approval on the transaction being fair and reasonable to the Company and, to the extent deemed relevant by such Directors, on terms no less favorable to the Company than prevailing market terms and conditions for comparable transactions. Directors who are also officers of the Company will be considered to be disinterested for this purpose provided they have no direct or indirect pecuniary interest in the transaction. POLICIES WITH RESPECT TO OTHER ACTIVITIES The Company has authority to issue additional Common Stock or other securities in exchange for property and other valid consideration, and to repurchase or otherwise reacquire its shares or any other securities and may engage in such activities in the future. The Company expects to implement a dividend reinvestment program, and may from time to time repurchase Common Stock in the open market for the purposes of fulfilling its obligations under the program or may elect to issue additional Common Stock. 28 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Below is a summary of Funds from Operations for the Trust for the nine months ended September 30, 1993 and 1992, and for the years ended December 31, 1992, 1991 and 1990. Management believes that the presentation of Funds from Operations will enhance the reader's understanding of the Trust's financial condition because it provides the reader with an additional measure of the Trust's operating performance which excludes non-recurring activities (i.e., gains or losses from debt restructuring and sales of property) as well as certain non-cash items (i.e., depreciation and amortization). Many REITs disclose Funds from Operations in order to provide readers with additional information with which to compare performance. Funds from Operations, however, should not be considered an alternative to net income as an indicator of the Trust's operating performance or to cash flows from operations as a measure of liquidity. The determination of Funds from Operations is based on the definition adopted by the National Association of Real Estate Investment Trusts, which is net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization (the Trust adds back the amortization of the original issue discount on its Notes) and after adjustments for unconsolidated partnerships and joint ventures.
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED SEPTEMBER 30, DECEMBER 31, ---------------- ---------------------------- 1993 1992 1992 1991 1990 ----- ------ ------ ------ ------ (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Funds From Operations.................. $(551) $2,861 $2,852 $8,308 $9,032 Per Share.............................. $(.06) $ .32 $ .31 $ .92 $ 1.00 Pro Forma Funds From Operations(1)..... $(551) $ 49 $ (48) $1,094 $1,329 Pro Forma Per Share.................... $(.06) $ .01 $ (.01) $ .12 $ .15
- --------------- (1) The pro forma presentation assumes that the approximately $65,000 of recorded value in Notes repurchased during 1992 were not outstanding and were replaced for all periods presented with the $45,234 in notes payable under the MLI Agreement which were issued and outstanding during 1993 in connection with the repurchases. The pro forma presentation also reflects the operations of only those properties owned by the Trust as of September 30, 1993, excluding the two properties sold in December, 1990, the two properties sold in December, 1992 and the property sold in January, 1993. Comparison of Nine Months Ended September 30, 1993 to 1992 Funds from Operations for the nine months ended September 30, 1993 decreased to $(551) from $2,861 for the same period in 1992 due primarily to the sales of the Woodland Industrial Park in Charlotte, North Carolina and the Southland industrial property in Houston, Texas, at the end of 1992, and the sale of the Royal Lane Business Park in Dallas, Texas in January, 1993. On a same property basis, rental revenues remained flat during the year, although in the third quarter the Trust began to see some strengthening in the leasing markets in most of the areas in which the Trust operates in terms of both traffic and rental rates (other than in Southern California). Same property occupancy improved to 87% at September 30, 1993 from 85% at September 30, 1992. The decline in Funds from Operations on a pro forma basis is attributable to the termination fee paid to the Advisor and the additional Trust administration and overhead costs incurred associated with the proxy solicitation effort to remove the Trust's finite life provision (discussed below). The Trust terminated its Advisory Agreement with the Advisor effective June 12, 1993. In accordance with the terms of the Advisory Agreement, a one-time termination fee of $435,000 was paid to the Advisor on June 12, 1993. The Trust is now self-administered and employs six full-time employees to conduct and manage the business affairs of the Trust. 29 33 The overall costs to the Trust over time under self-administration related to managerial, administrative and other services are expected to be lower than fees previously paid to the Advisor under the Advisory Agreement. For example, under self-management, the Trust will be able to provide, through its management group, certain services, including restructuring activities and certain transaction services, without the need to pay the fees previously provided for in the Advisory Agreement. Comparison of 1992 to 1991 The Trust had a net loss of $17,593,000 in 1992 compared to a net loss of $9,162,000 in 1991. The 1992 net loss included a provision for possible losses on real estate of $14,094,000, an extraordinary gain from partial repurchases of Notes of $1,910,000 and a net loss on sales of real estate of $784,000. Excluding the 1992 and 1991 provisions for possible losses, the extraordinary gains, and the gain or loss on sales of real estate, the net loss would have been $4,625,000 and $4,415,000 in 1992 and 1991, respectively. Net loss before extraordinary gain and gain or loss on sales of real estate was $18,719,000 in 1992 and $13,786,000 in 1991. Total revenue decreased to $15,139,000 in 1992 from $16,488,000 in 1991. Average occupancy levels were the same in both years, at 89%; however, the sales of the Southland and Woodland properties negatively impacted revenue and earnings. Total real estate expenses decreased to $18,443,000 in 1992 from $19,555,000 in 1991. This decrease is principally attributable to a reduction in amortization of original issue discount on Zero Coupon Notes repurchased in 1992 (which accreted at 12%) that was partially offset by interest expense on the 8.8% Notes payable. Comparison of 1991 to 1990 The Trust had a net loss of $9,162,000 in 1991 compared to a net loss of $2,626,000 in 1990. The 1991 net loss included a provision for possible losses on real estate of $9,371,000, and an extraordinary gain from partial repurchases of Notes of $4,320,000. Excluding the provision for possible losses, the extraordinary gain and the gain on sales of real estate, the net loss would have been $4,415,000 and $4,484,000 in 1991 and 1990, respectively. An additional factor affecting the comparison of 1991 and 1990 financial results is the sale of two of the Trust's properties on December 31, 1990. In addition to reducing the size of the portfolio for 1991 operations, the sale resulted in gains of $304,000 in 1991 and $1,858,000 in 1990. Net loss before extraordinary gain and gain on sales of real estate was $13,786,000 in 1991 and $4,484,000 in 1990. LIQUIDITY AND CAPITAL RESOURCES The principal source of funds for the Trust's liquidity requirements is funds generated from operations of the Trust's real estate assets and unrestricted cash reserves. As of September 30, 1993, the Trust had $2,914,000 in unrestricted cash on hand. The Trust presently anticipates that cash on hand and Funds from Operations will provide sufficient funds for all known liabilities and commitments relating to the Trust's operations. However, certain uses of the Trust's cash, including (i) the costs of the Trust's reorganization into a Maryland corporation via merger (estimated at approximately $400,000), (ii) the loss of the income producing ability of the $10.2 million expected to be used to defease the Notes (see discussion below), and (iii) future debt service payments, could affect the Trust's operations by reducing its ability to make capital investments necessary to be competitive in the markets in which the Trust operates and could result in a default under the provisions of the MLI Agreement. Distributions made and declared to date during 1993 in the amount of $1,452,000 ($.16 per Share), have been paid out of cash reserves of the Trust. In December, 1993, the Trust Managers announced the suspension of the Trust's quarterly distribution in order to redirect the Trust's resources to the ultimate defeasance of the Trust's Notes (see discussion below). The initial capitalization of the Trust included $179,698,000 face amount of Zero Coupon Notes due November 27, 1997 secured by first or second liens on all of the Trust's initial investments. Amortization of the original issue discount on the Notes is a non-cash charge against net income of the Trust, compounding semiannually at 12%. During 1991 and 1992 the Trust repurchased a substantial amount of the Notes, decreasing the remaining face amount outstanding to a total of $19,956,000. Subsequent to September 30, 1993, the Trust Managers authorized management to utilize the Trust's available cash to provide liquidity for 30 34 the repurchase of outstanding Notes at their accreted value from Noteholders desiring to sell their notes and unable to find a market for them. Through December 31, 1993, the Trust had acquired approximately $500,000 face amount of the Notes at their accreted value. No other purchases of significance are planned at this time, however, should the Trust identify an opportunity to purchase significant blocks of the Zero Coupon Notes at a discount to their defeasance amount (the amount that would be required to Defease the Notes under the Indenture), additional purchases may be made. Pursuant to the terms of the Indenture covering the Trust's Notes, the Trust is required to deposit the net proceeds of any property sale or refinancing into a Property Acquisition Account administered by a Trustee to the extent deemed necessary or appropriate by the Trust Managers to secure the interests of the Noteholders. Prior to November 27, 1993 (the "Defeasance Commencement Date"), funds in the Property Acquisition Account could be used to make additional investments as allowed under the Trust's By-Laws. After the Defeasance Commencement Date, any remaining funds in the Property Acquisition Account must be used to defease the holders of the remaining Notes. Subsequent to September 30, 1993, the Trust reinvested all of the funds held in the Property Acquisition Account (approximately $13.6 million) into short-term commercial paper and Treasury Notes which are pledged as additional collateral to the Noteholders. On December 10, 1993, pursuant to a court order directing the Indenture Trustee to release certain funds securing the Noteholders, the Trust acquired a 175,000 square foot multi-tenant distribution center in Dallas for a purchase price of approximately $3,400,000. The acquired property is pledged under a first mortgage lien to the Noteholders. Management believes the acquisition will further enhance Funds from Operations of the Trust in fiscal 1994. The Trust has determined that it is in the best interest of the Shareholders to use the remaining $10.2 million of cash pledged as collateral to the Noteholders, which is currently invested in short-term securities due to mature in February of 1994, to partially defease the Notes outstanding in the first quarter of 1994. The result of a partial defeasance of the Notes would be a reduction in the accreted value of the debt on the Trust's balance sheet from approximately $13.0 million to approximately $4.9 million, with a loss of approximately $2.1 million being recognized by the Trust. In acquiring its existing Properties, the Trust assumed a total of $8,075,000 in mortgage debt, of which $7,242,000 remained outstanding as of September 30, 1993. The debt service on the Trust's mortgages amount to approximately $800,000 annually. Under the terms of the first mortgage loan due April 30, 1995, covering the Trust's Burnsville property located in Minneapolis, Minnesota, the termination of the Advisory Agreement constituted an event of default. The Trust secured a waiver of the event of default from the mortgagee by agreeing to make a principal prepayment in the amount of $120,000 in two installments of $60,000. The first installment was made on May 17, 1993 and the second installment was paid on November 17, 1993. In accordance with the terms of the Notes, the Trust paid its first installment of accrued interest on the Notes on May 27, 1993 in the amount of $1,974,000. Accrued interest in the amount of approximately $1,990,000 will be payable each May and November until the Notes become due. Tenant and capital improvements were $1,105,000 for the nine months ended September 30, 1993 as compared to $2,508,000 for the same period of 1992. The improvements during 1992 primarily related to renovation at the Trust's Tamarac Square retail property in Denver, Colorado. Current year capital expenditures relate primarily to leasing activity, including tenant improvements and lease commissions arising from the new lease with The GAP at Tamarac Square. The Trust's successful conversion from a finite-life entity required to liquidate in 1997 to a perpetual-life entity (which was announced after the Trust received in excess of the required 80% positive vote of all Shareholders on October 22, 1993) is expected to enhance the Trust's ability to take advantage of the capital and investment markets available to REITS. Management intends to pursue a strategy which will lower the Trust's cost of capital and enable the Trust to make additional investments in industrial real estate. This can be accomplished through raising additional debt and/or equity capital from various sources, including the public markets. At this time, however, management has obtained no commitments for funding or underwriting 31 35 additional debt or equity capital and there can be no assurances that sources of capital will become available in the future. The Trust Managers have determined that a reorganization of the Trust into a Maryland corporation is a necessary step towards a future financial restructuring because it removes existing barriers of the Trust's organization to additional debt and equity capital by increasing the authorized Shares of the Trust and allowing for different classes of equity capital, amongst other things. As such, the Trust has capitalized a Maryland corporation, American Industrial Properties REIT, Inc., with $1,000 and will seek approval from Shareholders to merge with this newly-formed subsidiary. Concurrent with this reorganization, management will continue to pursue capital raising opportunities. However, there can be no assurances that a successful recapitalization will occur as a result of the reorganization into a Maryland corporation. In order to replace the income generated from the investment of the funds to be used to achieve a partial defeasance of the Notes as discussed above, the Trust may seek liquidity through sales of existing Properties, financing transactions and from improvements in the operating cash flow of the Trust. Additionally, the Trust Managers have determined that it is in the best interest of the Trust and its Shareholders to suspend quarterly distributions to Shareholders until such time as the remaining Notes are fully defeased and distributions can be supported from the available Funds from Operations of the Trust. OTHER MATTERS On January 8, 1993, the Trust sold its Royal Lane Business Park in Dallas, Texas. The sales price was $7,500,000, and the net proceeds of approximately $1,800,000, after reduction for the existing first mortgage loan and the related sales costs, were deposited into the Property Acquisition Account under the terms of the Indenture. Distributions to Shareholders are charges against Shareholders' equity, and therefore, Shareholders' equity will continue to decrease due to distributions made and net losses incurred by the Trust. Distributions in excess of taxable net income, or to the extent of net loss, constitute a return of capital to Shareholders. For federal income tax purposes, the taxable portion of distributions is determined on a calendar year basis, and is computed based on actual distributions for the year. It is presently estimated that the entire distributions paid by the Trust in 1993 will constitute a return of capital. Management has been notified of the possible existence of underground contamination at Tamarac Square, the Trust's Denver retail Property. The source of the possible contamination is apparently related to petroleum underground storage tanks located on an adjacent property. This adjacent property was placed on Colorado's list of leaking underground storage tanks. A second potential source of contamination is a nearby tract on which a service station was formerly operated. The owner of the adjacent property is currently conducting studies under the direction of the Colorado Department of Health in an attempt to define the contamination and institute an appropriate plan to address the situation. At this time, management does not anticipate any exposure to the Trust relative to this issue. 32 36 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS The following table sets forth certain information as to the number of Trust Shares and the number of shares of Company Common Stock beneficially owned before and after the Merger by (a) each person (including any "group" as that term is used in Section 13(d) of the Exchange Act) who is known by the Trust to own beneficially 5% or more of the Shares, (b) each Trust Manager, (c) each executive officer, and (d) all executive officers and Trust Managers as a group.
AMOUNT AND NATURE OF BENEFICIAL PERCENTAGE OWNERSHIP OF CLASS BEFORE/AFTER BEFORE/AFTER NAMES OF BENEFICIAL OWNERS THE MERGER THE MERGER --------------------------------------------------- ------------ ------- W. H. Bricker.................................... 2,000/400 * George P. Jenkins................................ 500/100 * Charles W. Wolcott............................... 15,500/3,100 * David B. Warner.................................. -- * Mark A. O'Brien.................................. -- * All Trust Managers and executive officers as a group......................................... 18,000/3,600 .20/.20%
- --------------- * Ownership is less than 1% of the outstanding Shares/Common Stock. As of January 17, 1994, no person or group within the meaning of Section 13(d)(3) of the Exchange Act, to the knowledge of the Trust, owned more than 5% of the outstanding Shares. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The persons who serve as executive officers and directors of the Company, their ages and their respective positions are as follows:
NAME AGE POSITION(S) AND OFFICE(S) HELD ------------------------- --- ------------------------------------------------- W. H. Bricker 61 Director Raymond H. Hay 65 Director Charles W. Wolcott 41 Director, President and Chief Executive Officer David B. Warner 35 Vice President and Chief Operating Officer Mark A. O'Brien 31 Vice President and Chief Financial Officer, Secretary and Treasurer
The term of Mr. Hay will expire at the Annual Meeting of Stockholders to be held in 1995. The term of Mr. Wolcott will expire at the Annual Meeting of Stockholders to be held in 1996. The term of Mr. Bricker will expire at the Annual Meeting of Stockholders to be held in 1997. In each case, the directors will serve until the election and qualification of their respective successors. Executive officers of the Company are elected annually by the Board of Directors and serve at the Board's discretion. The following is a biographical summary of the experience of the persons that will serve as executive officers and directors of the Company: WILLIAM H. BRICKER has served as President of D.S. Energy Services Incorporated (consulting in the energy field; 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. Mr. Bricker is a director of the LTV Corporation, the Eltech Systems Corporation and the National Paralysis Foundation. He received his Bachelor of Science and Masters of Science degrees from Michigan State University. 33 37 RAYMOND H. HAY became Chairman of Aberdeen Associates (investments) after his retirement in 1991 as Chairman and Chief Executive Officer of the LTV Corporation (steel, aerospace, defense and energy) where he worked for 16 years. Mr. Hay previously served as Executive Vice President of the Xerox Corporation (office equipment) where he worked from 1961 through 1975. Mr. Hay is director of National Medical Enterprises, Inc. and Maxus Energy Corporation. He has a Bachelor of Science degree in Economics from Long Island University. CHARLES W. WOLCOTT was hired as the President and Chief Executive Officer of the Trust on May 4, 1993. For the six months immediately prior to his election as President of the Trust, Mr. Wolcott was engaged in developing various personal business enterprises. Mr. Wolcott was President and Chief Executive Officer of Trammell Crow Asset Services, a real estate asset and portfolio management affiliate of Trammel Crow Company, from 1990 to 1992. He served as Vice President and Chief Financial and Operating Officer of the Trust 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 Masters of Business Administration degree from Harvard University in 1977. DAVID B. WARNER was hired as Vice President and Chief Operating Officer of the Trust on May 24, 1993. From 1989 through the date of his accepting a position with the Trust, Mr. Warner was 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 Masters of Business Administration from the same institution in 1984. MARK A. O'BRIEN was hired as the Vice President of Finance & Administration of the Trust on May 11, 1993. Prior to joining the Trust, Mr. O'Brien was employed by the accounting firm of Arthur Andersen & Co. in the real estate services group. Mr. O'Brien was the Vice-President of Finance & Administration with the Fritz Duda Company, a Dallas, Texas based real estate development, investment and property management company, from 1991 to October 1992. Mr. O'Brien was employed by Arthur Andersen & Co. from 1984 through 1991, where he was an auditor of and consultant to companies engaged in real estate, health care and construction industries, including publicly traded limited partnerships and other Securities and Exchange Commission registrants. Mr. O'Brien graduated from the University of Mississippi in 1984 with a Bachelor of Accountancy degree. He is a Certified Public Accountant and a member of the AICPA and the Texas Society of CPA's. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS The Company will pay each independent director a fee of $20,000 per year for services as a director plus $1,000 for each meeting of the directors or a committee of the Board of Directors attended in person. In addition, the Company will reimburse the directors for their expenses incurred in connection with their duties as directors. Payment by the Company for services will not commence until the first meeting following consummation of the Merger. 34 38 The Company was organized on January 12, 1994. Accordingly, the Company did not pay any cash compensation to its executive officers for the year ended December 31, 1993. The Company will not pay compensation to its executive officers prior to the Effective Date. Effective January 12, 1994, the Company awarded stock options under the Omnibus Plan to purchase Common Stock as follows:
NUMBER OF SHARES OF COMMON STOCK COVERED BY EXERCISE NAME AND OFFICE OPTIONS PRICE ------------------------------------------------------- ------ ------ Charles W. Wolcott..................................... 81,600 $10.63 President and Chief Executive Officer David B. Warner........................................ 27,200 $10.63 Vice President and Chief Operating Officer Mark A. O'Brien........................................ 27,200 $10.63 Vice President and Chief Financial Officer, Secretary and Treasurer
EMPLOYMENT AGREEMENTS Messrs. Wolcott, O'Brien and Warner have entered into Employment Agreements with the Company (each an "Employment Agreement"), effective as of January 1, 1994. In general, the Employment Agreements provide for certain incentive bonus compensation and severance compensation in order to encourage these key-employees of the Company to remain as employees of the Company. In the event that such employee is terminated, voluntarily or involuntarily, as a direct result of a change in control of the Company, the employee will be entitled to receive severance compensation in an amount equal to three times the average of the total cash compensation, inclusive of base salary and cash bonuses, received by such employee during each of the preceding five calendar years. Each Employment Agreement is for an initial term of three years, renewable for unlimited terms of one year with the agreement of both the Company and the employee. For purposes of the Employment Agreements, the term "change in control" means the consolidation or merger of the Company with or into another entity (other than a merger with a subsidiary or a merger in which the Company is the surviving entity) or the sale of all or substantially all of the assets of the Company to a third-party unaffiliated with the Company. In the event of the expiration of the term of the Employment Agreement, or the termination of the employee for any reason at any time at least 90 days prior to the time that a change in control of the Company occurs, the employee shall not be entitled to receive severance compensation. Each Employment Agreement also provides that key-employees shall be eligible for an annual incentive bonus, subject to certain conditions being satisfied. Annual incentive bonuses will be awarded as follows: for every incremental specified increase (the "Increase Multiple") in Funds from Operations per share earned by the Company in each calendar year during the term of the Employment Agreement, key-employees shall receive an additional fixed percentage of such employee's base salary (the "Bonus Percentage") as incentive bonus compensation. The Increase Multiple and the Bonus Percentage shall be determined by the Compensation Committee of the Company for each calendar year for which an incentive bonus is calculated. In no event may any employee's incentive bonus exceed 25% of such employee's base salary for each calendar year. In the event of the expiration of the term of an Employment Agreement, employees shall not be entitled to receive any further incentive bonus, provided, however, that in the event an employee's employment is terminated for any reason prior to the expiration of the Employment Agreement or any renewal, such employee shall be entitled to receive any previously unpaid annual incentive bonus, prorated for the portion of such year which elapsed prior to the date of such termination. In addition to the annual incentive bonus, the Employment Agreement provides that the employee is also entitled to receive an annual achievement bonus of up to 15% of employee's base salary during the year in which the annual achievement bonus is awarded. The employee is entitled to receive an annual achievement bonus in each year that the Company achieves specific targets established annually by the Compensation Committee of the Company. The Employment Agreement also provides that the employee is eligible to receive annually a merit bonus at the discretion of the Compensation Committee. The merit bonus may not 35 39 exceed 10% of the employee's base salary for the year in which the merit bonus is awarded. The Compensation Committee determines if an employee should be awarded a merit bonus based upon an evaluation of employee's work by his direct supervisor and the recommendation of the President and Chief Executive Officer of the Company. The Compensation Committee determines whether the President and Chief Executive Officer should receive a merit bonus without being required to review an evaluation or receiving any recommendations as described above. The Employment Agreements provide further that each key-employee is employed by the Company on an at-will basis, which means that their employment with the Company is terminable at the will of either the Company or such employee without prior notice to the other. STOCK OPTION PLAN The Company has adopted an Omnibus Common Stock Incentive Plan (the "Omnibus Plan") to assist the Company in recruiting, retaining and rewarding employees with ability and initiative by enabling employees to participate in its future success and to associate their interests with those of the Company and its Stockholders. The summary of the Omnibus Plan set forth below is qualified in its entirety by reference to the text of the Omnibus Plan, a copy of which has been filed as an exhibit to the Registration Statement of which this Proxy Statement/Prospectus constitutes a part. The Board of Directors of the Company approved and adopted the Omnibus Plan as of January 12, 1994, and the sole Stockholder of the Company approved and adopted the Omnibus Plan as of January 12, 1994. The Omnibus Plan will be administered by a committee of the Board of Directors (the "Committee"). A total of 185,000 shares of Common Stock have been reserved for issuance under the Omnibus Plan pursuant to the exercise of incentive and non-incentive stock options (collectively, "Options"), stock appreciation rights ("SARs") and the award of Common Stock of the Company subject to forfeiture and limitations on transferability ("Restricted Shares"). The maximum number of shares of Common Stock authorized for issuance under the Omnibus Plan will be increased each year beginning January 1, 1994, by 6% of the amount, if any, by which the total number of shares of Common Stock outstanding as of the last day of the Company's fiscal year exceeds the total number of shares of Common Stock outstanding as of the first day of such fiscal year. The Committee has complete authority to interpret all provisions of the Omnibus Plan, to prescribe the form of agreements, to adopt, amend and rescind rules and regulations pertaining to the administration of the Omnibus Plan, and to make all other determinations necessary or advisable for the administration of the Omnibus Plan. A member of the Committee may not participate in the Omnibus Plan during the time that his or her participation would prevent the Committee from being "disinterested" within the meaning of Rule 16b-3, as from time to time amended, under the Exchange Act. Under the terms of the Omnibus Plan, any employee who is an officer of the Company or of any Affiliate of the Company is eligible to participate in the Omnibus Plan if the Committee, in its sole discretion, determines that such person has contributed or can be expected to contribute to the profits or growth of the Company or an Affiliate. Options and SARs. The number of shares of Common Stock which may be granted under the Omnibus Plan or for which any outstanding Options and SARs are exercisable are subject to customary anti-dilution adjustment provisions. The maximum term of any Option or SAR granted pursuant to the Omnibus Plan is ten years. If an Option or SAR is terminated or forfeited, in whole or in part, for any reason other than its exercise, Common Stock allocated to such Options or SARs (or portion thereof) may be reallocated to other awards to be granted under the Omnibus Plan. The Omnibus Plan provides that the exercise price of an Option shall be determined by the Committee on the date of grant; provided, however, that the exercise price of any Option that is an incentive stock option shall not be less than the fair market value of the underlying Common Stock on the date of grant of the Option. No participant in the Omnibus Plan may be granted incentive options or related SARs (under any incentive option plan of the Company or its Affiliates) which are first exercisable in any calendar year for stock having an aggregate fair market value (determined as of the date of grant) exceeding $100,000. 36 40 Any Option or SAR granted under the Omnibus Plan shall be nontransferable except by will or by laws of descent and distribution. Any Option or SAR may only be exercised by the participant to whom they were granted during the lifetime of such participant. Restricted Share Awards. The Committee may, in its discretion, designate eligible employees to receive awards of Restricted Shares. The Committee may prescribe that a participant's rights in the Restricted Shares are forfeitable or otherwise restricted for a period of time set forth in the agreement applicable to each such award. Prior to their forfeiture, in accordance with the terms of each award agreement, a participant will have all of the rights of a Stockholder with respect to such Restricted Shares, including the right to receive dividends and vote; provided, however, that (i) a participant may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of Restricted Shares, (ii) the Company shall retain custody of the certificates evidencing the Restricted Shares, and (iii) a participant will deliver to the Company a stock power endorsed in blank, with respect to each award of Restricted Shares. The Omnibus Plan may be amended or terminated by the Board of Directors of the Company, provided, however, that no amendment may become effective until approved by the Stockholders of the Company if (i) the amendment increases the aggregate number of shares of Common Stock that may be issued under the Omnibus Plan, or (ii) the amendment changes the class of individuals eligible to become participants. No amendment to the Omnibus Plan may, without a participant's consent, adversely affect any rights of such participant under any outstanding Restricted Share award or under any Option or SAR outstanding at the time such amendment is made. 401(K) PLAN The Trust has adopted a Retirement and Profit Sharing Plan (the "Profit Sharing Plan") (to be assumed by the Company upon consummation of the Merger) for the benefit of employees of the Trust. Employees who were employed by the Trust on January 1, 1993, and who have attained the age of 21 are immediately eligible to participate in the Profit Sharing Plan. All other employees of the Trust are eligible to participate in the Plan after they have completed one year of service with the Trust and attained the age of 21. The summary of the Profit Sharing Plan set forth below is qualified in its entirety by reference to the text of the Profit Sharing Plan, a copy of which has been filed as an exhibit to the Registration Statement of which this Proxy Statement/Prospectus is a part. Each participant may make contributions to the Profit Sharing Plan by means of a pre-tax salary deferral which may not be more than 15% of the employee's compensation. The Trust will contribute, on behalf of each non-highly compensated employee and non-key employee who is actively employed on the last day of each plan year, a special discretionary contribution equal to a percentage of such employee's compensation, which will be determined each year by the Trust. The Code limits the annual amount of salary deferrals that may be made by any employee. An employee's salary deferral contribution will always be 100% vested and nonforfeitable, although such contributions will be affected by any investment gains or losses to the Profit Sharing Plan. In general, in the event of retirement, death or disability, 100% of a participating employee's account would be available for distribution to either the employee or such employee's beneficiary, as applicable. The Trust Managers may amend the Profit Sharing Plan at any time. In no event, however, may any amendment (i) authorize or permit any part of the Profit Sharing Plan assets to be used for purposes other than the exclusive benefit of participating employees or their beneficiaries, or (ii) cause any reduction in the amount credited to each participating employee's account. Likewise, the Trust Managers have the right to terminate the Profit Sharing Plan at any time. In the event of such termination, all amounts credited to each employee's account will continue to be 100% vested. A complete discontinuance of contributions to the Profit Sharing Plan by the Trust will also constitute an event of termination of the Profit Sharing Plan. LIMITATION OF LIABILITY AND INDEMNIFICATION The Company's Articles limit the liability of the Company's directors and officers to the Company and its Stockholders to the fullest extent permitted from time to time by Maryland law. Maryland law presently 37 41 permits the liability of directors and officers to a corporation or its stockholders for money damages to be limited, except (i) to the extent that it is proved that the director or officer actually received an improper benefit or profit or (ii) if a judgment or other final adjudication is entered against the director or officer in a proceeding based on a finding that the director's or officer's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. This provision does not limit the ability of the Company or its Stockholders to obtain other relief, such as an injunction or rescission. The Company's Articles require the Company to indemnify its directors, officers and certain other parties to the fullest extent permitted from time to time by the MGCL. The MGCL permits a corporation, subject to certain exceptions, to indemnify its directors, officers and certain other parties against judgments, penalties, fines, settlements and reasonable expenses, including attorneys' fees, actually incurred by or at the request of the corporation, unless it is established that (i) the act or omission of the indemnified party was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty, (ii) the indemnified party actually received an improper personal benefit, or (iii) in the case of any criminal proceeding, the indemnified party had reasonable cause to believe that the act or omission was unlawful. Indemnification may be made against judgments, penalties, fines, settlements and reasonable expenses actually incurred by the director or officer in connection with the proceeding; provided, however, that if the proceeding is one by or in the right of the corporation, indemnification may not be made with respect to any proceeding in which the director or officer has been adjudged to be liable to the corporation. In addition, a director or officer may not be indemnified with respect to any proceeding charging improper personal benefit to the director or officer in which the director or officer was adjudged to be liable on the basis that personal benefit was improperly received. The termination of any proceeding by conviction, or upon a plea of nolo contendere or its equivalent, or an entry of any order of probation prior to judgment, creates a rebuttable presumption that the director or officer did not meet the requisite standard of conduct required for indemnification to be permitted. It is the position of the Commission that indemnification of directors and officers for liabilities arising under the Securities Act is against public policy and is unenforceable pursuant to Section 14 of the Securities Act. SUMMARY COMPARISON OF SHARES OF BENEFICIAL INTEREST AND COMMON STOCK There are a number of differences in the investment attributes and legal rights associated with the ownership of Trust Shares and shares of Company Common Stock. The principal differences are summarized below.
SHARES OF BENEFICIAL INTEREST COMMON STOCK - -------------------------------------------- -------------------------------------------- PREFERENCES All holders of Shares participate equally in All holders of Common Stock participate distributions and have no preference rights. equally in distributions and have no preference rights; however, the Company may issue Preferred Stock with priorities or preferences with respect to dividends and liquidation proceeds. CUMULATIVE VOTING Cumulative voting in the election of Trust There is no cumulative voting in the Managers is prohibited except when the Trust election of directors. is aware that a person beneficially owns more than 30% of the outstanding Shares. EXCHANGE LISTING The Shares are listed for trading on the The Company will apply to list the Common NYSE. Stock on the NYSE.
38 42
SHARES OF BENEFICIAL INTEREST COMMON STOCK - -------------------------------------------- -------------------------------------------- STAGGERED BOARD OF DIRECTORS The Texas REIT Act does not specifically The MGCL specifically authorizes the Company authorize the Trust to stagger the terms of to stagger the terms of office of the Board office of the Trust Managers, and the of Directors, and the Articles of the Declaration of Trust does not provide for Company provide for staggered terms. staggered terms. BUSINESS COMBINATIONS Certain business combinations between the Certain business combinations between the Trust and a beneficial holder of 10% or Company and an Interested Stockholder (as more of the Trust's outstanding Shares (an hereinafter defined) or an affiliate "Interested Shareholder") must be approved thereof, are prohibited for five years after by the affirmative vote of the holders of at the most recent date on which the Interested least 80% of the voting power of the Stockholder became an Interested outstanding Shares. "Business Combinations" Stockholder. Thereafter any such business include liquidations, mergers or combination must be recommended by the Board consolidations with or into an Interested of Directors of the Company and approved by Shareholder, the sale of substantially all the affirmative vote of at least (i) 80% of the Trust's assets to an Interested the votes entitled to be cast by holders of Shareholder, and certain issuances of outstanding voting shares of the Company and securities to an Interested Shareholder. (ii) 2/3 of the votes entitled to be cast by the holders of outstanding voting shares of the Company other than shares held by the Interested Stockholder with whom the business combination is to be affected unless, among other things, the Company's stockholders receive a minimum price for their shares and the consideration is received in cash or the same form as previously paid by the Interested Stockholder for its shares. See "Certain Provisions of Maryland Law and of the Company's Articles and Bylaws." SPECIAL MEETINGS Special meetings of Shareholders may be Special meetings may be called by the called by the holders of not less than holders of not less than 25% of the stock 1/10 of all Shares entitled to vote at the entitled to vote at the special meeting. meeting. DIVIDENDS The Trust Managers may declare dividends on The Board of Directors may declare dividends the outstanding Shares in cash, property on outstanding stock in cash, property or or Shares except when the Trust is insolvent its own stock except when the Company would or the payment thereof would render the not be able to pay its indebtedness as it Trust insolvent. becomes due or if liabilities exceed assets. VOTING REQUIREMENTS Under the Declaration of Trust, a two-thirds Under the Articles, a majority vote of vote of outstanding Shares is required to outstanding stock is required to approve approve mergers (other than business mergers and consolidations (other than combinations), dissolution of the Trust and business combinations), transfers of assets, amendment of the Declaration of Trust. dissolution of the Company and amendment of the Articles.
39 43 THE COMPANY'S SECURITIES The description of the Company's securities set forth below does not purport to be complete and is qualified in its entirety by reference to the Company's Articles and Bylaws, copies of which are filed as Exhibits to this Registration Statement of which this Proxy Statement/Prospectus is a part. See "ADDITIONAL INFORMATION." CAPITAL STOCK General. Under the Articles, the Company has the authority to issue up to 60,000,000 shares of capital stock, consisting of 50,000,000 shares of Common Stock, par value $.01 per share and 10,000,000 shares of Preferred Stock, par value $.01 per share. Shares of Common Stock and Preferred Stock may be automatically deemed "Excess Stock" as described below. Under the MGCL, stockholders generally are not responsible for the corporation's debts or obligations. Upon completion of the Merger, there will be approximately 1,815,080 shares of Common Stock issued and outstanding, and no shares of Preferred Stock will be issued or outstanding. Common Stock. All shares of Common Stock received by Shareholders in connection with the Merger will be duly authorized, fully paid and non-assessable. Subject to the preferential rights of any other shares or series of shares and to the provisions of the Articles regarding Excess Shares, holders of shares of Common Stock will be entitled to receive dividends on the stock if, as and when authorized and declared by the Board of Directors out of assets legally available therefor and to share ratably in the assets of the Company legally available for distribution to its Stockholders in the event of its liquidation, dissolution or winding-up after payment of, or adequate provision for payment of, all known debts and liabilities of the Company. Subject to the provisions of the Articles regarding Excess Shares, each outstanding share of Common Stock entitles the holder to one vote on all matters submitted to a vote of Stockholders, including the election of directors, and, except as otherwise required by law or except as provided with respect to any other class or series of stock, the holders of shares of Common Stock will possess the exclusive voting power. There is no cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of Common Stock can elect all of the directors then standing for election and the holders of the remaining shares will not be able to elect any directors. Holders of shares of Common Stock have no conversion, sinking fund, redemption rights or preemptive rights to subscribe for any securities of the Company. The Company intends to furnish its Stockholders with annual reports containing audited consolidated financial statements and an opinion thereon expressed by an independent public accounting firm and quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. Subject to the provisions of the Articles regarding Excess Shares, shares of Common Stock will have equal dividend, distribution, liquidation and other rights and will have no preference, appraisal or exchange rights. The transfer agent and registrar for the Common Stock is Society Shareholder Services, Inc., Dallas, Texas. Preferred Stock. Shares of Preferred Stock may be issued from time to time, in one or more series, as authorized by the Board of Directors. Prior to the issuance of shares of each series, the Board of Directors is required by the MGCL and the Articles to fix for each series, subject to the provisions of the Articles regarding Excess Shares, the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption, as are permitted by the MGCL. The Board of Directors could authorize the issuance of Preferred Shares with terms and conditions that could have the effect of discouraging a takeover or other transaction that holders of shares of Common Stock might believe to be in their best interests or in which holders of some, or a majority, of shares of Common Stock might receive a premium for their shares over the then-current market price of such 40 44 shares. As of the date hereof, no Preferred Shares are outstanding, and the Company has no present plans to issue any Preferred Shares. Restrictions on Transfers. For the Company to qualify as REIT under the Code, among other things, not more than 50% of the value of its issued and outstanding shares of capital stock may be owned, directly or indirectly, by five or fewer individuals (defined in the Code to include certain entities) during the last half of a taxable year or during a proportionate part of a shorter taxable year, and such shares of Common Stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. See "FEDERAL INCOME TAX CONSIDERATIONS." Since the Board of Directors believes it is essential for the Company to maintain its status as a REIT under the Code, the Articles provide that no holder (other than persons approved by the directors at their option and in their discretion) may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 9.8% percent (the "Ownership Limit") of the number or value of the issued and outstanding capital stock of the Company. The Board of Directors may waive the Ownership Limit if evidence satisfactory to the Board of Directors is presented that the changes in ownership will not then or in the future jeopardize the Company's status as a REIT. As a condition to this waiver, the intended transferee must give written notice to the Company of the proposed transfer no later than the 50th day prior to any transfer which, if effected, would result in the intended transferee owning shares in excess of the Ownership Limit. The Board of Directors may require opinions of counsel, affidavits, undertakings or agreements as it may deem necessary or advisable in order to determine or ensure the Company's status as a REIT. Any transfer of shares of stock that would create a direct or indirect ownership of shares of stock in excess of the Ownership Limit or that would result in the disqualification of the Company as a REIT, including any transfer that results in the shares of Common Stock being owned by fewer than 100 persons or that results in the Company being "closely-held" within the meaning of Section 856(h) of the Code, shall be null and void, and the intended transferee will acquire no rights to the shares of stock. The foregoing restrictions on transferability and ownership will not apply if the Board of Directors determines that it is no longer in the best interests of the Company to attempt to qualify, or to continue to qualify, as a REIT. Shares of stock owned, or deemed to be owned, or transferred to a Stockholder in excess of the Ownership Limit or which cause the Company to become "closely-held" under Section 856(h) of the Code except as permitted above, will automatically be deemed Excess Shares that will be transferred, by operation of law, to the trustee of a trust for the exclusive benefit of the transferees for whom such shares of stock may be ultimately transferred without violating the Ownership Limit. Subject to the Ownership Limit, the Excess Shares may be transferred by the intended transferee to any person (if the Excess Shares would not be Excess Shares in the hands of that person) at a price not to exceed the price paid by the intended transferee (or, if no consideration was paid, fair market value at the time of the original attempted transfer) at which point the Excess Shares will automatically be deemed shares of stock. In addition, Excess Shares held in trust are subject to purchase by the Company at a purchase price equal to the lesser of: (i) the price paid for the shares of stock by the intended transferee (or, if no consideration was paid, fair market value of the shares of stock by the attempted transfer of which resulted in Excess Shares, measured on the date of the transfer); or (ii) the average daily per share closing price on a national securities exchange or NASDAQ NMS of the shares of stock the attempted transfer of which resulted in Excess Shares measured during the 30 day calendar period ending on the business day immediately preceding the redemption date, or if not then traded on the NYSE, a national securities exchange or NASDAQ NMS, the mean between the average per share closing bid prices and the average per share closing asked prices measured during the 30 day calendar period ending on the business day immediately preceding the redemption date, then the market price of the shares of stock on the relevant date as determined in good faith by the Board of Directors. From and after the intended transfer to the intended transferee of the Excess Shares, the intended transferee shall cease to be entitled to distributions (except upon liquidation), voting rights and other benefits with respect to the Excess Shares except the right to payment of the purchase price for the shares of stock. Any dividend or distribution paid to a proposed transferee on Excess Shares prior to the discovery by the Company that the shares have been transferred in violation of the Articles shall be repaid to the Company upon demand. If the foregoing transfer restrictions are determined to be void or invalid by virtue of any legal 41 45 decision, statute, rule or regulation, then the intended transferee of any Excess Shares may be deemed, at the option of the Company, to have acted as an agent on behalf of the Company in acquiring the Excess Shares and to hold the Excess Shares on behalf of the Company. All certificates representing shares of Common Stock and Preferred Stock will bear a legend referring to the restrictions described above. The Board of Directors may require an affidavit from each Stockholder or proposed transferee of Common or Preferred Stock setting forth the number of shares already beneficially owned by such person. If, in the opinion of the Board of Directors, a proposed transfer jeopardizes the qualification of the Company as a REIT, the Board has the right, but not the duty, to refuse to permit the transfer of Stock to such person. All persons who own, directly or by virtue of the attribution provisions of the Code, more than 9.8% of the number or value of the outstanding shares of Common Stock must give the Company written notice by January 31st of each year. In addition, each Stockholder shall, upon demand, be required to disclose to the Company in writing all information regarding the direct, indirect and constructive ownership of shares of Common Stock as the Board of Directors deems reasonably necessary to comply with the provisions of the Code applicable to a REIT, to comply with the requirements of any taxing authority or governmental agency or to determine any such compliance. These ownership limitations could have the effect of discouraging a takeover or other transaction in which holders of some, or a majority, of shares of Common Stock might receive a premium for their shares over the then prevailing market price or which these holders might believe to be otherwise in their best interest. THE NOTES General. The Trust issued the Notes pursuant to an Indenture (the "Indenture") dated as of November 15, 1985, between the Trust and IBJ Schroder Bank & Trust (formerly known as J. Henry Schroder Bank & Trust Company), as Trustee (the "Indenture Trustee"). The Notes are sold in registered form, without coupons, in minimum denominations of $1,000 and integral multiples thereof. In connection with the acquisition of the Properties, the Trust granted Mortgages (defined below) to or for the benefit of the Indenture Trustee for the ratable benefit of the Noteholders pursuant to the provisions of the Indenture. See "-- Collateral." Under the Merger Agreement, the Company will assume the obligations of the Trust under the Indenture and will assume the Mortgages. If all currently outstanding Notes remain outstanding, the Notes will accrue at stated maturity to $19,491,000 on the twelfth anniversary of date of issuance, and there are no periodic payments of interest. Collateral. The Notes are secured by first or second mortgages on the Properties to be acquired by the Company in the Merger (the "Mortgages"). Pursuant to the Indenture and Mortgages on the Properties, the Noteholders will have a claim prior to that of the Stockholders with respect to the Company's Properties. See "-- Events of Default." In addition, the Indenture Trustee will hold a security interest on funds in the defeasance account (as described below), excluding income earned on such funds, which income will be distributed at least annually to the Company. Subject to its investment policies and the limitations set forth in "-- Proceeds from Sale of Assets and Refinancing" below, the Company will have the right from time to time to sell or dispose of for cash any or all of the Properties subject to the Mortgages. In the event of a sale or other disposition of any of the Properties, the Company will be entitled to the release thereof from the lien of the Indenture and the applicable Mortgage upon delivery to the Indenture Trustee of funds generally equal to not less than the purchase price of the Property (less debt assumed on the purchase) to be released, and compliance with certain other conditions precedent. In any such event, funds delivered shall be deposited in the defeasance account (as described below). Insurance; Uninsured Losses. Until all Notes are defeased or redeemed, the Mortgages require the Company to maintain adequate insurance coverage for the Properties from an insurance company having a claims paying rating of "AA" or better by Standard & Poor's Corporation. The insurance policies covering the Properties will not cover certain types of losses (generally of a catastrophic nature, such as earthquakes, floods and wars). Should such an uninsured loss occur, the Company could lose both its invested capital and 42 46 anticipated profits relating to the affected Property, and the Company would be required to defease an amount of the Notes having an aggregate principal amount at stated maturity equal generally to the purchase price (less debt assumed on the purchase) to the Company of the affected Property. In that event, the Company might be required to use reserves, seek additional funds, sell a Property at unfavorable terms or suffer a foreclosure of a Property. Because of the restrictions contained in the Indenture, there can be no assurance, however, that additional funds would be available or, if available, that such funds would be on acceptable terms. See "RISK FACTORS -- Uninsured Loss." Proceeds from Sale of Assets and Refinancing. Pursuant to the Indenture, until all Notes are defeased or redeemed, the Board of Directors shall deposit with the Indenture Trustee such portion of the proceeds of any sale, refinancing or other disposition of any of the Company's Properties as they deem necessary or appropriate to protect the interests of the Noteholders but in no event less than the original purchase price of the Property being sold, refinanced or otherwise disposed of (less debt assumed on purchase). In the event of a sale or other disposition of property, such Property may only be released from the lien of the Indenture and the applicable Mortgage upon compliance with the conditions set forth in Article 13 of the Indenture. See "-- Collateral." Until the eleventh anniversary of the issuance of the Notes, the Company shall not make distributions to Stockholders out of the proceeds of the sale, refinancing or other disposition of any Property, or insurance payment or condemnation proceeding, if the principal amount of the Notes at stated maturity (reduced by the amount, if any, of the funds in the defeasance account and the redemption account (excluding income earned on such funds)) would be greater than 100% of the sum of the most recent appraisal report on the Company's Properties (reduced by the amount of debt assumed on purchase of the Properties and the amount attributable to the gain, if any, or the proposed sale, refinancing or other disposition, based on the most recent appraisal report on such Property or to the gain, if any, from the insurance payment or condemnation proceeding) and the gross value of all other Properties. Notwithstanding the foregoing, this limitation shall not prevent the Company from making any distributions to Stockholders deemed necessary by the Board of Directors to maintain the Company's qualification as a REIT under the Code. If, by November 27, 1996, the Notes have not been redeemed or defeased in full and refinancing commitments from bona fide creditors are not sufficient to repay the outstanding Notes at stated maturity, the Company will be required to sell Properties to raise cash sufficient to retire the Notes at stated maturity. Redemption, Defeasance and Discharge. From and after November 27, 1995, the Notes may be redeemed at the option of the Trust, in whole or in part, upon not less than 30 nor more than 60 days notice at their stated principal amounts at maturity. Funds deposited in the redemption account are held for the persons entitled thereto, do not constitute part of the collateral pursuant to the Indenture, and may be used solely to redeem the Notes subject to redemption. Pursuant to the Indenture, a defeasance account will be established. In order to defease all or any portion of the Notes, at or before maturity, the Trust must deposit cash and government obligations in the defeasance account, in principal amounts sufficient to pay the aggregate principal amount of the defeased Notes at stated maturity. The amounts in the defeasance account may be transferred to the redemption account to be used to redeem the Notes subject to redemption. Events of Default. The following events constitute Events of Default pursuant to the terms of the Notes and the Indenture: (i) Any failure to pay principal on the Notes when due; (ii) Any nonpayment of taxes or insurance or failure to perform any other obligation under any of the Mortgages involving solely the payment of money occurring for a period of 30 calendar days after proper notice; (iii) Any default in the performance or breach of any warranty or of any other obligation contained in the Indenture or any Mortgage for a period of 30 calendar days after proper notice (provided that the 30-day cure period will be extended for another single 30-day period if the default is not cured 43 47 within the initial period but the Company has commenced efforts to cure the default and thereafter proceeds to cure the same with due diligence); (iv) Events of bankruptcy, insolvency, reorganization or other similar events, of the Company; and (v) Any default under any indebtedness for borrowed money by the Company under any mortgage, indenture or other instrument which secures such indebtedness, whether now-existing or hereafter incurred, which default shall constitute a monetary default or result in such indebtedness being declared due and payable prior to its maturity after expiration of applicable grace periods, without such indebtedness being discharged, rescinded or waived within a period of 20 calendar days after proper notice. Upon the occurrence and continuance of an Event of Default as described above, the Indenture Trustee or the holders of not less than 25% in principal amount of the Notes may declare to be due and payable immediately an amount of principal equal to the then accreted aggregate principal amount of the Notes using the interest method of computation. After declaration of acceleration but before judgment or decree thereon, holders of a majority in principal amount of the Notes by notice may rescind such acceleration if certain monies are deposited for payment of Notes which are due otherwise than by acceleration, payments of certain Indenture Trustee fees are made and all Events of Default other than non-payment of principal of Notes which have become due as a result of acceleration are cured or waived. Upon such declaration, such amount of principal will become immediately due and payable and the Indenture Trustee may foreclose on the Properties subject to Mortgages. Overdue principal will bear interest at an annual rate equal to 14.70% (to the extent that the payment of such interest is legally enforceable). Limitations on Consolidation, Merger. The Trust, without the consent of Noteholders, may consolidate with or merge into any entity or convey or transfer its properties and assets substantially as an entirety, if its successor is a domestic trust or corporation and assumes the Trust's obligations on the Notes and under the Indenture, and after giving effect to such transaction the Trust or its successor would not be in default under the Indenture. CERTAIN STATUTORY AND CHARTER PROVISIONS The following is a summary of certain provisions of the MGCL and the Company's Articles and Bylaws and does not purport to be complete and is qualified in its entirety by reference to the MGCL and the Company's Articles and Bylaws. Copies of the Company's Articles and Bylaws have been filed as exhibits to the Registration Statement of which this Proxy Statement/Prospectus is a part. See "ADDITIONAL INFORMATION." CLASSIFICATION OF THE BOARD OF DIRECTORS The Company's Bylaws provide that the number of directors of the Company may be established by the Board of Directors but may not be fewer than the number required under the MGCL. Any vacancy will be filled, at any regular meeting or at any special meeting called for that purpose, by a majority of the remaining directors, except that a vacancy resulting from an increase in the number of directors will be filled by a majority of the entire Board of Directors. The Stockholders may fill vacancies resulting from the removal of a director. Pursuant to the terms of the Articles, the directors are divided into three classes. One class will hold office initially for a term expiring at the annual meeting of Stockholders to be held in 1995, another class will hold office initially for a term expiring at the annual meeting of Stockholders to be held in 1996 and another class will hold office initially for a term expiring at the annual meeting of Stockholders to be held in 1997. As the term of each class expires, directors in that class will be elected for a term of three years until their successors are duly elected and qualified. The Company believes that classification of the Board of Directors will help to assure the continuity and stability of the Company's business strategies and policies as determined by the Board of Directors. 44 48 The classified director provision could have the effect of making the removal of incumbent directors more time-consuming and difficult, which could discourage a third party from making a tender offer or otherwise attempting to obtain control of the Company, even though such an attempt might be beneficial to the Company and its Stockholders. At least two annual meetings of Stockholders, instead of one, will generally be required to effect a change in a majority of the Board of Directors. Thus, the classified board provision could increase the likelihood that incumbent directors will retain their positions. Further, holders of shares of Common Stock will have no right to cumulative voting for the election of directors. Consequently, at each annual meeting of Stockholders, the holders of a majority of shares of Common Stock will be able to elect all of the successors of the class of directors whose term expires at that meeting. LIMITATION OF LIABILITY AND INDEMNIFICATION The Company's Articles limit the liability of the Company's directors and officers to the Company and its Stockholders to the fullest extent permitted from time to time by Maryland law. Maryland law presently permits the liability of directors and officers to a corporation or its Stockholders for money damages to be limited, except (i) to the extent that it is proved that the director or officer actually received an improper benefit or profit or (ii) if a judgment or other final adjudication is entered against the director or officer in a proceeding based on a finding that the director's or officer's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. This provision does not limit the ability of the Company or its Stockholders to obtain other relief, such as an injunction or rescission. The Company's Articles require the Company to indemnify its directors, officers and certain other parties to the fullest extent permitted from time to time by the MGCL. The MGCL permits a corporation, subject to certain exceptions, to indemnify its directors, officers and certain other parties against judgments, penalties, fines, settlements and reasonable expenses, including attorneys' fees, actually incurred by or at the request of the corporation, unless it is established that (i) the act or omission of the indemnified party was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty, (ii) the indemnified party actually received an improper personal benefit, or (iii) in the case of any criminal proceeding, the indemnified party had reasonable cause to believe that the act or omission was unlawful. Indemnification may be made against judgments, penalties, fines, settlements and reasonable expenses actually incurred by the director or officer in connection with the proceeding; provided, however, that if the proceeding is one by or in the right of the corporation, indemnification may not be made with respect to any proceeding in which the director or officer has been adjudged to be liable to the corporation. In addition, a director or officer may not be indemnified with respect to any proceeding charging improper personal benefit to the director or officer in which the director or officer was adjudged to be liable on the basis that personal benefit was improperly received. The termination of any proceeding by conviction, or upon a plea of nolo contendere or its equivalent, or an entry of any order of probation prior to judgment, creates a rebuttable presumption that the director or officer did not meet the requisite standard of conduct required for indemnification to be permitted. It is the position of the Commission that indemnification of directors and officers for liabilities arising under the Securities Act is against public policy and is unenforceable pursuant to Section 14 of the Securities Act. BUSINESS COMBINATIONS Under the MGCL, certain "business combinations" (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and any person who beneficially owns 10% or more of the voting power of the corporation's shares or an affiliate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding voting stock of the corporation (an "Interested Stockholder") or an affiliate thereof, are prohibited for five years after the most recent date on which the Interested Stockholder became an Interested Stockholder. Thereafter, any such business combination must be recommended by the board of directors of such corporation and approved by the affirmative vote of at least (i) 80% of the votes entitled to be cast by holders of outstanding voting 45 49 shares of the corporation voting together as a single group; and (ii) two-thirds of the votes entitled to be cast by holders of outstanding voting shares of the corporation other than shares held by the Interested Stockholder with whom the business combination is to be effected, unless, among other things, the corporation's stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Stockholder for its shares. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by the board of directors of the corporation prior to the time that the Interested Stockholder becomes an Interested Stockholder. The Articles contain a provision exempting from these provisions of the MGCL any business combination involving the Trust (or its affiliates). CONTROL SHARE ACQUISITION The MGCL provides that "control shares" of the Maryland corporation acquired in a "control share acquisition" have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares of stock owned by the acquirer, by officers or by directors who are employees of the corporation. "Control shares" are voting shares of stock which, if aggregated with all other such shares of stock previously acquired by such person, or in respect of which such person is able to exercise or direct the exercise of voting power, would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-fifth or more but less than one-third; (ii) one-third or more but less than a majority; or (iii) a majority or more of all voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A "control share acquisition" means the acquisition of control shares, subject to certain exceptions. A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses), may compel the board of directors to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting. If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then, subject to certain conditions and limitations, the corporation may redeem any and all of the control shares (except those for which voting rights have previously been approved) for fair value determined, without regard to the absence of voting rights for control shares, as of the date of the last control share acquisition or of any meeting of stockholders at which the voting rights of such shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid in the control share acquisition, and certain limitations and restrictions otherwise applicable to the exercise of dissenters' rights do not apply in the context of a control share acquisition. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or to acquisitions approved or exempted by the charter or bylaws of the corporation. The Articles contain a provision exempting from the control share acquisition statute any and all acquisitions by the Trust (or its affiliates). AMENDMENT TO THE ARTICLES OF INCORPORATION AND BYLAWS The Company's Articles, including their provisions on classification of the Board of Directors and removal of directors, may not be amended without the affirmative vote of the holders of at least a majority of all of the votes entitled to be cast on the matter. The Company's Bylaws may be amended by either the affirmative vote of a majority of all shares outstanding and entitled to vote or by the affirmative vote of a majority of the Company's directors then holding office. Neither the Board of Directors nor the Stockholders may amend the indemnification provisions of the Bylaws without the consent of the persons whose right to indemnification under the Bylaws would be adversely affected by the amendment. 46 50 DISSOLUTION OF THE COMPANY The MGCL permits the dissolution of the Company by (i) the affirmation or vote of a majority of the entire Board of Directors declaring such dissolution to be advisable and directing that the proposed dissolution be submitted for consideration at an annual or special meeting of Stockholders; and (ii) upon proper notice, Stockholder approval by the affirmative vote of the holders of not less than a majority of all of the votes entitled to be cast on the matter or the written consent of all shares entitled to vote on the matter. DIRECTOR NOMINATIONS AND NEW BUSINESS The Company's Bylaws provide that (i) with respect to an annual meeting of Stockholders, nominations of persons for election to the Board of Directors may be made only by the Board of Directors; and (ii) with respect to special meetings of Stockholders, only the business specified in the Company's notice of meeting may be brought before the meeting of Stockholders. The provisions in the Company's Articles on classification of the Board of Directors and removal of directors, the business combination and, if the applicable provision in the Bylaws is rescinded, control share acquisition provisions of the MGCL could have the effect of discouraging a takeover or other transaction in which holders of some, or a majority, of the shares of Common Stock might receive a premium for their shares of Common Stock over the then prevailing market price or which such holders might believe to be otherwise in their best interests. MEETINGS OF STOCKHOLDERS Beginning in 1995, an annual meeting of the Stockholders for the election of directors and the transaction of any business within the powers of the Company shall be held during May of each calendar year at the time set by the directors. Subject to the rights which may be granted to the holders of any series of Preferred Stock to elect additional directors under specified circumstances, special meetings of the Stockholders may be called by the Chairman of the Board of Directors, by the President or by a resolution adopted by a majority of the directors, assuming no vacancies, and by the holders of 25% or more of the outstanding Common Stock. FEDERAL INCOME TAX CONSIDERATIONS EFFECT OF THE MERGER In the opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., special counsel to the Company, the Merger will be treated as a reorganization within the meaning of Section 368(a) of the Code, and accordingly (i) no gain or loss will be recognized by the Trust as a result of the Merger; (ii) except for Stockholders who elect to receive cash in lieu of fractional shares or who own less than 10 shares of the Company's Common Stock after the Merger and elect to have the Company repurchase those shares, no gain or loss will be recognized by the Trust's Shareholders upon receipt of the Company's Common Stock in exchange for the Trust's Shares in connection with the Merger; (iii) the tax basis of the Company's Common Stock to be received by the Trust's Shareholders in connection with the Merger will be the same as the basis in the Trust's Shares surrendered in exchange therefor; and (iv) the holding period of the Company's Common Stock to be received by the Trust's Shareholders in connection with the Merger will include the holding period of the Trust's Shares surrendered in exchange therefor, provided that the Trust's Shares are held as a capital asset at the Effective Date. TAXATION This section is a general summary of the material federal income tax considerations that may be relevant to prospective purchasers of Common Stock of the Company and is based upon applicable Code provisions, rules and regulations promulgated thereunder, and reported judicial and administrative interpretations pertaining thereto, all of which are subject to change (possibly on a retroactive basis). 47 51 The following discussion does not include all matters that may be relevant to any particular holder of Common Stock in light of such holder's particular facts and circumstances. Certain Stockholders, such as foreign persons, tax-exempt entities, insurance companies and financial institutions, may be subject to special rules not discussed below. In particular, the following discussion does not address issues under the Employee Retirement Income Security Act of 1974, as amended, the Foreign Investment in Real Property Tax Act of 1980, and foreign, state and local tax laws. Each prospective purchaser should consult his own tax advisor regarding the specific tax consequences to him of the purchase, ownership, and sale of the Common Stock, including the federal, state, local, foreign and other tax consequences of such purchase, ownership, sale and of potential changes in applicable tax laws. TAXATION OF THE COMPANY To qualify as a REIT under the Code for a taxable year, the Company must meet certain requirements relating to its assets, income, stock ownership and distributions to Stockholders. Generally, at the end of each calendar quarter, (i) at least 75% of the value of the total assets of the Company must consist of real estate assets, cash or government securities, (ii) not more than 25% of the value of its total assets may consist of non-governmental securities, and (iii) the Company may not own more than 10% of the outstanding voting securities of any one issuer and may not own securities of any one issuer whose value represents more than 5% of the total value of the Company's assets (shares of qualified REITs and of certain wholly-owned subsidiaries are exempt from the requirements described in clauses (ii) and (iii) above). The Company must also satisfy three separate income tests. First, at least 75% of a REIT's gross income must be derived from specified real estate sources for each taxable year. Income that qualifies under the 75% test includes certain qualified rents from real property, gains from the sale of real property not held primarily for sale to customers in the ordinary course of business, dividends on REIT shares, interest on loans secured by mortgages on real property, and certain qualified temporary investment mortgages on real property, certain income from foreclosure property, and certain qualified temporary investment income attributable to the investment of new capital received by the REIT in exchange for either stock or certain debt instruments during the one-year period following the receipt of such new capital. In order for rents to qualify under the 75% test, they may not be derived from tenants having certain relationships with the Company and may not be based on the income or profits of any person, except that they may be based on a fixed percentage or percentages of gross income or receipts. Further, a REIT may not manage the property or furnish services to the tenants from whom the rents are received unless either (i) the property is managed by an independent contractor which is paid an arm's-length fee for its services and from which the REIT derives no income, or (ii) any services performed are of a type customarily rendered in connection with the rental of space for occupancy only. In this regard, it should be noted that the Company currently retains an independent contractor which is paid an arm's-length fee to manage its rental properties. Second, at least 95% of the Company's gross income for each taxable year must be derived from income that qualifies under the 75% test (other than qualified temporary investment income), plus dividends, interest or gains from disposition of certain stock or securities. Third, gross income from the sale or other disposition of (i) stock and securities held for less than one year, (ii) property in certain prohibited transactions, and (iii) real property held for less than four years must comprise less than 30% of the gross income for each taxable year of the Company. In order to qualify as a REIT, the Company must also satisfy certain ownership requirements with respect to its Common Stock. The Common Stock of the Company must be held by at least 100 Stockholders, and no more than 50% in value of the outstanding Common Stock may be owned, actually or constructively, by five or fewer individuals (including certain types of pension funds and other tax-exempt entities that are treated as individuals for this purpose, subject to a "look-through" exception described below) at any time during the last half of the Company's taxable year. In this regard, there are restrictions in the Company's Articles that would limit the ability of a Stockholder to transfer Common Stock if such transfer would cause or contribute to a violation of the stock ownership requirements. 48 52 Finally, the Company must distribute to its Stockholders annually an amount (determined without regard to capital gains dividends) at least equal to (i) 95% of its REIT taxable income (computed without regard to capital gains and the dividends-received deduction), plus (ii) 95% of the after-tax income from any foreclosure property, and less (iii) certain noncash income. If the Company were to fail the 95% distribution requirement as a result of an IRS adjustment (to taxable income or to the dividend paid amount) to a particular taxable year, then, provided certain conditions are met, the Company generally would be entitled to cure the deficiency retroactively by paying deficiency dividends to its Stockholders. However, the Company would be liable for interest charges on such deficiency dividends. So long as the Company satisfies the above-described requirements and qualifies for taxation as a REIT, it generally will not be subject to federal income tax on that portion of its taxable income and capital gain that is currently distributed to its Stockholders. Any undistributed taxable income or capital gain, however, will be taxed to the Company at regular corporate rates. In addition, the Company may be subject to other special income and excise taxes (including the alternative minimum tax) in certain circumstances. Regardless of distributions to Stockholders: (i) if the Company fails either or both of the 75% or 95% income tests, but still maintains its qualification as a REIT, it will be subject to a 100% tax on the taxable income attributable to the greater of the amount by which it failed the 75% or the 95% income test, and (ii) the Company will be subject to a 100% tax on any net income from prohibited transactions. A "prohibited transaction" is the sale or other disposition of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Certain sales, which might otherwise be classified as "prohibited transactions", will not be subject to the 100% tax if the sales meet the "safe harbor" rules provided in the Code. A REIT is required to pay a 4% excise tax on the difference between the "required distribution" and the "distributed amount" for each calendar year. These terms are specifically defined in Code Section 4981. The excise tax rule is designed to encourage REITs to distribute income in the same calendar year that the income is accrued. If the Company fails to qualify as a REIT for any taxable year and certain relief provisions do not apply, the Company will be subject to federal income tax (including the alternative minimum tax) on all of its taxable income at regular corporate rates, and will not receive a deduction for dividends paid to its Stockholders. Additionally, any distributions to Stockholders will still be taxable to the Stockholders as ordinary income to the extent of current and accumulated earnings and profits (although such dividends will be eligible, subject to certain limitations, for the corporate dividends-received deduction as to a corporate Stockholder). Thus, the Company's income would be subject to "double taxation" -- at the corporate level and the stockholder level -- to the extent such income is distributed to Stockholders. Failure to qualify as a REIT could force the Company to reduce significantly its distributions and to incur substantial indebtedness or liquidate substantial investments in order to pay the resulting corporate taxes. In addition, the Company would not be eligible to elect REIT status for the four subsequent taxable years, unless its failure to qualify was due to reasonable cause and not willful neglect, and certain other requirements were satisfied. As a foreign corporation doing business in Texas, the Company will be subject to the payment of Texas franchise taxes. The Texas franchise tax is measured by a corporation's earnings and capital base apportioned on the basis of business done in Texas versus business done everywhere. Thus, the relative percentage of the Company's business in Texas and the Company's capital base will affect the Texas franchise tax liability of the Company regardless of whether the Company has earnings. It is the opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., based upon certain representations of the Company, that the Company is organized in conformity with the requirements for qualification as a REIT and that its proposed method of operations, as described in this Proxy Statement/Prospectus, will enable it to meet the requirements for taxation as a REIT. Counsel's opinion does not have binding effect on the IRS or the courts, and no assurance can be given that the Company would be characterized as a REIT if its status were challenged by the IRS. 49 53 TAXATION OF THE STOCKHOLDERS OF A REIT Distributions made by the Company to its Stockholders out of its current or accumulated earnings and profits will generally be taxed to them as ordinary income. Distributions paid to Stockholders will constitute portfolio income for purposes of Code Section 469. A distribution by the Company of net capital gains will generally be taxed to the Stockholders as long-term capital gain to the extent properly designated by the Company as a capital gain dividend. Ordinary and capital gain dividends are not eligible for the dividends-received deduction that is generally allowed to corporate stockholders. Capital gain distributions to corporate stockholders are generally taxed in the same manner as ordinary income except that capital losses are deductible only to the extent of capital gains. However, corporate stockholders may be required to treat up to 20% of any such capital gain as ordinary income. For non-corporate stockholders, net capital gains are currently taxed at a maximum rate of 28%, while short-term capital gains and ordinary income are taxed at a maximum rate of 39.6%. However, because of certain limitations on itemized deductions and personal exemptions, the effective rate may be higher in certain circumstances. Except to a very limited extent, capital losses of non-corporate stockholders are deductible only to the extent of capital gains. Any loss recognized by a stockholder on a sale of shares of a REIT which were held for not more than six months and with respect to which a capital gain dividend was received will be treated as a long-term capital loss to the extent of the amount of distributions from the Company required to be treated by such stockholder as long-term capital gain. A distribution in excess of current or accumulated earnings and profits will constitute a nontaxable return of capital to the extent of the stockholder's basis in his share of a REIT, and is applied to reduce the stockholder's basis in such shares. To the extent that such distribution exceeds such basis, the excess will be treated as capital gain to those stockholders holding their shares as capital assets. The Company will notify each Stockholder as to the portions of each distribution which, in its judgment, constitute ordinary income, capital gain or return of capital. Should the Company incur ordinary or capital losses, Stockholders will not be entitled to deduct such losses on their own income tax returns. Under regulations to be promulgated by the Treasury Department, Stockholders may be required to report as tax preference items or adjustments, certain items and adjustments of the Company for purposes of determining the Stockholders' alternative minimum tax liability, if any. WITHHOLDING ON DIVIDENDS AND SALE PROCEEDS Dividends from the Company will ordinarily not be subject to withholding of federal income taxes. However, the Company will be required to withhold at a rate of 31% from distributions paid to those Stockholders who (i) fail to furnish their taxpayer identification number to the Company, (ii) have, according to the IRS, furnished an incorrect taxpayer identification number to the Company, (iii) have, according to the IRS, under-reported interest, dividend or patronage dividend income in the past, or (iv) have failed to satisfy the payee-certification requirements of Code Section 3406. Each Stockholder will be required to provide and certify his correct taxpayer identification number and to certify that he is an exempt recipient. In addition, proceeds from the sale of Common Stock could be subject to backup withholding if the broker through whom the sale is made does not have certain certifications from the selling Stockholder. FOREIGN STOCKHOLDERS Whether gain from the sale of Common Stock of the Company by a nonresident alien individual or foreign corporation ("foreign persons") is subject to United States taxation will depend on, among other things, whether the Company is a "domestically controlled REIT." The Company will be a "domestically controlled REIT" if United States persons own 50% or more in value of the Common Stock of the Company at all times during a specified testing period. If the Company is a "domestically controlled REIT," gain from the sale of Common Stock by foreign persons generally will not be subject to United States income taxation. However, such gain will be subject to United States taxation if it is effectively connected with the foreign person's United States trade or business or, in the case of an individual foreign person, such person is present 50 54 within the United States for more than 182 days in the taxable year in question, regardless of whether the Company is a "domestically controlled REIT." In addition, if the Company at any time ceases to be a "domestically controlled REIT," gain from the sale of Common Stock by a foreign person may be subject to United States taxation if the foreign person holds more than 5% of the Common Stock of the Company. Distributions of cash generated by the Company's operations that are paid to foreign persons generally will be subject to United States withholding tax at a rate of 30% or at a lower rate if a foreign person can claim the benefits of a tax treaty. Capital gain or other taxable distributions of cash to foreign persons generated by the Company's sale or exchange of "United States real property interests" generally will be subject to United States taxation at the rates applicable to U.S. persons, collected by means of a withholding tax at a rate of 34%. In addition, to the extent such dividends are attributable to the sale or exchange by the Company of "United States real property interests" they may be subject to a 30% branch profits tax (net of the amount of regular income tax) in the hands of any foreign corporate recipients. Such tax may be reduced or eliminated in the case of corporations which are residents of certain countries with which the United States has a tax treaty if certain statutory requirements are met. Stockholders may be able to obtain a partial refund of taxes withheld in respect of capital gains distributions by filing a nonresident U.S. tax return. Upon the death of a foreign individual Stockholder, the Stockholder's Common Stock will be treated as part of the Stockholder's U.S. estate for purposes of the U.S. estate tax, except as may be otherwise provided in an applicable estate tax treaty. The federal taxation of foreign persons is a highly complex matter that may be affected by many considerations. Foreign investors should consult their own tax advisors regarding the U.S. and foreign tax considerations of investing. TAX EXEMPT STOCKHOLDERS In general, a qualified plan, IRA or other tax-exempt entity which is a Stockholder of the Company is not subject to federal income tax on distributions from the Company because the IRS has ruled that amounts distributed as dividends by a qualified REIT do not constitute unrelated business taxable income ("UBTI") when received by a tax-exempt entity. Based on that ruling, indebtedness incurred by the Company in connection with the acquisition of an investment will not cause distributions of the Company paid to a tax-exempt Stockholder to be UBTI. Revenue rulings are interpretive in nature and subject to revocation or modification; however, based on this ruling, it would appear that distributions by the Company to tax-exempt entities would not constitute UBTI. Furthermore, provided that the tax-exempt Stockholder has not borrowed money to acquire Common Stock, the dividend income from the Company will not be UBTI to a tax-exempt Stockholder. Similarly, income from the sale of Common Stock should not constitute UBTI unless the Stockholder has borrowed to acquire his Common Stock or is a dealer in Common Stock. For taxable years beginning after December 31, 1993, however, qualified trusts that hold more than 10% (by value) of the shares of certain REITs may be required to treat a certain percentage of such a REIT's distributions as UBTI. This requirement will apply only if (i) the REIT would not qualify as such for federal income tax purposes but for the application of a "look-through" exception to the five or fewer requirement applicable to Common Stock held by qualified trusts, and (ii) the REIT is "predominantly held" by qualified trusts. A REIT is predominantly held if either (i) a single qualified trust holds more than 25% by value of the REIT interests or (ii) one or more qualified trusts, each owning more than 10% by value of the REIT interests, hold in the aggregate more than 50% of the REIT interest. The percentage of any REIT dividend treated as UBTI is equal to the ratio of (a) the UBTI earned by the REIT (treating the REIT as if it were a qualified trust and therefore subject to tax on UBTI) to (b) the total gross income (less certain associated expenses) of the REIT. A de minimis exception applies where the ratio set forth in the preceding sentence is less than 5% for any year. For these purposes, a qualified trust is any trust described in Section 401(a) of the Code and exempt from tax under Section 501(a) of the Code. The provisions requiring qualified trusts to treat a portion of REIT distributions as UBTI will not apply if the REIT is able to satisfy the five or fewer requirement without relying upon the "look-through" exception. The restrictions on ownership of Common Stock in the Company's Articles will prevent application of the provisions treating a portion of REIT distributions as UBTI to tax- 51 55 exempt entities purchasing Common Stock, absent a waiver of such restrictions by the Board of Directors of the Company. EXPERTS The balance sheets of the Trust as of December 31, 1992 and 1991 and the related statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1992 included in this Proxy Statement/Prospectus have been audited by Kenneth Leventhal & Company, independent auditors, as stated in its report appearing herein, and having been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The balance sheet of the Company as of January 17, 1994 included in this Proxy Statement/Prospectus has been audited by , independent auditors, as stated in its report appearing herein, and having been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. LEGAL MATTERS The legality of the shares of Common Stock to be issued in connection with the proposed Merger has been passed upon for the Company by Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., Dallas, Texas. The statement in this Proxy Statement/Prospectus under the caption "FEDERAL INCOME TAX CONSIDERATIONS" and the other statements herein relating to the Company's qualification as a REIT, as well as the tax consequences of the Merger will be passed upon by Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., Dallas, Texas. STOCKHOLDER PROPOSALS A proper proposal submitted by a Stockholder for presentation at the Company's 1995 Annual Meeting and received at the Company's principal executive offices no later than , 1995, will be included in the Company's proxy statement and form of proxy relating to the 1995 Annual Meeting. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement (of which this Proxy Statement/Prospectus is a part) on the Form S-4 under the Securities Act with respect to the securities offered hereby. This Proxy Statement/Prospectus does not contain all the information set forth in the Registration Statement, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. Statements contained in this Proxy Statement/Prospectus as to the content of any contract or other document are not necessarily complete, and in each instance reference is made to copies of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference and the exhibits and schedules hereto. For further information regarding the Company and the Common Stock offered hereby, reference is hereby made to the Registration Statement and such exhibits and schedules which may be obtained from the SEC at its Public Reference Section, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Registration Statement, the exhibits and schedules forming a part thereof filed by the Company with the Commission can be inspected and copies can be obtained at the Commission at Room 1024 Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: 7 World Trade Center, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60601. 52 56 GLOSSARY ACMs -- Asbestos-containing materials. ADA -- Title III of the Americans with Disabilities Act of 1990, as amended. Affiliate -- Any "subsidiary corporation" or "parent corporation" as such terms are defined in Sections 424(d) and 424(e) of the Code, respectively. Articles -- The Company's Articles of Incorporation as filed with the Maryland Secretary of State. Employment Agreement -- the Employment Agreement between the Company and either of Messrs. Wolcott, Warner or O'Brien. Code -- Internal Revenue Code of 1986, as amended. Commission -- Securities and Exchange Commission. Common Stock -- The Common Stock of the Company, $0.01 par value per share. Company -- American Industrial Properties REIT, Inc., a Maryland corporation. Effective Date -- The effective date of the Merger. Excess Shares -- Those shares of Common Stock of the Company in excess of 9.8% of the issued and outstanding Common Stock of the Company acquired by one person or persons acting as a group, which acquisition would give rise to certain redemption and other rights in favor of the Board of Directors of the Company. Exchange Act -- The Securities Exchange Act of 1934, as amended. Funds from Operations -- Net income (computed in accordance with generally accepted accounting principles), excluding financing costs and gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization and other non-cash items. Indenture -- The Indenture dated as of November 15, 1985 relating to the issuance of the Notes. Interested Shareholder -- Any beneficial holder of 10% or more of the Trust's outstanding shares. IRS -- Internal Revenue Service. Merger -- The proposed merger of the Trust with and into the Company. Merger Agreement -- The Agreement and Plan of Merger between the Trust and the Company. MGCL -- The Maryland General Corporation Law, as amended. MLI Agreement -- The Note Purchase Agreement dated as of February 27, 1992, by and between the Trust and Manufacturers Life Insurance Company. Mortgage -- Each of the mortgages on the Properties securing payment of the Notes. NYSE -- The New York Stock Exchange. Notes -- Zero Coupon Notes of the Company due 1997 issued pursuant to an Indenture dated as of November 15, 1985, between the Trust and IBJ Schroder Bank & Trust Company, as Trustee. Omnibus Plan -- The Omnibus Common Stock Incentive Plan of the Company approved by the Board of Directors of the Company as of January 12, 1994 and by the sole Stockholder of the Company as of January 12, 1994. Options -- All incentive and non-incentive stock options granted pursuant to the Omnibus Plan. Ownership Limit -- The maximum percentage of the issued and outstanding capital stock of the Company that may be beneficially owned by any single Stockholder of the Company. 53 57 Preferred Stock -- The Preferred Stock of the Company, $0.01 par value per share. Profit Sharing Plan -- The Retirement and Profit Sharing Plan of the Company adopted by the Board of Directors of the Company on October 28, 1993. Properties -- Fourteen industrial properties and one enclosed specialty retail mall owned and operated by the Trust including Patapsco Center, Baltimore, Maryland; Beltline Center, Gateway 5 and 6, Northgate II and Northview Distribution Center, Dallas, Texas; Tamarac Square, Denver Colorado; Quadrant, Deerfield Beach, Florida; Plaza Southwest, Commerce Park, and Westchase Park, Houston, Texas; Huntington Drive Center, Los Angeles, California; Northwest Business Park, Milwaukee, Wisconsin; Burnsville and Cahill, Minneapolis, Minnesota; and Springbrook, Seattle, Washington. One of the Properties shall be referred to herein as a "Property." Proposal -- Proposals to be presented at the Special Meeting to approve and adopt the Merger Agreement. Record Date -- February 28, 1994, the date established by the Trust for determining Shareholders entitled to notice of and to vote at the Special Meeting. REIT -- A real estate investment trust as that term is defined in sections 856 through 860 of the Code. Restricted Shares -- Common Stock of the Company awarded pursuant to the Omnibus Plan. SARs -- Stock appreciation rights issued pursuant to the Omnibus Plan. Securities Act -- The Securities Act of 1933, as amended. Shareholders -- Persons holding Shares in the Trust. Shares -- Shares of beneficial interest in the Trust. Special Meeting -- A meeting of the Shareholders of the Trust which has been called to consider and to vote on the Proposal. Stockholders -- Persons holding shares of Common Stock of the Company. Trust -- American Industrial Properties REIT, a Texas real estate investment trust. UBTI -- Unrelated business taxable income. 54 58 AMERICAN INDUSTRIAL PROPERTIES REIT, INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE ---- FINANCIAL STATEMENTS OF AMERICAN INDUSTRIAL PROPERTIES REIT. INC.: Independent Auditors' Report........................................................ F-2 Balance Sheet as of January 17, 1994................................................ F-3 Notes to Balance Sheet.............................................................. F-4 FINANCIAL STATEMENTS OF AMERICAN INDUSTRIAL PROPERTIES REIT (FORMERLY TRAMMELL CROW REAL ESTATE INVESTORS): Independent Auditors' Report........................................................ F-6 Financial Statements: Statements of Operations for the nine months ended September 30, 1993 and 1992 and for the years ended December 31, 1992, 1991, and 1990....................... F-7 Balance Sheets as of September 30, 1993 and December 31, 1992 and 1991........... F-8 Statements of Changes in Shareholders' Equity for the nine months ended September 30, 1993 and for the years ended December 31, 1992, 1991, and 1990.... F-9 Statements of Cash Flows for the nine months ended September 30, 1993 and 1992 and for the years ended December 31, 1992, 1991, and 1990....................... F-10 Notes to Financial Statements.................................................... F-11 Financial Statement Schedules: VIII Valuation and Qualifying Accounts........................................... F-20 XI Real Estate and Accumulated Depreciation...................................... F-21 Notes to Schedule XI............................................................. F-22
All other financial statements and schedules not listed have been omitted since the required information is either included in the Financial Statements and the Notes thereto as included herein or is not applicable or required. Because the entities to be merged are under common control, this transaction will be accounted for as a pooling of interests. PRO FORMA FINANCIAL STATEMENT PRESENTATIONS OF THE MERGED ENTITIES HAVE NOT BEEN INCLUDED AS THERE IS NOT EXPECTED TO BE ANY MATERIAL ADJUSTMENTS TO THE HISTORICAL OPERATIONS OF AMERICAN INDUSTRIAL PROPERTIES REIT AS A RESULT OF THE MERGER OTHER THAN THE INCURRENCE OF TEXAS FRANCHISE TAX LIABILITY IN AN IMMATERIAL AMOUNT WHICH IS EXPECTED TO BE OFFSET BY A DECREASE IN THE COST OF DIRECTOR AND OFFICER LIABILITY INSURANCE. F-1 59 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholder of American Industrial Properties REIT, Inc. We have audited the accompanying balance sheet of American Industrial Properties REIT, Inc. (a Maryland corporation and a wholly-owned subsidiary of American Industrial Properties REIT, a Texas real estate investment trust) (the "Company") as of January 17, 1994. This balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on this balance sheet based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial condition of American Industrial Properties REIT, Inc. as of January 17, 1994, in conformity with generally accepted accounting principles. Dallas, Texas F-2 60 AMERICAN INDUSTRIAL PROPERTIES REIT, INC. (A WHOLLY-OWNED SUBSIDIARY OF AMERICAN INDUSTRIAL PROPERTIES REIT) BALANCE SHEET JANUARY 17, 1994 ASSETS Cash................................................................................ $1,000 ------ ------ LIABILITIES AND STOCKHOLDER'S EQUITY Stockholder's Equity: Preferred stock, $.01 par value; 10,000,000 shares authorized; none outstanding... $ -- Common stock, $.01 par value; 50,000,000 shares authorized; 100 shares issued and outstanding................................................................ 1 Additional paid-in capital........................................................ 999 ------ $1,000 ------ ------
The accompanying notes are an integral part of this balance sheet. F-3 61 AMERICAN INDUSTRIAL PROPERTIES REIT, INC. (A WHOLLY-OWNED SUBSIDIARY OF AMERICAN INDUSTRIAL PROPERTIES REIT) NOTES TO BALANCE SHEET JANUARY 17, 1994 NOTE 1 ORGANIZATION American Industrial Properties REIT, Inc., a Maryland corporation (the "Company", a wholly-owned subsidiary of American Industrial Properties REIT, a Texas real estate investment trust, the "Trust") was incorporated on January 12, 1994. The Company has no operations to date, but has issued 100 shares of Common Stock to the Trust for consideration of $1,000. NOTE 2 FEDERAL INCOME TAXES The Company intends to qualify as a real estate investment trust under the Internal Revenue Code at the earliest possible date. As such, the Company will not be subject to federal income taxes on amounts distributed to stockholders provided that it distributes at least 95% of its real estate investment trust taxable income to its stockholders and meets certain other conditions. NOTE 3 PREFERRED STOCK No shares of preferred stock are outstanding. Preferred stock may be issued from time to time without stockholder approval with terms and conditions established by the Board of Directors of the Company. NOTE 4 PROPOSED MERGER The Trust has announced its intent to merge with the Company which will involve the exchange of shares of the Trust's Shares of Beneficial Interest for the Company's Common Stock, in a ratio of one share of Common Stock for every five Shares of Beneficial Interest tendered. The proposed merger must be voted on by the Trust's shareholders and receive approval from the holders of at least 66 2/3% of the outstanding Shares of Beneficial Interest in order for the merger to be consummated. NOTE 5 EMPLOYEE BENEFIT PLANS Stock Option Plan Effective January 12, 1994, the Company adopted an Omnibus Common Stock Incentive Plan (the "Omnibus Plan"). A maximum of 185,000 shares of Common Stock of the Company have been reserved for issuance under the Omnibus Plan for the exercise of incentive and non-incentive stock options (collectively "Options"), stock appreciation rights ("SARs") and the award of shares of the Company's common stock subject to forfeiture, and limitations on transferability ("restricted stock"). Options granted under the Omnibus Plan are exercisable at the "fair market value" of the shares of Common Stock at the date of grant as established by the Board of Directors of the Company. Effective January 12, 1994, the Board has granted the officers of the Company options to purchase 136,000 shares of Common Stock at an exercise price equivalent to the "fair market value" of the Trust's Shares of Beneficial Interest at their close on the New York Stock Exchange on the date of grant multiplied by the exchange ratio for the shares of Common Stock in connection with the proposed merger. Each of these Options vests at 20% per year over five years and are exercisable for a period of ten years from the date of grant. Employment Agreements The Company has entered into separate employment agreements with the President and Chief Executive Officer, the Vice-President and Chief Operating Officer and the Vice-President and Chief Financial Officer effective as of January 12, 1994. In the event that any of these employees are terminated, voluntarily or F-4 62 involuntarily, as a result of a change in control of the Company, the employee will be entitled to receive severance compensation in an amount equal to three times the average total cash compensation, inclusive of base salary and cash bonuses, received by such employee during each of the preceding five calendar years. The employment agreements also provide for annual incentive bonuses calculated as a percentage of base salary for the year, based upon the achievement of certain objectives to be established annually by the Company's Compensation Committee. Retirement Plan The Company will assume the American Industrial Properties REIT Retirement and Profit Sharing Plan which qualifies under section 401(k) of the Internal Revenue Code. All initial employees of the Company will be eligible to participate. Eligible employees can make voluntary contributions to the Plan of up to 15% of their pay into the Plan, subject to other limitations, in which they are fully vested. The Company has the option to make annual voluntary contributions to the Plan which are allocated based on employees base compensation. F-5 63 INDEPENDENT AUDITORS' REPORT To the Trust Managers and Shareholders of American Industrial Properties REIT: We have audited the Financial Statements and the Financial Statement Schedules of American Industrial Properties REIT (formerly Trammell Crow Real Estate Investors) (the "Trust") listed in the Index on page F-I of this Proxy Statement/Prospectus. These financial statements and schedules are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement and schedule presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Industrial Properties REIT as of December 31, 1992 and 1991, and the results of its operations and its cash flows for the years ended December 31, 1992, 1991 and 1990 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the financial statements taken as a whole, present fairly in all material respects, the information required to be set forth therein. {SIG} KENNETH LEVENTHAL & COMPANY Dallas, Texas March 5, 1993, except for the first and last paragraph of Note 1 as to which the date is January 17, 1994 F-6 64 AMERICAN INDUSTRIAL PROPERTIES REIT (FORMERLY TRAMMELL CROW REAL ESTATE INVESTORS) STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, --------------------- ---------------------------------- 1993 1992 1992 1991 1990 -------- -------- -------- -------- -------- (UNAUDITED) Revenues Rents............................... $ 5,649 $ 9,149 $ 11,908 $ 12,995 $ 14,578 Tenant Reimbursements............... 1,739 2,188 3,001 3,210 2,921 Interest Income..................... 414 124 230 283 245 -------- -------- -------- -------- -------- 7.802 11,461 15,139 16,488 17,744 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Real Estate Expenses Amortization of original issue discount on Zero Coupon Notes due 1997............................. 1,031 2,766 3,356 8,456 8,842 Depreciation and amortization....... 2,338 3,105 4,190 4,267 4,674 Interest on 8.8% notes payable due 1997......................... 2,978 2,457 4,024 -- Interest on mortgages payable....... 522 1,064 1,370 1,528 1,939 Property taxes...................... 1,145 1,694 2,139 2,140 2,179 Property management fees, including payments to affiliates of the Advisor of $598, $686, and $773 in 1992, 1991 and 1990, respectively..................... 313 469 621 686 773 Utilities........................... 336 402 549 489 515 Repairs and maintenance............. 748 858 1,183 1,147 1,131 Other property operating expenses... 472 731 1,011 842 948 -------- -------- -------- -------- -------- 9,883 13,546 18,443 19,555 21,001 -------- -------- -------- -------- -------- Loss from real estate operations...... (2,081) (2,085) (3,304) (3,067) (3,257) -------- -------- -------- -------- -------- Provisions for permanent impairments in value of real estate............. -- 2,836 14,094 9,371 -- -------- -------- -------- -------- -------- Administrative Expenses Fees paid to Advisor................ 716 324 565 594 624 Trust administration and overhead... 1,125 601 756 754 603 -------- -------- -------- -------- -------- 1,841 925 1,321 1,348 1,227 -------- -------- -------- -------- -------- Loss before gain (loss) on sales of real estate and extraordinary gain................................ (3,922) (5,846) (18,719) (13,786) (4,484) Gain (loss) on sales of real estate........................... (205) (360) (784) 304 1,858 Extraordinary gain from partial repurchase of Zero Coupon Notes Payable.................... -- 116 1,910 4,320 -- -------- -------- -------- -------- -------- Net Loss.............................. $ (4,127) $ (6,090) $(17,593) $ (9,162) (2,626) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Per Share Data Loss before gain (loss) on sales of real estate and extraordinary gain............... $ (0.43) $ (0.64) $ (2.06) $ (1.52) $ (0.49) Gain (loss) on sales of real estate........................... (0.02) (0.04) (0.09) 0.03 0.20 Extraordinary gain from partial repurchase of Zero Coupon Notes Payable.......................... -- 0.01 0.21 0.48 -- -------- -------- -------- -------- -------- Net Loss............................ $ (0.45) $ (0.67) $ (1.94) $ (1.01) $ (0.29) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Distributions Paid.................. $ 0.12 $ 0.16 $ 0.20 $ 0.42 $ 0.70 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Number of shares outstanding........ 9,075,400 9,075,400 9,075,400 9,075,400 9,075,400 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of these financial statements. F-7 65 AMERICAN INDUSTRIAL PROPERTIES REIT (FORMERLY TRAMMELL CROW REAL ESTATE INVESTORS) BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
DECEMBER 31, SEPTEMBER 30, ------------------------------- 1993 1992 1991 ------------- ------------- ------------- (UNAUDITED) Real Estate: Operating properties: Held for investment............................... $ 100,277 $ 88,530 $ 128,996 Held for sale..................................... -- 25,601 36,700 Allowance for possible losses on real estate held for sale........................................ -- (6,095) (5,855) ------------- ------------- ------------- 100,277 108,036 159,841 Accumulated depreciation............................. (18,592) (18,036) (20,804) ------------- ------------- ------------- Net real estate........................................ 81,685 90,000 139,037 ------------- ------------- ------------- Cash and Cash Equivalents: Unrestricted......................................... 2,914 5,893 4,374 Restricted........................................... 13,608 11,886 -- ------------- ------------- ------------- 16,522 17,779 4,374 ------------- ------------- ------------- Other Assets: Issuance costs of Zero Coupon Notes due 1997, net.... 152 169 1,477 Other assets, net.................................... 2,727 2,498 2,989 ------------- ------------- ------------- $ 101,086 $ 110,446 $ 147,877 ------------- ------------- ------------- ------------- ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: 8.8% Notes payable due 1997.......................... $ 45,239 $ 45,239 $ -- Zero Coupon Notes payable due 1997 ($19,956, $20,011, and $145,401 principal amount at maturity, respectively), net of unamortized original issue discount.......................................... 12,265 11,267 73,015 Mortgage notes payable............................... 7,242 12,072 14,126 Accrued interest on 8.8% Notes payable............... 1,374 371 -- Accounts payable, accrued expenses and other liabilities....................................... 1,548 2,835 2,468 Tenant security deposits............................. 464 491 689 ------------- ------------- ------------- Total Liabilities............................ 68,132 72,275 90,298 ------------- ------------- ------------- Shareholders' Equity: Shares of Beneficial Interest; authorized 10,000,000 Shares; issued and outstanding 9,075,400 Shares... 125,513 125,513 125,513 Accumulated distributions............................ (57,366) (56,276) (54,461) Accumulated loss from operations and extraordinary gains............................................. (36,366) (32,444) (15,635) Accumulated net gain on sales of real estate......... 1,173 1,378 2,162 ------------- ------------- ------------- Total Shareholders' Equity................... 32,954 38,171 57,579 ------------- ------------- ------------- $ 101,086 $ 110,446 $ 147,877 ------------- ------------- ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. F-8 66 AMERICAN INDUSTRIAL PROPERTIES REIT (FORMERLY TRAMMELL CROW REAL ESTATE INVESTORS) STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
ACCUMULATED ACCUMULATED NET LOSS GAIN FROM ON SHARES OF BENEFICIAL OPERATIONS SALES INTEREST AND OF --------------------- ACCUMULATED EXTRAORDINARY REAL NUMBER AMOUNT DISTRIBUTIONS GAIN ESTATE TOTAL -------- -------- -------- -------- ------ -------- Balance at December 31, 1989... 9,075,400 $125,513 $(44,342) $ (1,685) $ -- $ 79,486 Loss before gain on sales of real estate............... -- (4,484) (4,484) Gain on sales of real estate.................... -- -- 1,858 1,858 Distributions to Shareholders.............. (6,353) -- -- (6,353) -------- -------- -------- -------- ------ -------- Balance at December 31, 1990... 9,075,400 125,513 (50,695) (6,169) 1,858 70,507 Loss before gain on sales of real estate and extraordinary gain........ -- (13,786) -- (13,786) Gain on sales of real estate.................... -- -- 304 304 Extraordinary gain on partial repurchases of Zero Coupon Notes..................... -- 4,320 -- 4,320 Distributions to Shareholders.............. (3,766) -- -- (3,766) -------- -------- -------- -------- ------ -------- Balance at December 31, 1991... 9,075,400 125,513 (54,461) (15,635) 2,162 57,579 Loss before loss on sales of real estate and extraordinary gain........ -- (18,719) -- (18,719) Loss on sales of real estate.................... -- -- (784) (784) Extraordinary gain on partial repurchases of Zero Coupon Notes..................... -- 1,910 -- 1,910 Distributions to Shareholders.............. (1,815) -- -- (1,815) -------- -------- -------- -------- ------ -------- Balance at December 31, 1992... 9,075,400 125,513 (56,276) (32,444) 1,378 38,171 (1993 activity is unaudited) Loss before loss on sales of real estate............... -- (3,922) -- (3,922) Loss on sales of real estate.................... -- -- (205) (205) Distributions to Shareholders.............. (1,090) -- -- (1,090) -------- -------- -------- -------- ------ -------- Balance at September 30, 1993 (unaudited).................. 9,075,400 $125,513 $(57,366) $(36,366) $1,173 $ 32,954 -------- -------- -------- -------- ------ -------- -------- -------- -------- -------- ------ --------
The accompanying notes are an integral part of these financial statements. F-9 67 AMERICAN INDUSTRIAL PROPERTIES REIT (FORMERLY TRAMMELL CROW REAL ESTATE INVESTORS) STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, ------------------- ---------------------------------- 1993 1992 1992 1991 1990 ------- ------- -------- -------- -------- (UNAUDITED) Cash Flows From Operating Activities: Net Loss................................. $(4,127) $(6,090) $(17,593) $ (9,162) $ (2,626) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Amortization of original issue discount on Zero Coupon Notes due 1997................................ 1,031 2,766 3,356 8,456 8,842 Depreciation and amortization......... 2,338 3,105 4,190 4,267 4,674 Deferred interest on 8.8% Notes payable............................. -- 2,604 -- -- -- Provision for permanent impairments in value of real estate................ -- 2,836 14,094 9,371 -- Decrease (increase) in other assets... (117) 271 435 (150) 448 Increase (decrease)in accounts payable, accrued expenses and other liabilities and tenant security deposits............................ (311) 37 539 (403) 246 Extraordinary gain from partial repurchases of Zero Coupon Notes payable............................. -- (116) (1,910) (4,320) -- Loss on sale of real estate........... 205 360 784 (304) (1,858) ------- ------- -------- -------- -------- Net Cash Provided By (Used In) Operating Activities............................... (981) 5,773 3,895 7,755 9,726 ------- ------- -------- -------- -------- Cash Flows From Investing Activities: Net proceeds from sales of real estate... 6,749 1,255 34,125 304 12,304 Capitalized improvements and leasing commissions, including payments to affiliates of the Advisor of approximately $1,041, $764, and $975 in 1992, 1991 and 1990, respectively.................... (1,105) (2,508) (3,995) (1,383) (2,003) ------- ------- -------- -------- -------- Net Cash Provided By (Used In) Investing Activities............................... 5,644 (1,253) 30,130 (1,079) 10,301 ------- ------- -------- -------- -------- Cash Flows From Financing Activities: Partial repayment of 8.8% note payable... -- -- (7,995) -- -- Debt issuance costs (increase in other assets)............................... -- (191) (11) (5) -- Partial repurchase of Zero Coupon Notes payable............................... -- (237) (8,745) (11,107) -- Principal repayments on mortgage notes payable............................... (4,830) (251) (2,054) (160) (4,518) Distributions to Shareholders............ (1,090) (1,453) (1,815) (3,766) (6,353) ------- ------- -------- -------- -------- Net Cash Provided By (Used In) Financing Activities............................... (5,920) (2,132) (20,620) (15,038) (10,871) ------- ------- -------- -------- -------- Net Increase in Cash and Cash Equivalents.............................. (1,257) 2,388 13,405 (8,362) 9,156 Cash and Cash Equivalents at Beginning of Period................................... 17,779 4,374 4,374 12,736 3,580 ------- ------- -------- -------- -------- Cash and Cash Equivalents at End of Period................................ $16,522 $ 6,762 $ 17,779 $ 4,374 $ 12,736 ------- ------- -------- -------- -------- ------- ------- -------- -------- -------- Cash Paid for Interest..................... $ 2,497 $ 1,064 $ 5,023 $ 1,528 $ 1,939 ------- ------- -------- -------- -------- ------- ------- -------- -------- --------
The accompanying notes are an integral part of these financial statements. F-10 68 AMERICAN INDUSTRIAL PROPERTIES REIT (FORMERLY TRAMMELL CROW REAL ESTATE INVESTORS) NOTES TO FINANCIAL STATEMENTS NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES: General. American Industrial Properties REIT (formerly Trammell Crow Real Estate Investors) (the "Trust") is an equity real estate investment trust which, as of December 31, 1992, owned and operated 15 commercial real estate properties consisting of 14 industrial properties and one retail property. The Trust was formed September 26, 1985, by issuing 13,400 shares to Trammell Crow Company, Inc. for $201,000. On November 27, 1985, the Trust issued 9,062,000 Shares of Beneficial Interest (the "Shares") and commenced operations. Update As of September 30, 1993 (Unaudited). On April 13, 1993, the Independent Trust Managers gave formal Notice of the Trust's intent to terminate the Advisory Agreement with Trammell Crow Ventures, Ltd. (the "Advisor", see Note 2). The Trust converted to self-management effective June 13, 1993 and began operating under the name American Industrial Properties REIT. Pursuant to the Trust's 1993 Annual Meeting of Shareholders, the Trust's Shareholders approved amendments to the Trust's Declaration of Trust and By-Laws which, amongst other things, officially changed the name of the Trust from Trammell Crow Real Estate Investors to American Industrial Properties REIT and removed the Trust's limited term restriction, converting the Trust from a finite life entity scheduled to liquidate in 1997, to a perpetual life entity. Interim Unaudited Financial Information. The accompanying interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and generally accepted accounting principles applicable to interim financial statements. The interim financial information included herein has been prepared in accordance with the Trust's customary accounting practices and has not been audited. In the opinion of management, the information presented reflects all adjustments necessary for a fair presentation of interim results. All such adjustments are of a normal and recurring nature. Real Estate and Provision for Possible Losses on Real Estate. The Trust carries its real estate at historical cost net of depreciation, writedowns for permanent impairment and allowances for possible losses. Writedowns for permanent impairment are recorded when management determines the recorded value of real estate held for long-term investment ("Held for Investment") will not be fully recovered over the assets holding period or to reduce the depreciated cost of real estate held for sale ("Held for Sale") to the lower of cost or net realizable value. Real estate Held for Investment is reclassified to real estate Held for Sale when management determines that there is a reasonable probability that the asset will no longer be held for long-term investment and activities begin to offer the property for sale. Any provisions for possible losses to reduce the depreciated cost of the asset to net realizable value are made when the reclassification occurs. Property improvements are capitalized while maintenance and repairs are expensed as incurred. Depreciation of buildings and capital improvements is computed using the straight-line method over forty years. Depreciation of tenant improvements is computed using the straight-line method over ten years. Cash and Cash Equivalents and Restricted Cash. Cash equivalents include demand deposits and all highly liquid debt instruments purchased with an original maturity of three months or less. According to the terms of the Indenture (the "Indenture") securing the Trust's Zero Coupon Notes payable due 1997 (the "Zero Coupon Notes"), upon the sale or refinancing of any property prior to the defeasance commencement date (November 27, 1993), the Trust is required to deposit into a Property Acquisition Account such portion of the net proceeds received by the Trust that the Trust Managers shall deem necessary or appropriate to protect the interests of the Holders of the Zero Coupon Notes (see Notes 5 and 8). Such deposits are shown as restricted cash on the accompanying balance sheet. After November 27, 1993, any proceeds held in the Property Acquisition Account must be placed in another restricted account and be used solely to defease the holders of the remaining Zero Coupon Notes. F-11 69 AMERICAN INDUSTRIAL PROPERTIES REIT (FORMERLY TRAMMELL CROW REAL ESTATE INVESTORS) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Update As of September 30, 1993 (Unaudited). Subsequent to September 30, 1993, the funds held in the Property Acquisition Account were reinvested by the Trust into short-term commercial paper and Treasury Bills which are pledged as collateral to the Zero Coupon Noteholders. Formation Costs. The Trust capitalized the costs related to organizing the Trust. These organization costs were fully amortized in 1990. The costs related to issuing the shares were charged to Shareholders' equity. Issuance Costs of Zero Coupon Notes Payable. The issuance costs of the outstanding Zero Coupon Notes are being amortized over 12 years (the life of the Zero Coupon Notes) and include the difference between the proceeds from the underwriters and the subsequent offering price to the public for the Zero Coupon Notes. Rents and Tenant Reimbursements. The Trust leases its retail and industrial properties to tenants under operating leases with expiration dates ranging from 1993 to 2005. Several tenants in the retail property are also required to pay as rent a percentage of their gross sales volume, to the extent such percentage exceeds their base rents. In addition to paying base and percentage rents, most tenants are required to reimburse the Trust for operating expenses in excess of a negotiated base. Contractual rent increases or delayed rent starts are recognized ratably over the lease term. Income Tax Matters. The Trust qualifies as a real estate investment trust under federal income tax law as long as it meets certain asset, income, and ownership tests and it distributes 95% of its taxable income annually. Since the Trust made distributions to Shareholders and had a taxable loss, no provision for federal income tax was required for 1992, 1991 or 1990. The amount of distributions taxable as dividend income to Shareholders is based on the earnings and profits of the Trust, another tax method of determining net income (see Note 9). Distributions in excess of earnings and profits, not in excess of a Shareholder's basis, are a nontaxable return of capital. To the extent cumulative cash distributions in excess of earnings and profits exceed a Shareholder's basis in the shares, a taxable gain is recognized by the Shareholder. The Trust has a net operating loss carryforward from 1992 and prior years of approximately $14,000,00. No tax benefit relating to the utilization of the loss has been recorded. The losses may be carried forward for up to 15 years. The present losses will expire beginning in the year 2004. Additionally, the Trust has not adopted Statement of Financial Accounting Standards ("FAS") No. 109, which is effective for fiscal years beginning after December 15, 1992. It is Management's opinion that the adoption of FAS No. 109 would not result in any material changes to the financial statements. Reclassification. The Trust has reclassified certain items in the accompanying financial statements in order to (i) present amounts paid directly to the Advisor separately from Trust administration and overhead costs and general and administrative costs related to property operations, (ii) separately present accrued interest on the 8.8% Notes payable, and (iii) reflect the portion of the principal paydown related to deferred interest on the 8.8% Notes payable as an interest payment rather than a principal reduction in the 1992 statement of cash flows. NOTE 2 -- TRANSACTIONS WITH PARTIES IN INTEREST: Parties in Interest. Trammell Crow Ventures, Ltd. acts as advisor (the "Advisor") to the Trust. Owners of the Advisor are associated with a group of entities engaged in various real estate businesses under the name "Trammell Crow Company" (collectively, the "TCC Entities"). Advisory Fees. For its services under an advisory agreement, in 1992, 1991, and 1990, the Advisor received an annual advisory fee equal to .4375% of the sum of (1) the estimated value of the Trust's real estate investments, as reviewed by an independent appraiser, less the original mortgage balances upon acquisition, and (2) the proceeds from the sale of real estate pending reinvestment. Through December 31, 1992, the Advisor was also entitled to an incentive advisory fee in varying degrees if distributabIe cash exceeded F-12 70 AMERICAN INDUSTRIAL PROPERTIES REIT (FORMERLY TRAMMELL CROW REAL ESTATE INVESTORS) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) $11,600,000. For the year commencing January 1, 1993, the Trust Managers have established an advisory fee of $500,000 per year. As in previous years, the Advisor is also entitled to reimbursement for costs of providing legal, accounting and financial reporting services. Also effective January 1, 1993, the Advisory Agreement has been amended to eliminate all incentive advisory fees. Total advisory fees paid to the Advisor including reimbursements were $565,000 in 1992, $633,000 in 1991 and $654,000 in 1990. Disposition Fees. The Trust pays the Advisor a real estate disposition fee equal to 2% of net cash proceeds realized by the Trust from the sale or disposition of any Trust real estate asset, after deduction for any real estate commission paid by the Trust. Disposition fees paid to the Advisor and charged against the gain or loss on sales of real estate were $711,000 in 1992, $8,000 in 1991, and $259,000 in 1990. Management Fees. Most of the Trust's real estate assets are managed by various TCC Entities (the "TCC Property Managers"). For their services, the TCC Property Managers receive base management fees of approximately 4% of gross income, as defined in the Property Management Agreements, from industrial properties and approximately 5% of gross income, as defined, from the retail property. Approximately $598,000 in management fees were paid to the TCC Property Managers in 1992. Additionally, the TCC Property Managers are entitled to receive incentive management fees of 5% of net cash flow, as defined, in excess of a 10% annual return on the Trust's investment in each property. The TCC Property Managers also receive leasing commissions based on prevailing market rates of 2% to 5% of future rentals to be collected from new tenants and 1% to 4.5% of future rentals from renewal tenants. Approximately $485,000 in leasing commissions were paid to the TCC Property Managers in 1992. Tenant improvements to the properties of approximately $556,000 were completed by entities affiliated with some of the TCC Property Managers. Incentive Disposition Fee. Each TCC Property Manager is entitled to an incentive disposition fee equal to (i) 5% of the excess of the amount, if any, by which the net cash proceeds realized by the Trust from any sale or disposition of the managed property, after deduction for any real estate commissions paid by the Trust and any fees payable to the Advisor on the sale or disposition, exceed the amount necessary to produce a 10% IRR on the Trust property but less than a 13.5% IRR and (ii) 10% of the excess of the amount, if any, by which the net cash proceeds exceed the amount necessary to produce greater than a 13.5% IRR on such Trust property. No incentive disposition fees were paid to TCC Property Managers in 1992. Incentive disposition fees earned by TCC Property Managers were $19,000 in 1991 and $7,000 in 1990. Other Fees. The Advisor may also receive fees for services provided to the Trust that are not required pursuant to the terms of the Advisory Agreement. For its services rendered in connection with the acquisition and refinancing of the Zero Coupon Notes on February 27, 1992 (see Note 4), the Trust Managers approved and the Trust paid to the Advisor a fee equal to 1% of the amount paid for the Zero Coupon Notes. This amount, $532,340, was charged against the extraordinary gain from partial repurchase of the Zero Coupon Notes. Update As of September 30, 1993 (Unaudited). Effective June 13, 1993, the Trust terminated the Advisory Agreement with the Advisor. Pursuant to the terms of the Advisory Agreement, the Trust paid to the Advisor a one-time termination fee of $435,000 in the second quarter. No additional amounts are due the Advisor. Certain TCC Entities continue to manage twelve of the Trust's fourteen properties, however these are no longer considered to be related party or party in interest relationships by the Trust. F-13 71 AMERICAN INDUSTRIAL PROPERTIES REIT (FORMERLY TRAMMELL CROW REAL ESTATE INVESTORS) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 -- REAL ESTATE, PERMANENT IMPAIRMENT OF REAL ESTATE, AND ALLOWANCES FOR POSSIBLE LOSSES ON REAL ESTATE: Real estate, permanent impairment of real estate, and allowances for possible losses on real estate consist of the following ($ in thousands):
DECEMBER 31, --------------------- 1992 1991 -------- -------- Real Estate Held for Investment, at cost....................... $101,929 $132,512 Less: Accumulated depreciation............................... (14,416) (16,258) Permanent impairment of value............................. (13,399) (3,516) -------- -------- 74,114 112,738 -------- -------- Real Estate Held for Sale, at cost............................. 25,601 36,700 Less: Accumulated depreciation............................... (3,620) (4,546) Allowance for possible losses............................. (6,095) (5,855) -------- -------- 15,886 26,299 -------- -------- Net real estate................................................ $ 90,000 $139,037 -------- -------- -------- --------
REAL ESTATE HELD FOR INVESTMENT; At December 31, 1992, 11 of the Trust's properties were held for investment. The Trust has recorded writedowns for permanent impairment of value related to real estate Held for Investment of $9,883,000 and $3,516,000 in 1992 and 1991, respectively. These writedowns are a reduction of the recorded value of the related assets to estimated market value. The writedowns for permanent impairment on real estate are based on estimates and, accordingly, actual losses may vary from current estimates. Writedowns for permanent impairment of real estate Held for Investment are recorded as a direct reduction of the property's basis when management determines it is probable that the recorded value of the asset will not be fully recovered over the asset's or Trust's remaining life. These writedowns are reviewed periodically and any additional writedown determined to be necessary is recorded in the period in which it becomes reasonably estimable. During 1992, one of the Trust's real estate assets which was classified as Held for Investment at December 31, 1991 was reclassified to real estate Held for Sale and subsequently sold. At the time of reclassification of the asset, the Trust recorded an allowance for possible losses on real estate Held for Sale of $2,836,000. Upon sale of the asset, the Trust recognized a gain on sale of $158,000. Among the various significant factors in determining writedowns for permanent impairment is the ability of the Trust to hold the property until such time as the depreciated cost can be recovered. If other factors should cause a reclassification of the Trust's real estate Held for Investment to Held for Sale, significant adjustments to reduce the depreciated cost of real estate Held for Investment to estimated market value could be required. As of December 31, 1992, management estimates that the difference between the depreciated cost (net of writedowns for permanent impairment) and the estimated market value for these assets is approximately $12,666,000. REAL ESTATE HELD FOR SALE: At December 31, 1992, four of the Trust's properties were Held for Sale. Valuation allowances are provided for possible losses on real estate Held for Sale when the depreciated cost of the property exceeds the Trust's estimate of net realizable value. Numerous factors are considered when estimating net realizable value, including market evaluations, the cost of capital, operating cash flow from the property during the projected holding period, and expected capitalization rates applied to the estimated stabilized net operating income of F-14 72 AMERICAN INDUSTRIAL PROPERTIES REIT (FORMERLY TRAMMELL CROW REAL ESTATE INVESTORS) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) the specific property. Management believes the market value estimates of the Trust's real estate Held for Sale at December 31, 1992 and 1991 approximate their net realizable value and has used such market value estimates in determining the allowance for possible losses on these assets. Management has determined that the depreciated cost of all of the Trust's real estate Held for Sale in 1992 and 1991 exceed their net realizable value and, therefore, valuation allowances of $6,095,000 and $5,855,000 were reflected as of December 31, 1992 and 1991, respectively. These allowances are based on estimates and, accordingly, actual losses may vary from current estimates. Update As of September 30, 1993 (Unaudited). As of September 30, 1993, none of the Trust's properties are Held for Sale. Valuation allowances recorded associated with the properties Held for Sale were netted against the properties as writedowns for permanent impairment upon reclassification of these assets to Real Estate Held for Investment. NOTE 4 -- 8.8% NOTES PAYABLE: To finance the February 27, 1992 repurchase of $106,322,000 principal amount at stated maturity ("Face Amount") of Zero Coupon Notes (see Note 5), the Trust issued $53,234,000 of unsecured notes payable due November 1997 (the "8.8% Notes Payable"). These notes bear interest at 8.8% per annum, with interest for the period February 27, 1992 through November 27, 1992 (totalling $3,558,000) deferred and added to the principal balance, and interest thereafter ($371,000 as of December 31, 1992) payable semiannually commencing May 27, 1993. An $8,000,000 mandatory principal repayment would have been required on November 27, 1993. The terms of the 8.8% Notes Payable allow for prepayment, in full or in part, at any time prior to maturity without penalty. On December 31, 1992, the Trust used $11,648,000 of the net sales proceeds from the 1992 sales of real estate (see Note 8) to repay $11,553,000 principal amount of the 8.8% Notes Payable. This repayment included the $8,000,000 mandatory repayment which was due in November 1993, $3,553,000 of principal which was due in November 1997, and $95,000 of accrued interest. NOTE 5 -- ZERO COUPON NOTES PAYABLE: The balance of the Zero Coupon Notes payable due November 27, 1997 increases annually in an amount equal to the amortization of the original issue discount, which is computed at 12% compounding semiannually; the balance is reduced for any Zero Coupon Note repurchases. The Zero Coupon Notes are collateralized by first and second mortgages on the Trust's properties and a security interest in the Trust's partnership interest in one property. The issuance costs of the outstanding Zero Coupon Notes are amortized over 12 years (the life of the Zero Coupon Notes) and as of December 31, 1992, the remaining accumulated amortization was $243,000. On March 18, 1991, in two separate transactions, the Trust repurchased an aggregate of $31,297,000 Face Amount of Zero Coupon Notes having an accreted value of $14,415,000 for an aggregate purchase price of $10,060,000. Amounts previously deposited into the Property Acquisition Account (restricted cash of $7,863,000 at December 31, 1990 plus interest earned) from the December 30, 1990 sale of two properties were used to repurchase $24,800,000 Face Amount of the Zero Coupon Notes. Pursuant to the terms of the Indenture, this portion of the Zero Coupon Notes is pledged to the Indenture trustee for the security of the remaining Noteholders. Cash on hand was used for the remainder of the repurchase. The Trust also acquired an option to repurchase an additional $21,371,000 Face Amount of Zero Coupon Notes at a discount rate of 17.75% compounded semiannually, exercisable in whole or in part prior to December 31, 1992. On May 30, 1991, the Trust repurchased $3,000,000 Face Amount of Zero Coupon Notes having an accreted value of $1,407,000 for an aggregate purchase price of $993,000, pursuant to the option. F-15 73 AMERICAN INDUSTRIAL PROPERTIES REIT (FORMERLY TRAMMELL CROW REAL ESTATE INVESTORS) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Trust recognized extraordinary gains of $4,320,000 from the 1991 repurchases of Zero Coupon Notes, determined as follows ($ in thousands): Accreted balance of Zero Coupon Notes repurchased................. $ 15,822 Cash paid to repurchase Zero Coupon Notes......................... (11,053) Bond issuance costs, net of accumulated amortization.............. (395) Expenses related to repurchases................................... (54) -------- Extraordinary gain from partial repurchase of Zero Coupon Notes... $ 4,320 -------- --------
On February 27, 1992, the Trust repurchased an aggregate of $106,322,000 Face Amount of Zero Coupon Notes for a purchase price of $53,234,000. The accreted balance of the Zero Coupon Notes was approximately $54,401,000. The entire purchase price was financed by issuing new 8.8% Notes Payable (see Note 4) to the seller of the Zero Coupon Notes. Pursuant to the terms of the Indenture, approximately $21,629,000 Face Amount of these repurchased Zero Coupon Notes are also pledged to the Indenture trustee for the security of the remaining Noteholders. Additionally, in four other separate transactions during February and April 1992, the Trust used cash on hand to repurchase $697,000 Face Amount of Zero Coupon Notes having an accreted value of $356,000 for an aggregate purchase price of $237,000. On December 30, 1992, the Trust exercised its remaining option to repurchase an additional $18,371,000 Face Amount of Zero Coupon Notes. These Zero Coupon Notes, having an accreted value of $10,341,000, were repurchased using the proceeds of the 1992 property sales for an aggregate purchase price of $7,968,000. Pursuant to the terms of the Indenture, these Zero Coupon Notes are also pledged to the Indenture trustee for the security of the remaining Noteholders. The Trust recognized extraordinary gains totaling $1,910,000 from the 1992 repurchases of the Zero Coupon Notes, determined as follows ($ in thousands): Accreted balance of Zero Coupon Notes repurchased................. $ 65,103 Principal amount of 8.8% Notes Payable............................ (53,234) Cash paid to repurchase Zero Coupon Notes......................... (8,205) Bond issuance costs, net of amortization.......................... (1,214) Expenses related to repurchases................................... (540) -------- Extraordinary gain from partial repurchases of Zero Coupon Notes........................................................... $ 1,910 -------- --------
The By-laws of the Trust, the Indenture, and the Note Purchase Agreement related to the 8.8% Notes Payable contain various borrowing restrictions and operating performance covenants. As of December 31, 1992, the Trust is in compliance with all of these restrictions and covenants. NOTE 6 -- MORTGAGES PAYABLE: Certain of the Trust's properties are subject: to first mortgage notes bearing interest at annual rates of 8 1/2% to 12 3/4%, requiring monthly payments of principal and interest aggregating $131,000 in 1992, and coming due in various years through 2010. Interest paid in 1992, 1991 and 1990 was $1,370,000, $1,543,000 and $2,007,000, respectively. Principal payments due for the next five years (excluding the mortgages on the Royal Lane property, which was sold January 8, 1993) are $115,000 in 1993, $126,000 in 1994, $2,224,000 in 1995, $154,000 in 1996 and $169,000 in 1997. Effective April 30, 1992, the Trust extended, for three years, the maturity date of the loan on one of its Minneapolis properties. In accordance with the applicable loan agreement, the Trust paid to the Lender $92,000 of deferred accrued interest at the date of the Note extension. The principal amount of this mortgage as of December 31, 1992 was $2,141,000. The payoff of this F-16 74 AMERICAN INDUSTRIAL PROPERTIES REIT (FORMERLY TRAMMELL CROW REAL ESTATE INVESTORS) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) loan is included in the total principal payments due in 1995. In addition to being secured by a mortgage on the property, this note is recourse to the Trust. NOTE 7 -- RENTAL INCOME: Minimum future rentals on noncancellable leases at December 31, 1992 were as follows ($ in thousands):
YEAR ------- 1993....................................................... $ 6,997 1994....................................................... 5,876 1995....................................................... 4,630 1996....................................................... 3,697 1997....................................................... 2,783 Thereafter................................................. 3,706 ------- $27,689 ------- -------
NOTE 8 -- GAIN (LOSS) ON SALES OF REAL ESTATE: For the year ended December 31, 1990, the Trust operated with 19 properties. The Trust sold two of its California industrial properties on December 31, 1990. In connection with the property sales, the Trust was required, through May 1, 1991, to guarantee certain leases of the properties, enter into a space lease for all vacant space, and agree to lease certain space upon expiration of the current leases. To secure these obligations, $732,000 of the sales proceeds were deposited into an escrow account. Release of this escrow to the Trust was conditioned upon achieving leasing objectives prior to May 1, 1991. Accordingly, a portion of the gain was deferred at December 31, 1990 in an amount equal to the sales proceeds deposited to the escrow account. The net sales proceeds after repayment of $4,300,000 of first mortgages on the properties and the related transaction costs totalled approximately $7,900,000. This amount was reflected as restricted cash at December 31, 1990 pursuant to the provisions of the Indenture. In 1991, $355,000 of the $732,000 escrow was released to the Trust since a portion of the required leasing objectives were achieved. The following is a summary of the gains recognized in 1990 and 1991 on the California property sales ($ in thousands): 1990: Gross selling price............................................... $ 15,040 Structural and leasing costs...................................... (1,350) Cost, net of accumulated depreciation............................. (10,442) Selling expenses.................................................. (658) -------- Gain on sales of real estate...................................... 2,590 Deferred gain on sales of real estate............................. (732) -------- Gain recognized in 1990........................................... 1,858 -------- 1991: Deferred gain on sales of real estate............................. 355 Additional selling expenses....................................... (51) -------- Gain recognized in 1991........................................... 304 -------- Total gain on sales of real estate as of December 31, 1991........ $ 2,162 -------- --------
F-17 75 AMERICAN INDUSTRIAL PROPERTIES REIT (FORMERLY TRAMMELL CROW REAL ESTATE INVESTORS) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) In the second quarter of 1992, the Trust sold one of the 13 buildings in the Woodland Industrial Park in Charlotte, North Carolina. In the fourth quarter of 1992, the Trust sold its Southland Industrial property located in Houston, Texas and the remaining 12 buildings in the Woodland Industrial Park. The net loss recognized in 1992 on these sales is summarized below ($ in thousands): Gross selling price............................................... $ 35,823 Cost, net of accumulated depreciation and allowance for possible losses.......................................................... (35,328) Selling expenses.................................................. (1,279) -------- Loss on sales of real estate...................................... $ (784) -------- --------
The total net sales proceeds after repayment of the $1,800,000 first mortgage on the Southland property and the related transaction costs were approximately $32,000,000. Pursuant to the terms of the Indenture, these proceeds were deposited in the Trust's Property Acquisition Account. A portion of the proceeds were subsequently used to repurchase a portion of the Trust's Zero Coupon Notes through the exercise of the remaining repurchase option (see Note 5) and to repay a portion of the 8.8% Notes Payable (see Note 4). The remaining net proceeds are held as restricted cash and, prior to November 27, 1993, may be used to acquire additional investments, including the acquisition of additional real estate assets and the repurchase of additional Zero Coupon Notes. NOTE 9 -- TAXABLE LOSS: The reconciliation of financial loss to taxable loss and to earnings and profits income (loss) of the Trust is as follows ($ in thousands):
1992 1991 1990 -------- ------- ------- Net loss..................................................... $(17,593) $(9,162) $(2,626) Provision for possible losses on real estate................. 14,094 9,371 -- Tax depreciation in excess of financial reporting depreciation............................................... (505) (575) (747) Rental income received, recognized in prior periods (due in future periods)............................................ (70) 28 117 Difference in property basis of assets sold.................. (5,038) -- 188 Other differences............................................ (138) 57 -- -------- ------- ------- Taxable loss................................................. $ (9,250) $ (281) $(3,068) Effect of difference in depreciation methods................. 256 378 615 Difference in property basis of assets sold.................. (923) -- (136) Other differences............................................ -- 25 -- -------- ------- ------- Earnings and profits income (loss)........................... $ (9,917) $ 122 $(2,589) -------- ------- ------- -------- ------- -------
The Trust's distributions of $1,815,000 ($.20 per Share) in 1992 and $6,353,000 ($.70 per Share) in 1990 represented a return of capital to Shareholders, to the extent of a Shareholder's basis in the shares. Of the Trust's total distributions of $3,766,000 ($.415 per Share) in 1991, $122,000 ($0.014 per Share) represented taxable income to Shareholders and $3,644,000 ($.401 per Share) represented a return of capital to Shareholders, to the extent of a Shareholder's basis in the shares. NOTE 10 -- PER SHARE DATA: Net income per Share is based on 9,075,400 Shares outstanding during all years presented. F-18 76 AMERICAN INDUSTRIAL PROPERTIES REIT (FORMERLY TRAMMELL CROW REAL ESTATE INVESTORS) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 11 -- SUBSEQUENT EVENTS: On January 8, 1993, the Trust sold the Royal Lane Business Park property (one of its real estate assets Held for Sale) located in Dallas, Texas. The net sales proceeds totalled approximately $1,800,000 after repayment of approximately $4,650,000 of first mortgages on the property and the related transaction costs. Pursuant to the Indenture, these net proceeds were deposited in the Trust's Property Acquisition Account. The estimated net loss on the sale of Royal Lane Business Park of $931,000 has been reflected in the December 31, 1992 financial statements. F-19 77 SCHEDULE VIII AMERICAN INDUSTRIAL PROPERTIES REIT (FORMERLY TRAMMELL CROW REAL ESTATE INVESTORS) VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990 ($ IN THOUSANDS)
BALANCE AT ADDITIONS BALANCE BEGINNING CHARGED TO AT END OF DESCRIPTION OF PERIOD EXPENSE DEDUCTIONS PERIOD - ------------------------------------------------- --------- ---------- ---------- --------- 1992 Allowance for possible losses on real estate held for sale............................... $ 5,855 $4,211 $3,971 $ 6,095 --------- ---------- ---------- --------- --------- ---------- ---------- --------- Allowance for doubtful accounts................ $ 281 $ 136 $ 384 $ 33 --------- ---------- ---------- --------- --------- ---------- ---------- --------- 1991 Allowance for possible losses on real estate held for sale............................... $ -- $5,855 $ -- $ 5,855 --------- ---------- ---------- --------- --------- ---------- ---------- --------- Allowance for doubtful accounts................ $ 161 $ 172 $ 52 $ 281 --------- ---------- ---------- --------- --------- ---------- ---------- --------- 1990 Allowance for doubtful accounts................ $ 203 $ 149 $ 191 $ 161 --------- ---------- ---------- --------- --------- ---------- ---------- ---------
F-20 78 SCHEDULE XI AMERICAN INDUSTRIAL PROPERTIES REIT (FORMERLY TRAMMELL CROW REAL ESTATE INVESTORS) REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1992 ($ IN THOUSANDS)
GROSS AMOUNT GROSS AMOUNT CARRIED CARRIED AT ACQUISITION SUBSEQUENT RETIREMENTS AT --------------------- COSTS --------------------- WRITEDOWNS DECEMBER BUILDINGS CAPITALIZED BUILDINGS DUE TO 31, 1992 ENCUMBRANCES AND ------------ AND PERMANENT ------- DESCRIPTION AT 12/31/92 LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS IMPAIRMENT LAND - ------------------------------------------------- ------- ------------ ------------ ------- ------------ ---------- ------- INDUSTRIAL PROPERTIES: TEXAS -- Commerce Park North................ $ 1,108 $ 4,431 $ 301 $ 1,108 Westchase.......................... 697 2,787 139 (46) 697 Plaza Southwest.................... 1,312 5,248 402 (1) 1,312 Southland I & II................... 2,182 8,727 292 (2,182) (9,019) 0 Beltline Center.................... 1,303 5,213 286 (3,516) 600 Gateway 5 & 6...................... 935 3,741 466 (1,861) 563 Northgate II....................... 2,153 8,612 585 (4,122) 1,329 Royal Lane Park.................... 4,654 2,122 8,489 318 2,122 CALIFORNIA -- Huntington Drive................... 1,559 6,237 400 1,559 NORTH CAROLINA -- Woodland........................... 6,522 26,087 1,576 (6,522) (27,663) 0 MARYLAND -- Patapsco I & II.................... 1,461 1,147 4,588 190 1,147 MINNESOTA -- Cahill............................. 625 2,498 283 625 Burnsville......................... 2,140 761 3,045 307 (1,563) 448 WASHINGTON -- Springbrook........................ 1,008 4,032 215 1,008 WISCONSIN -- Northwest.......................... 1,359 1,296 5,184 348 (131) 1,296 FLORIDA -- Quadrant........................... 1,200 1,137 4,549 69 (63) (2,337) 670 RETAIL PROPERTY: COLORADO -- Tamarac Square..................... 1,258 6,799 27,194 3,652 6,799 ------------ ------- ------------ ------ ------- ------------ ---------- ------- 12,072 $32,666 $130,662 $9,829 $(8,704) $(36,923) $(13,399) $21,282 ------- ------------ ------ ------- ------------ ---------- ------- ------- ------------ ------ ------- ------------ ---------- ------- ZERO COUPON NOTES.................... 11,267 8.8% NOTES PAYABLE................... 45,239 ------------ $ 68,578 ------------ ------------
GROSS AMOUNT BUILDINGS & CARRIED AT CAPITAL TENANT DECEMBER 31, 1992 IMPROVEMENTS IMPROVEMENTS ----------------- LIFE ON LIFE ON BUILDINGS WHICH WHICH AND ACCUMULATED DATE OF DATE DEPRECIATION DEPRECIATION DESCRIPTION IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED IS COMPUTED - ------------------------------------- ------------ -------- ----------- ------------- -------- ------------ ------------ INDUSTRIAL PROPERTIES: TEXAS -- Commerce Park North................ $ 4,732 $ 5,840 $ 813 1984 1985 40 10 Westchase.......................... 2,880 3,577 511 1983 1985 40 10 Plaza Southwest.................... 5,649 6,961 1,043 1970-74 1985 40 10 Southland I & II................... 0 0 0 1975-78 1985 40 10 Beltline Center.................... 2,686 3,286 925 1984 1985 40 10 Gateway 5 & 6...................... 2,718 3,281 753 1984-85 1985 40 10 Northgate II....................... 5,899 7,228 1,652 1982-83 1985 40 10 Royal Lane Park.................... 8,807 10,929 1,548 1980-81 1985 40 10 CALIFORNIA -- Huntington Drive................... 6,637 8,196 1,156 1984-85 1985 40 10 NORTH CAROLINA -- Woodland........................... 0 0 0 1981-85 1985 40 10 MARYLAND -- Patapsco I & II.................... 4,778 5,925 849 1980-84 1985 40 10 MINNESOTA -- Cahill............................. 2,781 3,406 523 1981 1986 40 10 Burnsville......................... 2,102 2,550 612 1984 1986 40 10 WASHINGTON -- Springbrook........................ 4,247 5,255 748 1984 1986 40 10 WISCONSIN -- Northwest.......................... 5,401 6,697 948 1983-86 1986 40 10 FLORIDA -- Quadrant........................... 2,685 3,355 713 1984-86 1986 40 10 RETAIL PROPERTY: COLORADO -- Tamarac Square..................... 30,846 37,645 5,242 1976-79 1985 40 10 ------------ -------- ----------- $ 92,849 $114,131 $18,036 ------------ -------- ----------- ------------ -------- ----------- ZERO COUPON NOTES.................... 8.8% NOTES PAYABLE...................
F-21 79 AMERICAN INDUSTRIAL PROPERTIES REIT (FORMERLY TRAMMELL CROW REAL ESTATE INVESTORS) NOTES TO SCHEDULE XI DECEMBER 31, 1992 (1) ACQUISITIONS: All of the real estate on Schedule XI was acquired for cash, subject to certain encumbrances shown therein, from TCC Entities. (2) RECONCILIATION OF REAL ESTATE: The following table reconciles the Trust's real estate for the years ended December 31, 1992 and 1991.
($ IN THOUSANDS) ---------------------- 1992 1991 --------- --------- Balance at beginning of period................................. $ 165,696 $ 168,100 Additions during period:....................................... 3,945 1,112 --------- --------- Improvements................................................. 169,641 169,212 Deductions during period: Cost of real estate sold..................................... 45,386 -- Writedowns for permanent impairment of value................. 9,883 3,516 Other -- asset retirements................................... 241 -- --------- --------- Balance at close of period..................................... $ 114,131 $ 165,696 --------- --------- --------- ---------
(3) REAL ESTATE, WRITEDOWNS FOR PERMANENT IMPAIRMENT AND PROVISION FOR POSSIBLE LOSSES ON REAL ESTATE. The Trust carries its real estate at historical cost net of depreciation, writedowns for permanent impairment and allowances for possible losses. Writedowns for permanent impairment are recorded when management determines the recorded value of real estate Held for Investment will not be recovered over the asset's or the Trust's remaining life or to reduce the depreciated cost of real estate Held for Sale to net realizable value. Real estate Held for Investment is reclassified to real estate Held for Sale when management determines that there is a reasonable probability that an asset will no longer be held for long-term investment and activities begin to offer the property for sale. Any provisions for possible losses to reduce the depreciated cost of the property to net realizable value are made when the reclassification occurs. For the years ended December 31, 1992 and 1991, provisions of $14,094,000 and $9,371,000, respectively, have been recorded. (4) RECONCILIATION OF ACCUMULATED DEPRECIATION: The following table reconciles the accumulated depreciation for the years ended December 31, 1992 and 1991.
($ IN THOUSANDS) -------------------- 1992 1991 -------- -------- Balance at beginning of period................................... $ 20,804 $ 17,133 Additions during period:......................................... 3,721 3,671 -------- -------- Depreciation provision for period.............................. 24,525 20,804 Deductions during period: Accumulated depreciation of real estate sold................... 6,426 -- Other -- asset retirements..................................... 63 -- -------- -------- Balance at close of period....................................... $ 18,036 $ 20,804 -------- -------- -------- --------
F-22 80 (5) TAX BASIS: The cost basis of the Trust's real estate for tax purposes at December 31, 1992 is $135,786,000. The basis reported under generally accepted accounting principles has been reduced by the aggregate amounts collected under developers' leases, less management fees paid on such developers' leases, and by reductions for the permanent impairment of real estate Held for Investment and allowances for possible losses on real estate Held for Sale. F-23 81 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER ("Merger Agreement") dated as of , 1994, is entered into by and between American Industrial Properties REIT, Inc., a Maryland corporation (the "Company") and American Industrial Properties REIT, a real estate investment trust formed under the Texas Real Estate Investment Trust Act (the "Trust"). RECITALS 1. The Company is a corporation duly organized on January 12, 1994, and existing under the laws of the State of Maryland. The principal office of the Company in Maryland is c/o The Corporation Trust Incorporated, 32 South Street, Baltimore, Baltimore City County, Maryland 21202. 2. The Trust is a real estate investment trust duly organized on September 26, 1985, and existing under the laws of the State of Texas. The predecessor of the Trust, Trammell Crow Real Estate Investors, was qualified to do business in Maryland on November 25, 1985. The principal office of the Trust in Maryland is c/o The Prentice-Hall Corporation, 11 East Chase Street, Baltimore, Maryland 21202-0000. The Trust owns property in Baltimore City County, Maryland. 3. On the date of this Merger Agreement, the Company has authority to issue 50,000,000 shares of Common Stock, $.01 par value per share, (the "Common Stock"), of which 100 shares are issued and outstanding and 10,000,000 of Preferred Stock, $.01 par value per share, none of which are issued or outstanding. The aggregate par value of all the shares of all classes is $600,000. 4. On the date of this Merger Agreement, the Trust has authority to issue 10,000,000 shares of beneficial interest, $.01 par value per share, (the "Shares"), with 9,475,400 Shares issued and outstanding. 5. The Board of Directors of the Company and the Trust Managers have determined that it is advisable and in the best interests of the stockholders and the shareholders, respectively, that the Trust merge with and into the Company upon the terms and subject to the conditions of this Merger Agreement for the purpose of effecting the incorporation of the Trust in the State of Maryland. 6. The Board of Directors of the Company and the Trust Managers have, by resolutions duly adopted, approved this Merger Agreement. The Trust, acting through the Trust Managers, has approved this Merger Agreement as the sole stockholder of the Company. The Trust Managers have directed that this Merger Agreement be submitted to a vote of its Shareholders, 66 2/3% of whom must approve this Merger Agreement for it to become effective. 7. The parties intend by this Merger Agreement to effect a "reorganization" under Section 368 of the Internal Revenue Code of 1986, as amended. AGREEMENT In consideration of the promises and agreements set forth herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Merger. The Trust shall be merged with and into the Company (the "Merger"), and the Company shall be the surviving corporation (hereinafter sometimes referred to as the "Surviving Corporation"). The name of the Surviving Corporation shall remain the same and shall be American Industrial Properties REIT, Inc., which is the name currently set forth in the Charter of the Surviving Corporation. The Merger shall become effective upon the time and date of issuance of a Certificate of Merger by the Secretary of State of the State of Maryland and the filing of such other documents as may be required under applicable law (the "Effective Time"). A-1 82 2. Governing Documents. (a) The Charter of the Company, as it may be amended or restated, and as in effect immediately prior to the Effective Time, shall be the Charter of the Surviving Corporation without further change or amendment until thereafter amended in accordance with the provisions thereof and applicable law. (b) The Bylaws of the Company as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation without change or amendment until thereafter amended in accordance with the provisions thereof and applicable law. 3. Officers and Directors. The persons who are executive officers of the Company immediately prior to the Effective Time shall, after the Effective Time, be the executive officers of the Surviving Corporation, without change until their successors have been duly elected and qualified. Mr. Raymond H. Hay and two of the Trust Managers of the Trust, Messrs. Charles W. Wolcott and W.H. Bricker, will serve as directors of the Surviving Corporation. The directors shall be classified into three classes in accordance with the Charter and Bylaws of the Surviving Corporation. 4. Succession. At the Effective Time, the separate corporate existence of the Trust shall cease, and the Surviving Corporation shall possess all the rights, privileges, powers and franchise of a public and private nature and be subject to all the restrictions, disabilities and duties of the Trust; and all rights, privileges, powers and franchises of the Trust, and all property, real, personal and mixed, and all debts due to the Trust on whatever account, as well as for Share subscriptions and all other things in action, shall be vested in the Surviving Corporation; and all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter the property of the Surviving Corporation as they were of the Trust, and the title to any real estate vested by deed or otherwise shall not revert or be in any way impaired by reason of the Merger; but all rights of creditors and all liens upon any property of the Trust shall be preserved unimpaired, and all debts, liabilities and duties of the Trust shall thenceforth attach to the Surviving Corporation and may be enforced against it to the same extent as if such debts, liabilities and duties had been incurred or contracted by it. All acts, plans, policies, agreements, arrangements, approvals and authorizations of the Trust, its Shareholders, Trust Managers and committees thereof, officers and agents which were valid and effective immediately prior to the Effective Time, shall be taken for all purposes as the acts, plans, policies, agreements, arrangements, approvals and authorizations of the Surviving Corporation and shall be as effective and binding thereon as the same were with respect to the Trust. The employees and agents of the Trust shall become the employees and agents of the Surviving Corporation and shall continue to be entitled to the same rights and benefits which they enjoyed as employees and agents of the Trust. 5. Further Assurances. From time to time, as and when required by the Surviving Corporation or by its successors and assigns, there shall be executed and delivered on behalf of the Trust such deeds, assignments and other instruments, and there shall be taken or caused to be taken by it all such further and other action, as shall be appropriate or necessary in order to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation the title to and possession of all property, interests, assets, rights, privileges, immunities, powers, franchises and authority of the Trust and otherwise to carry out the purposes of this Merger Agreement, and the officers and directors of the Surviving Corporation are fully authorized in the name and on behalf of the Trust or otherwise, to take any and all such action and to execute and deliver any and all such deeds, assignments and other instruments. 6. Conversion of Shares. At the Effective Time, by virtue of the Merger and without any action on the part of the holder thereof: (a) Each five Shares outstanding immediately prior to the Effective Time shall be changed and converted into and shall be one fully paid and nonassessable share of Common Stock. (b) Persons that will hold a fractional share in the Company after the Merger must either (i) pay to the Company an amount equal to the fraction necessary to round upward to a whole share of Common Stock times the opening price of the Company's Common Stock on the first trading date after the consummation of the Merger (the "Opening Price") and the fractional share shall be rounded upward to the nearest whole share of Common Stock or (ii) permit the Company to repurchase the fractional share at a price equal to the fraction owned times the Opening Price. A-2 83 (c) Persons holding fewer than 10 shares of Common Stock after the Merger must either (i) be cashed out by the Company at a price equal to the number of shares of Common Stock owned times the Opening Price or (ii) purchase from the Company the number of shares of Common Stock necessary to bring the Stockholder's ownership up to 10 shares of Common Stock, at a purchase price per share equal to the Opening Price. (d) The 100 shares of Common Stock issued and outstanding in the name of the Trust shall be cancelled and retired and resume the status of authorized and unissued shares of Common Stock. 7. Stock Certificates. At and after the Effective Time, all of the outstanding certificates which immediately prior to the Effective Time represented Shares shall be deemed for all purposes to evidence ownership of, and to represent shares of, Common Stock into which the Shares formerly represented by such certificates have been converted as herein provided. The registered owner on the books and records of the Trust or its transfer agent of any such outstanding stock certificate shall, until such certificate shall have been surrendered for transfer or otherwise accounted for to the Surviving Corporation or its transfer agent, have and be entitled to exercise any voting and other rights with respect to and to receive any dividends and other distributions upon the shares of Common Stock evidenced by such outstanding certificate as above provided. 8. 401(k) Plan. As of the Effective Time, the Surviving Corporation hereby assumes all obligations of the Trust under the Trust's Retirement and Profit Sharing Plan in effect as of the Effective Time. 9. Conditions. Consummation of the Merger and related transactions is subject to satisfaction of the following conditions prior to the Effective Time: (a) The Merger shall have been approved by the requisite number of holders of Trust Shares and the Company Stock and all necessary action shall have been taken to authorize the execution, delivery and performance of this Merger Agreement by the Trust and the Company. (b) All regulatory approvals necessary in connection with the consummation of the Merger and the transactions contemplated thereby shall have been obtained. (c) No suit, action, proceeding or other litigation shall have been commenced or threatened to be commenced which, in the opinion of the Trust or the Company would pose a material restriction on or impair consummation of the Merger, performance of this Merger Agreement or the conduct of the business of the Company after the Effective Time, or create a risk of subjecting the Trust or the Company, or their respective Shareholders, Stockholders, officers, or directors, to material damages, costs, liability or other relief in connection with the Merger or this Merger Agreement. (d) The shares of Common Stock to be issued or reserved for issuance shall, if required, have been approved for listing on the New York Stock Exchange or such other national securities exchange or national market system as the Board of Directors of the Company may designate, upon official notice of issuance by such exchange. 10. Governing Law. This Merger Agreement was negotiated in and is performable in the State of Texas and shall be governed by and construed in accordance with the laws of the State of Texas applicable to contracts entered into and to be performed within the State of Texas, except to the extent that the laws of the State of Maryland are mandatorily applicable to the Merger. 11. Amendment. Subject to applicable law and subject to the rights of the Shareholders further to approve any amendment which would have a material adverse effect on the Shareholders, this Merger Agreement may be amended, modified or supplemented by written agreement of the parties hereto at any time prior to the Effective Time with respect to any of the terms contained herein. 12. Deferral or Abandonment. At any time prior to the Effective Time and in accordance with the provisions of Maryland and Texas law, this Merger Agreement may be terminated and the Merger may be abandoned or the time of consummation of the Merger may be deferred for a reasonable time by the Board of Directors of the Company or the Trust Managers or both, notwithstanding approval of this Merger Agreement by the Shareholders or the Stockholders of the Company, or both, if circumstances arise which, in the opinion A-3 84 of the Board of Directors of the Company or the Trust Managers, make the Merger inadvisable or such deferral of the time of consummation advisable. 13. Counterparts. This Merger Agreement may be executed in any number of counterparts each of which when taken alone shall constitute an original instrument and when taken together shall constitute but one and the same Agreement. 14. Assurances. The Trust and the Company agree to execute any and all documents, and to perform such other acts, which may be necessary or expedient to further the purposes of this Merger Agreement. IN WITNESS WHEREOF, the Trust and the Company have caused this Merger Agreement to be signed by their respective duly authorized officers and delivered this day of , 1994. AMERICAN INDUSTRIAL PROPERTIES REIT Charles W. Wolcott, President and Chief Executive Officer AMERICAN INDUSTRIAL PROPERTIES REIT, INC. Charles W. Wolcott, President A-4 85 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROXY STATEMENT/PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, THE SECURITIES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Proxy Statement/Prospectus Summary............ 5 Risk Factors.................................. 12 The Proposal.................................. 16 The Special Meeting........................... 19 The Company................................... 20 The Properties................................ 23 Policies With Respect to Certain Activities... 27 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 29 Security Ownership of Certain Beneficial Owners and Managers......................... 33 Management.................................... 33 Summary Comparison of Shares of Beneficial Interest and Common Stock................... 38 The Company's Securities...................... 40 Certain Statutory and Charter Provisions...... 44 Federal Income Tax Considerations............. 47 Experts....................................... 52 Legal Matters................................. 52 Stockholder Proposals......................... 52 Additional Information........................ 52 Glossary...................................... 53 Index to Financial Statements................. F-1 Agreement and Plan of Merger.................. A-1
------------------------ UNTIL , 1994 (25 DAYS AFTER THE DATE OF THIS PROXY STATEMENT/PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROXY STATEMENT/PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROXY STATEMENT/PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- AMERICAN INDUSTRIAL PROPERTIES REIT, INC. 1,915,080 SHARES OF COMMON STOCK ------------------------ PROXY STATEMENT/PROSPECTUS ------------------------ , 1994 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 86 PART II INFORMATION NOT REQUIRED IN PROXY STATEMENT/PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Articles of Incorporation (the "Articles") and Bylaws of the Company (the "Bylaws") provide certain limitations on the liability of the Company's directors and officers for monetary damages. The Articles and the Bylaws obligate the Company to indemnify its directors and officers, and permit the Company to indemnify its employees and other agents, against certain liabilities incurred in connection with their service in such capacities. These provisions could reduce the legal remedies available to the Company and the Stockholders against these individuals. The Articles require it to indemnify (a) any person or former director or officer who has been successful, on the merits or otherwise, in the defense of a proceeding to which he was made a party by reason of his service in that capacity, against reasonable expenses incurred by him in connection with the proceeding; and (b) any present or former director or officer against any claim or liability unless it is established that (i) his act or omission was committed in bad faith or was the result of active or deliberate dishonesty; (ii) he actually received an improper personal benefit in money, property or services; or (iii) in the case of a criminal proceeding, he had reasonable cause to believe that his act or omission was unlawful. In addition, the Articles require it to pay or reimburse, in advance of final disposition of a proceeding, reasonable expenses incurred by a director or officer made a party to a proceeding by reason of his service as a director or officer under procedures provided for under the Maryland General Corporation Law ("MGCL") and the Bylaws also (i) permit the Company to provide indemnification and advance expenses to a present or former director or officer who served a predecessor of the Company in such capacity, and to any employee or agent of the Company or a predecessor of the Company; (ii) provide that any indemnification or payment or reimbursement of the expenses permitted by the Bylaws shall be furnished in accordance with the procedures provided for indemnification and payment or reimbursement of expenses under Section 2-418 of the MGCL for directors of Maryland corporations; and (iii) permit the Company to provide such other and further indemnification or payment or reimbursement of expenses as may be permitted by Section 2-418 of the MGCL for directors of Maryland corporations. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits:
EXHIBIT NO. DESCRIPTION ------- ----------- *3.1 -- Articles of Incorporation the Company *3.2 -- Bylaws of the Company 4.1 -- Form of Certificate representing Common Stock of the Company *5.1 -- Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. as to legality of the Common Stock *8.1 -- Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. as to certain tax matters 10.1 -- Employment Agreement between the Company and Charles W. Wolcott 10.2 -- Employment Agreement between the Company and Mark A. O'Brien 10.3 -- Employment Agreement between the Company and David B. Warner 10.5 -- Omnibus Common Stock Incentive Plan *10.6 -- Indenture dated as of November 15, 1985, between the Trust and IBJ Schroder Bank & Trust Company 10.7 -- 401(K) Retirement and Profit Sharing Plan *10.8 -- Note Purchase Agreement dated February 27, 1992, between the Trust and Manufacturers Life Insurance Company *24.2 -- Consent of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. (included in Exhibit 5.1) *24.3 -- Consent of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. (included in Exhibit 8.1)
II-1 87
EXHIBIT NO. DESCRIPTION ------- ----------- *24.4 -- Consent of Kenneth Leventhal & Company, independent accountants *25.1 -- Power of Attorney (included on the signature pages of the Registration Statement) *28.1 -- Form of Proxy Card *28.2 -- Notice of Special Meeting
- --------------- * Filed herewith. (b) Financial Statement Schedules. None. (c) Reports, Opinions or Appraisals. None Required. ITEM 22. UNDERTAKINGS. (1) The undersigned registrant hereby undertakes: (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (b) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (2) The undersigned registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through the use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by person who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (3) The registrant undertakes that every prospectus (i) that is filed pursuant to paragraph (2) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (4) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such II-2 88 indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (5) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (6) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-3 89 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on January 20, 1994. AMERICAN INDUSTRIAL PROPERTIES REIT, INC. /s/ CHARLES W. WOLCOTT Charles W. Wolcott, President and Chief Executive Officer, Director KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors of American Industrial Properties REIT, Inc. hereby severally constitute Charles W. Wolcott and Mark A. O'Brien and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below the Registration Statement filed herewith and any and all amendments to said Registration Statement, and generally to do all such things in our names and in our capacities as officers and directors to enable American Industrial Properties REIT, Inc. to comply with the Securities Act of 1933, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to said Registration Statement and any and all amendments thereto. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE - ----------------------------------------------- ---------------------------- ----------------- /s/ CHARLES W. WOLCOTT President and Chief January 19, 1994 Charles W. Wolcott Executive Officer, Director (principal executive officer) /s/ DAVID B. WARNER Vice President and Chief January 19, 1994 David B. Warner Operating Officer /s/ MARK A. O'BRIEN Vice President and Chief January 19, 1994 Mark A. O'Brien Financial Officer, Secretary and Treasurer (principal financial officer) Director January 19, 1994 W. H. Bricker /s/ RAYMOND H. HAY Director January 19, 1994 Raymond H. Hay
II-4 90 INDEX TO EXHIBITS
EXHIBIT SEQUENTIAL NO. DESCRIPTION PAGE NUMBER - ---------------------------------------------------------------------------------- ----------- *3.1 -- Articles of Incorporation CE *3.2 -- Bylaws of the Company CE 4.1 -- Form of Certificate representing Common Stock of the Company *5.1 -- Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. as to legality of the Common Stock CE *8.1 -- Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. as to certain tax matters CE 10.1 -- Employment Agreement between the Company and Charles W. Wolcott 10.2 -- Employment Agreement between the Company and Mark A. O'Brien 10.3 -- Employment Agreement between the Company and David B. Warner 10.5 -- Omnibus Common Stock Incentive Plan *10.6 -- Indenture dated as of November 15, 1985, between the Trust and IBJ Schroder Bank & Trust Company CE 10.7 -- 401(K) Retirement and Profit Sharing Plan *10.8 -- Note Purchase Agreement dated February 27, 1992, between the Trust and Manufacturers Life Insurance Company CE *24.2 -- Consent of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. (included in Exhibit 5.1) CE *24.3 -- Consent of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. (included in Exhibit 8.1) CE *24.4 -- Consent of Kenneth Leventhal & Company, independent accountants CE *25.1 -- Power of Attorney (included on the signature pages of the Registration Statement) CE *28.1 -- Form of Proxy Card CE *28.2 -- Notice of Special Meeting CE
- --------------- * Filed herewith. EX-3.1 2 ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 STATE OF MARYLAND DEPARTMENT OF ASSESSMENTS AND TAXATION 301 West Preston Street Baltimore, Maryland 21201 DATE: JANUARY 13, 1994 THIS IS TO ADVISE YOU THAT THE ARTICLES OF INCORPORATION FOR AMERICAN INDUSTRIAL PROPERTIES REIT, INC. WERE RECEIVED AND APPROVED FOR RECORD ON JANUARY 12, 1994 AT 10:17 AM. FEE PAID: 170.00 {STATE SEAL} PAUL B. ANDERSON CORPORATE ADMINISTRATOR AT5-031 2 ARTICLES OF INCORPORATION OF AMERICAN INDUSTRIAL PROPERTIES REIT, INC. ARTICLE I INCORPORATION The undersigned, Audrey T. Andrews, whose office address is 2200 Ross Avenue, Suite 900, Dallas, Texas 75201, being at least eighteen (18) years of age, does hereby form a corporation (the "Corporation") under the general laws of the State of Maryland. ARTICLE II NAME The name of the Corporation is American Industrial Properties REIT, Inc. ARTICLE III PURPOSES 3.1 General Purpose. The purpose for which the Corporation is formed and the business or objects to be carried on and promoted by it, within the State of Maryland or elsewhere, is to engage in any lawful act or activity for which corporations may be formed under the Maryland General Corporation Law, as amended from time to time (the "MGCL"). 3.2 REIT Purpose. Without limiting the generality of the foregoing purpose, business and objects, at such time or times as the Board of Directors of the Corporation (the "Board of Directors") determines that it is in the interests of the Corporation and its stockholders that the Corporation engage in the business of, and conduct its business and affairs so as to qualify as, a real estate investment trust (as that phrase is defined in the Internal Revenue Code of 1986, as amended (the "Code")), the purpose of the Corporation shall include engaging in the business of a real estate investment trust ("REIT"). This reference to such purpose shall not make unlawful or unauthorized any otherwise lawful act or activity that the Corporation may take that is inconsistent with such purpose. ARTICLE IV PRINCIPAL OFFICE ADDRESS The address of the principal office of the Corporation in the State of Maryland is c/o The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202. 3 ARTICLE V RESIDENT AGENT The Resident Agent of the Corporation is The Corporation Trust Incorporated, whose address is 32 South Street, Baltimore, Maryland 21202. Said Resident Agent is a Maryland corporation. ARTICLE VI BOARD OF DIRECTORS 6.1 Number of Directors. The Corporation shall have a Board of Directors consisting of three (3) Directors, which number may be increased or decreased in accordance with the Bylaws of the Corporation, but shall not be less than the number required by Section 2-402 of the MGCL. The following individuals shall act as Directors until the first annual meeting of the stockholders of the Corporation or until their successors are duly elected and qualified: W. H. Bricker Raymond H. Hay Charles W. Wolcott 6.2 Classification of Directors. The Board of Directors of the Corporation shall be divided into three classes, each class to consist as nearly as possible of one-third of the Directors. The term of office of one class of Directors shall expire each year. The initial term of office of the first class shall expire at the 1995 annual meeting of stockholders. The initial term of office of the second class shall expire at the 1996 annual meeting of stockholders. The initial term of office of the third class shall expire at the 1997 annual meeting of stockholders. Commencing with the 1995 annual meeting of stockholders, the Directors of the class elected at each annual meeting of stockholders shall hold office for a term of three years. Vacancies occurring by resignation, enlargement of the Board of Directors or otherwise shall be filled as specified in the Bylaws of the Corporation. ARTICLE VII AUTHORIZED CAPITAL STOCK; RIGHTS AND PREFERENCES; ISSUANCE OF STOCK 7.1 Authorized Capital Stock. The total number of shares of stock which the Corporation has authority to issue (the "Stock") is sixty million (60,000,000) shares, consisting of (i) fifty million (50,000,000) shares of common stock, par value $.01 per share ("Common Stock") (or shares of one or more classes of "Excess Common Stock" as provided in Section 9.5); and (ii) ten million (10,000,000) shares of preferred stock, par value $.01 per share ("Preferred Stock") (or one or more classes of "Excess Preferred Stock" as provided in Section 9.5). Excess Common Stock and Excess Preferred Stock shall be collectively referred to herein as "Excess Stock." The aggregate par value of all the shares of all classes of stock is $600,000. - 2 - 4 7.2 Common Stock. 7.2.1 Dividend Rights. The holders of shares of Common Stock shall be entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefor. 7.2.2 Rights Upon Liquidation. Subject to the rights of the holders of any shares of any series of Preferred Stock, in the event of any voluntary or involuntary liquidation, dissolution or winding up of, or any distribution of the assets of, the Corporation, each holder of shares of Common Stock shall be entitled to receive, ratably with each other holder of shares of Common Stock or Excess Common Stock, that portion of the assets of the Corporation available for distribution to the holders of its Common Stock and Excess Common Stock as the number of shares of Common Stock held by such holder bears to the total number of shares of Common Stock and Excess Common Stock then outstanding. 7.2.3 Voting Rights. The holders of shares of Common Stock shall be entitled to vote on all matters submitted to the holders of Common Stock for a vote, at all meetings of stockholders, and each holder of shares of Common Stock shall be entitled to one vote for each share of Common Stock held by such stockholder. 7.3 Preferred Stock. The Board of Directors may issue the Preferred Stock in such one or more series consisting of such numbers of shares and having such preferences, conversion and other rights, voting powers, restrictions and limitations as to dividends, qualifications and terms and conditions of redemption of stock as the Board of Directors may from time to time determine when designating such series. 7.4 Classification of Stock. The Board of Directors may classify or reclassify any unissued shares of Stock from time to time by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of those shares of Stock, including, but not limited to, the reclassification of unissued shares of Common Stock to shares of Preferred Stock or unissued shares of Preferred Stock to shares of Common Stock or the issuance of any rights plan or similar plan. 7.5 Issuance of Stock. The Board of Directors may authorize the issuance from time to time of shares of Stock of any class, whether now or hereafter authorized, or securities or rights convertible into shares of Stock, or share splits or share dividends for such consideration as the Board of Directors may deem advisable (or without consideration in the case of a share split or share dividend), and without any action by the stockholders, subject to such restrictions or limitations, if any, as may be set forth in the Bylaws of the Corporation. - 3 - 5 7.6 Stock Legend. All certificates representing shares of Stock issued by the Corporation shall bear a legend referencing the restrictions on ownership and transfer set forth in this Charter. ARTICLE VIII LIMITATION ON PREEMPTIVE RIGHTS No stockholder shall have any preferential or preemptive right to acquire additional shares of Stock, except to the extent that, and on such terms as, the Board of Directors from time to time may determine in its sole discretion. ARTICLE IX LIMITATIONS ON TRANSFER AND OWNERSHIP 9.1 Limitations on Transfer. The shares of Stock (other than Excess Stock) shall be freely transferable by the record owner thereof, subject to the provisions of Section 9.2 hereof and provided that any purported acquisition or transfer of Stock that would result in (a) the Common Stock being owned directly or indirectly by fewer than 100 persons (determined without reference to the rules of attribution under Section 544 of the Code) or (b) the Corporation being "closely held" within the meaning of Section 856(h) of the Code shall be void ab initio. Subject to the provisions of Section 9.5 hereof, any purported transfer of Stock that, if effective, would result in a violation of Section 9.2 hereof (unless excepted from the application of such Section 9.2 pursuant to Section 9.6 hereof) shall be void ab initio as to the transfer of that number of shares of Stock that would otherwise be beneficially owned by a stockholder in violation of Section 9.2 hereof, the intended transferee of such shares shall acquire no rights therein and the transfer of such shares will not be reflected on the Corporation's stock record books. For purposes of this Article IX, a "transfer" of shares of Stock shall mean any sale, transfer, gift, hypothecation, pledge, assignment or other disposition, whether voluntary or involuntary, by operation of law or otherwise. 9.2 Limitations on Ownership. Commencing on the date of the exchange of shares of Common Stock pursuant to the Corporation's first effective registration statement on Form S-4 filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Effective Date"), or such earlier time as the Board of Directors may determine, except as provided by Section 9.6 hereof, no person shall at any time directly or indirectly acquire or hold beneficial ownership of shares of Stock with an aggregate value in excess of 9.8% of the aggregate value of all outstanding Stock (the "Ownership Limit"). For purposes of this Article IX, (a) the value of any share of Stock shall be reasonably determined in the manner established by the Board of Directors and (b) a person (which includes natural persons, corporations, trusts, partnerships and other entities) shall be deemed to be the beneficial owner of the Stock that such person (i) actually owns, (ii) constructively owns after applying the rules of Section 544 of the Code, as modified in the case of a REIT by Section 856(h) of the Code, and (iii) has the right to acquire upon exercise of - 4 - 6 outstanding rights, options and warrants, and upon conversion of any securities convertible into Stock, if any. 9.3 Stockholder Information. Each stockholder shall, upon demand of the Corporation, disclose to the Corporation in writing such information with respect to his or its direct and indirect beneficial ownership of the Stock as the Board of Directors in its discretion deems necessary or appropriate in order that the Corporation may fully comply with all provisions of the Code relating to REITs and all regulations, rulings and cases promulgated or decided thereunder (the "REIT Provisions") and to comply with the requirements of any taxing authority or governmental agency. All persons who have acquired or who hold, directly or indirectly, beneficial ownership of shares of Stock with an aggregate value in excess of 9.8% of the aggregate value of all outstanding Stock must disclose in writing such ownership information to the Corporation no later than January 31 of each year. 9.4 Transferee Information. No later than the 50th day prior to any transfer which, if effected, would result in the intended transferee owning shares in excess of the Ownership Limit, the intended transferee shall provide to the Board if Directors an affidavit setting forth the number of shares of Stock already beneficially owned by such intended transferee. In addition, whenever the Board of Directors deems it reasonably necessary to protect the tax status of the Corporation as a REIT under the REIT Provisions, the Board of Directors may require a statement or affidavit from each stockholder setting forth the number of shares of Stock beneficially owned by such stockholder. Subject to the terms of Section 9.10 hereof, if, in the opinion of the Board of Directors, any proposed transfer may jeopardize the qualification of the Corporation as a REIT, the Board of Directors shall have the right, but not the duty, to refuse to permit the transfer of such Stock to the proposed transferee. All contracts for the sale or other transfer of stock shall be subject to this Section 9.4. 9.5 Excess Stock. 9.5.1 Creation of Excess Stock. If, notwithstanding the other provisions contained in this Article IX, at any time after the Effective Date there is a purported transfer of Stock or a change in the capital structure of the Corporation (including any redemption of Excess Stock pursuant to subsection 9.5.7 hereof) such that any person would beneficially own Stock in excess of the Ownership Limit then, except as otherwise provided in Section 9.6 hereof, such shares of Stock in excess of the Ownership Limit (rounded up to the nearest whole share), shall be automatically deemed an equal number of shares of Excess Stock. 9.5.2 Ownership in Trust. Upon any purported transfer of Stock that results in Excess Stock pursuant to subsection 9.5.1 hereof, such Excess Stock shall be deemed to have been transferred to the Corporation, as trustee of a separate trust for the exclusive benefit of the person or persons to whom such Excess Stock can ultimately be transferred without violating the Ownership Limit. Shares of Excess Stock so held in trust shall be issued and outstanding Stock of the Corporation under the MGCL. The purported transferee of Excess Stock shall have no rights in such Excess Stock, except the right to - 5 - 7 designate a transferee of its interest in the trust created under this subsection 9.5.2 upon the terms specified in subsection 9.5.6 hereof. If any of the restrictions on transfer set forth in this Article IX are determined to be void, invalid or unenforceable by virtue of any legal decision, statute, rule or regulation, then the intended transferee of any Excess Stock may be deemed, at the option of the Corporation, to have acted as an agent on behalf of the Corporation in acquiring the Excess Stock and to hold the Excess Stock on behalf of the Corporation. 9.5.3 Dividend Rights. Excess Stock shall not be entitled to any dividends. Any dividend or distribution paid prior to the discovery by the Corporation that shares of Stock have been deemed Excess Stock shall be repaid to the Corporation upon demand, and any dividend or distribution declared but unpaid shall be rescinded as void ab initio with respect to such shares of Excess Stock. 9.5.4 Rights Upon Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of, or any distribution of the assets of, the Corporation, each holder of shares of Excess Common Stock shall be entitled to receive, ratably with each other holder of shares of Common Stock or Excess Common Stock, that portion of the assets of the Corporation available for distribution to the holders of shares of Excess Common Stock as the number of shares of Excess Common Stock held by such holder bears to the total number of shares of Common Stock and Excess Common Stock then outstanding. In the event of any voluntary liquidation, dissolution or winding up of, or any distribution of the assets of, the Corporation, each holder of shares of Excess Preferred Stock shall be entitled to receive the pro rata share of the assets of the Corporation available for distribution to the holders of Preferred Stock of the series from which such Excess Stock was created. The Corporation, as the holder of all Excess Stock in one or more trusts, or, if the Corporation shall have been dissolved, any trustee appointed by the Corporation prior to its dissolution, shall distribute to each transferee of an interest in such a trust pursuant to subsection 9.5.6 hereof, when determined, any assets received in any liquidation, dissolution or winding up of, or any distribution of the assets of, the Corporation in respect of the Excess Stock held in such trust and represented by the trust interest transferred to such transferee. 9.5.5 Voting Rights. No stockholder may vote any shares of Excess Stock. The shares of Excess Stock will not be considered for purposes of any stockholder vote or for purposes of determining a quorum for such a vote. 9.5.6 Restrictions on Transfer. Excess Stock shall not be transferable. The purported transferee of any shares of Stock that are deemed Excess Stock pursuant to subsection 9.5.1 hereof (the "Initial Transferee") may freely designate a transferee (the "Subsequent Transferee") of the interest in the trust that represents such shares of Excess Stock, if (a) the shares of Excess Stock held in the trust and represented by the trust interest to be transferred would not be Excess Stock in the hands of the Subsequent Transferee, and (b) the Initial Transferee does not receive a price for the trust interest in excess of (i) the price the Initial Transferee paid for the Stock in the purported transfer of Stock that resulted in the Excess Stock represented by the trust interest or (ii) if the - 6 - 8 Initial Transferee did not give value for such Stock (e.g., the shares were received through a gift, devise or other transaction), a price equal to the aggregate Market Price (as defined in subsection 9.5.7 hereof) for all shares of the Stock that were deemed Excess Stock on the date of the purported transfer that resulted in the Excess Stock. No interest in a trust may be transferred unless the Initial Transferee of such interest has given advance written notice to the Corporation of the designation of the Subsequent Transferee. Upon the transfer of an interest in a trust in compliance with this subsection 9.5.6, the corresponding shares of Excess Stock that are represented by the transferred interest in the trust shall be automatically deemed an equal number of shares of Stock of the same class and series from which the corresponding shares of Excess Stock were originally created, such shares of Stock shall be transferred of record to the Subsequent Transferee, and the interest in the trust representing such Excess Stock shall automatically terminate. 9.5.7 Corporation's Redemption Right. All shares of Excess Stock shall be deemed to have been offered by the Initial Transferee for sale to the Corporation, or its designee, at a price per share equal to the lesser of (a) the price per share of Stock in the transaction that created such Excess Stock (or, in the case of devise or gift, the Market Price per share of such Stock at the time of such devise or gift) or (b) the Market Price per share of Stock of the class of Stock for which such Excess Stock was created on the date the Corporation or its designee, accepts such offer. The Corporation shall have the right to accept such offer for a period ending on the earlier of (i) ninety (90) days after (a) the date of the purported transfer that resulted in such Excess Stock if the Initial Transferee notified the Corporation of such purported transfer within ten (10) days thereof or (b) the date on which the Board of Directors determines in good faith that the purported transfer resulting in Excess Stock occurred if the Corporation was not notified of the purported transfer by the Initial Transferee and (ii) the date on which the Initial Transferee gives notice of its intent to transfer its trust interest to a Subsequent Transferee. For purposes of this Article IX, "Market Price" means for any share of Stock, the average daily per share closing sales price of a share of such Stock if shares of such Stock are listed on a national securities exchange or quoted on the National Association of Securities Dealers Automated Quotation National Market System ("NASDAQ NMS"), and if such shares are not so listed or quoted, the Market Price shall be the mean between the average per share closing bid prices and the average per share closing asked prices, in each case during the 30 calendar day period ending on the business day prior to the redemption date, or if there have been no sales on a national securities exchange or on the NASDAQ NMS and no published bid and asked quotations with respect to shares of such Stock during such 30 calendar day period, the Market Price shall be the price determined by the Board of Directors in good faith. Payment of all of the amount determined as the redemption payment for Stock redeemed in accordance with this subsection 9.5.7 shall be made within 30 days of the date on which the Corporation shall have notified the Initial Transferee in writing of the Corporation's intent to exercise its redemption rights. No interest shall accrue on any redemption payment with respect to the period subsequent to the redemption date to the date of the redemption payment. Notwithstanding anything in this subsection 9.5.7 to the contrary, - 7 - 9 the Corporation's redemption rights with respect to any Excess Stock shall terminate upon any transfer of the trust interest relating thereto to a Subsequent Transferee. 9.6 Exceptions to Certain Ownership and Transfer Limitations. The Ownership Limit set forth in Section 9.2 hereof shall not apply to the following shares of Stock and such shares shall not be deemed to be Excess Stock at the times and subject to the terms and conditions set forth in this Section 9.6: 9.6.1 Exemption by Board of Directors. Subject to the provisions of Section 9.7 hereof, shares of Stock which the Board of Directors in its sole discretion may exempt from the Ownership Limit while owned by a person who has provided the Corporation with evidence and assurances acceptable to the Board of Directors that the qualification of the Corporation as a REIT would not be jeopardized thereby. 9.6.2 Stock Held by Underwriters. Subject to the provisions of Section 9.7 hereof, shares of Stock acquired and held by an underwriter in a public offering of Stock, or in any transaction involving the issuance of Stock by the Corporation in which the Board of Directors determines that the underwriter or other person or party initially acquiring such Stock will make a timely distribution of such Stock to or among other holders such that, at all times prior to and following such distribution, the Corporation will continue to be in compliance with the REIT Provisions. 9.6.3 All Cash Tender Offers. Subject to the provisions of Article XIII hereof, shares of Stock acquired pursuant to an all cash tender offer made for all outstanding shares of Stock of the Corporation in conformity with applicable federal and state securities laws where not less than two-thirds of the outstanding Stock (not including Stock or securities convertible into Stock held by the tender offeror and/or any "affiliates" or "associates" thereof within the meaning of the Securities Exchange Act of 1934, as amended) is duly tendered and accepted pursuant to the cash tender offer and where the tender offeror commits to such tender offer, if the tender offer is so accepted by holders of such two-thirds of the outstanding Stock, as promptly as practicable thereafter to give any holders who did not accept such tender offer a reasonable opportunity to put their Stock to the tender offeror at a price not less than the price per share paid for Stock tendered pursuant to the tender offer. 9.6.4 Shares Issued to Texas REIT. Shares of Stock issued by the Corporation to American Industrial Properties REIT, a Texas real estate investment trust (the "Texas REIT"). 9.7 Authority to Revoke Exceptions to Limitations. The Board of Directors, in its sole discretion, may at any time revoke any exception pursuant to subsection 9.6.1 or 9.6.2 hereof in the case of any stockholder, and upon such revocation, the provisions of Sections 9.2 and 9.5 hereof shall immediately become applicable to such stockholder and all Stock of which such stockholder may be the beneficial owner. A decision to exempt or refuse to exempt from the Ownership Limit the ownership of certain designated shares of Stock, or to revoke an exemption previously granted, shall be made by the Board of Directors in its sole discretion, - 8 - 10 based on any reason whatsoever, including, but not limited to, the preservation of the Corporation's qualification as a REIT. 9.8 Severability. If any provision of this Article IX or any application of any such provision is determined to be invalid by any federal or state court having jurisdiction, the validity of the remaining provisions of this Article IX shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court. To the extent this Article IX may be inconsistent with any other provision of this Charter, this Article IX shall be controlling. 9.9 Authority of the Board of Directors. Subject to Section 9.10 hereof, nothing contained in this Article IX or in any other provisions of this Charter shall limit the authority of the Board of Directors to take such action as it deems necessary or advisable to protect the Corporation and the interests of the stockholders by preservation of the Corporation's qualification as a REIT under the REIT Provisions, provided that no such action may be taken to amend or delete Section 9.10 hereof. In applying the provisions of this Article IX, the Board of Directors may take into account the lack of certainty in the REIT Provisions relating to the ownership of stock that may prevent a corporation from qualifying as a REIT and may make interpretations concerning the Ownership Limit, Excess Stock, beneficial ownership and related matters as conservatively as the Board of Directors deems advisable to minimize or eliminate uncertainty as to the Corporation's continued qualification as a REIT. Notwithstanding any other provisions of this Charter, if the Board of Directors determines that it is no longer in the best interests of the Corporation and the stockholders to continue to have the Corporation qualify as a REIT, the Board of Directors may revoke or otherwise terminate the Corporation's REIT election pursuant to Section 856(g) of the Code. 9.10 New York Stock Exchange. Nothing in this Article IX shall preclude the settlement of any transaction entered into through the facilities of the New York Stock Exchange. ARTICLE X RIGHTS AND POWERS OF CORPORATION, BOARD OF DIRECTORS AND OFFICERS In carrying on its business, or for the purpose of attaining or furthering any of its objects, the Corporation shall have all of the rights, powers and privileges granted to a corporation by the laws of the State of Maryland, as well as the power to do any and all acts and things that a natural person or partnership could do as now or hereafter authorized by law, either alone or in partnership or conjunction with others. In furtherance and not in limitation of the powers conferred by statute, the powers of the Corporation and of the Directors and stockholders shall include the following: 10.1 Certain Contracts. Any Director or officer individually, or any firm of which any Director or officer may be a member, or any corporation or association of which any Director or officer may be a director or officer or in which any Director or officer may be interested as - 9 - 11 the holder of any amount of its capital stock or otherwise, may be a party to, or may be pecuniarily or otherwise interested in, any contract or transaction of the Corporation, and in the absence of fraud, no contract or other transaction shall be thereby affected or invalidated; provided, however, that (a) such fact shall have been disclosed or shall have been known to the Board of Directors or the committee thereof that authorized, approved or ratified such contract or transaction and such contract or transaction shall have been approved or satisfied by the affirmative vote of a majority of the disinterested Directors, or (b) such fact shall have been disclosed or shall have been known to the stockholders entitled to vote, and such contract or transaction shall have been authorized, approved or ratified by a majority of the votes cast by the stockholders entitled to vote, other than the votes of shares owned of record or beneficially by the interested Director or corporation, firm or other entity, or (c) the contract or transaction is fair and reasonable to the Corporation. Any Director of the Corporation who is also a director or officer of or interested in such other corporation or association, or who, or the firm of which he is a member, is so interested, may be counted in determining the existence of a quorum at any meeting of the Board of Directors which shall authorize any such contract or transaction, with like force and effect as if he were not such director or officer of such other corporation or association or were not so interested or were not a member of a firm so interested. 10.2 Charter Amendments. The Corporation reserves the right, from time to time, to make any amendment of this Charter, now or hereafter authorized by law, including any amendment which alters the contract rights, as expressly set forth in this Charter, of any outstanding Stock. 10.3 Powers of Board of Directors. Except as otherwise provided in this Charter or the Bylaws of the Corporation, as amended from time to time, the business of the Corporation shall be managed by its Board of Directors. The Board of Directors shall have and may exercise all the rights, powers and privileges of the Corporation except only for those that are by law, this Charter or the Bylaws of the Corporation, conferred upon or reserved to the stockholders. Additionally, the Board of Directors is hereby specifically authorized and empowered from time to time in its discretion: 10.3.1 Borrowing Money and Issuance of Indebtedness. To borrow and raise money, without limit and upon any terms for any corporate purposes; and, subject to applicable law, to authorize the creation, issuance, assumption, or guaranty of bonds, debentures, notes or other evidences of indebtedness for money so borrowed, to include therein such provisions as to redeemability, convertibility or otherwise, as the Board of Directors, in its sole discretion, determines, and to secure the payment of principal, interest or sinking fund in respect thereof by mortgage upon, or the pledge of, or the conveyance or assignment in trust of, all or any part of the properties, assets and goodwill of the Corporation then owned or thereafter acquired. 10.3.2 Bylaws. To make, alter, amend, change, add to or repeal the Bylaws of the Corporation in accordance with the terms of the Bylaws adopted by the Board of Directors pursuant to Section 2-109 of the MGCL. - 10 - 12 10.3.3 Dividends. To the extent permitted by law, to declare and pay dividends or other distributions to the stockholders from time to time out of the earnings, earned surplus, paid-in surplus or capital of the Corporation, notwithstanding that such declaration may result in the reduction of the capital of the Corporation. In connection with any dividends or other distributions upon the Stock, the Corporation need not reserve any amount from such dividend or other distributions to satisfy any preferential rights of any stockholder. 10.4 Stockholder Vote Required. Notwithstanding any provision of law requiring the authorizing of any action by a greater proportion than a majority of the total number of shares of all classes of capital stock or of the total number of shares of any class of capital stock, such action shall be valid and effective if authorized by the affirmative vote of the holders of a majority of the total number of shares of all classes of Stock outstanding and entitled to vote thereon, except as otherwise provided in this Charter. ARTICLE XI INDEMNIFICATION The Corporation shall indemnify (a) its Directors and officers, whether serving the Corporation or at its request any other entity, to the fullest extent required or permitted by the General Laws of the State of Maryland now or hereafter in force, including the advancement of expenses and to the fullest extent permitted by law and (b) other employees and agents to such extent as shall be authorized by the Board of Directors or the Corporation's Bylaws and be permitted by law. The foregoing rights of indemnification shall not be exclusive of any other rights to which those seeking indemnification may be entitled. The Board of Directors may take such action as is necessary to carry out these indemnification provisions and is expressly empowered to adopt, approve and amend from time to time such Bylaws, resolutions or contracts implementing such provisions or such further indemnification arrangements as may be permitted by law. No amendment of the charter of the Corporation or repeal of any of its provisions shall limit or eliminate the right to indemnification provided hereunder with respect to acts or omissions occurring prior to such amendment or repeal. ARTICLE XII LIMITATION OF LIABILITY To the fullest extent permitted by Maryland statutory or decisional law, as amended or interpreted, no Director or officer shall be personally liable to the Corporation or its stockholders for money damages. Neither the amendment or the repeal of this Article XII, nor the adoption of any other provision in this Charter inconsistent with this Article XII, shall eliminate or reduce the protection afforded by this Article XII to a Director or officer of the Corporation with respect to any matter which occurred, or any cause of action, suit or claim which but for this Article XII would have accrued or arisen, prior to such amendment, repeal or adoption. - 11 - 13 ARTICLE XIII SPECIAL VOTING REQUIREMENTS Pursuant to Section 3-603(e)(l)(iii) of the MGCL, the Corporation expressly elects not to be governed by the provisions of Section 3-602 of the MGCL with respect to any business combination (as defined in Section 3-601 of the MGCL) involving the Texas REIT, or any present or future affiliates or associates (as such terms are defined in Section 3-601 of the MGCL) of the Texas REIT. The provisions of Title 3, Subtitle 7 of the MGCL shall not apply to the voting rights of Stock presently or in the future owned or acquired by the Texas REIT or any present or future affiliates or associates (as such terms are defined in Section 3-601 of the MGCL) of the Texas REIT. ARTICLE XIV DURATION The duration of the Corporation shall be perpetual. ARTICLE XV INDEMNIFICATION OF INCORPORATOR The Corporation shall indemnify and hold the undersigned incorporator of the Corporation harmless from and against any and all loss, cost, damage, expense (including, without limitation, attorneys' fees and expenses) for liability caused by, resulting from or arising out of any action taken or authorized by the incorporator of the Corporation in respect of the incorporation and organization of the Corporation in what she deemed to be in or not opposed to the best interests of the Corporation. - 12 - 14 IN WITNESS WHEREOF, these Articles of Incorporation were signed by Audrey T. Andrews on this 11th day of January, 1994. /s/ AUDREY T. ANDREWS __________________________________ Audrey T. Andrews Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. 2200 Ross Avenue Suite 900 Dallas, Texas 75201 - 13 - EX-3.2 3 BYLAWS OF THE COMPANY 1 EXHIBIT 3.2 BYLAWS OF AMERICAN INDUSTRIAL PROPERTIES REIT, INC. 2 BYLAWS OF AMERICAN INDUSTRIAL PROPERTIES REIT, INC. TABLE OF CONTENTS
Page ---- ARTICLE I MEETINGS OF STOCKHOLDERS 1.01 Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.02 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.03 Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.04 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.05 Scope of Notice . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.06 Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.07 Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.08 Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.09 Conduct of Meetings . . . . . . . . . . . . . . . . . . . . . . . 2 1.10 Tabulation of Votes . . . . . . . . . . . . . . . . . . . . . . . 2 1.11 Informational Action by Stockholders . . . . . . . . . . . . . . 3 1.12 Voting by Ballot . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE II DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.01 General Powers . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.02 Number, Tenure and Qualification . . . . . . . . . . . . . . . . 3 2.03 Nomination of Directors . . . . . . . . . . . . . . . . . . . . . 4 2.04 Annual and Regular Meetings . . . . . . . . . . . . . . . . . . . 4 2.05 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . 4 2.06 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.07 Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.08 Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.09 Conduct of Meetings . . . . . . . . . . . . . . . . . . . . . . . 5 2.10 Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.11 Removal of Directors . . . . . . . . . . . . . . . . . . . . . . 5 2.12 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.13 Informal Action by Directors . . . . . . . . . . . . . . . . . . 5 2.14 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE III COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.01 Number, Tenure and Qualification . . . . . . . . . . . . . . . . 6 3.02 Delegation of Power . . . . . . . . . . . . . . . . . . . . . . . 6 3.03 Quorum and Voting . . . . . . . . . . . . . . . . . . . . . . . . 6
-i- 3 TABLE OF CONTENTS (Continued)
Page ---- 3.04 Conduct of Meetings . . . . . . . . . . . . . . . . . . . . . . . 6 3.05 Informal Action by Committees . . . . . . . . . . . . . . . . . . 6 ARTICLE IV OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.01 Powers and Duties . . . . . . . . . . . . . . . . . . . . . . . . 7 4.02 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.03 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.04 Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . 7 4.05 President . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.06 Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.07 Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.08 Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.09 Assistant Secretaries and Assistant Treasurers . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.10 Subordinate Officers . . . . . . . . . . . . . . . . . . . . . . 8 4.11 Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE V SHARES OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.01 No Certificates for Stock . . . . . . . . . . . . . . . . . . . . 9 5.02 Election to Issue Certificates . . . . . . . . . . . . . . . . . 9 5.03 Stock Ledger . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.04 Recording Transfers of Stock . . . . . . . . . . . . . . . . . . 10 5.05 Lost Certificates . . . . . . . . . . . . . . . . . . . . . . . . 10 5.06 Fixing of Record Date . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE VI DIVIDENDS AND DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . 11 6.01 Declaration . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 6.02 Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE VII INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . 11 7.01 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 7.02 Non-Exclusive Right to Indemnify; Heirs and Personal Representatives . . . . . . . . . . . . . . . . . 11 7.03 No Limitations . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE VIII NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 8.01 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
-ii- 4 TABLE OF CONTENTS (Continued)
Page ---- 8.02 Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE IX MISCELLANEOUS 9.01 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . 12 9.02 Inspection of Bylaws and Corporate Records . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9.03 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9.04 Checks, Drafts, etc. . . . . . . . . . . . . . . . . . . . . . . 12 9.05 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 9.06 Annual Report . . . . . . . . . . . . . . . . . . . . . . . . . . 13 9.07 Bylaws Severable . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE X AMENDMENT OF BYLAWS 10.01 By Directors . . . . . . . . . . . . . . . . . . . . . . . . . . 13 10.02 By Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . 13 10.03 Amendment of Indemnification Provisions . . . . . . . . . . . . . 13
-iii- 5 ARTICLE I MEETINGS OF STOCKHOLDERS 1.01. PLACE. All meetings of the holders of the issued and outstanding capital stock of the Corporation (the "Stockholders") shall be held at the principal executive office of the Corporation or such other place within the United States as shall be stated in the notice of the meeting. 1.02. ANNUAL MEETING. An annual meeting of Stockholders of the Corporation shall be held in May of each year at such date and at such time as shall be designated from time to time by the Board of Directors and stated in the notice of meeting or a duly executed waiver of notice of such meeting. At each annual meeting, the Stockholders shall elect directors and transact such other business as may properly be brought before the meeting. The first annual meeting of the Corporation shall be held in May of 1995 on a date designated by the Board of Directors. 1.03. SPECIAL MEETINGS. The Chairman of the Board, the President or a majority of the Board of Directors may call special meetings of the Stockholders. Special meetings of Stockholders shall also be called by the Secretary upon the written request of the holders of shares entitled to cast 25% or more of the votes entitled to be cast at such meeting. Such request shall state the purpose or purposes of such meeting and the matters proposed to be acted on at such meeting. The date, time, place and record date for any special meeting, including a special meeting called at the request of Stockholders, shall be established by the Board of Directors or officer calling the special meeting. 1.04. NOTICE. Not less than 30 nor more than 90 calendar days before the date of every meeting of Stockholders, written or printed notice of such meeting shall be given, in accordance with Article VIII of these Bylaws, to each Stockholder entitled to vote or entitled to notice by statute, stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by statute, the purpose or purposes for which the meeting is called. Notice is given to a Stockholder when it is personally delivered to him, left at his residence or usual place of business or mailed to him at his address as it appears on the records of the Corporation. Notwithstanding the foregoing provisions, each person who is entitled to notice waives notice if before or after the meeting he signs a waiver of the notice which is filed with the records of Stockholders' meetings, or is present at the meeting in person or by proxy. 1.05. SCOPE OF NOTICE. No business shall be transacted at a special meeting of Stockholders except as specifically designated in the notice of the meeting. Any business of the Corporation may be transacted at the annual meeting without being specifically designated in the notice, except such business as is required by statute to be stated in such notice. 1.06. QUORUM. At any meeting of Stockholders, the presence in person or by proxy of Stockholders entitled to cast a majority of the votes shall constitute a quorum; but this Section 1.06 shall not affect any requirement under any statute or the Articles of Incorporation of the Corporation, as amended and/or restated (the "Charter"), for the vote necessary for the adoption 6 of any measure. If, however, a quorum is not present at any meeting of Stockholders, the Stockholders present in person or by proxy shall have the power to adjourn the meeting from time to time without notice other than announcement at the meeting until a quorum is present and the meeting so adjourned may be reconvened without further notice. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted at the meeting as originally notified. The Stockholders present at a meeting which has been duly called and convened and at which a quorum is present at the time counted may continue to transact business until adjournment, notwithstanding the withdrawal of enough Stockholders to leave less than a quorum. 1.07. VOTING. A majority of the votes cast at a meeting of Stockholders duly called and at which a quorum is present shall be sufficient to take or authorize action upon any matter which may properly come before the meeting, unless more than a majority of the votes cast is specifically required by statute, the Charter or these Bylaws and except that a plurality of all the votes cast at a meeting at which a quorum is present is sufficient to elect a Director. Stock directly or indirectly owned by the Corporation shall not be voted in any meeting and shall not be counted in determining the total number of outstanding stock entitled to vote at any given time, but shares of its own voting stock held by it in a fiduciary capacity may be voted and shall be counted in determining the total number of outstanding shares of stock at any given time. 1.08. PROXIES. A Stockholder may vote the Stock owned of record by him or her, either in person or by proxy executed in writing by the Stockholder or by his or her duly authorized attorney in fact. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after 11 months from the date of its execution, unless otherwise provided in the proxy. 1.09. CONDUCT OF MEETINGS. The Chairman of the Board, or, in the absence of the Chairman, the President or, in the absence of the Chairman and the President, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated at the time of their election or, in the absence of any such designation, then in order of their election) or, in the absence of the Chairman, President and any Vice President, a presiding officer elected at the meeting shall preside over meetings of the Stockholders. The Secretary of the Corporation, or, in the absence of the Secretary and Assistant Secretaries, the person appointed by the presiding officer at the meeting shall act as secretary of the meeting. 1.10. TABULATION OF VOTES. At any annual or special meeting of Stockholders, the presiding officer shall be authorized to appoint a teller for such meeting (the "Teller"). The Teller may, but need not, be an officer or employee of the Corporation. The Teller shall be responsible for tabulating or causing to be tabulated shares voted at the meeting and reviewing or causing to be reviewed all proxies. In tabulating votes, the Teller shall be entitled to rely in whole or in part on tabulations and analyses made by personnel of the Corporation, its counsel, its transfer agent, its registrar or such other organizations that are customarily employed to provide such services. The Teller shall be authorized to determine the legality and sufficiency of all votes cast and proxies delivered under the Charter, these Bylaws and applicable law. The 2 7 presiding officer may review all determinations made by the Teller hereunder, and in doing so the presiding officer shall be entitled to exercise his or her sole judgment and discretion and he or she shall not be bound by any determination made by the Teller. 1.11. INFORMAL ACTION BY STOCKHOLDERS. An action required or permitted to be taken at any meeting of Stockholders (other than the annual meeting of Stockholders) may be taken without a meeting if a consent in writing, setting forth such action, is signed by all the Stockholders entitled to vote on the subject matter thereof and any other Stockholders entitled to notice of a meeting of Stockholders (but not to vote thereat) have waived in writing any rights which they may have to dissent from such action, and such consents and waivers are filed with the minutes of proceedings of the Stockholders. Such consents and waivers may be signed by different Stockholders on separate counterparts. 1.12. VOTING BY BALLOT. Voting on any question or in any election may be by voice vote unless the presiding officer shall order or any Stockholder shall demand that voting be by ballot. ARTICLE II DIRECTORS 2.01. GENERAL POWERS. The business and affairs of the Corporation shall be managed by its Board of Directors. All powers of the Corporation may be exercised by or under authority of the Board of Directors, except as conferred on or reserved to the Stockholders by statute, the Charter or these Bylaws. 2.02. NUMBER, TENURE AND QUALIFICATION. The number of Directors of the Corporation shall be that number set forth in the Charter or such other number as may be designated from time to time by resolution of a majority of the entire Board of Directors; provided, however, that the number of Directors shall never be less than the number required by Section 2-402 of the Maryland General Corporation Law (the "MGCL"), as amended from time to time, and further provided that the tenure of office of a Director shall not be affected by any decrease in the number of Directors. The Board of Directors shall be divided into such classes as are set forth in the Charter, with each class to consist as nearly as possible of one-third of the Directors. Each Director shall serve for the term set forth in the Charter and until his or her successor is elected and qualified. No person shall be eligible to serve as a Director of the Corporation if such person is seventy-five years of age or older. Upon the seventy-fifth birthday of any Director (or if that day is not a business day for the Corporation, the next business day), such Director shall resign, such resignation shall create a vacancy on the Board of Directors, and the vacancy shall be filled in accordance with Section 2.12. 3 8 2.03. NOMINATION OF DIRECTORS. Nominations of candidates for election as Directors of the Corporation at any annual meeting of Stockholders may be made by, or at the direction of, a majority of the Board of Directors or by any committee of the Board of Directors established for such purpose. 2.04. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board of Directors may be held immediately after and at the same place as the annual meeting of Stockholders, or at such other time and place, either within or without the State of Maryland, as is selected by resolution of the Board of Directors, and no notice other than this Bylaw or such resolution shall be necessary. The Board of Directors may provide, by resolution, the time and place, either within or without the State of Maryland, for the holding of regular meetings of the Board of Directors without other notice other than such resolutions. 2.05. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board, or a majority of the Directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of Maryland, as the place for holding any special meeting of the Board of Directors called by them. 2.06. NOTICE. Notice of any special meeting to be provided herein shall be given by written notice delivered personally, telegraphed or telecopied to each Director at his or her business or residence at least 48 hours, or by mail at least 5 calendar days, prior to the meeting. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board of Directors need be specified in the notice, unless specifically required by statute, the Charter or these Bylaws. 2.07. QUORUM. One-third of the Board of Directors then in office constitutes a quorum for the transaction of business at any meeting of the Board of Directors; provided, however, that a quorum for the transaction of business with respect to any matter in which any Director (or affiliate of such Director) who is not an independent Director has any interest shall consist of a majority of the Directors that includes a majority of the independent Directors in the office. If less than a majority of the Board of Directors is present at said meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice. Notwithstanding the foregoing, if at any time the Board of Directors consists of two or three Directors, two Directors shall constitute a quorum, and if at any time the Board of Directors consists of one Director, that one Director shall constitute a quorum. 2.08. VOTING. The act of a majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless the concurrence of a greater proportion is required for such action by applicable statute, the Charter or these Bylaws; provided, however, that no act relating to any matter in which a Director (or affiliate of such Director) who is not an independent Director has any interest shall be the act of the Board of Directors unless such act has been approved by a majority of the Board of Directors that 4 9 includes a majority of the independent Directors. Notwithstanding the foregoing, if at any time the Board of Directors consists of two Directors, the act of both Directors shall be required to constitute the act of the Board of Directors. 2.09. CONDUCT OF MEETINGS. All meetings of the Board of Directors shall be called to order and presided over by the Chairman of the Board, or in the absence of the Chairman of the Board, by the President (if a member of the Board of Directors) or, in the absence of the Chairman of the Board and the President, by a member of the Board of Directors selected by the members present. The Secretary of the Corporation, or in the absence of the Secretary, any Assistant Secretary, shall act as Secretary at all meetings of the Board of Directors, and in the absence of the Secretary and Assistant Secretaries, the presiding officer of the meeting shall designate any person to act as secretary of the meeting. Members of the Board of Directors may participate in meetings of the Board of Directors by conference telephone or similar communications equipment by means of which all Directors participating in the meeting can hear each other at the same time, and participation in a meeting in accordance herewith shall constitute presence in person at such meeting for all purposes of these Bylaws. 2.10. RESIGNATIONS. Any Director may resign from the Board of Directors or any committee thereof at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, or if no time be specified, at the time of the receipt of notice of such resignation by the President or the Secretary of the Corporation. 2.11. REMOVAL OF DIRECTORS. Consistent with the Charter, the Stockholders may, at any time, remove any Director, with or without cause, by the affirmative vote of a majority of all the votes entitled to be cast on the matter, and may elect a successor to fill any resulting vacancy for the balance of the term of the removed director. 2.12. VACANCIES. The Stockholders may elect a successor to fill a vacancy on the Board of Directors which results from the removal of a Director. Any vacancy created by a resignation of a Director on his or her seventy-fifth birthday as required by Section 2.02 or any vacancy created by any cause other than by reason of an increase in the number of Directors, may be filled by a majority vote of the remaining Directors, although such majority is less than a quorum. Any vacancy occurring in the Board of Directors by reason of an increase in the number of Directors may be filled by a majority vote of the entire Board of Directors. A Director elected by the Board of Directors to fill a vacancy shall hold office until the next annual meeting of Stockholders at which the term of the class of Directors to which such Director is elected expires or until his or her successor is elected and qualified. 2.13. INFORMAL ACTION BY DIRECTORS. Any action required or permitted to be taken at any meeting at the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by all the Directors and such written consent is filed with the minutes of the Board of Directors. Such consents may be signed by different Directors on separate counterparts. 5 10 2.14. COMPENSATION. A fee for service and payment for expenses of attendance of each meeting of the Board of Directors, or of any committee thereof, may be allowed to any Director by resolution of the Board of Directors. ARTICLE III COMMITTEES 3.01. NUMBER, TENURE AND QUALIFICATION. The Board of Directors may appoint from among its members an executive committee and other committees, composed of two or more Directors, to serve at the pleasure of the Board of Directors. If any committee may take or authorize any act as to any matter in which any Director (or affiliate of such Director) who is an employee of the Corporation has or may have any interest, a majority of the members of such committee shall be Directors who are not employees of the Corporation, except that any such committee consisting of only two Directors may have one Director who is not an employee of the Corporation and one Director who is an employee of the Corporation. 3.02. DELEGATION OF POWER. The Board of Directors may delegate to those committees in the intervals between meetings of the Board of Directors any of the powers of the Board of Directors to manage the business and affairs of the Corporation, except those powers which the Board of Directors is specifically prohibited from delegating pursuant to Section 2-411 of the MGCL. 3.03. QUORUM AND VOTING. A majority of the members of any committee shall constitute a quorum for the transaction of business by such committee, and the act of a majority of the quorum shall constitute the act of the committee, except that no act relating to any matter in which any Director (or affiliate of such Director) who is not an independent Director has any interest shall be the act of any committee unless a majority of the independent Directors on the committee votes for such act. Notwithstanding the foregoing, if at any time any committee consists of two members, both members shall be necessary to constitute a quorum and the act of both members shall be required to constitute the act of the committee. 3.04. CONDUCT OF MEETINGS. Each committee shall designate a presiding officer of such committee, and if not present at a particular meeting, the committee shall select a presiding officer for such meeting. Members of any committee may participate in meetings of such committee by conference telephone or similar communications equipment by means of which all members participating in the meeting can hear each other at the same time, and participation in a meeting in accordance herewith shall constitute presence in person at such meeting for all purposes of these Bylaws. Each committee shall keep minutes of its meetings, and report the results of any proceedings at the next succeeding annual or regular meeting of the Board of Directors. 3.05. INFORMAL ACTION BY COMMITTEES. Any action required or permitted to be taken at any meeting of a committee of the Board of Directors may be taken without a 6 11 meeting, if a written consent to such action is signed by all members of the committee and such written consent is filed with the minutes of proceedings of such committee. Such consents may be signed by different members on separate counterparts. ARTICLE IV OFFICERS 4.01. POWERS AND DUTIES. The officers of the Corporation shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of Stockholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Each officer shall hold office until his successor is duly elected and qualified or until his earlier death, resignation or removal in the manner hereinafter provided. Any two or more offices except President and Vice President may be held by the same person. Election or appointment of an officer or agent shall not of itself create contract rights between the Corporation and such officer or agent. 4.02. REMOVAL. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation would be served thereby, that the consequences of any such removal shall be subject to any contractual arrangement, if any, that such officer or agent may have with the Corporation. The fact that a person is elected to an office, whether or not for a specified term, shall not by itself constitute any undertaking or evidence of any employment obligation of the Corporation to that person. 4.03. VACANCIES. A vacancy in any office may be filled by the Board of Directors for the unexpired portion of the term of such office. 4.04. CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all meetings of the Stockholders and of the Board of Directors. In general, the Chairman of the Board shall perform all duties incident to the office of Chairman of the Board and such other duties as may be prescribed by the Board of Directors from time to time. 4.05. PRESIDENT. Unless the Board of Directors shall otherwise determine, the President shall in general supervise and control all the business and affairs of the Corporation. In the absence of the Chairman of the Board, the President shall preside at all meetings of the Stockholders and the Board of Directors (if a member of the Board of Directors). The President may sign any deeds, mortgages, bonds, contracts or other obligations or instruments on behalf of the Corporation except in cases where the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law to be otherwise signed and executed. In general, the President shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors from time to time. 7 12 4.06. VICE PRESIDENTS. The Board of Directors may appoint one or more Vice Presidents. In the absence of the President or in the event of a vacancy in such office, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated at the time of their election, or in the absence of any designation, then in order of their election) shall perform the duties of the President and when so acting shall have all the powers of and be subject to all the restrictions upon the President. Every Vice President shall perform such duties as from time to time may be assigned to him or her by the President or the Board of Directors. 4.07. SECRETARY. The Secretary shall (a) keep the minutes of the proceedings of the Stockholders and Board of Directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records of the Corporation; (d) unless a transfer agent is appointed, keep a register of the post office address of each Stockholder that shall be furnished to the Secretary by such Stockholder and have general charge of the stock ledger of the Corporation (as hereinafter defined); (e) when authorized by the Board of Directors or the President, attest to or witness all documents requiring the same; (f) perform all duties as from time to time may be assigned to him or her by the President or by the Board of Directors; and (g) perform all the duties generally incident to the office of Secretary of a Corporation. 4.08. TREASURER. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositaries as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at the regular meetings of the Board of Directors or whenever they may require it, an account of all his or her transactions as Treasurer and of the financial condition of the Corporation. The Board of Directors may engage a custodian to perform some or all of the duties of the Treasurer, and if a custodian is so engaged then the Treasurer shall be relieved of the responsibilities set forth herein to the extent delegated to such custodian and, unless the Board of Directors otherwise determines, shall have general supervision over the activities of such custodian. The custodian shall not be an officer of the Corporation. 4.09. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The Board of Directors may appoint one or more Assistant Secretaries or Assistant Treasurers. The Assistant Secretaries and Assistant Treasurers (a) shall have all the power and shall perform all the duties of the Secretary and the Treasurer, respectively, in such respective officer's absence and (b) shall perform such duties as shall be assigned to him or her by the Secretary or Treasurer, respectively, or by the President or the Board of Directors. 4.10. SUBORDINATE OFFICERS. The Corporation shall have such subordinate officers as the Board of Directors may from time to time elect. Each such officer shall hold 8 13 office for such period and perform such duties as the Board of Directors, the President or any designated committee or officer may prescribe. 4.11. SALARIES. The salaries, if any, of the officers shall be fixed from time to time by the Board of Directors. No officer shall be prevented from receiving such salary, if any, by reason of the fact that he or she is also a Director of the Corporation. ARTICLE V SHARES OF STOCK 5.01. NO CERTIFICATES FOR STOCK. Unless the Board of Directors authorizes the issuance of certificates pursuant to Section 5.02, none of the Stock shall be represented by certificates. 5.02. ELECTION TO ISSUE CERTIFICATES. The Board of Directors may authorize the issuance of certificates representing some or all of the shares of any or all of the classes or series of Stock. If the Board of Directors so authorizes certificates, such certificates shall be of such form, not inconsistent with the Charter, as shall be approved by the Board of Directors. All certificates, if issued, shall be signed by the Chairman of the Board, the President or a Vice President and countersigned by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary. Any signature or countersignature may be either a manual or a facsimile signature. All certificates, if issued, for each class of Stock shall be consecutively numbered. 5.03. STOCK LEDGER. The Corporation shall maintain at its principal executive office, at the office of its transfer agent or at such other place designated by the Board of Directors an original or duplicate Stock ledger containing the names and addresses of all the Stockholders and the number of shares of each class of Stock held by each Stockholder (the "Stock Ledger"). The Stock Ledger shall be maintained pursuant to a system that the Corporation shall adopt allowing for the issuance, recordation and transfer of its Stock and by electronic or other means that can be readily converted into written form for visual inspection and not involving any issuance of certificates. Such system shall include provisions for notice to inquirers of Stock (whether upon issuance or transfer of Stock) in accordance with Sections 2-210 and 2-211 of the MGCL, and Section 8-408 of the Commercial Law Article of the Code of the State of Maryland. The Corporation shall be entitled to treat the holder of record of any share or shares as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Maryland. Until a transfer is duly effective on the Stock Ledger, the Corporation shall not be effected by any notice of such transfer, either actual or constructive. Nothing herein shall impose upon the Corporation, the Board of Directors or officers or their agents and representatives a duty or limit their rights to inquire as to the actual ownership of shares. 9 14 5.04. RECORDING TRANSFERS OF STOCK. If transferred in accordance with any restrictions on transfer contained in the Charter, these Bylaws or otherwise, shares of Stock shall be recorded as transferred in the Stock Ledger upon provision to the Corporation or the transfer agent of the Corporation of an executed Stock power duly guaranteed and any other documents reasonably requested by the Corporation, and the surrender of the certificate or certificates, if any, representing such shares of Stock. Upon receipt of such documents, the Corporation shall issue the statements required by Sections 2-210 and 2-211 of the MGCL and Section 8-408 of the Commercial Law Article of the Code of the State of Maryland and shall issue, as needed, a new certificate or certificates (if the transferred shares were certificated) to the persons entitled thereto, cancel any old certificates and record the transaction upon its books. 5.05. LOST CERTIFICATE. The Board of Directors may direct a new certificate to be issued in the place of any certificate theretofore issued by the Corporation alleged to have been stolen, lost or destroyed upon the making of an affidavit of that fact by the person claiming the certificate of Stock to be stolen, lost or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such stolen, lost or destroyed certificate or his legal representative to advertise the same in such manner as it shall require and/or to give a bond, with sufficient surety, to the Corporation to indemnify it against any loss or claim which may arise by reason of the issuance of a new certificate. 5.06. FIXING OF RECORD DATE. (a) The Board of Directors may fix, in advance, a date as the record date for the purpose of determining Stockholders entitled to notice of, or to vote at, any meeting of Stockholders, or Stockholders to receive payment of any dividend or the allotment of any rights, or in order to make a determination of Stockholders for any other proper purpose. Such date, in any case, shall not be prior to the close of business on the day the record date is fixed and shall be not more than 90 calendar days, and in case of a meeting of Stockholders not less than 30 days, prior to the date on which the meeting or particular action requiring such determination of Stockholders is to be held or taken. (b) If no record date is fixed, (i) the record date for the determination for Stockholders entitled to notice of, or to vote at, a meeting of Stockholders shall be at the close of business on the later of the day on which the notice of meeting is mailed or the 30th calendar day before the meeting; and (ii) the record date for the determination of Stockholders entitled to receive payment of a dividend or an allotment of any rights shall be at the close of business on the day on which the resolution of the Board of Directors, declaring the dividend or allotment of rights, is adopted. (c) When a determination of Stockholders entitled to vote at any meeting of Stockholders has been made as provided in this Section 5.06, such determination shall apply to any adjournment thereof, except where the determination has been made through the closing of the Stock transfer books and the stated period of closing has expired. 10 15 ARTICLE VI DIVIDENDS AND DISTRIBUTIONS 6.01. DECLARATION. Dividends and other distributions upon the Stock may be declared by the Board of Directors as set forth in the applicable provisions of the Charter and any applicable law, at any meeting, limited only to the extent of Section 2-311 of the MGCL. Dividends and other distributions upon the Stock may be paid in cash, property or Stock of the Corporation, subject to the provisions of law and of the Charter. 6.02. CONTINGENCIES. Before payment of any dividends or other distributions upon the Stock, there may be set aside (but there is no duty to set aside) out of any funds of the Corporation available for dividends or other distributions such sum or sums as the Board of Directors may from time to time, in its absolute discretion, think proper as a reserve fund to meet contingencies, for repairing or maintaining any property of the Corporation or for such other purpose as the Board of Directors shall determine to be in the best interests of the Corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE VII INDEMNIFICATION 7.01. INSURANCE. The Corporation shall have the power to purchase and maintain insurance on behalf of any person to whom indemnification is provided by the Corporation pursuant to the terms of the Charter (an "Indemnified Person") against any liability, whether or not the Corporation would have the power to indemnify him or her against such liability. 7.02. NON-EXCLUSIVE RIGHT TO INDEMNIFY; HEIRS AND PERSONAL REPRESENTATIVES. The rights to indemnification set forth in the Charter are in addition to all rights which any Indemnified Person may be entitled to as a matter of law, and shall inure to the benefit of the heirs and personal representatives of each Indemnified Person. 7.03. NO LIMITATIONS. In addition to any indemnification permitted by the Charter, the Board of Directors shall, in its sole discretion, have the power to grant such indemnification as it deems in the best interests of the Corporation to the fullest extent permitted by law. ARTICLE VIII NOTICES 8.01. NOTICES. Except as otherwise specifically provided herein, notice required to be given pursuant to the MGCL, the Charter or these Bylaws shall be given by either written notice personally served against written receipt, or notice in writing transmitted by mail, by 11 16 depositing the same in a post office box or letter box, in a post-paid sealed wrapper, addressed, if to the Corporation, 6220 North Beltline, Suite 205, Irving, Texas 75063-2656 (or any subsequent address selected by the Board of Directors), attention: President, or if to a Stockholder, Director or officer, at the address of such person as it appears on the books of the Corporation or in default of any other address at the general post office situated in the city or county of his or her residence. Unless otherwise specified, notice sent by mail shall be deemed to be given at the time mailed. 8.02. WAIVER OF NOTICE. Whenever any notice is required to be given pursuant to the Charter or these Bylaws or pursuant to applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at or other purpose of any meeting need be set forth in the waiver of notice, unless specifically required by statute. The attendance of any person at any meeting whether in person or by proxy, shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully held or convened. ARTICLE IX MISCELLANEOUS 9.01. BOOKS AND RECORDS. The Corporation shall keep correct and complete books and records of its accounts and transactions and minutes of the proceedings of its Stockholders and Board of Directors meetings and of its executive or other committees when exercising any of the powers or authority of the Board of Directors. The books and records of the Corporation may be in written form or in any other form that be converted within a reasonable time into written form for visual inspection. Minutes shall be recorded in written form, but may be maintained in the form of a reproduction. 9.02. INSPECTION OF BYLAWS AND CORPORATE RECORDS. These Bylaws, the accounting books and records of the Corporation, the minutes of proceedings of the Stockholders, the Board of Directors and the Committees thereof, the annual statement of affairs and any voting trust agreements on record shall be open to inspection upon written demand delivered to the Corporation by any Stockholder at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interest as a Stockholder to the extent permitted by the MGCL. 9.03. CONTRACTS. The Board of Directors may authorize any officer(s) or agent(s) to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances. 9.04. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall 12 17 be signed by such officers or agents of the Corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. 9.05. FISCAL YEAR. The Board of Directors shall have the power, from time to time, to fix the fiscal year of the Corporation by duly adopted resolution, and, in the absence of such resolution, the fiscal year shall be the period ending December 31. 9.06. ANNUAL REPORT. No later than 120 calendar days after the close of each fiscal year, the Board of Directors of the Corporation shall cause to be sent to the Stockholders an annual report in such form as may be deemed appropriate by the Board of Directors. 9.07 BYLAWS SEVERABLE. The provisions of these Bylaws are severable, and if any provision shall be held invalid or unenforceable, that invalidity or unenforceability shall attach only to that provision and shall not in any manner effect or render invalid or unenforceable any other provision of these Bylaws, and these Bylaws shall be carried out as if the invalid or unenforceable provision were not contained herein. ARTICLE X AMENDMENT OF BYLAWS 10.01 BY DIRECTORS. The Board of Directors shall have the power, at any annual or regular meeting, or at any special meeting if notice thereof is included in the notice of such special meeting, to alter or repeal any Bylaws of the Corporation and to make new Bylaws. 10.02 BY STOCKHOLDERS. The Stockholders, by affirmative vote of a majority of the shares of common stock of the Corporation, shall have the power, at any annual meeting (subject to the requirements of Section 1.03 of these Bylaws), or at any special meeting if notice thereof is included in the notice of special meeting, to alter or repeal any Bylaws of the Corporation and to make new Bylaws. 10.03 AMENDMENT OF INDEMNIFICATION PROVISIONS. Neither the Board of Directors nor the Stockholders may amend the indemnification provisions set forth in Article VII without the consent of the persons whose right to indemnification under these Bylaws would be adversely affected by the amendment. The foregoing are certified as the Bylaws of the Corporation adopted by the Board of Directors on January 12, 1994. /s/ MARK A. O'BRIEN _______________________________________ SECRETARY 13 EX-5.1 4 OPINION OF LIDDELL AS TO LEGALITY 1 EXHIBIT 5.1 LIDDELL, SAPP, ZIVLEY, HILL & LABOON, L.L.P. A REGISTERED LIMITED LIABILITY PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS ATTORNEYS 3400 TEXAS COMMERCE TOWER 2200 ROSS AVENUE 700 LAVACA HOUSTON, TEXAS 77002-3004 SUITE 800 (713) 226-1200 SUITE 900 AUSTIN, TEXAS 78701-3102 TELEX 76-2616 (512) 404-2000 TELECOPIER (713) 223-3717 DALLAS, TEXAS 75201-2774 TELECOPIER (512) 404-2099 (214) 220-4800 TELECOPIER (214) 220-4899
January 18, 1994 American Industrial Properties REIT, Inc. 6220 N. Beltline Suite 205 Irving, Texas 75063 Gentlemen: We have acted as counsel to American Industrial Properties REIT, Inc., a Maryland corporation (the "Company"), in connection with the Registration Statement on Form S-4 (the "Registration Statement") filed with the Securities and Exchange Commission regarding the registration under the Securities Act of 1933, as amended (the "Act"), of 1,915,080 shares of common stock, $0.01 par value per share (the "Common Stock"), in connection with the merger (the "Merger") of American Industrial Properties REIT, a Texas real estate investment trust (the "Trust"), with and into the Company. We have examined and are familiar with originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments as we have deemed necessary or advisable in connection with this opinion, including (a) the Articles of Incorporation of the Company and the Bylaws of the Company, as amended, and (b) the Registration Statement. In our examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, the authenticity of the originals of such copies and the authenticity of telegraphic or telephonic confirmations of public officials and others. As to facts material to our opinion, we have relied upon certificates or telegraphic or telephonic confirmations of public officials and certificates, documents, statements and other information of the Company or representatives or officers thereof. The opinions set forth herein are subject to the qualification that we are admitted to practice law in the State of Texas and we express no opinion as to laws other than the law of the State of Texas, the General Corporation Law of Maryland and the federal law of the United States of America. 2 American Industrial Properties REIT, Inc. January 18, 1994 Page 2 Based upon the foregoing, and subject to the Registration Statement becoming effective, we are of the opinion that the Common Stock, when issued, exchanged and delivered in the manner and for the consideration stated in the Proxy Statement/Prospectus constituting part of the Registration Statement, will be validly issued, fully paid and nonassessable. We consent to the reference to our Firm under the heading "Legal Matters" in the Proxy Statement/Prospectus included in the Registration Statement, and to the filing of this opinion as Exhibit 5.1 to the Registration Statement. By so consenting, we do not thereby admit that our Firm's consent is required by Section 7 of the Securities Act of 1933, as amended, or any comparable provision of the securities laws of any state or other jurisdiction. This opinion is rendered as of the date hereof, and we undertake no, and disclaim any, obligation to advise you of any change in or any new development that might affect any matters or opinions set forth herein. This opinion is furnished by us to you as counsel to you in connection with the Merger and is solely for your benefit and not for the benefit of any other person. Without our prior written consent, this opinion may not be used, circulated, quoted or otherwise referred to in whole or in part for any other purpose. Very truly yours, /s/ LIDDELL, SAPP, ZIVLEY, HILL & LABOON, L.L.P. ________________________________________________ LIDDELL, SAPP, ZIVLEY, HILL & LaBOON, L.L.P. EX-8.1 5 OPINION OF LIDDELL AS TO TAX MATTERS 1 THIS DOCUMENT IS A COPY OF THE FORM S-4 FILED ON JANUARY 21, 1994 PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION. AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 21, 1994 REGISTRATION NO. 33-74292 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- AMERICAN INDUSTRIAL PROPERTIES REIT, INC. (Exact name of registrant as specified in its charter) MARYLAND 6798 75-6335572 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code No.) Identification No.)
6220 NORTH BELTLINE, SUITE 205, DALLAS, TEXAS 75063 (214) 550-6053 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------------- CHARLES W. WOLCOTT 6220 NORTH BELTLINE, SUITE 205 DALLAS, TEXAS 75063 (214) 550-6053 (Name, address, including zip code, and telephone number of agent for service of process) --------------------- Copies to: BRYAN L. GOOLSBY GINA E. BETTS LIDDELL, SAPP, ZIVLEY, HILL & LABOON, L.L.P. 2200 ROSS AVENUE, SUITE 900 DALLAS, TEXAS 75201 (214) 220-4800 --------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after the Registration Statement becomes effective. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / --------------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM AMOUNT AGGREGATE PROPOSED MAXIMUM TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE - ------------------------------------------------------------------------------------------------- Common Stock, par value $0.01 per share.......... 1,915,080 $10.65 $20,395,602 $7,035.00 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) Based upon the maximum number of shares of Common Stock to be issued pursuant to the Merger, which is equal to 1/5 of the number of Shares of Beneficial Interest issued and outstanding as of January 17, 1994, plus an additional 100,000 shares to cover shares that may be issued to holders of fractional shares and holders of fewer than 10 shares of Common Stock. (2) Estimated solely for the purpose of calculating the registration fee. --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EX-10.6 6 INDENTURE 1 EXHIBIT 10.6 ________________________________________________________________________________ ________________________________________________________________________________ TRAMMELL CROW REAL ESTATE INVESTORS TO J. HENRY SCHRODER BANK & TRUST COMPANY, Trustee _______________ INDENTURE Dated as of November 15, 1985 _______________ ________________________________________________________________________________ ________________________________________________________________________________ 2 Trammell Crow Real Estate Investors Reconciliation and tie between Trust Indenture Act of 1939 and Indenture, dated as of November 15, 1985*
Trust Indenture Act Section Indenture Section - --------------- ----------------- SECTION 310 (a)(1) ............................... 709 (a)(2) ............................... 709 (a)(3) ............................... Not Applicable (a)(4) ............................... Not Applicable (b) .................................. 708 Section 311 (a) .................................. 713(a) (b) .................................. 713(b) (b)(2) ............................... 803(a)(2); 803(b) Section 311 (c) .................................. Not Applicable Section 312 (a) .................................. 801; 802(a) (b) .................................. 802(b) (c) .................................. 802(c) Section 313 (a) .................................. 803(a) (b) .................................. 803(b) (c) .................................. 803(c) (d) .................................. 803(d) Section 314 (a) .................................. 804 (b) .................................. 1110 (c)(1) ............................... 102 (c)(2) ............................... 102 (c)(3) ............................... Not Applicable (d) .................................. 403; 1302 (e) .................................. 102 Section 315 (a) .................................. 701(a) (b) .................................. 702; 803 (c) .................................. 701(b) (d) .................................. 701(c) (d)(1) ............................... 701(a)(1) (d)(2) ............................... 701(c)(2) (d)(3) ............................... 701(c)(3) (e) .................................. 614 Section 316 (a) .................................. 101 (a)(1)(A) ............................. 612 (a)(1)(B) ............................. 613 (a)(2) ............................... Not Applicable (b) .................................. 608 Section 317 (a)(1) ............................... 603 (a)(2) ............................... 604 (b) .................................. 1103 Section 318 (a) .................................. 107
- --------------- * This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. 3 TABLE OF CONTENTS* ________________
Page PARTIES ............................................................ 1 RECITALS OF THE REIT ............................................... 1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions: Acceleration Amount ................................... 3 Account .............................................. 3 Act .................................................. 3 Additional Investments ................................ 3 Advisor .............................................. 3 Affiliate ............................................ 3 Appraised Value ...................................... 3 Appraiser ............................................ 3 Authenticating Agent ................................. 3 Business Day ......................................... 4 By-Laws .............................................. 4 Code ................................................. 4 Collateral ........................................... 4 Commission ........................................... 4 Corporate Trust Office ............................... 4 Corporation .......................................... 4 Debt Service ......................................... 4 Declaration of Trust ................................. 4 Defeasance Account ................................... 4 Defeasance Commencement Date ......................... 4 Distributable Cash ................................... 4 Eligible Securities .................................. 5 Event of Default ..................................... 5 Government Obligations ............................... 5 Holder ............................................... 6 Indenture ............................................ 6 Independent .......................................... 6 Insurance Costs ....................................... 6 Maturity ............................................. 6 Mortgage ............................................. 6 Note Register and Note Registrar ..................... 7 Officers' Certificate ................................ 7 Opinion of Counsel .................................... 7 Optional Notes ....................................... 7
- --------------- * This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. i 4
Page Other Secured Debt .................................... 7 Outstanding ........................................... 7 Overallotment Investments ............................. 8 Paying Agent .......................................... 8 Permitted Liens ....................................... 8 Person ................................................ 9 Predecessor Note ...................................... 9 Prior Lien ............................................ 9 Prior Lien Obligations ................................ 9 Property .............................................. 10 Property Acquisition Account .......................... 10 Property Acquisition Costs ............................ 10 Redemption Account .................................... 10 Redemption Date ....................................... 10 Redemption Price ...................................... 10 REIT .................................................. 10 REIT Request; REIT Order .............................. 10 Resolution of Trust Managers .......................... 10 Responsible Officer ................................... 10 Secured Debt .......................................... 11 Security .............................................. 11 Shares ................................................ 11 Short-Term Indebtedness ............................... 11 Specified Investments ................................. 11 Stated Maturity ....................................... 11 TCC Entity ............................................ 11 Transfer Agent ........................................ 11 Trust Indenture Act ................................... 11 Trust Managers ........................................ 11 Trustee ............................................... 11 Working Capital Payments .............................. 12 SECTION 102. Compliance Certificates and Opinions .................. 12 SECTION 103. Form of Documents Delivered to Trustee ................ 13 SECTION 104. Acts of Holders of Notes .............................. 13 SECTION 105. Notices, Etc., to Trustee and the REIT ................ 14 SECTION 106. Notice to Holders; Waiver ............................. 15 SECTION 107. Conflict with Trust Indenture Act ..................... 15 SECTION 108. Effect of Headings and Table of Contents ............................... 16 SECTION 109. Successors and Assigns ................................ 16 SECTION 110. Separability Clause; Limitations on Interest ......................................... 16 SECTION 111. Benefits of Indenture ................................. 16 SECTION 112. Governing Law ......................................... 17 SECTION 113. Legal Holidays ........................................ 17 SECTION 114. Limitation of Liability ............................... 17
ii 5
Page ARTICLE TWO THE NOTE FORM SECTION 201. Form Generally ..................................... 17 SECTION 202. Form of Notes ...................................... 18 SECTION 203. Form of Trustee's Certificate of Authentication ................................... 23 ARTICLE THREE THE NOTES SECTION 301. Titles and Terms ................................... 24 SECTION 302. Denominations ...................................... 25 SECTION 303. Execution, Authentication, Delivery and Dating ....................................... 25 SECTION 304. Temporary Notes .................................... 26 SECTION 305. Registration, Registration of Transfer and Exchange ..................................... 27 SECTION 306. Mutilated, Destroyed, Lost and Stolen Notes ............................................ 28 SECTION 307. Persons Deemed Owners .............................. 29 SECTION 308. Cancellation ....................................... 29 ARTICLE FOUR ACCOUNTS SECTION 401. Establishment of Accounts .......................... 30 SECTION 402. Payments into Property Acquisition Account .......... 30 SECTION 403. Use of Moneys Deposited into Property Acquisition Account .............................. 31 SECTION 404. Defeasance Account ................................. 34 SECTION 405. Redemption Account ................................. 36 SECTION 406. Investment of Accounts ............................. 37 SECTION 407. Trustee's Reliance ................................. 37 ARTICLE FIVE SATISFACTION AND DISCHARGE SECTION 501. Satisfaction and Discharge of Indenture and Mortgages ................................... 37 SECTION 502. Application of Trust Money; Indemnification ................................. 39
iii 6
Page ARTICLE SIX REMEDIES SECTION 601. Events of Default .................................... 40 SECTION 602. Acceleration of Maturity; Rescission and Annulment ...................................... 42 SECTION 603. Collection of Indebtedness and Suits for Enforcement by Trustee ............................. 43 SECTION 604. Trustee May File Proofs of Claim ..................... 44 SECTION 605. Trustee May Enforce Claims Without Possession of Notes ................................ 45 SECTION 606. Application of Money Collected ....................... 45 SECTION 607. Limitation on Suits .................................. 46 SECTION 608. Unconditional Right of Holders to Receive Payment ............................................ 47 SECTION 609. Restoration of Rights and Remedies ................... 47 SECTION 610. Rights and Remedies Cumulative ....................... 47 SECTION 611. Delay or Omission Not Waiver ......................... 48 SECTION 612. Control by Holders of Notes .......................... 48 SECTION 613. Waiver of Past Defaults .............................. 48 SECTION 614. Undertaking for Costs ................................ 49 SECTION 615. Waiver of Stay or Extension Laws ..................... 49 ARTICLE SEVEN THE TRUSTEE SECTION 701. Certain Duties and Responsibilities ................. 50 SECTION 702. Notice of Defaults .................................. 51 SECTION 703. Certain Rights of Trustee ........................... 52 SECTION 704. Not Responsible for Recitals or Issuance of Notes .......................................... 53 SECTION 705. May Hold Notes ...................................... 53 SECTION 706. Money Held in Trust ................................. 53 SECTION 707. Compensation and Reimbursement ...................... 54 SECTION 708. Disqualification; Conflicting Interests............... 54 SECTION 709. Corporate Trustee Required; Eligibility............... 60 SECTION 710. Resignation and Removal; Appointment of Successor ......................................... 61 SECTION 711. Acceptance of Appointment by Successor .............. 62 SECTION 712. Merger, Conversion, Consolidation or Succession to Business ............................ 63 SECTION 713. Preferential Collection of Claims Against the REIT .................................. 63 SECTION 714. Appointment of Mortgage Trustees .................... 68
iv 7
Page ARTICLE EIGHT HOLDERS' LISTS AND REPORTS BY TRUSTEE AND REIT SECTION 801. REIT to Furnish Trustee Names and Addresses of Holders ........................... 68 SECTION 802. Preservation of Information; Communications to Holders ......................................... 69 SECTION 803. Reports by Trustee ................................... 71 SECTION 804. Reports by REIT ...................................... 73 ARTICLE NINE CONSOLIDATION, MERGER, CONVEYANCE, OR TRANSFER SECTION 901. The REIT May Consolidate, Etc., Only on Certain Terms ...................................... 74 SECTION 902. Successor Substituted ................................ 75 ARTICLE TEN SUPPLEMENTAL INDENTURES SECTION 1001. Without Consent of Holders ........................... 75 SECTION 1002. With Consent of Holders .............................. 76 SECTION 1003. Execution of Supplemental Indentures ................. 78 SECTION 1004. Effect of Supplemental Indentures .................... 78 SECTION 1005. Conformity with Trust Indenture Act .................. 78 SECTION 1006. Notice of Supplemental Indentures .................... 78 SECTION 1007. Reference in Notes to Supplemental Indentures ............................ 79 ARTICLE ELEVEN COVENANTS SECTION 1101. Payment of Principal and Interest .................... 79 SECTION 1102. Maintenance of Offices or Agencies ................... 79 SECTION 1103. Money for Note Payment to be Held in Trust ........................................... 80 SECTION 1104. To Keep Books; Access ................................ 81 SECTION 1105. Trust Existence ...................................... 82 SECTION 1106. Indebtedness ......................................... 82 SECTION 1107. Payment of Taxes and Claims .......................... 83
v 8
Page SECTION 1108. Sales of Certain Properties ............... 83 SECTION 1109. Statement as to Compliance ................ 83 SECTION 1110. Further Assurances; Recording ............. 84 SECTION 1111. Waiver of Certain Covenants ............... 84 SECTION 1112. Defeasance of Certain Obligations ......... 85 SECTION 1113. Uninsured Losses .......................... 86 SECTION 1114. Distributions ............................. 86 SECTION 1115. Maintenance of Title Insurance ............ 86 ARTICLE TWELVE REDEMPTION OF NOTES SECTION 1201. Right of Redemption ...................... 87 SECTION 1202. Notice to Trustee ........................ 87 SECTION 1203. Selection by Trustee of Notes to be Redeemed ............................ 87 SECTION 1204. Notice of Redemption ..................... 88 SECTION 1205. Deposit of Redemption Price .............. 88 SECTION 1206. Notes Payable on Redemption Date ......... 88 SECTION 1207. Notes Redeemed in Part ................... 89 ARTICLE THIRTEEN RELEASES SECTION 1301. Possession by the REIT; Dispositions without Release ........... 89 SECTION 1302. Releases ................................. 90 SECTION 1303. Powers Exercisable Notwithstanding Default ................................ 91 SECTION 1304. Powers Exercisable by Trustee or Receiver ............................... 91 SECTION 1305. Purchaser Protected ...................... 92 TESTIMONIUM ............................................ 92 SIGNATURES .............................................. 92 ACKNOWLEDGEMENTS ........................................ 93 SCHEDULE I ............................... Specified Investments SCHEDULE II .................................. List of Mortgages ANNEX A ......................................... Form of Mortgage
vi 9 INDENTURE, dated as of November 15, 1985, between Trammell Crow Real Estate Investors, a real estate investment trust duly organized and existing under the laws of the State of Texas, (herein called the "REIT"), having its principal office at 3500 LTV Center, Dallas, Texas 75201, and J. Henry Schroder Bank & Trust Company, a banking corporation duly organized and existing under the laws of the State of New York as Trustee (herein called the "Trustee") having its Corporate Trust Office at One State Street Plaza, New York, New York 10015. RECITALS OF THE REIT The REIT has duly authorized the creation of an issue of its Zero Coupon Notes due 1997 (the "Notes"); and to secure the Notes and to provide for their authentication and delivery by the Trustee, the REIT has duly authorized the execution and delivery of this Indenture. All things necessary to make the Notes, when executed by the REIT, authenticated and delivered hereunder and duly issued by the REIT, the valid obligations of the REIT and to make this Indenture a valid agreement of the REIT in accordance with their and its respective terms, have been done. GRANTING CLAUSES NOW, THEREFORE, the REIT, in consideration of the premises and the acceptance by the Trustee of the trust hereby created and of the purchase and acceptance of the Notes by the Holders, and in order to secure the payment of the Notes according to their tenor and effect and to secure the performance and observance by the REIT of all the covenants and obligations expressed or implied herein and in the Notes, does hereby grant, alienate, bargain, sell, convey, transfer, assign, mortgage and pledge unto or for the benefit of the Trustee, and its successors in trust and assigns forever, all right, title, and interest of the REIT in all moneys and securities from time to time held by the Trustee under the terms of this Indenture (other than any part thereof which is specifically stated herein not to be deemed part of the Collateral), all property described in the Mortgages listed on Schedule II hereto, subject to Permitted Liens and Prior Liens and any substitutions of, additions to or proceeds arising from any of the foregoing. 10 TO HAVE AND TO HOLD all and singular said property, whether now owned or hereafter acquired, unto the Trustee and its respective successors in trust and assigns forever. IN TRUST NEVERTHELESS, upon the terms and trusts herein set forth for the equal and ratable benefit, security, and protection of all present and future Holders of the Notes issued under and secured by this Indenture without privilege, priority, or distinction as to the lien or otherwise (except as herein expressly provided) of any of the Notes over any of the other Notes. THIS INDENTURE FURTHER WITNESSETH, and it is expressly declared, that all Notes issued and secured hereunder are to be issued, authenticated and delivered, and all said property, rights, and interests, including, without limitation, the amounts hereby assigned, are to be dealt with and disposed of, under, upon and subject to the terms, conditions, stipulations, covenants, agreements, trusts, uses and purposes hereinafter expressed, and that the REIT has agreed and covenanted, and does hereby agree and covenant with the Trustee and with the respective owners, from time to time, of said Notes, or any part thereof, as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any -2- 11 computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation; and (4) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Certain terms, used principally in Article Seven, are defined in that Article. "Acceleration Amount" has the meaning specified in the form of Note set forth in Section 202. "Account" means the Property Acquisition Account, the Defeasance Account or the Redemption Account. "Act", when used with respect to any Holder of a Note, has the meaning specified in Section 104. "Additional Investments" means any investment permitted by the By-Laws other than the Specified Investments or Overallotment Investments. "Advisor" means Trammell Crow Ventures, Ltd., a Texas limited partnership acting through its general partner, Trammell Crow Ventures, Inc., a Texas corporation, or such other Person as to whom the REIT may give written notice to the Trustee. "Affiliate" of the Trustee means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Trustee. For the purposes of this definition, "control" when used with respect to the Trustee means the power to direct the management and policies of the Trustee, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Appraised Value" means fair market value as determined by an Appraiser selected by the REIT. "Appraiser" means an Independent engineer, appraiser or other expert who may be employed by the REIT or the Advisor on behalf of the REIT. "Authenticating Agent" means the Trustee. -3- 12 "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in the State of New York are authorized or obligated by law to close. "By-Laws", means the By-Laws of the REIT, as amended from time to time. "Code" means the Internal Revenue Code of 1954, as amended. "Collateral" means all money, instruments and other property subject to the lien of this Indenture or any of the Mortgages. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Corporate Trust Office" means the principal office of the Trustee in the Borough of Manhattan, the City of New York, at which at any particular time its corporate trust business shall be administered, which office at the date of the original execution of this Indenture is located at One State Street Plaza, New York, New York 10015. "Corporation" includes corporations, associations, companies and business trusts. "Debt Service" means, for any period, the sum of (i) interest expense (other than amortization of original issue discount) actually payable on all indebtedness of the REIT for such period and (ii) the principal amount of indebtedness of the REIT that matured on, or was by its terms due to be repaid or renewed during such period. "Declaration of Trust" means that certain Declaration of Trust of the REIT, dated as of September 26, 1985, as amended from time to time. "Defeasance Account" means the account of that name established pursuant to Section 401 of this Indenture. "Defeasance Commencement Date" means November 27, 1993. "Distributable Cash" for any period means operating income of the REIT less tenant improvements, leasing commissions, -4- 13 advisory and incentive management fees and administrative expenses, plus interest income. "Eligible Securities" means such of the following obligations or securities maturing (or redeemable at the option of the Trustee) or marketable prior to the maturities thereof, at such time or time as to enable disbursements to be made from the Account in which such investment is held in accordance with the terms hereof: (a) Government Obligations; (b) interest-bearing deposit accounts (which may be represented by certificates of deposit) of one or more national or state banks insured by the Federal Deposit Insurance Corporation (which may include the Trustee or the Paying Agent); (c) prime commercial paper rated P-1 by Moody's Investors Service, Inc. or A-1+ by Standard & Poor's Corporation and secured by interests in mortgages on real property; (d) bonds, debentures, notes or other evidences of indebtedness issued by any of the following federal agencies: Bank for Cooperatives; Export-Import Banks of the United States; Federal Financing Banks; Federal Intermediate Credit Banks; Federal Home Loan Banks; Federal Home Loan Mortgage Corporation; Federal Land Banks; the Government National Mortgage Association; the Tennessee Valley Authority; the United States Postal Service; or any agency or instrumentality of the United States of America which shall be established for the purpose of acquiring the obligations of any of the foregoing or otherwise providing financing therefor; and (e) repurchase agreements (including those issued by the Trustee or the Paying Agent) under which Government Obligations are sold to and deposited with the Trustee or a custodian on behalf of the Trustee. "Event of Default" has the meaning specified in Section 601. "Government Obligations" means securities which are (i) direct obligations of the United States for the payment of which its full faith and credit is pledged, or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States, which, in either case are not callable or redeemable at the option of the issuer thereof. Government -5- 14 Obligations shall also include a depositary receipt issued by a bank or trust company as custodian with respect to any such Government Obligation or a specific payment of interest on or principal of any such Government Obligation held by such custodian for the account of the holder of a depositary receipt; provided, however, that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the Government Obligation or the specific payment of interest on or principal of the Government Obligation evidenced by such depositary. receipt. "Holder", when used with respect to any Note, means the Person in whose name the Note is registered in the Note Register. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Independent" when used with respect to any specified Person means such a Person who (i) is not a TCC entity, (ii) does not own any interest in a TCC Entity, and (iii) does not perform any other services for the REIT or any TCC Entity except in the capacity in which he is performing services for the REIT and with respect to which such Person's independence is at issue. Whenever it is herein provided that any independent Person's opinion or certificate shall be furnished to the Trustee, such Person shall be appointed by a REIT Order and approved by the Trustee in the exercise of reasonable care, and such opinion or certificate shall state that the signer has read this definition and that the signer is independent within the meaning hereof. "Issuance Costs" mean costs incurred by or on behalf of the REIT in connection with the issuance of the Notes, directly or indirectly. "Maturity", when used with respect to any Note, means the date on which the principal of such Note becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "Mortgage" means the mortgage, deed of trust, security agreement or other security instrument, as applicable under local law, substantially in the forms of Annex A to be executed by the REIT in favor or for the benefit of the Trustee for the ratable benefit of the Holders, which creates a valid, prior and -6- 15 enforceable lien on the Property of the REIT described therein subject only to Permitted Liens and Prior Liens, as the same may be from time to time amended or supplemented, and which contains such other provisions as may be required by local law in the opinion of counsel, to grant such valid, prior and enforceable lien. "Note Register" and "Note Registrar" have the respective meanings specified in Section 305. "Officers' Certificate" means a certificate signed by any Trust Manager or any authorized officer of the REIT or by the Advisor on behalf of the REIT and delivered to the Trustee. "Opinion of Counsel" means a written opinion of counsel, who may be counsel employed by the REIT, or any TCC Entity, and who shall be reasonably acceptable to the Trustee. "Optional Notes" means up to an aggregate of $23,439,000 principal amount at Stated Maturity of Notes that may be issued and sold in conjunction with the exercise of an overallotment option on the Shares. "Other Secured Debt" means all secured indebtedness of the REIT for borrowed money other than Secured Debt. "Outstanding", when used with respect to Notes means, as of the date of determination, all Notes theretofore authenticated and delivered under this Indenture, except: (i) Notes theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Notes for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the REIT) in trust or in the Redemption Account or set aside and segregated in trust by the REIT (if the REIT shall act as its own Paying Agent) for the Holders of such Notes; provided that, if such Notes are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and (iii) Notes which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Notes have been authenticated and delivered pursuant to this Indenture, other than any such Notes in respect of which there shall have been presented to the Trustee proof satisfactory to it -7- 16 that such Notes are held by a bona fide purchaser in whose hands such Notes are valid obligations of the REIT; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Notes have given any request, demand, authorization, direction, notice, consent or waiver hereunder or are present at a meeting of Holders of Notes for quorum purposes, Notes owned by the REIT or by any Person directly or indirectly cotrolling or controlled by or under direct or indirect common control with the REIT, shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver or upon any such determination as to the presence of a quorum, only Notes which the Trustee knows to be so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Notes and that the pledgee is not the REIT or any TCC Entity. "Overallotment Investments" means the interests in any one or more real estate investments (i) approved by a majority of the Independent Trust Managers, (ii) located outside Texas, (iii) of the same general types and quality as the Specified Investments, (iv) developed and owned by TCC Entities, and (v) acquired with the proceeds of the Optional Notes and the Shares sold pursuant to an overallotment option thereon. "Paying Agent" means any Person authorized by the REIT to pay the principal of or interest, if any, on any Notes on behalf of the REIT. "Permitted Liens" means (i) liens for taxes and assessments, both general and special, not yet due and payable or which are due and payable but not yet delinquent or which are currently being contested in good faith by appropriate proceedings; (ii) liens of mechanics, materialmen, warehousemen, carriers or other like liens for services or materials for which payment is not yet due or which is being contested in good faith by appropriate proceedings; (iii) landlords' liens for rentals not yet due and payable; (iv) liens in respect of judgments or awards with respect to which the REIT shall in good faith currently be prosecuting an appeal or proceedings for review and with respect to which the REIT shall have secured a stay of execution pending such appeal or proceedings for review, provided the REIT shall have set aside on its books adequate reserves with respect thereto; (v) easements and rights granted by any predecessor in title of the REIT; (vi) easements, leases, -8- 17 reservations or other rights of others in any Property of the REIT for streets, roads, bridges, pipes, pipe lines, railroads, electric transmission and distribution lines, telegraph and telephone lines, the removal of oil, gas, coal or other minerals and for other similar purposes, flood rights, river control and development rights, sewage and drainage rights, none of which impair the use of the Property by the REIT in the operation of its business; (vii) liens or privileges of any employees of the REIT for salary or wages earned but not yet payable, (viii) any lien or privilege vested in any lessor, licensor or permittor for rent to become due or for other obligations or acts to be performed, the payment of which rent or the performance of which other obligations or acts is required under leases, subleases, licenses or permits, so long as the payment of such rent or the performance of such other obligations or acts is not delinquent; (ix) encumbrances and restrictions consisting of zoning restrictions, assessments or other restrictions on the use of real property, none of which impair the use of the Property by the REIT in the operation of its business; (x) any other conditions, covenants, restrictions or exceptions to the title of the Property specified in any title insurance policy obtained by the REIT upon acquisition of the Property; and (xi) leases affecting any Property prior to or simultaneously with its acquisition by the REIT. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Note" of any particular Note means every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for the purposes of this definition, any Note authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Note shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Note. "Prior Lien" means any mortgage, lien, charge or encumbrance on or pledge of a security interest in any Property which exists at the time of its acquisition by the REIT which is prior to or on a parity with the lien of this Indenture, other than Permitted Liens. "Prior Lien Obligations" means any indebtedness and the evidence thereof, if any, secured by a Prior Lien. -9- 18 "Property" means the interests of the Trust in (i) the Specified Investments, (ii) the Overallotment Investments, if any, and (iii) the Additional Investments, if any. "Property Acquisition Account" means the account of that name established pursuant to Section 401 of this Indenture. "Property Acquisition Costs" means costs incurred by or on behalf of the REIT in connection with the acquisition of or investment in any Property, directly or indirectly, or to repair, rebuild, replace or restore any Property destroyed or damaged. "Redemption Account" means the account of that name established pursuant to Section 401 of this Indenture. "Redemption Date", when used with respect to any Note to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Note to be redeemed, means its principal amount at Stated Maturity. "REIT" means the Person named as the "REIT" in the first paragraph of this Indenture until a successor trust shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "REIT" shall mean such successor trust. "REIT Request" or "REIT Order" means a written request or order signed in the name of the REIT by any of its Trust Managers, authorized officers or by the Advisor on behalf of the REIT and delivered to the Trustee. "Resolution of the Trust Managers" means a copy of a resolution certified by a Trust Manager to have been duly adopted by the Trust Managers of the REIT and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Responsible Officer", when used with respect to the Trustee, means the chairman or vice-chairman of the board of directors of the Trustee, the chairman or vice-chairman of the executive committee of said board, the president, any vice-president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any trust officer or assistant trust officer, the controller, any assistant controller or any other officer of the Trustee customarily performing functions similar to those -10- 19 performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer of the Trustee to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Secured Debt" shall mean the then-accreted amount of the Notes secured pursuant to this Indenture. "Security" shall have the same meaning as in Section 2(1) of the Securities Act of 1933, as amended. "Shares" shall mean the shares of beneficial interest, par value $0.10 per share, of the REIT. "Short-Term Indebtedness" means indebtedness of the REIT for borrowed money which by its terms is payable on demand or matures not more than one year from the date of its incurrence. "Specified Investments" means (i) the fee simple interest in each of the real estate investments listed on Schedule I hereto and (ii) the 99.99% interests in each of Crow-Maryland #2, a Texas limited partnership, and Crow-Patapsco Service Center #2 Ltd., a Texas limited partnership. "Stated Maturity" when used with respect to any Note, means the date specified in such Note as the fixed date on which the principal of such Note is due and payable. "TCC Entity" means the general partnerships, limited partnerships, joint ventures and corporations that operate under the name "Trammell Crow Company" and the individuals who are members of the Management Board of, or are designated as Partners in the Firm or Regional Partners of Trammell Crow Company. "Transfer Agent" means any Person, which may be the REIT or the Advisor, authorized by the REIT to exchange or register the transfer of Notes. "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed. "Trust Managers" means the persons named as Trust Managers in the Declaration of Trust. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee -11- 20 shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean or include each Person who is then a Trustee hereunder. "Working Capital Payments" means, in the aggregate, up to an amount, if any, by which the amount initially deposited into the Property Acquisition Account pursuant to Section 402(a) hereof exceeds the aggregate gross purchase price (less assumed debt) be paid by the REIT under purchase agreements for each of the Specified Investments. SECTION 102. Compliance Certificates and Opinions. Upon any application or request by the REIT to the Trustee take any action under any provision of this Indenture, the REIT shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every Officer's Certificate or Opinion of Counsel with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the Person signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of such Person, such condition or covenant has been complied with. -12- 21 SECTION 103. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the REIT may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the REIT stating that the information with respect to such factual matters is in the possession of the REIT, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 104. Acts of Holders of Notes. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agent duly appointed in writing; and except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the REIT. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holder or Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing -13- 22 appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 701) conclusive in favor of the Trustee and the REIT, if made in the manner provided in this Section. At any time prior to (but not after) the evidencing to the Trustee, as provided in this Section, of the Act of the Holders of the percentage in aggregate principal amount of the Notes specified in this Indenture in connection with such Act, any Holder of a Note who is shown by the evidence to be one of the Holders who consented to such Act may, by filing written notice with the Trustee at its Corporate Trust Office and upon proof of holding as provided in this Section, revoke such Act so far as concerns such Holder's Note. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved in any manner reasonably acceptable to the Trustee. (c) The principal amount and serial numbers of Notes held by any Person, and the date of holding the same, shall be proved by the Note Register. (d) Any request, demand, authorization, direction, notice, consent, election, waiver or other Act of the Holder of any Note shall bind every future Holder of the same Note and the Holder of every Note issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the REIT in reliance thereon, whether or not notation of such action is made upon such Note. (e) The Trustee shall not be bound to recognize any person as a Holder of a Note unless title to such Note is proved by the Note Register. SECTION 105. Notices, Etc., to Trustee and the REIT. Any request, demand, authorization, direction, notice, consent, election, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the REIT shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Department, or -14- 23 (2) the REIT by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, or telexed or telecopied and confirmed by mail first-class postage prepaid, addressed to it at the address of its principal office specified in the first paragraph of this instrument, to the attention of the Advisor, or at any other address previously furnished in writing to the Trustee by the REIT. SECTION 106. Notice to Holders; Waiver. Except as otherwise expressly provided herein, where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Note Register, not later than the latest date and not earlier than the earliest date prescribed for the giving of such notice. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification to Holders as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders of Notes shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. SECTION 107. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in this Indenture by any of the provisions of the Trust Indenture Act, such required provision shall control. -15- 24 SECTION 108. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 109. Successors and Assigns. All covenants and agreements in this Indenture by the REIT shall bind its successors and assigns, whether so expressed or not. SECTION 110. Separability Clause; Limitations on Interest In case any provision in this Indenture o[ the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Furthermore, all agreements of the REIT whether now existing or hereafter arising and whether written or oral, are expressly limited so that in no contingency or event whatsoever shall the amount paid, or agreed to be paid to the Holders for the use, forebearance or detention of the indebtedness evidenced by the Notes or for the performance or payment of any covenant or obligation contained herein, exceed the maximum amount permissible under applicable law from time to time in effect. If for any reason whatsoever fulfillment of any provision hereof or of any other document evidencing, securing or pertaining to this Indenture, including but not limited to the Mortgages, at the time performance of such provision shall be due, shall involve transcending the limit of validity; and if under any such cirumstances the REIT shall ever receive anything of value deemed interest under applicable law from time to time in effect which would exceed interest at the highest lawful rate, such amount that would be excessive interest shall be applied to the reduction of the principal amount owing under the Notes and not to the payment of interest, or if such amount that would be excessive interest exceeds the unpaid balance of principal of the Notes, such excess shall be refunded to the Holders. SECTION 111. Benefits of Indenture. Nothing in this Indenture, the Mortgages or the Notes, express or implied, shall give to any Person, other than the parties hereto and thereto, their successors hereunder and thereunder and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture or the Mortgages. -16- 25 SECTION 112. Governing Law. This Indenture and the Notes shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to the principles of conflict of laws thereof except to the extent the internal real property laws and secured transactions laws of the states in which the Properties are located must necessarily control. SECTION 113. Legal Holidays. In any case where any Redemption Date or the Stated Maturity of the Notes shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Notes) payment of principal need not be made on such day, but may be made on the next succeeding Business Day with the same force and effect as if made on the Redemption Date or at the Stated Maturity; provided that no interest shall accrue for the period from and after such Redemption Date or Stated Maturity, as the case may be. SECTION 114. Limitation of Liability. Any obligation or liability whatsoever of the REIT which may arise at any time under this Indenture, the Mortgages or the Notes, or any obligation or liability incurred by it pursuant to any other instrument, transaction or undertaking contemplated by this Indenture, the Mortgages or the Notes, shall be satisfied, if at all, out of the REIT's property only. No such obligation or liability shall be personally binding upon nor shall there be any resort for the enforcement thereof to the private property of any of its Trust Managers, shareholders, officers, employees or agents, regardless of whether such obligations or liability is in the nature of contract, tort or otherwise. ARTICLE TWO THE NOTE FORM SECTION 201. Form Generally. The Notes shall be in substantially the form set forth in this Article with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed -17- 26 thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the Trust Managers executing such Notes, as evidenced by their execution. The Trustee's certificates of authentication shall be in substantially the form set forth in this Article. The Notes shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner permitted by the rules of any securities exchange on which the Notes may be listed, all as determined by the Trust Managers executing such Notes, as evidenced by their execution of such Notes. SECTION 202. Form of Notes. {Form of Face} FOR PURPOSES OF SECTION 1273 OF THE UNITED STATES INTERNAL REVENUE CODE OF 1954, AS AMENDED, THE ISSUE PRICE OF THIS SECURITY IS % OF ITS PRINCIPAL AMOUNT AND THE ISSUE DATE IS NOVEMBER 27, 1985. TRAMMELL CROW REAL ESTATE INVESTORS Zero Coupon Note Due 1997 No. $ Trammell Crow Real Estate Investors, a real estate investment trust duly organized and existing under the laws of the State of Texas (herein called the "REIT", which term includes any successor to the REIT under the Indenture referred to on the reverse hereof), for value received, hereby promises to pay to , or registered assigns, the principal sum of Dollars on November 27, 1997. The principal of this Note shall not bear interest except in the case of a default in payment of principal upon acceleration, upon redemption or at Stated Maturity and in each such case the overdue principal of this Note shall bear interest at the rate of 14.70% per annum (to the extent that the payment of such interest shall be legally enforceable), which shall accrue from the date of such default in payment to the date payment of such principal has been made or duly provided for. Interest on any overdue principal shall be payable on demand. Payment of the principal of and any such interest on this Note shall be made at the office of the Paying Agent, who initially shall be the Trustee, in the Borough of -18- 27 Manhattan, the City of New York. All such payments shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth in this place. Unless the certificate of authentication hereon has been executed by the Trustee by the manual signature of one of its authorized officers, this Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the REIT has caused this Note to be duly executed. Dated: Trammell Crow Real Estate Investors By ________________________________ Trust Manager {Form of Reverse} This Note is one of a duly authorized issue of securities of the REIT designated as its Zero Coupon Notes due 1997 (herein called the "Notes"), limited in aggregate principal amount at Stated Maturity to $156,259,000 (plus up to an aggregate additional principal amount at Stated Maturity of $23,439,000) issued and to be issued pursuant to an Indenture, dated as of November 15, 1985 (herein called the "Indenture"), between the REIT and J. Henry Schroder Bank & Trust Company, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the REIT, the Trustee and the Holders of the Notes, of the terms upon which the Notes are, and are to be, authenticated and delivered and for a statement of the nature and extent of the security for the Notes. The Notes will be equally and ratably secured pursuant to the Indenture. -19- 28 The Notes are subject to redemption, in whole or in part, from time to time after November 27, 1995, at 100% of the principal amount at Stated Maturity of the Notes, at the election of the REIT, upon mailing a notice of such redemption not less than 30 nor more than 60 days prior to the date fixed for redemption to the Holders of the Notes at their addresses as they appear on the Note Register. In the event of redemption of this Note in part only, a new Note or Notes for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. The Indenture contains provisions for the defeasance of all portion of the Notes upon the satisfaction of certain conditions. Upon defeasance of all Outstanding Notes, the REIT shall not be required to comply with certain restrictive covenants and certain events shall no longer constitute Events of Default with respect to the Notes. If an Event of Default shall occur and be continuing, an amount of principal of the Notes (the "Acceleration Amount") may be declared due and payable on demand. Interest, if any, on any principal not punctually paid or duly provided for shall be calculated as provided in the Indenture and shall be payable to the person in whose name the Note is registered at the close of business on a record date for the payment of interest, if any, to be fixed by the Trustee as provided in the Indenture, notice of which shall be mailed to the Holder of the Note not less than 10 days prior to such record date, or may be payable in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed. Any Interest on the Notes shall cease to accrue on the payment date fixed by the Trustee. In case of a declaration of acceleration on or before November 27, 1985 or on the twenty-seventh day of May or November in any year, the Acceleration Amount per $1,000 principal amount at Stated Maturity of the Notes shall be equal to the amount set forth in respect of such date below: -20- 29
Acceleration Amount per $1,000 principal amount at Stated Date of declaration Maturity ------------------- ------------- On or before November, 1985 $ 228.19 May, 1986 242.68 November, 1986 258.09 May, 1987 274.48 November, 1987 291.91 May, 1988 310.45 November, 1988 330.16 May, 1989 351.13 November, 1989 373.42 May, I990 397.13 November, 1990 422.35 May, 1991 449.17 November, 1991 477.69 May, 1992 508.03 November, 1992 540.29 May, 1993 574.60 November, 1993 611.08 May, 1994 649.89 November, 1994 691.15 May, 1995 735.04 November, 1995 781.72 May, 1996 831.36 November, 1996 884.15 May, 1997 940.29 At Stated Maturity $ 1,000.00
and in case of a declaration of acceleration on any other date, the Acceleration Amount shall be equal to the Acceleration Amount as of the next preceding date set forth in the table above, plus accrued original issue discount (computed by the REIT using the interest method) from such next preceding date to the date of declaration, calculated at the yield to maturity. For the purpose of this computation the yield to maturity is 12.70%, compounding semi-annually on the twenty-seventh day of each May and November calculated on the basis of the actual number of days elapsed on the basis of a 360-day year. Upon payment (i) of the Acceleration Amount so declared due and payable and (ii) of interest on any overdue principal (to the extent that the payment of such interest shall be legally enforceable), all of the REIT's obligations in respect of the payment of the principal of and interest, if any, on the Notes shall terminate. -21- 30 The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the REIT and the rights of the Holders of the Notes under the Indenture at any time by the REIT and the Trustee with the consent of the Holders of 66-2/3% of the aggregate principal amount at Stated Maturity of the Notes at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount at Stated Maturity of the Notes at the time Outstanding, on behalf of the Holders of all the Notes, to waive compliance by the REIT with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any security issued upon the registration of transfer hereof or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note or such other Note. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the REIT, which is absolute and unconditional, to pay the principal at Stated Maturity of and interest, if any, on this Note at the times, places and rate, and in the coin or currency, herein prescribed as provided in the Indenture. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note is registrable on the Note Register upon surrender of this Note for registration of transfer at the office or agency of the REIT in the Borough of Manhattan, the City of New York, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the REIT and the Note Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Notes are issuable only in registered form without coupons in denominations as provided in the Indenture. As provided in the Indenture and subject to certain limitations therein set forth, Notes are exchangeable for a like aggregate principal amount of Notes of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the REIT may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. -22- 31 Prior to due presentment of this Note for registration of transfer, the REIT, the Trustee and any agent of the REIT or the Trustee may treat the Person in whose name this Note is registered as the owner thereof for all purposes, whether or not this Note be overdue, and neither the REIT, the Trustee nor any such agent shall be affected by notice to the contrary. Recourse for the payment of the principal of this Note or interest on any such principal that is overdue, or for any claim based herein or otherwise in respect hereof, and recourse under or upon any obligation, covenant or agreement of the REIT under the Indenture or this Note shall be satisfied, if at all, out of the REIT's property only. No such obligation or liability shall be personally binding upon nor shall recourse be had to, the private property of its Trust Managers, shareholders, officers, employees or agents, regardless of whether such obligation or liability is in the nature of contract, tort or otherwise. The Indenture and the Notes shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to the principles of conflict of laws thereof except to the extent the internal real property laws and secured transactions laws of the states in which the REIT's properties are located must necessarily control. All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. SECTION 203. Form of Trustee's Certificate of Authentication. This is one of the Notes referred to in the within mentioned Indenture. J. Henry Schroder Bank & Trust Company By ______________________________ Authorized Officer -23- 32 ARTICLE THREE THE NOTES SECTION 301. Titles and Terms. (a) The aggregate principal amount at Stated Maturity of Notes which may be authenticated and delivered under this Indenture is limited to $156,259,000, plus such amount of Optional Notes up to an aggregate principal amount at Stated Maturity of $23,439,000 which shall be authenticated and delivered upon REIT Order, except for Notes authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Notes pursuant to Sections 304, 305, 306 or 1207. (b) The Notes shall be known and designated as, and the principal of and interest, if any, on the Notes shall be payable as provided herein and in, the form of Notes set forth in Section 202. (c) If principal on any Note is not punctually paid or provided for at Maturity, then interest on such principal shall be payable at the rate of 14.70% per annum (to the extent that the payment of such interest shall be legally enforceable). Interest, if any, shall be paid as provided below: (1) The REIT shall notify the Trustee in writing of the amount of interest, if any, due on the Notes and the date of the proposed payment, and at the same time the REIT shall deposit with the Trustee an amount off money equal to the aggregate amount proposed to be paid in respect of interest, if any, thereon or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when so deposited to be held in trust for the benefit of the persons entitled to such unpaid amounts as in this Subsection provided. Thereupon, the Trustee shall fix a record date for the payment of interest, if any, which shall be not more than 20 nor less than 10 days prior to the date of the proposed payment. The Trustee shall promptly notify the REIT of such record date and, in the name and at the expense of the REIT, shall cause notice of the proposed payment of interest, if any, and the record date therefor to be mailed, first-class, postage prepaid, to each Holder at the Holder's address as it appears on the Note Register not less than 10 days prior to the proposed payment date. Notice of the proposed payment of interest, if any, and the record -24- 33 date therefor having been mailed as aforesaid, interest, if any, shall be paid to the persons in whose names the Notes are registered at the close of business on such record date, and shall no longer be payable pursuant to the following Subsection (2). Any Interest shall cease to accrue on such payment date. (2) The REIT may make payment of interest, if any, in any other lawful manner not inconsistent with the requirements of any Securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, if, after notice given by the REIT to the Trustee of the proposed payment pursuant to this Subsection, such payment shall be deemed practicable by the Trustee. (d) The REIT shall notify the Trustee in writing of the Acceleration Amount proposed to be paid on each Note and the date of the proposed payment. The principal of the Notes shall be payable at the office or agency of the Paying Agent upon presentation and surrender of the Note at such office or agency. All such payments shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. (e) The Notes shall be redeemable as provided in Article Twelve. SECTION 302. Denominations. The Notes shall be issuable in denominations of $1,000 and integral multiples thereof. SECTION 303. Execution, Authentication, Delivery and Dating. The Notes shall be executed on behalf of the REIT by any of its Trust Managers. The signature of any of the Trust Managers on the Notes may be manual or facsimile. Notes bearing the manual or facsimile signatures of individuals who were at any time Trust Managers of the REIT shall bind the REIT, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Notes or did not hold such offices at the date of such Notes. At any time and from time to time after the execution and delivery of this Indenture, the REIT may deliver Notes executed by the REIT to the Trustee for authentication, together with a REIT Order for the authentication and delivery of such Notes; -25- 34 and the Trustee in accordance with the REIT Order shall authenticate and deliver such Notes as in this Indenture provided and not otherwise. Each Note shall be dated the date of its authentication. No Note shall be secured by or entitled to any benefit under this Indenture or the benefit of the lien of any of the Mortgages or be valid or obligatory for any purpose unless there appears on such Note a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Note shall be conclusive evidence, and the only evidence, that such Note has been duly authencicated and delivered hereunder and is entitled to the benefits of this Indenture. SECTION 304. Temporary Notes. Pending the preparation of definitive Notes, the REIT may execute, and upon REIT Order the Trustee shall authenticate and deliver, temporary Notes which are printed, lithographed, type-written, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Notes in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the Trust Managers executing such Notes may determine, as evidenced by their execution of such Notes. If temporary Notes are issued, the REIT will cause definitive Notes to be prepared without unreasonable delay. After the preparation of definitive Notes, the temporary Notes shall be exchangeable for definitive Notes upon surrender of the temporary Notes at any office or agency of the REIT designated pursuant to Section 1102, without service charge to the Holder; provided however that, the REIT may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Upon surrender for cancellation of any one or more temporary Notes the REIT shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Notes of authorized denominations. Until so exchanged the temporary Notes shall in all respects be entitled to the same benefits under this Indenture as definitive Notes. -26- 35 SECTION 305. Registration, Registration of Transfer and Exchange. The REIT shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency of the REIT being herein sometimes collectively referred to as the "Note Register") in which, subject to such reasonable regulations as the REIT may prescribe, the REIT shall provide for the registration of the Notes and of transfers of the Notes. The Trustee is hereby initially appointed "Note Registrar" for the purpose of registering the Notes and transfers of the Notes as herein provided. Upon surrender for registration of transfer of any Note at an office or agency maintained by the REIT for such purpose, the REIT shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes, of any authorized denominations and of a like aggregate principal amount. At the option of the Holder, the Notes may be exchanged for other Notes of any authorized denominations and of a like aggregate principal amount, upon surrender of the Notes to be exchanged at any office or agency maintained by the REIT for such purpose. Whenever any Notes are so surrendered for exchange, the REIT shall execute, and the Trustee shall authenticate and deliver, the Notes which the Holder making the exchange is entitled to receive. All Notes issued upon any registration of transfer or exchange of Notes shall be the valid obligations of the REIT, evidencing the same debt, and entitled to the same security and benefits under this Indenture and the Mortgages, as the Notes surrendered upon such registration of transfer or exchange. Every Note presented or surrendered for registration of transfer or for exchange shall (if so required by the REIT or the Note Registrar) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the REIT and the Note Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Notes, but the REIT may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Notes, other than exchanges pursuant to Sections 304 and 1207 not involving any transfer. -27- 36 The REIT shall not be required (i) to issue, register the transfer of or exchange Notes during a period beginning at the opening of business 15 calendar days before any selection of Notes to be redeemed and ending at the close of business on the day of the mailing of the relevant notice of redemption or, if there is no mailing, the first publication of the relevant notice of redemption or (ii) to register the transfer of or exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. SECTION 306. Mutilated, Destroyed, Lost and Stolen Notes. If any mutilated Note is surrendered to the Trustee, the REIT shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Note of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the REIT and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Note and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the REIT or the Trustee that such Note has been acquired by a bona fide purchaser, the REIT shall execute and upon the REIT's request the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Note a new Note of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Note has become or is about to become due and payable, the REIT in its discretion may, instead of issuing a new Note, pay such Note (without surrender thereof, except in the case of a mutilated Note), if the Person seeking such payment shall furnish the REIT and the Trustee with such security and indemnity as each may require to hold-each of them harmless, and in the case of destruction, loss or theft, evidence to the satisfaction of the REIT and the Trustee of the destruction, loss or theft of such Note and the ownership thereof. Upon the issuance of any new Note under this Section, the REIT may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. -28- 37 Every new Note issued pursuant to this Section in lieu of any destroyed, lost or stolen Note shall constitute an original additional contractual obligation of the REIT, whether or not the destroyed, lost or stolen Note shall be at any time enforceable by anyone, and any such new Note shall be entitled to all the benefits of this Indenture and the Mortgages equally and proportionately with any and all other Notes duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes. SECTION 307. Persons Deemed Owners. Prior to due presentment of a Note for registration of transfer, the REIT, the Trustee and any agent of the REIT or the Trustee may treat the Person in whose name such Note is registered as the owner of such Registered Note for the purpose of receiving payment of principal of and interest, if any, on such Note and for all other purposes whatsoever, whether or not such Note be overdue, and neither the REIT, the Trustee nor any agent of the REIT or the Trustee shall be affected by notice to the contrary. SECTION 308. Cancellation. All Notes surrendered for payment, redemption, registration of transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee. All Notes so delivered shall be promptly cancelled by the Trustee. The REIT may at any time deliver to the Trustee for cancellation any Notes previously authenticated and delivered hereunder which the REIT may have acquired in any manner whatsoever, and all Notes so delivered shall be promptly cancelled by the Trustee. No Notes shall be authenticated in lieu of or in exchange for any Notes cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Notes held by the Trustee shall be destroyed (and the Trustee shall deliver to the REIT a certificate in respect of such destruction), unless the Trustee is otherwise directed by a REIT Order. If the REIT shall acquire any of the Notes, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Notes, which shall be considered outstanding for purposes of this Section only unless and until the same are delivered or surrendered to the Trustee for cancellation. -29- 38 ARTICLE FOUR ACCOUNTS SECTION 401. Establishment of Accounts. There are hereby created the following trust accounts which shall be held in trust by the Trustee: the Property Acquisition Account, the Defeasance Account and the Redemption Account. Each such Account shall be maintained by the Trustee as a separate and distinct trust account to be held, invested, disbursed and administered as provided in this Indenture. All money deposited in such Accounts and pursuant to Section 501 shall be used solely for the purposes set forth in this Indenture and shall be segregated from and not commingled with any other funds held by the Trustee. SECTION 402. Payments into Property Acquisition Account. (a) The REIT shall deliver to the Trustee, and the Trustee shall deposit into the Property Acquisition Account at the time of the issuance of the Shares sold in the public offering thereof, the gross proceeds of the sale of the Notes, together with the net proceeds of the public offering of the Shares. (b) The REIT shall deliver to the Trustee, and the Trustee shall deposit into the Property Acquisition Account, the gross proceeds of the issuance and delivery of any Optional Notes, together with the net proceeds of additional Shares issued in conjunction with an overallotment option thereon. (c) Upon the sale or refinancing of any Property prior to the Defeasance Commencement Date, the REIT shall deliver to the Trustee, and the Trustee shall deposit into the Property Acquisition Account, such portion of the net proceeds received by the Trustee therefor as the Trust Managers shall deem necessary or appropriate to protect the interests of the Holders hereunder, which amount shall be specified in an Officer's Certificate delivered by the REIT to the Trustee; provided, however, that notwithstanding the foregoing, the Trust Managers shall be entitled to deduct and set aside from the net proceeds of any such sale or refinancing an amount which they deem sufficient to pay any taxes thereon. (d) Prior to the Defeasance Commencement Date, the Trustee shall deposit into the Property Acquisition Account such portion of the net proceeds of insurance (other than business interruption insurance) or from any condemnation proceedings -30- 39 received by the Trustee in respect of any Property as the Trust Managers shall deem necessary or appropriate to protect the interests of the Holders hereunder, which amount shall be specified in an Officer's Certificate delivered by the REIT to the Trustee; provided, however, that notwithstanding the foregoing, the Trust Managers shall be entitied to deduct and set aside from the net proceeds of any such insurance or condemnation proceedings an amount which they deem sufficient (A) to pay any taxes thereon or (B) to repair or restore the Property as specified in a certificate of Appraiser delivered by the REIT to the Trustee. Any such deduction and any excess proceeds shall be paid by the Trustee to the REIT, as specified in the Officer's Certificate. Any appraisal or adjustment of any loss or damage of or to any part of any Property or any settlement in respect thereof which may be agreed upon between the REIT, any insurer or any other Person and which is otherwise in compliance with the applicable Mortgage, as evidenced by an Officers' Certificate, shall be accepted by the Trustee and applied as provided herein. SECTION 403. Use of Moneys Deposited into Property Acquisition Account. (a) All amounts deposited into the Property Acquisition Account pursuant to Section 402(a) hereof shall be disbursed by the Trustee to, or at the direction of, the REIT upon receipt by the Trustee of an Officers' Certificate stating (i) the amounts to be paid and the name of the Persons to whom payments are to be made, (ii) that such amounts have been expended, or are being expended concurrently therewith, for Issuance Costs, for Property Acquisition Costs related to a Specified Investment (or in the event of a failure of a condition of a purchase agreement for a Specified Investment, an Additional Investment to be acquired as a substitute for such Specified Investment) or as a Working Capital Payment, (iii) that no other Officers' Certificate in respect of such disbursements is being or previously has been delivered to the Trustee, (iv) that no Event of Default exists, and (v) that all conditions precedent herein provided for relating to such disbursements have been complied with, including the provisions of Section 403(d). (b) Any amounts deposited into the Property Acquisition Account pursuant to Section 402(b) hereof shall be disbursed by the Trustee to, or at the direction of, the REIT upon receipt by the Trustee of an Officers' Certificate stating (i) the amounts to be paid and the name of the Persons to whom and amounts in which payments are to be made, (ii) that such amounts have been expended, or are being expended concurrently therewith, for -31- 40 Issuance Costs or for Property Acquisition Costs related to an Overallotment Investment, (iii) that no other Officers' Certificate in respect of such disbursements is being or previously has been delivered to the Trustee, (iv) that no Event of Default exists, and (v) that all conditions precedent herein provided for relating to such disbursements have been complied with, including the provisions of Section 403(d). (c) Any amounts deposited into the Property Acquisition Account pursuant to Sections 402(c) and (d) hereof shall be disbursed by the Trustee to, or at the direction of, the REIT upon receipt by the Trustee of an Officers' Certificate stating (i) the amounts to be paid and the name of the Persons to whom payments are to be made, (ii) that such amounts have been expended, or are being expended concurrently therewith, for Property Acquisition Costs related to an Additional Investment, (iii) that no other Officers' Certificate in respect of such disbursements is being or previously has been delivered to the Trustee, (iv) that no Event of Default exists, and (v) that all conditions precedent herein provided for relating to such disbursements have been complied with, including the provisions of Section 403(d). (d) As conditions precedent to the disbursement of any moneys to pay Property Acquisition Costs of any Property pursuant to Section 402(a), (b), (c) or (d), the REIT shall cause to be delivered to the Trustee with respect to such Property each of the following: (i) a duly executed and delivered Mortgage, with confirmation (which may be oral or in writing) of the proper recording and filing thereof; (ii) if the Property is real property, a standard form of title commitment for a mortgagee policy of title insurance in use in the jurisdiction in which the Property is located, which shall be an ALTA form if it is available, together with written confirmation from the title company that the mortgagee policy shall be issued subject only to those exceptions specified in Schedule B of the title commitment and excluding any exceptions which may arise subsequent to the date of the title commitment, upon the disbursement of the moneys for such Property in favor of the Trustee for the benefit of the Holders in an amount equal to the lesser of the most recent Appraised Value of the Property or the maximum amount available pursuant to applicable title insurance -32- 41 requirements with respect to the amount of the Secured Debt; (iii) an Opinion of Counsel (A) which states that, subject to the assumptions and customary exceptions reasonably acceptable to the Trustee specified therein, the Mortgage has been properly recorded, registered and filed or has been received for record, filing or registration, to the extent necessary under applicable local law to make effective the lien intended to be created hereby and thereby, (B) which recites the details of such action or refers to prior Opinions of Counsel in which such details are given, and (C) which states that, subject to the assumptions and customary exceptions reasonably acceptable to the Trustee specified therein, (1) upon execution, delivery, recordation and filing of the Mortgage and appropriate financing statements, the Mortgage, including any security agreement as it relates to the personalty included in the Collateral, grants to the Trustee a valid and perfected first or second lien, (2) the Mortgage constitutes a legal, valid and binding agreement of the REIT, and upon payment of applicable fees and taxes, if any, relating thereto, is enforceable in accordance with its terms, subject as to enforcement to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and general equity principles, (3) the execution, delivery, recordation and filing of the Mortgage are within the power and authority of the REIT, have been duly authorized, will not violate any provision of or constitute a default under any agreement or instrument to which the REIT is a party or by which it is bound and will not require the consent, approval, authorization or order of any person, court or governmental agency or body except as have been obtained by the REIT, and (4) all conditions precedent to disbursements pursuant to this Section have been complied with; and (iv) with respect to any Property Acquisition Costs to be expended pursuant to Sections 403(b) and (c) for real property, a certificate of an Appraiser as to the fair value of the Property which is the subject of such Property Acquisition Costs. -33- 42 (e) Upon the occurrence of an Event of Default and acceleration of the Maturity of the Notes in accordance with this Indenture, the balance of the Property Acquisition Account, if any, shall be applied in accordance with Section 606. (f) The Trustee shall transfer to the Defeasance Account any amounts deposited into the Property Acquisition Account pursuant to Section 402(a) or (b) which shall not have been used to purchase Properties pursuant to Sections 403(a) or (b), respectively, within 18 months after the date of the original issuance of Notes. (g) From and after the Defeasance Commencement Date, any amounts deposited in the Property Acquisition Account remaining therein shall be transferred by the Trustee to the Defeasance Account. (h) Pending disbursement of the amounts on deposit in the Property Acquisition Account, the Trustee is hereby directed to invest and reinvest such amounts in Eligible Securities promptly upon receipt of, and, subject to the limitations set forth in this Article, in accordance with the instructions of the REIT set forth in an Officers' Certificate. All such investments shall be credited to the Property Acquisition Account and all losses thereon shall be charged against the Property Acquisition Account. Net income and profits on such investments shall not be deemed a part of the Collateral and shall be held by the Trustee on behalf of the REIT and shall be paid by the Trustee, upon delivery of an Officers' Certificate if such Officers' Certificate states that no Event of Default exists hereunder, to the Advisor on behalf of the REIT on the last Business Day of each fiscal year of the REIT or at such other times, upon delivery of an Officer's Certificate; provided that, if the Officers' Certificate states that an Event of Default exists, such income and profits shall become a part of the Collateral and shall not be paid by the Trustee to the REIT, but shall be held by the Trustee for the benefit of the Holders. As amounts invested are needed for disbursement from the Account, the Trustee shall cause a sufficient amount of the investments credited to the Account to be redeemed or sold and converted into cash to the credit of the Account. (i) If there exists excess funds as specified in Section 502(c) which would permit the Trustee to pay to the REIT such amounts as are specified in and in accordance with such Section, then the Trustee shall also pay to the REIT any amounts remaining in the Property Acquisition Account, upon receipt of a REIT Request. -34- 43 SECTION 404. Defeasance Account. (a) From and after the Defeasance Commencement Date, upon the sale or refinancing of any Property, the REIT shall deliver to the Trustee, and the Trustee shall deposit into the Defeasance Account, such portion of the net proceeds received by the Trustee therefor as the Trust Managers shall deem necessary or appropriate to protect the interests of the Holders hereunder as specified in an Officers' Certificate; provided, however, that notwithstanding the foregoing, the Trust Managers shall be entitled to deduct and set aside from the net proceeds of any such sale or refinancing an amount which they deem sufficient to pay any taxes thereon. (b) From and after the Defeasance Commencement Date, the Trustee shall deposit into the Defeasance Account such portion of the net proceeds of insurance, (other than business interruption insurance) or from any condemnation proceedings received by the Trustee in respect of any Property as the Trust Managers shall deem necessary or appropriate to protect the interests of the Holders hereunder as specified in an Officers' Certificate; provided, however, that notwithstanding the foregoing, the Trust Managers shall be entitled to deduct and set aside from the net proceeds of any such insurance or condemnation proceedings an amount which they deem sufficient to pay any taxes thereon, and any such deduction and any excess proceeds shall be paid by the Trust to the REIT, as specified in the Officers' Certificate; provided that, if the Officers' Certificate states that an Event of Default exists, such income and profit shall become a part of the Collateral and shall not be paid by the Trustee to the REIT, but shall be held by the Trustee for the benefit of the Holders. Any appraisal or adjustment of any loss or damage of or to any part of any Property or any settlement in respect thereof which may be agreed upon between the REIT and any insurer or any other Person, as evidenced by an Officers' Certificate, shall be accepted by the Trustee and applied as provided herein. (c) If the REIT has given a notice of redemption of the Notes in accordance with Article Twelve, then the Trustee shall transfer amounts in the Defeasance Account to the Redemption Account upon and in accordance with a REIT Request. (d) Any amounts in the Defeasance Account in excess of the amount necessary to cause a defeasance of the Notes pursuant to Section 1112 hereof shall be paid by the Trustee to the REIT in accordance with Section 502(c). -35- 44 (e) Upon satisfaction of each of the conditions set forth in subclause (C) of clause (1) of Section 501, the Trustee shall transfer any amounts in the Defeasance Account to an account established for the purposes of Section 501 by the Trustee, upon REIT Request. (f) If there exists excess funds as specified in Section 502(c), which would permit the Trustee to pay to the REIT such amounts as are specified in and in accordance with Section 502(c), then the Trustee shall pay to the REIT any amounts remaining in the Defeasance Account, upon REIT Request. (g) The Trustee shall deposit into the Defeasance Account any moneys or Government Obligations delivered to the Trustee by the REIT for deposit pursuant to Section 1112 together with any moneys or securities permitted or required to be deposited therein pursuant to the terms of this Indenture. In the event of a prepayment of any Government Obligation on deposit in the Defeasance Account, the Trustee promptly shall give notice thereof to the REIT, and upon delivery to the Trustee of an Officers' Certificate to such effect the Trustee shall invest the amount of any prepaid principal in Government Obligation which through the payment of principal in respect thereof in accordance with their terms will provide not later than one day before the due date of any payment of principal money in an amount sufficient to pay and discharge the principal of and interest, if any, on the Notes Outstanding at the Stated Maturity of such principal. (h) Net income and profits on investments of amounts in the Defeasance Account shall not be deemed a part of the Collateral and shall be held by the Trustee on behalf of the REIT and, shall be paid by the Trustee, upon delivery of an Officers' Certificate, if such Officers' Certificate states that no Event of Default exists hereunder, to the Advisor on behalf of the REIT on the last Business Day of each fiscal year of the REIT or at such other times, pursuant to an Officers' Certificate. When amounts invested are needed for disbursement from the Defeasance Account, the Trustee shall cause a sufficient amount of the investments credited to the Defeasance Account to be redeemed or sold and converted into cash to the credit of the Defeasance Account. (i) Upon the occurrence of an Event of Default and acceleration of the Maturity of the Notes in accordance with this Indenture, the amounts in the Defeasance Account shall be applied in accordance with Section 606. -36- 45 SECTION 405. Redemption Account. All amounts required to be deposited with the Trustee pursuant to Section 1205 of this Indenture shall be credited to the Redemption Account to be held in trust for the benefit of the Persons entitled thereto but shall not be deemed part of the Collateral. Moneys on deposit in the Redemption Account shall be applied solely to pay the Redemption Price of Notes to be redeemed in accordance with Article Twelve. The Trustee shall deposit into the Redemption Account any amounts in the Defeasance Account directed pursuant to this Indenture to be deposited into the Redemption Account. On and after any Redemption Date, the Trustee shall apply or hold funds on deposit in the Redemption Account in accordance with the last paragraph of Section 1103 and this Section 405. SECTION 406. Investment of Accounts. The Trustee shall not be liable or responsible for any loss resulting from any such investment or reinvestment as herein authorized; except that the Trustee shall be liable for any loss resulting from its willful or negligent failure, within a reasonable time after receiving the direction from the REIT to make any investment or reinvestment in the manner provided for herein at the REIT's direction. If the Trustee is unable, after reasonable effort and within a reasonable time, to make any such investment or reinvestment, it shall so notify in writing the REIT and thereafter the Trustee shall be relieved of all responsibility with respect thereto. SECTION 407. Trustee's Reliance. The Trustee shall be entitled conclusively to rely on Officers' Certificates delivered pursuant to this Article and shall be under no duty to examine the accuracy of the facts stated therein. ARTICLE FIVE SATISFACTION AND DISCHARGE SECTION 501. Satisfaction and Discharge of Indenture and Mortgages. This Indenture and the Mortgages and the lien, rights and interests created hereby and thereby shall cease to be of further effect and the Trustee, at the expense of the REIT, shall execute, record and file proper instruments acknowledging -37- 46 satisfaction and discharge of this Indenture and the Mortgages and shall pay, assign, transfer and deliver to the REIT or upon REIT Order all Property held by it hereunder and under the Mortgages as part of the Collateral; provided that, the following conditions have been satisfied: (1) either (A) all Notes theretofore authenticated and delivered (other than Notes which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306, and Notes for whose payment money or Government Obligations have theretofore been deposited in trust or segregated and held in trust by the REIT and thereafter repaid to the REIT or discharged from such trust, as provided in Section 1103) have been delivered to the Trustee for cancellation, or (B) all such Notes not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the REIT, and (C) the REIT, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee, as trust funds in trust for the purpose, an amount sufficient to pay and discharge the entire indebtedness on such Notes not theretofore delivered to the Trustee for cancellation, for principal and interest, if any, to the date of such deposit (in the case of Notes which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (2) the REIT has paid or caused to be paid all other sums payable hereunder or under the Mortgages; and (3) the REIT has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all -38- 47 conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture and the Mortgages have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the REIT to the Trustee under Sections 502(b) or 707 and, if money shall have been deposited with the Trustee pursuant to subclause (C) of clause (1) of this Section, the obligations of the Trustee under Section 502 and the last paragraph of Section 1103 shall survive. SECTION 502. Application of Trust Money; Indemnification. (a) Subject to the provisions of the last paragraph of Section 1103, all money and Government Obligations deposited with the Trustee pursuant to Section 501 and 1112 and all money received by the Trustee in respect of Government Obligations deposited with the Trustee pursuant to Section 501 and 1112, shall be held in trust and applied by it, in accordance with the provisions of the Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the REIT acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and interest, if any, for whose payment such money has been deposited with or received by the Trustee or analogous payments as contemplated by Sections 501 or 1112. (b) The REIT shall pay and shall indemnify the Trustee against any tax, fee or other charge imposed on or assessed against Government Obligations deposited pursuant to Sections 501 or 1112 or the interest and principal received in respect of such obligations other than any payable by or on behalf of the Holders. (c) The Trustee shall deliver or pay to the REIT from time to time upon REIT Request any Government Obligations or money held by it as provided in Sections 501 and 1122 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are then in excess of the amount thereof which then would have been required to be deposited for the purpose for which such Government Obligations or money were deposited or received. -39- 48 ARTICLE SIX REMEDIES SECTION 601. Events of Default. "Event of Default", wherever used herein with respect to the Notes, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of the principal of any Note at its Maturity; or (b) default in the performance or breach of the REIT's obligations to pay taxes, to maintain insurance or to perform any other monetary obligations under any of the Mortgages for a period of 30 calendar days after there has been given by registered or certified mail to the REIT by the Trustee or to the REIT and the Trustee by the Holders of at least 10% in principal amount of the Outstanding Notes a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; (c) default in the performance, or breach, of any other covenant or of any warranty of the REIT under this Indenture or any Mortgage (other than a covenant or warranty, the default or breach of which is elsewhere specifically dealt with in this Section) and continuance of such default or breach for a period of 30 calendar days after there has been given, by registered or certified mail, to the REIT by the Trustee or to the REIT and the Trustee by the Holders of at least 10% in principal amount of the Outstanding Notes a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; provided that, such cure period will be extended for another single 30-day period if the default or breach has not been cured within that period but the REIT has commenced efforts to cure the default or breach and thereafter proceeds to cure same with due diligence; or (d) a default under any bond, debenture, note or other evidence of indebtedness for money borrowed by the REIT or -40- 49 under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the REIT (excluding this Indenture or any of the Mortgages), whether such indebtedness now exists or shall hereafter be created, which default shall constitute a failure to pay any portion of the principal of, or interest, if any, on such indebtedness when due and payable after the expiration of any applicable grace period with respect thereto or shall have resulted in such principal amount of indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such indebtedness having been discharged, or such acceleration having been rescinded, stayed, annulled, or waived within a period of 20 calendar days after there shall have been given, by registered or certified mail, to the REIT by the Trustee or to the REIT and the Trustee by the Holders of at least 10% in principal amount of the Outstanding Notes, a written notice specifying such default and requiring the REIT to cause such indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that it is a "Notice of Default" hereunder; (e) the entry by a court having jurisdiction in the premises of (i) a decree or order for relief in respect of the REIT in an involuntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law or (ii) a decree or order adjudging the REIT a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the REIT under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the REIT or of any substantial part of the REIT's property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive calendar days; or (f) the commencement by the REIT of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the REIT in an involuntary case or proceeding under any applicable Federal -41- 50 or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the REIT or of any substantial part of the REIT's property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due. Nothing in this Section shall preclude the holder of a Prior Lien with respect to Overallotment Investments or Specified Investments from curing any default described in this Section to the extent that the REIT is entitled to cure such default hereunder; provided that, nothing herein shall be construed to grant such holders of Prior Liens any rights under this Indenture. SECTION 602. Acceleration of Maturity; Rescission and Annulment. If an Event of Default occurs and is continuing, then in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Notes may declare the Acceleration Amount of all of the Notes to be due and payable immediately, by a notice in writing to the REIT (and to the Trustee if given by Holders), and upon any such declaration such Acceleration Amount shall become immediately due and payable. At any time after such a declaration of acceleration with respect to the Notes has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Notes, by written notice to the REIT and the Trustee, may rescind and annul such declaration and its consequences if (a) the REIT has paid or deposited with the Trustee a sum sufficient to pay (i) the principal of any Notes which have become due otherwise than by such declaration of acceleration and interest thereon from the date such principal became due at the rates prescribed therefor in such -42- 51 Notes (to the extent that payment of such is enforceable under applicable law); and (ii) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, including those sums due to the Trustee or advanced pursuant to Section 707; and (b) all Events of Default other than the non-payment of the principal of Notes which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 613. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 603. Collection of Indebtedness and Suits for Enforcement by Trustee. The REIT covenants that if default is made in the payment of the principal of any Note at the Maturity thereof, the REIT will, upon demand of the Trustee, pay to the Trustee, for the benefit of the Holders of the Notes, the whole amount then due and payable on the Notes and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal at the rate or rates prescribed therefor in such Notes, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances by the Trustee, its agents and counsel pursuant to Section 707, and including any debt incurred by or on behalf of the Trustee pursuant to any Mortgage. If the REIT fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may exercise its rights and remedies hereunder and under the Mortgages and may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the REIT or any other obligor upon such Notes and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the REIT or any other obligor upon such Notes, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders hereunder and under the Mortgages -43- 52 by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or the Mortgages or in aid of the exercise of any power granted herein or therein, or to enforce any other proper remedy; provided, however, that the Trustee shall use its best efforts first to exercise its rights and remedies hereunder and under Mortgages covering Properties not subject to Prior Liens on the Specified Investments before exercising its rights and remedies under Mortgages covering other Properties. Nothing herein however, shall be construed to prevent the Trustee from exercising its rights and remedies under Mortgages covering Properties subject to Prior Liens if the Trustee determines in its sole discretion that such action would be in the best interest of the Holders, and nothing herein shall be construed to require the Trustee to exhaust its remedies under Mortgages covering Properties not subject to Prior Liens prior to exercising its rights and remedies under the other Mortgages. In the event the Trustee is not the mortgagee under a particular Mortgage, the Trustee shall proceed to protect and enforce its rights and the rights of the Holders hereunder and under such Mortgage by directing the mortgagee thereunder to exercise its rights and remedies under the Mortgage. SECTION 604. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the REIT or the property of the REIT or its creditors, the Trustee (irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the REIT for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (i) to file and prove a claim for the whole amount of principal and interest, if any, owing and unpaid in respect of the Notes and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and -44- 53 (ii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 707. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder of a Note in any such Proceeding. SECTION 605. Trustee May Enforce Claims Without Possession of Notes. All rights of action and claims under this Indenture, the Mortgages or the Notes may be prosecuted and enforced by the Trustee without the possession of any of the Notes or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Notes in respect of which such judgment has been recovered. SECTION 606. Application of Money Collected. Any money collected by the Trustee pursuant to this Article, including exercise of its rights and remedies under the Mortgages, shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal or interest, if any, upon presentation of the Notes, or both, as the case may be, and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: -45- 54 FIRST: To the payment of all amounts due the Trustee under Section 707 and under any Mortgage; SECOND: To the payment of the amounts then due and unpaid for principal of and interest, if any, on the Notes in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal and interest, if any, respectively; THIRD: To the payment of any other amounts due under this Indenture or any of the Mortgages; and FOURTH: To the payment of the remainder, if any, to the REIT or to whomsoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct. SECTION 607. Limitation on Suits. No Holder of any Note shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture or the Mortgages, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (2) the Holders of not less than 25% in principal amount of the Outstanding Notes shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 calendar days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Notes; -46- 55 it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture or any Mortgage to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture or any Mortgage, except in the manner herein provided and for the equal and ratable benefit of all of such Holders. SECTION 608. Unconditional Right of Holders to Receive Payment. Notwithstanding any other provision in this Indenture or any Mortgage, the Holder of any Note shall have the right, which is absolute and unconditional, to receive payment of the principal or interest, if any, of such Note on the Stated Maturity or Maturities expressed in such Note (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment and such rights shall not be impaired without the consent of the Holder, except to the extent that the institution or prosecution of suit or the entry of judgment therein would, under applicable law, result in the surrender, impairment, waiver or loss of the lien of the Indenture or any Mortgage upon the Collateral. SECTION 609. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture or the Mortgages and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the REIT, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 610. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes in the last paragraph of Section 306, no right or remedy herein or in the Mortgages conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the -47- 56 extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 611. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 612. Control by Holders of Notes. The Holders of a majority in principal amount of the Outstanding Notes shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee under the Indenture or any Mortgage; provided that such direction shall not be in conflict with any rule of law or with this Indenture or any Mortgage which would be unduly prejudicial to the rights of the Holders not joining therein and shall not require the Trustee to incur any financial liability if the Trustee shall have no reasonable grounds for believing that adequate indemnity against such liability is not reasonably assured to it and the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. SECTION 613. Waiver of Past Defaults. The Holders of not less than a majority in principal amount of the Outstanding Notes may on behalf of the Holders of all the Notes waive any past default hereunder or under the Mortgages and the consequences thereof, except a default (a) in the payment of the principal of any Note, or (b) in respect of a covenant or provision hereof which under Article Ten cannot be modified or amended without the consent of the Holder of each Outstanding Note. -48- 57 Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture or the Mortgages, but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 614. Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Note by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture or under any of the Mortgages, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the REIT, to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Notes, or to any suit instituted by any Holder of any Note for the enforcement of the payment of the principal of or interest, if any, on any Note on or after the Stated Maturity expressed in such Note (or, in the case of redemption, on or after the Redemption Date). SECTION 615. Waiver of Stay or Extension Laws. The REIT covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture or any Mortgage; and the REIT (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. -49- 58 ARTICLE SEVEN THE TRUSTEE SECTION 701. Certain Duties and Responsibilities. (a) Except during the continuance of an Event of Default, (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and the Mortgages, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. (b) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture or by any of the Mortgages, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (c) No provision of this Indenture or in any of the Mortgages shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that (1) this Subsection shall not be construed to limit the effect of Subsection (a) of this Section; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (3) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a -50- 59 majority in principal amount of the Outstanding Notes, determined as provided in Section 612, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture with respect to the Notes; and (4) no provision of this Indenture or the Mortgages shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (d) Whether or not therein expressly so provided, every provision of this Indenture and the Mortgages relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. SECTION 702. Notice of Defaults. Within 90 calendar days after the occurrence of any default hereunder with respect to the Notes, the Trustee shall transmit by mail to all Holders of Notes entitled to receive reports pursuant to Section 803(c), notice of such default hereunder known to the Trustee, unless such default shall have been cured or waived; provided, however, that, except in the case of a default in the payment of the principal of or interest, if any, on any Note, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interest of the Holders of Notes; and provided, further, that in the case of any default of the character specified in Section 601(d) with respect to Notes, no such notice to Holders shall be given until at least 20 calendar days after the occurrence thereof, and, in the case of any default of the character specified in Section 601(b) and (c) with respect to the Notes, no such notice to the Holders shall be given until at least 30 calendar days after the occurrence thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default with respect to the Notes. -51- 60 SECTION 703. Certain Rights of Trustee. Subject to the provisions of Section 701: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties including, but not limited to, copies of any insurance policies or certificate of insurance delivered to it pursuant to any Mortgage; (b) any request or direction of the REIT mentioned herein shall be sufficiently evidenced by a REIT Request or REIT Order and any Resolution of the Trust Managers; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (d) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders of Notes pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, including, but not limited to, the examination of insurance policies either as to coverage or as to value insured, but the Trustee, in its discretion, may -52- 61 make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the REIT, personally or by agent or attorney; and (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. (h) the Trustee shall not be liable for any action suffered or omitted by it in good faith and believed by it be authorized or within the discretion or rights or power conferred upon it by this Indenture. SECTION 704. Not Responsible for Recitals or Issuance of Notes. The recitals contained herein and in the Notes (except the Trustee's certificates of authentication) shall be taken as the statements of the REIT, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Notes. The Trustee or any Authenticating Agent shall not be accountable for the use or application by the REIT of Notes or the proceeds thereof except as provided in this Indenture. SECTION 705. May Hold Notes. The Trustee, any Paying Agent, any Note Registrar, any Transfer Agent or any other agent of the REIT, in its individual or any other capacity, may become the owner or pledgee of Notes and, subject to Sections 708 and 713, may otherwise deal with the REIT with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Note Registrar, Transfer Agent or such other agent. SECTION 706. Money Held in Trust. Money held by the Trustee in trust hereunder shall be segregated from and shall not be commingled with any other funds held by the Trustee. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise specifically provided in this Indenture. -53- 62 SECTION 707. Compensation and Reimbursement. The REIT agrees (a) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder and under the Mortgages (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture or any Mortgage (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (c) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligations of the REIT under this Section 707 to compensate the Trustee and to pay or reimburse the Trustee for such expenses and disbursements shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Notes upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the Holders of particular Notes. SECTION 708. Disqualification; Conflicting Interests. (a) If the Trustee has or shall acquire any conflicting interest, as defined in this Section, with respect to the Notes, it shall, within 90 calendar days after ascertaining that it has such conflicting interest, either eliminate such conflicting interest or resign with respect to the Notes in the manner and with the effect hereinafter specified in this Article. (b) In the event that the Trustee shall fail to comply with the provisions of Subsection (a) of this Section with respect to the Notes, the Trustee shall, within 10 calendar days after the -54- 63 expiration of such 90-day period, transmit, in the manner and to the extent provided in Section 803(c), to all Holders of Notes notice of such failure. (c) For the purposes of this Section, the Trustee shall be deemed to have a conflicting interest with respect to the Notes if (1) the Trustee is trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the REIT are outstanding, unless such other indenture is a collateral trust indenture under which the only collateral consists of Notes issued under this Indenture, provided that there shall be excluded from the operation of this paragraph, or any indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the REIT are outstanding, if the REIT shall have sustained the burden of proving, on application to the Commission and after opportunity for hearing thereon, that trusteeship under this Indenture with respect to the Notes or such other indenture or indentures is not so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to the Notes or under such other indenture or indentures; (2) the Trustee or any of its directors or executive officers is an obligor upon the Notes or an underwriter for the REIT; (3) the Trustee directly or indirectly controls or is directly or indirectly controlled by or is under direct or indirect common control with the REIT or an underwriter for the REIT; (4) the Trustee or any of its directors or executive officers is a director, officer, partner, employee, appointee or representative of the REIT, or of an underwriter (other than the Trustee itself) for the REIT who is currently engaged in the business of underwriting, except that (i) one individual may be a director or an executive officer, or both, of the Trustee and a director or an executive officer, or both, of the REIT but may not be at the same time an executive officer of both the Trustee and the REIT; (ii) if and so long as the number of directors of -55- 64 the Trustee in office is more than nine, one additional individual may be a director or an executive officer, or both, of the Trustee and a director of the REIT; and (iii) the Trustee may be designated by the REIT or by any underwriter for the REIT to act in the capacity of transfer agent, registrar, custodian, paying agent, fiscal agent, escrow agent or depositary, or in any other similar capacity, or, subject to the provisions of paragraph (1) of this Subsection, to act as trustee, whether under an indenture or otherwise; (5) 10% or more of the voting securities of the Trustee is beneficially owned either by the REIT or by any director, partner, executive officer or Trust Manager thereof, or 20% or more of such voting securities is beneficially owned, collectively, by any two or more of such persons; or 10% or more of the voting securities of the Trustee is beneficially owned either by an underwriter for the REIT or by any director, partner, executive officer or Trust Manager thereof, or is beneficially owned, collectively, by any two or more such persons; (6) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default (as hereinafter in this Subsection defined), (i) 5% or more of the voting securities, or 10% or more of any other class of security, of the REIT not including the Notes issued under this Indenture and securities issued under any other indenture under which the Trustee is also trustee, or (ii) 10% or more of any class of security of an underwriter for the REIT; (7) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default (as hereinafter in this Subsection defined), 5% or more of the voting securities of any person who, to the knowledge of the Trustee, owns 10% or more of the voting securities of, or controls directly or indirectly or is under direct or indirect common control with, the REIT; (8) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default (as hereinafter in this Subsection defined), 10% or more of any class of security of any person who, to the knowledge of the Trustee, owns 50% or more of the voting securities of the REIT; or -56- 65 (9) the Trustee owns, on May 15 in any calendar year, in the capacity of executor, administrator, testamentary or inter vivos trustee, guardian, committee or conservator, or in any other similar capacity, an aggregate of 25% or more of the voting securities, or of any class of security, of any person, the beneficial ownership of a specified percentage of which would have constituted a conflicting interest under paragraph (6), (7) or (8) of this Subsection. As to any such securities of which the Trustee acquired ownership through becoming executor, administrator or testamentary trustee of an estate which included them, the provisions of the preceding sentence shall not apply, for a period of two years from the date of such acquisition, to the extent that such securities included in such estate do not exceed 25% of such voting securities or 25% of any such class of security. Promptly after May 15 in each calendar year, the Trustee shall make a check of its holdings of such securities in any of the above-mentioned capacities as of such May 15. If the REIT fails to make payment in full of the principal of or interest on any of the Notes when and as the same becomes due and payable, and such failure continues for 30 calendar days thereafter, the Trustee shall make a prompt check of its holdings of such securities in any of the above-mentioned capacities as of the date of the expiration of such 30-day period, and after such date, notwithstanding the foregoing provisions of this paragraph, all such securities so held by the Trustee, with sole or joint control over such securities vested in it, shall, but only so long as such failure shall continue, be considered as though beneficially owned by the Trustee for the purposes of paragraphs (6), (7) and (8) of this Subsection. The specification of percentages in paragraphs (5) to (9), inclusive, of this Subsection shall not be construed as indicating that the ownership of such percentages of the securities of a person is or is not necessary or sufficient to constitute direct or indirect control for the purposes of paragraph (3) or (7) of this Subsection. For the purposes of paragraphs (6), (7), (8) and (9) of this Subsection only, (i) the terms "security" and "securities" shall include only such securities as are generally known as corporate securities, but shall not include any note or other evidence of indebtedness issued to evidence an obligation to repay moneys lent to a person by one or more banks, trust companies or banking firms, or any certificate of interest or participation in any such note or evidence of indebtedness; (ii) an obligation -57- 66 shall be deemed to be "in default" when a default in payment of principal shall have continued for 30 calendar days or more and shall not have been cured; and (iii) the Trustee shall not be deemed to be the owner or holder of (A) any security which it holds as collateral security, as trustee or otherwise, for an obligation which is not in default as defined in clause (ii) above, or (B) any security which it holds as collateral security under this Indenture, irrespective of any default hereunder, or (C) any security which it holds as agent for collection, or as custodian, escrow agent or depositary, on in any similar representative capacity. (d) For the purposes of this Section: (1) The term "underwriter", when used with reference to the REIT, means every person who, within three years prior to the time as of which the determination is made, has purchased from the REIT with a view to, or has offered or sold for the REIT in connection with, the distribution of any security of the REIT outstanding at such time, or has participated or has had a direct or indirect participation in any such undertaking, or has participated or has had a participation in the direct or indirect underwriting of any such undertaking, but such term shall not include a person whose interest was limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission. (2) The term "director" means any director of a corporation or any individual performing similar functions with respect to any organization, whether incorporated or unincorporated. (3) The term "person" means an individual, a corporation, a partnership, an association, a joint-stock company, a trust, an unincorporated organization or a government or political subdivision thereof. As used in this paragraph, the term "trust" shall include only a trust where the interest or interests of the beneficiary or beneficiaries are evidenced by a security. (4) The term "voting security" means any security presently entitling the owner or holder thereof to vote in the direction or management of the affairs of a person, or any security issued under or pursuant to any trust, agreement or arrangement whereby a trustee or trustees or agent or agents for the owner or holder of such security are presently entitled to vote in the direction or management of the affairs of a person. -58- 67 (5) The term "REIT" means any obligor upon the Notes. (6) The term "executive officer" means the president, every vice president, every trust officer, the cashier, the secretary and the treasurer of a corporation, and any individual customarily performing similar functions with respect to any organization whether incorporated or unincorporated, but shall not include the chairman of the board of directors. (e) The percentages of voting securities and other securities specified in this Section shall be calculated in accordance with the following provisions: (1) A specified percentage of the voting securities of the Trustee, the REIT or any other person referred to in this Section (each of whom is referred to as a "person" in this paragraph) means such amount of the outstanding voting securities of such person as entitles the holder or holders thereof to cast such specified percentage of the aggregate votes which the holders of all the outstanding voting securities of such person are entitled to cast in the direction or management of the affairs of such person. (2) A specified percentage of a class of securities of a person means such percentage of the aggregate amount of securities of the class outstanding. (3) The term "amount", when used in regard to securities, means the principal amount if relating to evidences of indebtedness, the number of shares if relating to capital shares and the number of units if relating to any other kind of security. (4) The term "outstanding" means issued and not held by or for the account of the issuer. The following securities shall not be deemed outstanding within the meaning of this definition: (i) securities of an issuer held in a sinking fund relating to securities of the issuer of the same class; (ii) securities of an issuer held in a sinking fund relating to another class of securities of the issuer, if the obligation evidenced by such other class of securities is not in default as to principal or interest or otherwise; -59- 68 (iii) securities pledged by the issuer thereof as security for an obligation of the issuer not in default as to principal or interest or otherwise; and (iv) securities held in escrow if placed in escrow by the issuer thereof; provided, however, that any voting securities of an issuer shall be deemed outstanding if any person other than the issuer is entitled to exercise the voting rights thereof. (5) A security shall be deemed to be of the same class as another security if both securities confer upon the holder or holders thereof substantially the same rights and privileges; provided, however, that, in the case of secured evidences of indebtedness, all of which are issued under a single indenture, differences in the interest rates or maturity dates of various series thereof shall not be deemed sufficient to constitute such series different classes and provided, further, that, in the case of unsecured evidences of indebtedness, differences in the interest rates or maturity dates thereof shall not be deemed sufficient to constitute them securities of different classes, whether or not they are issued under a single indenture. SECTION 709. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be a Corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000 subject to supervision or examination by Federal or State authority and having its Corporate Trust Office in the Borough of Manhattan, the City of New York. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. -60- 69 SECTION 710. Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 711. (b) The Trustee may resign at any time with respect to the Notes by giving written notice thereof to the REIT. If the instrument of acceptance by a successor Trustee required by Section 711 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Notes. (c) The Trustee may be removed at any time with respect to the Notes by Act of the Holders of a majority in principal amount of the Outstanding Notes delivered to the Trustee and to the REIT. (d) If at any time: (1) the Trustee shall fail to comply with Section 708(a) after written request therefor by the REIT or by any Holder of a Note who has been a bona fide Holder of a Note for at least six months, or (2) the Trustee shall cease to be eligible under Section 709 and shall fail to resign after written request therefor by the REIT or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the REIT by a Resolution of Trust Managers may remove the Trustee with respect to all Notes, or (ii) subject to Section 614, any Holder of a Note who has been a bona fide Holder of a Note for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all Notes and the appointment of a successor Trustee. -61- 70 (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, with respect to the Notes, the REIT, by a Resolution of the Trust Managers, shall promptly appoint a successor Trustee or Trustees with respect to the Notes and shall comply with the applicable requirements of Section 711. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee with respect to the Notes shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Notes delivered to the REIT and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 711, become the successor Trustee with respect to the Notes and to that extent supersede the successor Trustee appointed by the REIT. If no successor Trustee with respect to the Notes shall have been so appointed by the REIT or the Holders of Notes and accepted appointment in the manner required by Section 711, any Holder of a Note who has been a bona fide Holder of Note for at least six months may, on behalf of himself and all others similarly situated, petition any court of competition jurisdiction for the appointment of a successor Trustee with respect to the Notes. (f) The REIT shall give notice of each resignation and each removal of the Trustee with respect to the Notes and each appointment of a successor Trustee with respect to the Notes by mailing written notice of such event by first-class mail, postage prepaid, to all Holders of Notes, as their names and addresses appear in the Note Register. Each notice shall include the name of the successor Trustee with respect to the Notes and the name of its Corporate Trust Office. SECTION 711. Acceptance of Appointment by Successor. (a) In case of the appointment hereunder and under any Mortgage of a successor Trustee, every such successor Trustee so appointed shall execute, acknowledge and deliver to the REIT and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the REIT or the successor Trustee, such retiring Trustee shall, upon payment of all amounts then due under the Indenture, execute and deliver an instrument transferring to such successor Trustee all the rights, power and trusts of the retiring Trustee and shall duly -62- 71 assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder and under each Mortgage. (b) Upon request of any such successor Trustee under the Indenture or under the Mortgages, the REIT shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in paragraph (a) of this Section. Any trustee ceasing to act shall retain a lien on all property or funds held or collected by such trustee to secure any amount then due it pursuant to the provisions of Section 707. (c) No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 712. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Notes shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Notes so authenticated with the same effect as if such Trustee had itself authenticated such Notes. SECTION 713. Preferential Collection of Claims Against the REIT. (a) Subject to Subsection (b) of this Section, if the Trustee shall be or shall become a creditor, directly or indirectly, secured or unsecured, of the REIT within four months prior to a default, as defined in Subsection (c) of this Section, or subsequent to such a default, then, unless and until such default shall be cured, the Trustee shall set apart and hold in a special account for the benefit of the Trustee individually, the Holders of the Notes and the holders of other indenture securities, as defined in Subsection (c) of this Section: -63- 72 (1) an amount equal to any and all reductions in the amount due and owing upon any claim as such creditor in respect of principal or interest, effected after the beginning of such four months' period and valid as against the REIT and its other creditors, except any such reduction resulting from the receipt or disposition of any property described in paragraph (2) of this Subsection, or from the exercise of any right of set-off which the Trustee could have exercised if a petition in bankruptcy had been filed by or against the REIT upon the date of such default; and (2) all property received by the Trustee in respect of any claims as such creditor, either as security therefor, or in satisfaction or composition thereof, or otherwise, after the beginning of such four months' period, or an amount equal to the proceeds of any such property, if disposed of, subject, however, to the rights, if any, of the REIT and its other creditors in such property or such proceeds. Nothing herein contained, however, shall affect the right of the Trustee: (A) to retain for its own account (i) payments made on account of any such claim by any Person (other than the REIT) who is liable thereon, and (ii) the proceeds of the bona fide sale of any such claim by the Trustee to a third Person, and (iii) distributions made in cash, securities or other property in respect of claims filed against the REIT in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Act or applicable State law; (B) to realize, for its own account, upon any property held by it as securities for any such claim, if such property was so held prior to the beginning of such four months' period; (C) to realize, for its own account, but only to the extent of the claim hereinafter mentioned, upon any property held by it as security for any such claim, if such claim was created after the beginning of such four months' period and such property was received as security therefor simultaneously with the creation thereof, and if the Trustee shall sustain the burden of proving that at the time such property was so received the Trustee had no reasonable cause to believe that a default, as defined in Subsection (c) of this Section, would occur within four months; or -64- 73 (D) to receive payment on any claim referred to in paragraph (B) or (C), against the release of any property held as security for such claim as provided in paragraph (B) or (C), as the case may be, to the extent of the fair value of such property. For the purposes of paragraphs (B), (C) and (D), property substituted after the beginning of such four months' period for property held as security at the time of such substitution shall, to the extent of the fair value of the property released, have the same status as the property released, and, to the extent that any claim referred to in any of such paragraphs is created in renewal of or in substitution for or for the purpose of repaying or refunding any pre-existing claim of the Trustee as such creditor, such claim shall have the same status as such pre-existing claim. If the Trustee shall be required to account, the funds and property held in such special account and the proceeds thereof shall be apportioned among the Trustee, the Holders of Notes and the holders of other indenture securities in such manner that the Trustee, the Holders of Notes and the holders of other indenture securities realize, as a result of payments from such special account and payments of dividends on claims filed against the REIT in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Act or applicable State law, the same percentage of their respective claims, figured before crediting to the claim of the Trustee anything on account of the receipt by it from the REIT of the funds and property in such special account and before crediting to the respective claims of the Trustee and the Holders of Notes and the holders of other indenture securities dividends on claims filed against the REIT in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Act or applicable State law, but after crediting thereon receipts on account of the indebtedness represented by their respective claims from all sources other than from such dividends and from the funds and property so held in such special account. As used in this paragraph, with respect to any claim, the term "dividends" shall include any distribution with respect to such claim, in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Act or applicable State law, whether such distribution is made in cash, securities or other property, but shall not include any such distribution with respect to the secured portion, if any, of such claim. The court in which such bankruptcy, receivership or proceeding for reorganization is pending shall have jurisdiction (i) to -65- 74 apportion among the Trustee, the Holders of Notes and the holders of other indenture securities, in accordance with the provisions of this paragraph, the funds and property held in such special account and proceeds thereof, or (ii) in lieu of such apportionment, in whole or in part, to give to the provisions of this paragraph due consideration in determining the fairness of the distributions to be made to the Trustee and the Holders of Notes and the holders of other indenture securities with respect to their respective claims, in which event it shall not be necessary to liquidate or to appraise the value of any securities or other property held in such special account or as security for any such claim, or to make a specific allocation of such distributions as between the secured and unsecured portions of such claims, or otherwise to apply the provisions of this paragraph as a mathematical formula. Any Trustee which has resigned or been removed after the beginning of such four months' period shall be subject to the provisions of this Subsection as though such resignation or removal had not occurred. If any Trustee has resigned or been removed prior to the beginning of such four months' period, it shall be subject to the provisions of this Subsection if and only if the following conditions exist: (i) the receipt of property or reduction of claim, which would have given rise to the obligation to account, if such Trustee had continued as Trustee, occurred after the beginning of such four months' period; and (ii) such receipt of property or reduction of claim occurred within four months after such resignation or removal. (b) There shall be excluded from the operation of Subsection (a) of this Section a creditor relationship arising from: (1) the ownership or acquisition of securities issued under any indenture, or any security or securities having a maturity of one year or more at the time of acquisition by the Trustee; (2) advances authorized by a receivership or bankruptcy court of competent jurisdiction or by this Indenture, for the purpose of preserving any property which shall at any time be subject to the lien of this Indenture or of discharging tax liens or other prior liens or -66- 75 encumbrances thereon, if notice of such advances and of the circumstances surrounding the making thereof is given to the Holders of Notes at the time and in the manner provided in this Indenture; (3) disbursements made in the ordinary course of business in the capacity of trustee under an indenture, transfer agent, registrar, custodian, paying agent, fiscal agent or depositary, or other similar capacity; (4) an indebtedness created as a result of services rendered or premises rented; or an indebtedness created as a result of goods or securities sold in a cash transaction, as defined in Subsection (c) of this Section; (5) the ownership of stock or of other securities of a corporation organized under the provisions of Section 25(a) of the Federal Reserve Act, as amended, which is directly or indirectly a creditor of the REIT; and (6) the acquisition, ownership, acceptance or negotiation of any drafts, bills of exchange, acceptances or obligations which fall within the classification of self-liquidating paper, as defined in Subsection (c) of this Section. (c) For the purposes of this Section only: (1) the term "default" means any failure to make payment in full of the principal of or interest on any of the Notes or upon the other indenture securities when and as such principal or interest becomes due and payable; (2) the term "other indenture securities" means securities upon which the REIT is an obligor outstanding under any other indenture (i) under which the Trustee is also trustee, (ii) which contains provisions substantially similar to the provisions of this Section, and (iii) under which a default exists at the time of the apportionment of the funds and property held in such special account; (3) the term "cash transaction" means any transaction in which full payment for goods or securities sold is made within seven days after delivery of the goods or securities in currency or in checks or other orders drawn upon banks or bankers and payable upon demand; -67- 76 (4) the term "self-liquidating paper" means any draft, bill of exchange, acceptance or obligation which is made, drawn, negotiated or incurred by the REIT for the purpose of financing the purchase, processing, manufacturing, shipment, storage or sale of goods, wares or merchandise and which is secured by documents evidencing title to, possession of, or a lien upon, the goods, wares or merchandise or the receivables or proceeds arising from the sale of the goods, wares or merchandise previously constituting the security, provided the security is received by the Trustee simultaneously with the creation of the creditor relationship with the REIT arising from the making, drawing, negotiating or incurring of the draft, bill of exchange, acceptance or obligation; (5) the term "REIT" means any obligor upon the Notes; and (6) the term "Federal Bankruptcy Act" means the Bankruptcy Act or Title 11 of the United States Code. SECTION 714. Appointment of Mortgage Trustees. (a) In the event the Trustee is not qualified under applicable state law to act as Trustee under a Mortgage, a mortgage trustee shall be appointed by the REIT and the Trustee to act as a mortgage trustee under that Mortgage for the benefit of the Trustee in accordance with the directions of the Trustee or of the Holders where permitted by this Indenture. Pursuant to such appointment, the mortgage trustee shall agree to act and shall be entitled to indemnity to the same extent as the Trustee pursuant to this Indenture. The Trustee and any mortgage trustee shall not be jointly and severally liable for any actions taken under this Indenture or the Mortgages and any liability hereunder or thereunder shall be several only. (b) The Trustee may, from time to time by written instrument appoint a substitute trustee to act as a mortgage trustee under any Mortgage, to act thereunder on behalf of the trustee, as provided in subparagraph (a) hereof. ARTICLE EIGHT HOLDERS' LISTS AND REPORTS BY TRUSTEE AND REIT SECTION 801. REIT to Furnish Trustee Names and Addresses of Holders. The REIT will furnish or cause to be furnished to the Trustee -68- 77 (a) semi-annually, not later than June 30 and December 31 in each year, a list, in such form as the Trustee may reasonably require, containing all the information in the possession or control of the REIT, any of its Paying Agents other than the Trustee, or the Note Registrar, if other than the Trustee, as to the names and addresses of the Holders of Notes as of the preceding June 15 or December 15, as the case may be, and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the REIT of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; excluding from any such list any names and addresses received by the Trustee in its capacity as Note Registrar (if it is then serving as such). SECTION 802. Preservation of Information; Communications to Holders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders of Notes (i) contained in the most recent list furnished to the Trustee as provided in Section 801, (ii) received by the Trustee in its capacity as Note Registrar (if it is then serving as such), and (iii) filed with it within the two preceding years pursuant to Section 803(c)(2). The Trustee may (i) destroy any list furnished to it as provided in Section 801 upon receipt of a new list so furnished, (ii) destroy any information received by it as Paying Agent (if so acting) hereunder upon delivering to itself as Trustee, not earlier than June 30 or December 31 in each year, a list containing the names and addresses of the Holders of Notes obtained from such information since the delivery of the next previous list, if any, (iii) destroy any list delivered to itself as Trustee which was compiled from information received by it as Paying Agent (if so acting) hereunder upon the receipt of a new list so delivered, and (iv) destroy not earlier than two years after filing, any information filed with it pursuant to Section 803(c)(2). (b) If three or more Holders of Notes (herein referred to as "applicants") apply in writing to the Trustee, and furnish to the Trustee reasonable proof that each such applicant has owned a Note for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other Holders of Notes -69- 78 with respect to their rights under this Indenture or under the Notes and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within five business days after the receipt of such application, at its election, either: (i) afford such applicants access to the information preserved at the time by the Trustee in accordance with Section 802(a), or (ii) inform such applicants as to the approximate number of Holders of Notes whose names and addresses appear in the information preserved at the time by the Trustee in accordance with Section 802(a), and as to the approximate cost of mailing to such Holders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Holder whose name and address appear in the information preserved at the time by the Trustee in accordance with Section 802(a) a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender the Trustee shall mail to such applicants and file with the Commission, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interest of the Holders or would be in violation of applicable Law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Holders with reasonable promptness after the entry of such order and the renewal of such tender. (c) Every Holder, by receiving and holding the same, agrees with the REIT and the Trustee that neither the REIT nor the Trustee nor any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders in accordance with -70- 79 Section 802(b), regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 802(b). SECTION 803. Reports by Trustee. (a) Within 60 calendar days after May 15 of each year commencing with the year 1986, the Trustee shall transmit by mail to the Holders, as provided in Subsection (c) of this Section, a brief report dated as of such May 15 with respect to: (1) its eligibility under Section 709 and its qualifications under Section 708, or in lieu thereof, if to the best of its knowledge it has continued to be eligible and qualified under said Sections, a written statement to such effect; (2) the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) which remain unpaid on the date of such report, and for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Notes, on any property or funds held or collected by it as Trustee, except that the Trustee shall not be required (but may elect) to report such advances if such advances so remaining unpaid aggregate not more than 1/2 of 1% of the principal amount of the Notes Outstanding on the date of such report; (3) the amount, interest rate and maturity date of all other indebtedness owing by the REIT (or by any other obligor on the Notes) to the Trustee in its individual capacity, on the date of such report, with a brief description of any property held as collateral security therefor, except any indebtedness based upon a creditor relationship arising in any manner described in Section 713(b)(2), (3), (4) or (6); (4) the property and funds, if any, in any of the Accounts or otherwise physically in the possession of the Trustee as such on the date of such report; (5) any release, or release and substitution, of Collateral securing the Notes (and the consideration therefor, if any) which it has not previously reported; -71- 80 (6) any additional issue of Notes which the Trustee has not previously reported; and (7) any action taken by the Trustee in the performance of its duties hereunder which it has not previously reported and which in its opinion materially affects the Notes or the Collateral, except action in respect of a default, notice of which has been or is to be withheld by the Trustee in accordance with Section 702. (b) The Trustee shall transmit to the Holders, as provided in Subsection (c) of this Section, a brief report with respect to the release, or release and substitution, of the Collateral securing the Notes (and the consideration therefor, if any) unless the fair value of such property as set forth in the certificate or opinion required by Section 1302 hereof, is less than 10% of the accreted value of the Notes Outstanding at the time of such release, or such release and substitution, and with respect to the character and amount of any advances (and if the Trustee elects to so state, the circumstances surrounding the making thereof) made by the Trustee (as such) since the date of the last report transmitted pursuant to Subsection (a) of this Section (or if no such report has yet been so transmitted, since the date of execution of this instrument) for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Notes or the Collateral, on property or funds held or collected by it as Trustee and which it has not previously reported pursuant to this Subsection, except that the Trustee shall not be required (but may elect) to report such advances if such advances remaining unpaid at any time aggregate 10% or less of the principal amount of the Notes Outstanding at such time, such reports to the transmitted within 90 calendar days after such time. (c) Reports pursuant to this Section shall be transmitted by mail: (1) To all Holders, as the names and addresses of such Holders appear in the Note Register; (2) to all Holders who, within the two years immediately preceding the transmission of such reports, have filed their addresses with the Trustee for the purpose of receiving the reports; and (3) except in the case of reports pursuant to Subsection (b) of this Section, to each Holder whose name and address is preserved at the time by the Trustee, as provided in Section 802(a). -72- 81 (d) A copy of each such report shall, at the time of such transmission to Holders of Notes, be filed by the Trustee with each stock exchange upon which any Notes are listed, with the Commission and with the REIT. The REIT will notify the Trustee when any Notes are listed on any stock exchange. SECTION 804. Reports by REIT. The REIT shall: (a) file with the Trustee, within 15 calendar days after the REIT is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the REIT may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934; or, if the REIT is not required to file information, documents or reports pursuant to either of said Sections, then it shall file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Securities Exchange Act of 1934 in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (b) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the REIT with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; and (c) transmit, within 30 calendar days after the filing thereof with the Trustee, to the Holders of Notes, in the manner and to the extent provided in Section 803(c) with respect to reports pursuant to Section 803(a), such summaries of any information, documents and reports required to be filed by the REIT pursuant to paragraphs (1) and (2) of this Section as may be required by rules and regulations prescribed from time to time by the Commission. -73- 82 ARTICLE NINE CONSOLIDATION, MERGER, CONVEYANCE OR TRANSFER SECTION 901. The REIT May Consolidate, Etc., Only on Certain Terms. The REIT shall not consolidate with or merge into any other Person or convey of transfer its properties and assets substantially as an entirety to any Person, unless: (a) in case the REIT shall consolidate with or merge into another entity or convey or transfer its properties and assets substantially as an entirety to any Person, such consolidation, merger, conveyance or transfer shall be in such terms as shall fully preserve the lien and security hereof and of the Mortgages and the rights and powers of the Trustee and the Holders hereunder and thereunder, the entity formed by such consolidation or into which the REIT is merged or the Person which acquired by conveyance or transfer the properties and assets of the REIT substantially as an entirety shall be a trust or corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto and amendment to Mortgage complying with the requirements of Article X, executed by such successor and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal on all the Notes and the performance of every covenant of this Indenture and the Mortgages on the part of the REIT to be performed or observed; (b) immediately after giving effect to such transaction no Event of Default and no event which, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be continuing; and (c) the REIT or successor Person has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance or transfer and such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. For purposes of this Section, the REIT shall not be deemed to have consolidated with or merged into or conveyed or transferred its properties or assets substantially as an entirety if it has acted in accordance with a plan of liquidation. - 74 - 83 SECTION 902. Successor Substituted. Upon any consolidation by the REIT with or merger by the REIT into any other entity or any conveyance or transfer of properties and assets of the REIT substantially as an entirety to any Person in accordance with Section 901, the successor Person formed by such consolidation or into which the REIT is merged or to which such conveyance or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the REIT under this Indenture or any Mortgage with the same effect as if such successor Person had been named as the REIT herein, and thereafter, the predecessor Person shall be relieved of all obligations and covenants under this Indenture, the Mortgages and the Notes. ARTICLE TEN SUPPLEMENTAL INDENTURES SECTION 1001. Without Consent of Holders. Without the consent of any Holders, the REIT, when authorized by a Resolution of the Trust Managers, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto or one or more amendments to any Mortgages, in form reasonably satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another trust or corporation to the REIT and the assumption by any such successor of the covenants of the REIT herein, in the Mortgages and in the Notes; or (2) to add to the covenants of the REIT for the benefit of the Holders, or to surrender any right or power conferred herein upon the REIT; or (3) to further secure the Notes; or (4) to evidence and provide for the acceptance of appointment under any of the Mortgages by a successor or substitute trustee with respect to the Mortgages and to add to or change any of the provisions of this Indenture or any of the Mortgages as shall be necessary to provide for or facilitate the administration of the trusts thereunder by more than one trustee; or -75- 84 (5) to cure any ambiguity, to correct or supplement any provision herein or in any of the Mortgages which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture or under any Mortgage, provided such amendment or additional provisions shall not adversely affect the interests of the Holders of Notes in any material respect; or (6) to add or to change any of the provisions of this Indenture in any manner that may be necessary to permit the qualification of this Indenture under the Trust Indenture Act; or (7) to correct or amplify the description of any property at any time subject to the lien of this Indenture or any of the Mortgages, or better to assure, convey and confirm unto the Trustee any property subject or required to be subjected to the lien of this Indenture or the Mortgages, or to subject to the lien of this Indenture or the Mortgages additional Property; or (8) to change Schedule II to add or delete Collateral as contemplated hereunder or to otherwise effect any release of Collateral hereunder or under any Mortgage pursuant to Section 1302; or (9) to modify the terms of any Mortgage in a manner that is not adverse in any material respect to the interest of the Holders. SECTION 1002. With Consent of Holders. With the consent of the Holders of not less than a 66-2/3% in principal amount at Stated Maturity of the Outstanding Notes by Act of said Holders delivered to the REIT and the Trustee, the REIT, when authorized by a Resolution of the Trust Managers, and the Trustee may enter into an indenture or indentures supplemental hereto or an amendment to any of the Mortgages for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of any of the Mortgages or this Indenture or modifying in any manner the rights of the Holders under this Indenture or under any of the Mortgages; Provided, however, that no such supplemental indenture or amendment to a Mortgage shall, without the consent of the Holder of each Outstanding Note affected thereby -76- 85 (1) change the Stated Maturity of, or reduce the principal amount of any Note, reduce the amount of the principal of the Notes that would be due and payable upon a declaration of acceleration of the Stated Maturity thereof pursuant to Section 602 or at the Redemption Date, the rate of interest borne after Maturity or change the place of payment where, or the coin or currency in which, any Note or the interest, if any, thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or in the case of redemption, on or after the Redemption Date), or (2) change any obligation of the REIT to maintain an office or agency in the Borough of Manhattan in the City of New York, or (3) modify any of the provisions of this Section, Section 613 or Section 1111 except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Note affected thereby; or (4) permit the creation of any lien ranking prior to or on a parity with the lien of this Indenture and the Mortgages with respect to any of the Collateral or terminate the lien of this Indenture or any of the Mortgages on any property at any time subject hereto, other than Prior Liens or Permitted Liens, or (5) reduce the percentage in principal amount of the Outstanding Notes, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture; It shall not be necessary for any Act of Holders of Notes under this Section to approve the particular form of any proposed supplemental indenture or amendment to any Mortgage, but it shall be sufficient if such Act shall approve the substance thereof. The Trustee may in its discretion determine whether or not any Notes are affected by a supplemental indenture and any such determination shall be conclusive upon the Holders. -77- 86 SECTION 1003. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture by this Article or the modifications thereby of the trusts created by this Indenture or any of the Mortgages, the Trustee shall be entitled to receive, and (subject to Section 701) shall be fully protected in relying upon, an Opinion of Counsel and an Officer's Certificate stating that the execution of such supplemental indenture and amendment to any Mortgages is authorized or permitted by this Indenture, that the supplemental indenture or amendment to mortgage is not inconsistent herewith and that the supplemental indenture or amendment to mortgage upon due execution, delivery and recordation or filing thereof, as the case may be, will be a legal, valid and binding obligation of the REIT enforceable in accordance with its terms. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture or amendment to any Mortgage which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 1004. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture or amendment to a Mortgage under this Article, this Indenture or such Mortgage, as the case may be, shall be modified in accordance therewith, and such supplemental indenture or amendment shall form a part of this Indenture or such Mortgage, as the case may be, for all purposes; and every Holder of Notes theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 1005. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect. SECTION 1006. Notice of Supplemental Indentures. Promptly after the execution by the REIT and the Trustee of any supplemental indenture or amendment to a Mortgage pursuant to the provisions of Section 1002, the REIT shall give notice, setting forth in general terms the substance of such supplemental indenture or amendment, in the manner provided in Section 106. Any failure of the REIT to give such notice, or any defect therein, shall not in any way impair or affect the validity of any such supplemental indenture or amendment. -78- 87 SECTION 1007. Reference in Notes to Supplemental Indentures. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the REIT shall so determine, new Notes so modified as to conform, in the opinion of the Trustee and the REIT, to any such supplemental indenture may be prepared and executed by the REIT and authenticated and delivered by the Trustee in exchange for Outstanding Notes but any such exchange shall not be necessary to make such modification effective as to the Outstanding Notes. ARTICLE ELEVEN COVENANTS SECTION 1101. Payment of Principal and Interest. The REIT will duly and punctually pay the principal of and interest, if any, on the Notes in accordance with the terms of the Notes and this Indenture. SECTION 1102. Maintenance of Offices or Agencies. The REIT hereby appoints the Trustee as its agent in the Borough of Manhattan, the City of New York where the Notes may be presented or surrendered for payment, where Notes may be surrendered for registration of transfer or exchange, and where notices and demands to or upon the Company in respect of the Notes, this Indenture and the Mortgages may be served. The REIT may at any time and from time to time vary or terminate the appointment of any such agent, or, appoint any additional agents for any or all of such purposes; provided, however, that the REIT will maintain in the Borough of Manhattan, the City of New York, an office or agency where Notes may be presented or surrendered for payment, where Notes may be surrendered for registration of transfer or exchange, and where notices and demands to or upon the REIT in respect of the Notes and this Indenture may be served. The REIT will give prompt written notice to the Trustee of the appointment or termination of any such agent and of the location and any change in the location of any such office or agency. -79- 88 If at any time the REIT shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, presentations and surrenders may be made and notices and demands may be served at the Corporate Trust Office of the Trustee, and the REIT hereby appoints the same as its agent to receive such presentations, surrenders, notices and demands. SECTION 1103. Money for Note Payment to Be Held in Trust. If the REIT shall at any time act as its own Paying Agent with respect to the Notes, it will, on or before the due date of the principal of the Notes, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided, and will promptly notify the Trustee of its action or failure so to act. Whenever the REIT shall have one or more Paying Agents for the Notes, it will, prior to the due date of the principal of the Notes, deposit with a Paying Agent a sum sufficient to pay the principal becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, and (unless such Paying Agent is the Trustee) the REIT will promptly notify the Trustee of its action or failure so to act. Moneys so segregated or deposited and held in trust shall not be a part of the Collateral but shall constitute a separate trust fund for the benefit of the Persons entitled to such principal. Except in the case of monies so segregated when acting as its own Paying Agent, monies held in trust by the Trustee or any other Paying Agent for the payment of the principal on the Notes need not be segregated from other funds, except to the extent required by law. The REIT will cause each Paying Agent for the Notes other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (1) hold all sums held by it for the payment of the principal of the Notes in trust for the benefit of Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee notice of any default by the REIT (or any other obligor upon the Notes) in the making of any payment of principal on the Notes; and -80- 89 (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The REIT may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture and the Mortgages or for any other purpose, pay, or by REIT Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the REIT or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the REIT or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the REIT, in trust for the payment of the principal at Stated Maturity and interest, if any, of any Note and remaining unclaimed for three years after such principal has become due and payable shall be repaid to the REIT on REIT Request, or (if then held by the REIT) shall be discharged from such trust; and the Holder of such Note shall thereafter, as an unsecured general creditor, look only to the REIT for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the REIT as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the REIT mail to all Holders notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such mailing, any unclaimed balance of such money then remaining will be repaid to the REIT. SECTION 1104. To Keep Books; Access. The REIT will keep proper books of record and account, in which entries in reasonable detail shall be made of all dealings or transactions of or in relation to the Notes and the properties, business and affairs of the REIT in accordance with generally accepted accounting principles. The REIT shall furnish to the Trustee any and all information and permit the Trustee reasonable access during customary business hours to its books, records and Properties as the Trustee may reasonably request with respect to the performance by the REIT of its covenants in this Indenture and the Mortgages. -81- 90 SECTION 1105. Trust Existence. Subject to Article Nine and the terms of the Declaration of Trust, the REIT will do or cause to be done all things necessary to preserve and keep in full force and effect its trust existence, rights (charter and statutory) and franchises; provided, however, that the REIT shall not be required to preserve any such right or franchise if the Trust Managers shall determine that the preservation thereof is no longer desirable in the conduct of the business of the REIT and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 1106. Indebtedness. The REIT shall not issue, incur or create any Other Secured Debt or Prior Lien Obligations unless immediately thereafter and after giving effect thereto, the aggregate amount of all outstanding Other Secured Debt, Secured Debt and Prior Lien Obligations would not exceed 50% of the sum of the Appraised Value of all of the Properties which are real property (which shall include the amount of any Prior Liens on such Collateral and shall be as set forth in the most recent report of the Appraised Value of the REIT's real property owned directly or indirectly by the REIT), and the gross value of all of the REIT's other assets. The REIT shall not issue, incur or create any Short-Term Indebtedness unless immediately thereafter and after giving effect thereto, (A) the aggregate amount outstanding of Other Secured Debt, Short-Term Indebtedness, Secured Debt and Prior Lien Obligations would not exceed 60% of the Appraised Value of all of the Property (which shall include the amount of any Prior Liens on such Collateral and shall be as set forth in the most recent report of the Appraised Value of the real property, owned directly or indirectly by the REIT) and the gross value of all of the REIT's other assets, and (B) the REIT's Distributable Cash for the 12 months immediately preceding such date of determination was equal to or greater than 300% of the sum of Debt Service payable for the next succeeding 12-month period and interest expense on the Short-Term Indebtedness to be incurred. During each year after 1985, the REIT shall be free from Short-Term Indebtedness for a period of at least 30 consecutive calendar days. Any Other Secured Debt and Short-Term Indebtedness issued, incurred or created by the REIT shall be expressly subordinated to the lien of this Indenture and the Mortgages. -82- 91 SECTION 1107. Payment of Taxes and Claims. The REIT will pay, when due, all taxes, assessments and governmental charges or levies imposed upon it, the income of the Trust, the Collateral or the proceeds arising from the disposition of the Collateral, and all claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons which, if unpaid, might result in the creation of a lien upon the income of the Trust, the Collateral or the proceeds arising from the disposition of the Collateral; provided that items of the foregoing description need not be paid while being contested in good faith and by appropriate proceedings. SECTION 1108. Sales of Certain Properties. To the extent that all of the Notes have not been redeemed or defeased in full in accordance with this Article, Article Five or Article Twelve herein by November 27, 1996 and the REIT shall not have, prior to such date, obtained refinancing commitments from bona fide creditors, in an amount sufficient to repay at Stated Maturity the remaining Outstanding Notes not previously discharged, redeemed or defeased, the REIT shall sell as soon as reasonably practicable such of its Properties as is necessary in order to obtain funds sufficient to retire the Notes at their Stated Maturity. The proceeds of any such sale shall be forthwith delivered to the Trustee for deposit in the Defeasance Account. SECTION 1109. Statement as to Compliance. The REIT shall deliver to the Trustee, within 120 calendar days after the end of each fiscal year of the REIT (which on the date of this Indenture is the calendar year) ending after the date hereof, an Officers' Certificate, stating whether or not to the knowledge of the signers thereof the REIT is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture or any of the Mortgages and if the REIT shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. The REIT shall deliver to the Trustee, within five Business Days after the occurrence thereof, notice of any event which, with the giving of notice or passage of time or both, would constitute an Event of Default. -83- 92 SECTION 1110. Further Assurances; Recording. The REIT will cause this Indenture and all supplemental indentures and other instruments of further assurance, including all financing statements and continuation statements covering security interests in personal property and all Mortgages to be promptly recorded, registered and filed, and at all times to be kept recorded, registered and filed, and will execute and file such financing statements and cause to be issued and filed such continuation statements, all in such manner and in such places as may be required by law fully to preserve and to protect the rights of the Holders and the Trustee hereunder and thereunder to all property comprising the Collateral. The REIT will furnish to the Trustee within 30 days after the end of each year beginning with the year 1986, an Opinion of Counsel, dated as of such date, either stating that, subject to certain assumptions and customary exceptions reasonably acceptable to the Trustee set forth therein in the opinion of such counsel, such action has been taken with respect to the recording, registering, filing, re-recording, re-registering and re-filing of this instrument, the Mortgages, and of all supplemental indentures, financing statements, continuation statements or other instruments of further assurances as is necessary to maintain the lien hereof and thereof and reciting the details of such action or referring to prior Opinions of Counsel in which such details are given, and stating that all financing statements and continuation statements have been executed and filed that are necessary fully to preserve and protect the rights of the Noteholders and the Trustee hereunder, or stating that, in the opinion of such Counsel, no such action is necessary to maintain such lien. SECTION 1111. Waiver of Certain Covenants. The REIT may omit in any particular instance to comply with any term, provision or condition set forth in Sections 1106, 1108 and 1113, if before the time for such compliance the Holders of at least 66-2/3% in principal amount of the Outstanding Notes shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the REIT and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. -84- 93 SECTION 1112. Defeasance of Certain Obligations. The REIT may omit to comply with any term, provision or condition set forth in Sections 1106, 1107, 1108, 1113, 1114 and 1115 and Sections 601(b) and 601(c) with respect to each of such Sections shall be deemed not to be an Event of Default; provided that, the following conditions have been satisfied: (a) With reference to this Section 1112, the REIT has deposited or caused to be deposited irrevocably (irrespective of whether the conditions in paragraphs (b), (c), (d) and (e) below have been satisfied) in the Defeasance Account, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Notes, (i) money in an amount, or (ii) Government Obligations which through the payment of principal in respect thereof in accordance with their terms will provide not later than one day before the due date of any payment of Principal money in an amount or (iii) a combination thereof, sufficient to pay and discharge the principal of and interest, if any, on the Notes Outstanding at the Stated Maturity of such principal; (b) Such deposit will not result in an Event of Default hereunder; (c) No Event of Default shall have occurred and be continuing on the date of such deposit; (d) The REIT has delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the Notes will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance of certain obligations and will be subject to federal income tax on the same amount and in the same manner and at the same times, as would have been the case if such deposit and defeasance had not occurred; (e) The REIT has delivered to the Trustee an Officers Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the defeasance contemplated by this Section have been complied with; and (f) The REIT has delivered to the Trustee its reasonable fees and expenses incurred hereunder and under any Mortgage. -85- 94 SECTION 1113. Uninsured Losses. From and after the Defeasance Commencement Date, in the event an uninsurable loss occurs with respect to any of the Property, the REIT shall deliver to the Trustee for deposit into the Defeasance Account an amount equal to the purchase price paid by the REIT for the Property less the amount of debt assumed by the REIT on the Property at the time of its acquisition. SECTION 1114. Distributions. During the period commencing on the fourth anniversary of the original issuance of the Notes and ending on the eleventh anniversary thereof, the REIT shall not make distributions to Shareholders out of the net proceeds of the sale or refinancing of any Property, insurance payment or condemnation proceeding, if the principal amount of the Notes at Stated Maturity (reduced by the amount, if any, of the Collateral in the Defeasance Account and the amount, if any, in the Redemption Account or held pursuant to Section 501) would be greater than 100% of the sum of the most recent Appraised Value of all of the Properties which are real property owned directly or indirectly by the REIT (reduced by the amount of the Prior Lien Obligations on all the Property and the amount attributable to the gain on the proposed sale, based on the most recent Appraised Value of such Property, or to the gain from the insurance payment or condemnation proceeding) and the gross value of all of the REIT's other assets. Notwithstanding the foregoing, nothing in this Section 1114 shall prevent the REIT from making any distributions to Shareholders deemed necessary by the Trust Managers to maintain the REIT's qualification as a real estate investment trust under the Code. SECTION 1115. Maintenance of Title Insurance. On or before the delivery in each year of the Officer's Certificate required pursuant to Section 1109, the REIT shall obtain and deliver to the Trustee evidence that the mortgagee policies of title insurance in force on the Properties are in an aggregate amount equal to the lesser of the amount of the Secured Debt as of the immediately preceding December 31 or the maximum amount available pursuant to applicable title insurance requirements with respect to the amount of the Secured Debt. -86- 95 ARTICLE TWELVE REDEMPTION OF NOTES SECTION 1201. Right of Redemption. The Notes may be redeemed at the election of the REIT, as a whole or, from time to time, in part, at any time on or after November 27, 1995 at the Redemption Price specified in the form of Note hereinbefore set forth. SECTION 1202. Notice to Trustee. In case of any redemption at the election of the REIT pursuant to a Resolution of Trust Managers of less than all the Notes, the REIT shall, at least 60 calendar days prior to the Redemption Date fixed by the REIT (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Notes to be redeemed. SECTION 1203. Selection by Trustee of Notes to Be Redeemed. If less than all the Outstanding Notes are to be redeemed, the particular Notes to be redeemed shall be selected not more than 60 calendar days prior to the Redemption Date by the Trustee, from the Outstanding Notes not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of the principal amount of the Notes of a denomination larger than the minimum authorized denomination. For the purpose of any such selection, the REIT will, upon request of the Trustee, close for a period of 15 days proceeding the mailing of any notice of redemption the Note Register of the REIT with respect to the Notes. The Trustee shall promptly notify the REIT in writing of the Notes selected for redemption and, in the case of any Notes selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Notes shall relate, in the case of any Notes redeemed or to be redeemed only in part, to the portion of the principal amount of such Notes which has been or is to be redeemed. -87- 96 SECTION 1204. Notice of Redemption. Notice of redemption shall be given in the manner provided in Section 106 to the Holders of Notes to be redeemed not less than 30 calendar nor more than 60 calendar days prior the Redemption Date. All notices of redemption shall state: (1) the Redemption Date, (2) the Redemption Price, (3) if less than all the Outstanding Notes are to be redeemed, the identification (and, in the case of partial redemption, the principal amounts) of the particular Notes to be redeemed, (4) that on the Redemption Date the Redemption Price will become due and payable upon each such Note to be redeemed, and (5) the place or places where such Notes are to be surrendered for payment of the Redemption Price. Notice of redemption of Notes to be redeemed at the election of the REIT shall be given by the REIT or, at the REIT's request, by the Trustee in the name and at the expense of the REIT. SECTION 1205. Deposit of Redemption Price. Prior to any Redemption Date, the REIT shall deposit with the Trustee in trust in the Redemption Account or with a Paying Agent (or, if the REIT is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1103) an amount of money sufficient to pay the Redemption Price of all the Notes which are to be redeemed. Such money shall be held in trust for the benefit of the Persons entitled to such Redemption Price and shall not be deemed part of the Collateral. SECTION 1206. Notes Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Notes so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified. Upon surrender of any such Note for redemption in accordance with said notice, such Note shall be paid by the REIT at the Redemption Price. If any Note called for redemption shall not -88- 97 be so paid upon surrender thereof for redemption, the principal shall until paid, bear interest from the Redemption Date at the rate of interest payable on overdue principal as indicated in the Note. SECTION 1207. Notes Redeemed in Part. Any Note which is to be redeemed only in part shall be surrendered at an office or agency of the REIT (with, if the REIT or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the REIT and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the REIT shall execute, and the Trustee shall authenticate and deliver to the Holder of such Note, without service charge, a new Note or Notes, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Note so surrendered. ARTICLE THIRTEEN RELEASES SECTION 1301. Possession by the REIT; Dispositions without Release. So long as no Event of Default shall have occurred and be continuing, the REIT shall be suffered and permitted, subject to the provisions of this Article, to possess, use, manage, operate and enjoy the Collateral (other than any cash and securities constituting part of the Collateral and deposited with the Trustee) and to collect, receive, use, invest and dispose of the rents, issues, tolls, profits, revenues and other income from the Collateral, with power, in the ordinary course of business, freely and without hindrance on the part of the Trustee or of the Holders, to use, consume and dispose, subject to the provisions of this Indenture and except as contemplated in the Mortgages, of any thereof, and to alter, repair and change the position of any of its Collateral, provided that, such alterations, repairs or changes shall not diminish the value thereof or impair the lien of this Indenture and the Mortgages thereon or affect materially the income from such Collateral and to deal with, exercise any and all rights under, receive and enforce performance under, and adjust and settle all matters relating to current performance of, choses in action, leases and contracts, in accordance with the By-Laws -89- 98 of the REIT and the leasing and management and leasing guidelines adopted from time to time by the Trust Managers. SECTION 1302. Releases. The REIT shall have the right, from time to time, to sell or otherwise dispose of any part of the Collateral (except cash, securities and other personal property held by, or required to be deposited or pledged with, the Trustee hereunder) and the Trustee shall, from time to time, release the Collateral so sold or disposed of from the lien hereof and the related Mortgages, but only upon receipt by the Trustee of the following: (a) A Resolution of the Trust Managers requesting such release and describing the Collateral to be released. (b) An Officers' Certificate (together with a certificate of Appraiser as to the matters contained in items (iv) and (v) below) setting forth in substance as follows: (i) that the REIT has sold or disposed of or has contracted to sell or dispose of the Collateral so requested to be released and the amount of the net proceeds from such sale or disposition; (ii) the portion of the net proceeds which the Trust Managers deem necessary or appropriate to protect the interest of the Holders; (iii) that no Event of Default exists; (iv) that, in the opinion of the signers, the proposed release will not impair the security under this Indenture and the Mortgages in contravention of the Provisions hereof and thereof and that all conditions precedent herein provided for relating to such release have been complied with; and (v) the fair value of the Collateral to be released at the date of the Officer's Certificate. (c) Delivery to the Trustee for deposit in accordance with the terms of the Officer's Certificate an amount equal to the amount of the net proceeds specified in Subsection (b)(ii) above, which shall in no event be less than the Property Acquisition Costs less the Prior Lien Obligations related thereto as specified in such Officer's Certificate. -90- 99 (d) An Opinion of Counsel stating that all conditions precedent to the release of the Collateral have been complied with. Notwithstanding the foregoing, upon a defeasance of the Notes pursuant to Section 1112 or a satisfaction and discharge pursuant to Section 501, the Trustee shall release or cause to be released the liens of the Mortgages upon receipt of the items referred to in subsections (a), (b) (with respect to clause (v) thereof) and (d) above, together with satisfaction of each of the conditions necessary pursuant to Section 1112 or 501, respectively. SECTION 1303. Powers Exercisable Notwithstanding Default. While in possession of all or substantially all of the Collateral (other than any cash and securities constituting a part thereof and deposited with the Trustee), the REIT may exercise the powers conferred upon it in the Sections of this Article even though it is prohibited from doing so while an Event of Default exists as provided therein, if the Trustee in its discretion, or the Holders of not less than 66-2/3% in principal amount of the Notes Outstanding shall consent to such action, in which event none of the instruments required to be furnished to the Trustee under any of such Sections as a condition to the exercise of such powers needs state that no Event of Default exists as provided therein. SECTION 1304. Powers Exercisable by Trustee or Receiver. In case all or substantially all of the Collateral (other than any cash and securities constituting part thereof and deposited with the Trustee) shall be in the possession of a trustee or receiver lawfully appointed, the powers hereinbefore in this Article conferred upon the REIT with respect to the sale or other disposition and release of Collateral may be exercised by such trustee or receiver (with the consent of the Trustee or Noteholders specified in Section 1303),in which case a written request signed by such receiver or trustee shall be deemed the equivalent of any Resolution of the Trust Managers required by this Article and a certificate signed by such trustee or receiver shall be deemed the equivalent of any Officers' Certificate required by this Article and such certificate need not state that no Event of Default exists. If the Trustee shall be in possession of the Collateral under any of the Mortgages, such powers may be exercised by the Trustee in its discretion. -91- 100 SECTION 1305. Purchaser Protected. No purchaser in good faith of Collateral purporting to be released herefrom shall be bound to ascertain the authority of the Trustee to execute the release or to inquire as to the existence of any conditions herein prescribed for the exercise of such authority; nor shall any purchaser or grantee of any property or rights permitted by this Article to be sold or otherwise disposed of by the REIT be under any obligation to ascertain or inquire into the authority of the REIT to make any such sale or other disposition. Any release executed by the Trustee under this Article shall be sufficient for the Purpose of this Indenture and the related Mortgage and shall constitute a good and valid release of the Collateral from the lien hereof and thereof. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and with respect to the Trustee, its seal to be hereunto affixed and attested, all as of the day and year first above written. TRAMMELL CROW REAL ESTATE INVESTORS By ------------------------------------ Attest: ----------------------- J. HENRY SCHRODER BANK & TRUST COMPANY, Trustee By ------------------------------------ Attest: ----------------------- -92- 101 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the 27th day of November, 1985, before me personally came , to me known, who, being by me duly sworn, did depose and say that he is of Trammell Crow Real Estate Investors, a real estate investment trust described in and which executed the foregoing instrument; and that he signed his name thereto by like authority. ---------------------------------------- STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the 27th day of November, 1985, before me personally came George R. Sievers, to me known, who, being by me duly sworn, did depose and say that he is Senior Vice President of J. Henry Schroder Bank & Trust Company, a banking corporation described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. ---------------------------------------- -93- EX-10.8 7 NOTE PURCHASE AGREEMENT 1 EXHIBIT 10.8 NOTE PURCHASE AGREEMENT Note Purchase Agreement (the "Agreement"), dated as of February 27, 1992, between TRAMMELL CROW REAL ESTATE INVESTORS, a real estate investment trust duly organized and existing under the laws of the State of Texas (the "REIT"), and MANUFACTURERS LIFE INSURANCE COMPANY, a corporation duly organized and existing under the laws of Canada (together with its successors and permitted assigns, "MLI"). RECITALS A. MLI is the holder of an aggregate of $106,322,000 principal amount at stated maturity of Zero Coupon Notes due 1997 (the "MLI Notes") issued by the REIT pursuant to the Indenture, dated as of November 15, 1985 (together with all indentures supplemental thereto, the "Indenture"), between the REIT and J. Henry Schroder Bank & Trust Company (now known as IBJ Schroder Bank & Trust Company), as Trustee (the "Trustee"). B. MLI has agreed to sell to the REIT, and the REIT has agreed to purchase from MLI, the MLI Notes. C. The REIT and MLI desire to set forth the terms and conditions of the sale of the MLI Notes by MLI and the purchase thereof by the REIT. Accordingly, the REIT and MLI hereby agree as follows: I. SALE AND PURCHASE OF MLI NOTES. 1.1. Sale and Purchase of MLI Notes. Subject to the terms and conditions, and in reliance upon the representations and warranties, set forth in this Agreement, MLI agrees to sell, convey and assign to the REIT, and the REIT agrees to purchase and accept from MLI (a) an aggregate of $21,629,000 principal amount at Stated Maturity of the MLI Notes (the "Investment MLI Notes") in consideration of (i) an Unsecured Promissory Note Due November 27, 1997, in the principal sum of $4,889,425.08, in the form attached as Exhibit A-1 hereto ("Note A-1"), and (ii) an Unsecured Promissory Note Due November 27, 1997, in the principal sum of $5,939,866.34, in the form attached as Exhibit A-2 hereto ("Note A-2"), and (b) an aggregate of $84,693,000 principal amount at Stated Maturity of the MLI Notes (the "Cancellation MLI Notes") in consideration of (i) an 2 Unsecured Promissory Note Due November 27, 1997, in the principal sum of $19,143,646.92 in the form attached as Exhibit B-1 hereto ("Note B-1"), and (ii) an Unsecured Promissory Note Due November 27, 1997, in the principal sum of $23,261,317.66, in the form attached as Exhibit B-2 hereto ("Note B-2"). 1.2. Closing. The closing of the sale and purchase of the MLI Notes shall take place on the Closing Date at the office of Jones, Day, Reavis & Pogue, 2300 Trammell Crow Center, 2001 Ross Avenue, Dallas, Texas 75201, at 10:00 a.m., Dallas, Texas time, or such other place and time as the parties may agree. II. CONDITIONS OF CLOSING. 2.1. Conditions to the REIT's Obligations. The REIT's obligation to purchase the MLI Notes hereunder is subject to the satisfaction, on or before the Closing Date, of the following conditions: (a) Representations and Warranties. The representations and warranties of MLI contained in Article IV of this Agreement shall be true and correct on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date, except to the extent of changes caused by the transactions herein contemplated. (b) Performance of Agreements. MLI shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by MLI prior to or on the Closing Date. (c) Compliance Certificate. MLI shall have delivered to the REIT an Officer's Certificate, dated the Closing Date, certifying that the conditions specified in Sections 2.1(a) and (b) hereof have been fulfilled. (d) Authority. MLI shall have delivered to the REIT evidence satisfactory to the REIT and its counsel of the authority of MLI to execute and deliver this Agreement, enter into the transactions contemplated hereby and perform its obligations hereunder, and a certificate of incumbency of the Person executing this Agreement on behalf of MLI. (e) Delivery of MLI Notes. MLI shall have delivered to the REIT all of the MLI Notes duly endorsed in blank. -2- 3 (f) Permitted by Applicab]e Laws. The purchase of the MLI Notes and the issuance of the Notes by the REIT on the Closing Date on the terms and conditions herein provided shall not violate any applicable law or governmental regulation (including, without limitation, Section 5 of the Securities Act) and shall not subject the REIT to any tax, penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation. (g) Proceedings Satisfactory. All proceedings taken by MLI in connection with the sale of the MLI Notes and the consummation of the transactions contemplated hereby and all documents and papers relating thereto shall be satisfactory in substance and form to the REIT and its counsel, and the REIT and its counsel shall have received all such counterpart originals or certified or other copies of such documents as the REIT and its counsel may reasonably request. 2.2. Conditions to MLI's Obligations. MLI's obligation to sell the MLI Notes hereunder is subject to the satisfaction, on or before the Closing Date, of the following conditions: (a) Representations and Warranties; No Default. The representations and warranties of the REIT contained in Article III of this Agreement shall be true and correct on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date, except to the extent of changes caused by the transactions herein contemplated, and there shall exist on the Closing Date no Event of Default or Default hereunder and no default or event of default under the Indenture. (b) Performance of Agreements. The REIT shall have performed and complied with all agreements and conditions contained in this Agreement and the Indenture required to be performed or complied with by the REIT prior to or on the Closing Date. (c) Compliance Certificate. The REIT shall have delivered to MLI an Officer's Certificate, dated the Closing Date, certifying that the conditions specified in Sections 2.2(a) and (b) hereof have been fulfilled. -3- 4 (d) Authority. The REIT shall have delivered to MLI (i) an Officer's Certificate certifying as to the Trust Manager resolutions authorizing the REIT to execute and deliver this Agreement and the Notes, enter into the transactions contemplated hereby and perform its obligations hereunder and thereunder, and (ii) a certificate as to the incumbency of the Person executing this Agreement and the Notes on behalf of the REIT. (e) Purchase Price. The REIT shall have delivered to MLI the Notes, duly executed and dated the Closing Date. (f) Permitted by Applicable Laws. The sale of the MLI Notes and the issuance of the Notes by the REIT on the Closing Date on the terms and conditions herein provided shall not violate any applicable law or governmental regulation (including, without limitation, Section 5 of the Securities Act) and shall not subject MLI to any tax, penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation. (g) Proceedings Satisfactory. All proceedings taken by the REIT in connection with the purchase of the MLI Notes, the issuance of the Notes and the consummation of the transactions contemplated hereby and all documents and papers relating thereto shall be satisfactory in substance and form to MLI and its counsel, and MLI and its counsel shall have received all such counterpart originals or certified or other copies of such documents as MLI and its counsel may reasonably request. III. REPRESENTATIONS OF THE REIT. 3.1. Organization of the REIT. The REIT has been duly formed and is validly existing as an unincorporated real estate investment trust in good standing under the laws of the State of Texas, with full real estate investment trust power and authority to own its properties and conduct its business as presently being conducted, and has been duly qualified for the transaction of business and is in good standing under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, or is subject to no material liability or disability by reason of the failure to be so qualified in any such jurisdiction. 3.2. Issuance of the Notes. The Notes have been duly authorized, and upon issuance and delivery pursuant to this Agreement, will have been duly executed, issued and delivered -4- 5 and will constitute the valid and legally binding obligation of the REIT. This Agreement has been duly authorized, executed and delivered by the REIT, and constitutes a valid and legally binding instrument, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. 3.3. Conflicting Agreements and Other Matters. The issuance of the Notes by the REIT and the compliance by the REIT with all provisions of this Agreement and the Notes and the consummation of the transactions herein and therein contemplated will not result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which the REIT is a party or by which the REIT is bound or to which any of the property or assets of the REIT is subject, nor will such action result in any violation of the provisions of the Declaration of Trust or the By-Laws or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the REIT or any of its properties; and no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issuance of the Notes or the consummation by the REIT of the transactions contemplated by this Agreement. 3.4. Actions Pending. Other than as set forth in Schedule I hereto, there are no legal or governmental proceedings pending to which the REIT is a party or of which any property of the REIT is the subject which, if determined adversely to the REIT, would individually or in the aggregate have a material adverse effect on the financial position, shareholders' equity or results of operations of the REIT, and, to the REIT's actual knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others. 3.5. Financial Statements. The balance sheets of the REIT as of December 31, 1990 and September 30, 1991 and the statements of earnings and of changes in financial position for the 12 months ended on December 31, 1990 and the nine months ended on September 30, 1991, respectively, as included in the reports filed by the REIT with the Commission, have been prepared in accordance with generally accepted accounting principles (except as noted therein), and present fairly the financial condition of the REIT as of such dates and the -5- 6 results of its operations for such periods, subject in the case of unaudited statements to changes resulting from year-end adjustments which will not in the aggregate be materially adverse to the business, properties, assets or condition (financial or otherwise) of the REIT. IV. REPRESENTATIONS OF MLI. 4.1. Organization. MLI has been duly formed and is validly existing as a corporation under the laws of Canada, with full power and authority to enter into this Agreement, to consummate the transactions contemplated hereby and to carry out the terms of this Agreement. 4.2. Legal, Valid and Binding Instrument. This Agreement has been duly authorized, executed and delivered by MLI, and constitutes a valid and legally binding instrument, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization, and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. 4.3. Conflicting Agreements and Other Matters. The compliance by MLI with all provisions of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which MLI is a party or by which MLI is bound or to which any of the property or assets of MLI is subject, nor will such action result in any violation of the provisions of the organizational documents of MLI or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over MLI or any of its properties; and no consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the consummation by MLI of the transactions contemplated by this Agreement. 4.4. Purchase for Investment. MLI is acquiring the Notes for investment for its own account and with no present intention of distributing or reselling the Notes or any part thereof, but without prejudice, however, to MLI's right at all times to sell or otherwise dispose of all or any part of the Notes under the terms and conditions set forth in this Agreement, and subject to any requirement of law that the disposition of the Notes shall at all times be within the control of the owner thereof. -6- 7 MLI acknowledges that it has received all the information it considers necessary or appropriate for deciding whether to acquire the Notes, and has had an opportunity to ask questions and receive answers from the REIT regarding the terms and conditions of the offering of the Notes. MLI has been made aware that the REIT has purchased, and in the future may purchase, Secured Debt from certain holders thereof under varying terms and prices. MLI is able to bear the economic risk of its investment and has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of its investment. MLI understands that the Notes purchased by MLI are "restricted securities" within the meaning of the Securities Act and as such cannot be resold without registration under the Securities Act and applicable state securities laws unless exemptions from registration under the Securities Act and such laws are available. In this connection, MLI is familiar with Rules 144 and 144A promulgated pursuant to the Securities Act and the resale limitations imposed thereby. MLI understands that no public market is likely to develop for the Notes. 4.5. Owner and Holder. MLI is the legal and beneficial owner and holder of the MLI Notes, free and clear of any and all Liens. No joinder-of any other Person is required to make the terms hereof fully binding and enforceable against MLI. V. COVENANTS OF THE REIT. 5.1. Payment of Principal and Interest. The REIT shall duly and punctually pay the principal of and interest on the Notes in accordance with the terms of the Notes and this Agreement. Except for mandatory prepayments pursuant to Section 5.14 hereof, all payments, including voluntary prepayments, with respect to the Notes shall be made on a prorata basis. 5.2. Maintenance of Offices or Agencies. The Notes may be presented or surrendered for payment or surrendered for registration of transfer or exchange at the offices of the REIT, at 3500 Trammell Crow Center, 2001 Ross Avenue, Dallas, Texas 75201. Notices and demands to or upon the REIT in respect of the Notes and this Agreement may be served at the offices of the REIT in Dallas, Texas. The REIT may at any time and from time to time appoint, vary or terminate the appointment of any agent for any or all of such purposes. The REIT will give prompt written notice to MLI of the appointment or termination of any such agent and of the location and any change in the location of any such office or agency. -7- 8 5.3. Money for Note Payments to Be Held in Trust. If the REIT shall at any time act as its own Paying Agent with respect to the Notes, it will, on or before the due date of the interest or principal of the Notes, segregate and hold in trust for the benefit of MLI a sum sufficient to pay the interest or principal becoming due until such sums shall be paid to MLI or otherwise disposed of as herein provided. Whenever a Person other than the REIT acts as Paying Agent for the Notes, the REIT will, on or before the due date of the interest or principal of the Notes, deposit with the Paying Agent a sum sufficient to pay the interest or principal becoming due, such sum to be held in trust for the benefit of MLI. Moneys so segregated or deposited and held in trust shall constitute a separate trust fund for the benefit of MLI. Except in the case of monies so segregated when acting as its own Paying Agent, monies held in trust by any Paying Agent for the payment of the interest or outstanding principal on the Notes need not be segregated from other funds, except to the extent required by law. Whenever a Person other than the REIT acts as Paying Agent for the Notes, the REIT will cause the Paying Agent to execute and deliver to the REIT an instrument in which the Paying Agent shall agree with the REIT, subject to the provisions of this Section 5.3, that the Paying Agent will: (a) hold all sums held by it for the payment of the interest or outstanding principal of the Notes in trust for the benefit of MLI until such sums shall be paid to MLI or otherwise disposed of as herein provided; (b) give MLI notice of any default by the REIT (or any other obligor upon the Notes) in the making of any payment of interest or outstanding principal on the Notes; and (c) at any time during the continuance of any such default, upon the written request of any holder of the Notes, forthwith pay to MLI all sums so held in trust by the Paying Agent. The REIT may at any time, for the purpose of obtaining the satisfaction and discharge of this Agreement or for any other purpose, pay, or direct the Paying Agent to pay, to MLI all sums held in trust by the REIT or the Paying Agent, such sums -8- 9 to be held by MLI upon the same trusts as those upon which such sums were held by the REIT or the Paying Agent; and, upon such payment by the Paying Agent to MLI, the Paying Agent shall be released from all further liability with respect to such money. Any money deposited with MLI or the Paying Agent, or then held by the REIT, in trust for the payment of the principal at Stated Maturity and interest of any Notes and remaining unclaimed for three years after such principal or interest has become due and payable shall be repaid to the REIT on request, or (if then held by the REIT) shall be discharged from such trust; and MLI shall thereafter look only to the REIT for payment thereof, and all liability of the Paying Agent with respect to such trust money, and all liability of the REIT as trustee thereof, shall thereupon cease; provided, however, that the Paying Agent, before being required to make any such repayment, may at the expense of the REIT mail to MLI notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such mailing, any unclaimed balance of such money then remaining will be repaid to the REIT. 5.4. To Keep Books; Access. The REIT shall keep proper books of record and account, in which entries in reasonable detail shall be made of all dealings or transactions of or in relation to the Notes and the properties, business and affairs of the REIT in accordance with generally accepted accounting principles. The REIT shall furnish to MLI any and all information and permit MLI reasonable access during customary business hours to its books, records and properties as MLI may reasonably request with respect to the performance by the REIT of its covenants in this Agreement. 5.5. Trust Existence. Subject to Section 5.11 hereof and the terms of the Declaration of Trust, the REIT shall do or cause to be done all things necessary to preserve and keep in full force and effect its trust existence, rights (charter and statutory) and franchises; provided, however, that the REIT shall not be required to preserve any such right or franchise if the Trust Managers shall determine that the preservation thereof is no longer desirable in the conduct of the business of the REIT and that the loss thereof is not disadvantageous in any material respect to MLI. 5.6. Indebtedness. The REIT shall not issue, incur or create any Other Secured Debt, other than Other Secured Debt incurred in connection with the refinancing of any Secured Debt, Other Secured Debt or Prior Lien Obligations and which is -9- 10 in a principal amount not in excess of the Secured Debt, Other Secured Debt or Prior Lien Obligations being refinanced, unless immediately thereafter and after giving effect thereto, the aggregate principal amount outstanding of all Other Secured Debt, Secured Debt, Prior Lien Obligations and the Notes would not exceed 50% of the sum of the Appraised Value of all of the Properties which are real property (which shall include the amount of any Prior Liens on such Collateral and shall be as set forth in the most recent report of the Appraised Value of the REIT's real property owned directly or indirectly by the REIT), and the gross value of all of the REIT's other tangible assets. The REIT shall not issue, incur or create any Short-Term Indebtedness, other than Short-Term Indebtedness incurred in connection with the refinancing of any other Short-Term Indebtedness or Long-Term Indebtedness and which is in a principal amount not in excess of the Short-Term Indebtedness or Long-Term Indebtedness being refinanced, unless immediately thereafter and after giving effect thereto, (a) the aggregate principal amount outstanding of Other Secured Debt, Short-Term Indebtedness, Secured Debt, Prior Lien Obligations and the Notes would not exceed 60% of the Appraised Value of all of the Property (which shall include the amount of any Prior Liens on such Collateral and shall be as set forth in the most recent report of the Appraised Value of the real property, owned directly or indirectly by the REIT) and the gross value of all of the REIT's other tangible assets, and (b) the REIT's Distributable Cash for the 12 months immediately preceding such date of determination was equal to or greater than 300% of the sum of Debt Service payable for the next succeeding 12-month period and interest expense on the Short-Term Indebtedness to be incurred. During each year, the REIT shall be free from Short-Term Indebtedness for a period of at least 30 consecutive calendar days. Any Other Secured Debt and Short-Term Indebtedness issued, incurred or created by the REIT shall be expressly subordinated to the payment of the Lien of the Indenture and the Mortgages executed in connection therewith. The REIT shall not issue, incur or create any Long-Term Indebtedness in excess of $2,000,000 outstanding in the aggregate at any time, other than Long-Term Indebtedness incurred in connection with the refinancing of any other Long-Term Indebtedness, Short-Term Indebtedness, Secured Debt, -10- 11 Other Secured Debt or Prior Lien Obligations and which is in a principal amount not in excess of the Long-Term Indebtedness, Short-Term Indebtedness, Secured Debt, Other Secured Debt or Prior Lien Obligations being refinanced, unless such Long-Term Indebtedness shall be expressly subordinated to the payment of the Notes or the holders of the Notes shall have consented thereto. 5.7. Payment of Taxes and Claims. The REIT shall pay, when due, all taxes, assessments and governmental charges or levies imposed upon it, the income of the REIT, the Collateral or the proceeds arising from the disposition of the Collateral, and all claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons which, if unpaid, might result in the creation of a Lien upon the income of the REIT, the Collateral or the proceeds arising from the disposition of the Collateral; provided that items of the foregoing description need not be paid while being contested in good faith and by appropriate proceedings. 5.8. Sales of Certain Properties. To the extent that the Notes have not been redeemed or paid in full in accordance with this Agreement by November 27, 1996 and the REIT shall not have, prior to such date, obtained refinancing commitments from bona fide creditors, in an amount sufficient to repay at Stated Maturity the remaining outstanding principal balance of the Notes, subject to the terms and provisions of the Indenture, the REIT shall sell as soon as reasonably practicable such of its Properties as is necessary in order to obtain funds sufficient to retire the Notes at Stated Maturity. 5.9. Statement as to Compliance. The REIT shall deliver to MLI, within 120 calendar days after the end of each calendar year of the REIT ending after the date hereof, an Officer's Certificate, stating whether or not to the knowledge of the signer thereof the REIT is in default in the performance and observance of any of the terms, provisions and conditions of this Agreement and if the REIT shall be in default, specifying all such defaults and the nature and status thereof of which it may have knowledge. The REIT shall deliver to MLI, within five Business Days after the occurrence thereof, notice of any event which, with the giving of notice or passage of time or both, would constitute an Event of Default. 5.10. Distributions. The REIT shall not make distributions to shareholders out of the Net Sales Proceeds of -11- 12 the sale or refinancing of any Property, insurance payment or condemnation proceeding, if the sum of the principal amount of the Notes issued and outstanding hereunder and the principal amount at Stated Maturity of the Zero Coupon Notes due 1997 issued and outstanding under the Indenture (reduced by the amount, if any, of the Collateral in the Defeasance Account described in the Indenture and the amount, if any, in the Redemption Account described in the Indenture or held pursuant to Section 501 of the Indenture) would be greater than 100% of the sum of the most recent Appraised Value of all of the Properties which are real property owned directly or indirectly by the REIT (reduced by the amount of the Prior Lien Obligations on all the Property and the amount attributable to the gain on the proposed sale, based on the most recent Appraised Value of such Property, or to the gain from the insurance payment or condemnation proceeding) and the gross value of all of the REIT's other tangible assets. Notwithstanding the foregoing, nothing in this Section 5.10 shall prevent the REIT from making any distributions to shareholders deemed necessary by the Trust Managers to maintain the REIT's qualification as a real estate investment trust under the Internal Revenue Code of 1986, as amended. 5.11. Merqer; Sale of Assets. The REIT shall not consolidate with or merge into any other Person or convey or transfer its properties and assets substantially as an entirety, except as permitted under the Indenture. Subject to the terms of the Indenture, upon any consolidation by the REIT with or merger by the REIT into any other entity or any conveyance or transfer of the REIT's properties and assets substantially as an entirety in one transaction to one purchaser, the REIT shall provide prompt written notice thereof to MLI, and, subject to the terms of the Indenture, for a period of 30 days following receipt of such notice, MLI shall have the right, by delivering to the REIT a written demand for redemption, to require the REIT to redeem the Notes at the Redemption Price within 60 days following receipt by the REIT of such demand by MLI. 5.12. Appraised Value to Debt Ratio. If at the end of any calendar quarter of the REIT occurring during any of the periods set forth below, the ratio of the sum of the Appraised Value of the Properties and the gross value of all of the REIT's other tangible assets to Total Outstanding Debt shall be less than the ratio set forth opposite such period below, and the REIT does not deliver to MLI, within 60 calendar days thereafter, an Officer's Certificate certifying that on the date of such Officer's Certificate such ratio is greater than -12- 13 or equal to the applicable ratio, then subject to the terms of the Indenture, MLI shall have the right, for a period of 30 days following the expiration of such 60-day period, by delivering to the REIT a written demand for redemption, to require the REIT to redeem the Notes at the Redemption Price within 60 days following receipt by the REIT of such demand by MLI.
Period Ratio ------ ----- February 27, 1992 through 1.10:1 November 27, 1993 November 28, 1993 through 1.15:1 November 27, 1995 November 28, 1995 until 1.20:1 payment of all outstanding principal under the Notes
5.13. Ratio of Operating Cash Flow to Operating Debt Service. The REIT will maintain, as of the end of each calendar year, a ratio of Operating Cash Flow to Operating Debt Service during each time period as set forth below:
Period Ratio ------ ----- January 1, 1992 to 1.10:1 December 31, 1993 January 1, 1994 to 1.20:1 December 31, 1995 January 1, 1996 until the 1.30:1 payment of all outstanding principal and interest under the Notes
If such ratio is not maintained, and as of June 30th of the next calendar year, the REIT is not then in compliance with the ratio in effect as of December 31st of the preceding year for such six month period, then within 90 days after such June 30th, the REIT will notify MLI, and MLI shall have the right, for a period of 30 days following the expiration of such 90-day period, by delivering to the REIT a written demand for redemption, to require the REIT to redeem the Notes at the Redemption Price within 60 days following receipt by the REIT of such demand by MLI. -13- 14 5.14. Mandatory Prepayments. If prior to November 27, 1993, the REIT shall consummate the sale of any Property and the Trust Managers shall make a determination not to use all of the Net Proceeds of any such sale to either (i) hold as a reserve in connection with the payments due on November 27, 1993 under Note A-1 and Note A-2, or (ii) make an Additional Investment comprised of Zero Coupon Notes due 1997 or Prior Lien Obligations prior to November 27, 1993, the Trust Managers shall notify MLI of such determination and, in such event, MLI shall have the right, by delivering written demand for prepayment to the REIT, to cause the REIT to use any unutilized net proceeds from any such sale or sales to make additional prepayments, on a pro rata basis, with respect to Note A-1 and Note A-2. If prior to November 27, 1993, the Trust Managers shall make any Additional Investment in Zero Coupon Notes due 1997 using net proceeds from the sale of any Property, the REIT agrees that the purchase price for such Zero Coupon Notes shall be an amount less than or equal to the principal amount of such Zero Coupon Notes at Stated Maturity discounted at 15 percent semi-annually, determined as of the closing date of any such purchase. 5.15. Treatment of MLI Notes. The Cancellation MLI Notes shall be cancelled and shall not be treated as outstanding for any purposes. The Investment MLI Notes shall remain outstanding, but so long as the REIT is the holder of the Investment MLI Notes, for purposes of Sections 5.6, 5.10, 5.12 and 5.13 hereof, the Investment MLI Notes shall not be included in the determination of the Appraised Value of the Properties or the gross value of the REIT's other tangible assets, and notwithstanding that the REIT is not surrendering the Investment MLI Notes to the Trustee under the Indenture for cancellation, for purposes of this Agreement, the Investment MLI Notes shall not be treated as outstanding in determining outstanding Secured Debt, Other Secured Debt, Prior Lien Obligations, Short-Term Indebtedness, Long-Term Indebtedness and Total Outstanding Debt. 5.16. Use of Proceeds. The REIT shall use the proceeds arising from any sale of any Property or any refinancing of any indebtedness outstanding on the Properties only in accordance with the terms and conditions of the Indenture and this Agreement. Any operating income not applied or reserved by the REIT to the payment of operating expenses, capital expenditures or outstanding debt or not distributed by the REIT to its shareholders shall be invested by the REIT only in the manner permitted under the By-Laws and under the Indenture. -14- 15 5.17. Copies of Reports and Other Information. The REIT shall furnish or cause to be furnished to MLI, within 15 calendar days after the REIT is required to file the same with the Commission, copies of the periodic information, documents and other reports which the REIT is required to file with the Commission pursuant to Section 13(a) of the Exchange Act. If the REIT ceases to be required to file information, documents and other reports pursuant to Section 13 of the Exchange Act, it shall remain obligated to furnish the same information, documents and reports otherwise required under Section 13(a) of the Exchange Act to MLI within 15 days after the REIT would have been required to file the same with the Commission. The REIT shall also furnish or cause to be furnished to MLI, within 15 calendar days after the effective date thereof, copies of any amendment or modification to the By-Laws, Declaration of Trust or Indenture. 5.18. Related Party Transactions. The REIT shall not at any time engage in any transaction with its Trust Managers, except as permitted in the By-Laws. VI. EVENTS OF DEFAULT; REMEDIES. 6.1. Events of Default. "Event of Default", wherever used herein with respect to the Notes, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) a default in the payment of any principal of any of the Notes when the same shall become due or a default in the payment of any interest on any of the Notes and continuance of such default for a period of five Business Days after there has been given, by registered or certified mail, to the REIT by the holder of such Note a written notice specifying such default and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; (b) a default in the performance, or breach, of any other covenant or of any representation and warranty of the REIT under this Agreement (other than a covenant or representation and warranty, the default or breach of which is elsewhere specifically dealt with in this Section 6.1) and continuance of such default or breach for a period of 30 consecutive calendar days after there has been given, by -15- 16 registered or certified mail, to the REIT by any holder of the Notes a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; provided, however, that such cure period will be extended for another single 30-day period if the default or breach has not been cured within that period but the REIT has commenced efforts to cure the default or breach and thereafter proceeds to cure same with due diligence; (c) a default under any bond, debenture, note or other evidence of indebtedness for money borrowed by the REIT or under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the REIT (excluding this Agreement), whether such indebtedness now exists or shall hereafter be created, which default shall constitute a failure to pay any portion of the principal of, or interest, if any, on such indebtedness when due and payable after the expiration of any applicable grace period with respect thereto or shall have resulted in such principal amount of indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such indebtedness having been discharged, or such acceleration having been rescinded, stayed, annulled, or waived within a period of 20 calendar days after there shall have been given, by registered or certified mail, to the REIT by any holder of the Notes, a written notice specifying such default and requiring the REIT to cause such indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that it is a "Notice of Default" hereunder; (d) the entry by a court having jurisdiction in the premises of (i) a decree or order for relief in respect of the REIT in an involuntary case or proceeding under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law or (ii) a decree or order adjudging the REIT a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the REIT under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the REIT or of any substantial part of the REIT's property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive calendar days; or -16- 17 (e) the commencement by the REIT of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the REIT in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the REIT or of any substantial part of the REIT's property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due. 6.2. Remedies. (a) Acceleration. If an Event of Default shall have occurred and be continuing under Section 6.1(a) hereof, MLI may declare any or all Notes to be due and payable immediately, by notice in writing to the REIT, and upon any such declaration, such Note or Notes shall thereupon become immediately due and payable. If any other Event of Default shall have occurred and be continuing, any holder of the Notes may declare the Notes to be due and payable immediately, by notice in writing to the REIT, and upon any such declaration, such Notes shall thereupon become immediately due and payable. The provisions of this Section 6.2(a) are subject, however, to the condition that if, at any time after such a declaration of acceleration with respect to any Note has been made and before a judgment or decree for payment of the money due has been obtained as hereinafter in this Article IV provided, the REIT shall pay all arrears of interest on such Note and all payments on account of the principal of and premium (if any) on such Note which shall have become due otherwise than by acceleration and all Events of Default (other than nonpayment of principal of and accrued interest on such Note due and payable solely by virtue of acceleration) shall be remedied then, and in every such case, the holder of such Note, by written notice -17- 18 to the REIT, may rescind and annul any such acceleration and its consequences; but no such action shall affect any subsequent Default or Event of Default or impair any right consequent thereof. (b) Collection of Indebtedness and Suits for Enforcement by MLI. The REIT covenants that if default is made in the payment of the principal of any Note at the maturity thereof, the REIT will, upon demand of the holder of such Note, pay to MLI the whole amount then due and payable on such Note and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal at the rate prescribed therefor in such Note, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection. If the REIT fails to pay such amounts forthwith upon such demand, MLI may exercise its rights and remedies hereunder and may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the REIT or any other obligor upon such Note and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the REIT or any other obligor upon such Note, wherever situated. If an Event of Default occurs and is continuing, MLI may in its discretion proceed to protect and enforce its rights hereunder by such appropriate judicial proceedings as MLI shall deem most effectual to protect and enforce any such right, whether for the specific enforcement of any covenant or agreement in this Agreement or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. (c) Other Remedies. If any Event of Default shall occur and be continuing, MLI may proceed to protect and enforce its rights under the Notes and under this Agreement by exercising such remedies as are available to it in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any covenant or the exercise of any power granted in this Agreement. No remedy conferred in this Agreement upon MLI is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or otherwise. -18- 19 VII. DEFINITIONS. 7.1. Defined Terms. For the purpose of this Agreement, unless otherwise defined herein, the following terms shall have the meanings specified with respect thereto below and shall include the plural as well as the singular: "Additional Investments" shall mean any investment permitted by the By-Laws, other than the Specified investments or Overallotment Investments. "Advisor" shall mean Trammell Crow Ventures, Ltd., a Texas limited partnership acting through its general partner, Trammell Crow Ventures, Inc., a Texas corporation, or such other Person as to whom the REIT may give written notice to MLI. "Agreement" shall mean this Note Purchase Agreement, as amended or supplemented from time to time. "Appraised Value" shall mean fair market value as determined by an Appraiser selected by the REIT. "Appraiser" shall mean an Independent engineer, appraiser or other expert who may be employed by the REIT or the Advisor on behalf of the REIT. "Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in the State of Texas are authorized or obligated by law to close. "By-Laws" shall mean the By-Laws of the REIT, as amended from time to time. "Cancellation MLI Notes" shall have the meaning ascribed to it in Section 1.1 of this Agreement. "Closing Date" shall mean February 27, 1992. "Collateral" shall mean all money, instruments and other property subject to the lien of the Indenture or any of the mortgages executed in connection therewith. "Commission" shall mean the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this Agreement such Commission is not existing and performing the duties now assigned to it under the Trust -19- 20 Indenture Act of 1939, as amended, then the body performing such duties at such time. "Debt Service" shall mean, for any period, the sum of (a) interest expense (other than amortization of original issue discount) actually payable on all indebtedness of the REIT for such period, and (b) the principal amount of indebtedness of the REIT that matured on, or was by its terms due to be repaid or renewed during such period. "Declaration of Trust" shall mean that certain Declaration of Trust of the REIT, dated as of September 26, 1985, as amended from time to time. "Default" shall mean any Event of Default whether or not any requirement for the giving of notice, or the lapse of time, or the happening of any further condition, event or act has been satisfied. "Distributable Cash" for any period shall mean operating income of the REIT less tenant improvements, leasing commissions, advisory and incentive management fees and administrative expenses, plus interest income. "Event of Default" shall mean any of the events specified in Section 6.1 of this Agreement, provided that there has been satisfied any requirement in connection with such event for the giving of notice, or the lapse of time, or the happening of any further condition, event or act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Indenture" shall have the meaning ascribed to it in Recital A of this Agreement. "Independent" when used with respect to any specified Person shall mean such a Person who (a) is not MLI, an MLI Affiliate or a TCC Entity, (b) does not own any interest in MLI, an MLI Affiliate or a TCC Entity, and (c) does not perform any other services for the REIT, MLI, any MLI Affiliate or any TCC Entity except in the capacity in which he is performing services for the REIT or MLI, as applicable, and with respect to which such Person's independence is at issue. Whenever it is herein provided that any independent Person's opinion or certificate shall be furnished by the REIT such Person shall be appointed by a REIT Order and shall have been approved by the Trustee under the Indenture in the exercise of reasonable care (or -20- 21 by MLI if the Indenture is no longer in effect), and such opinion or certificate shall state that the signer has read this definition and that the signer is independent within the meaning hereof. "Investment MLI Notes" shall have the meaning ascribed to it in Section 1.1 of this Agreement. "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing), any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction. "Long-Term Indebtedness" shall mean unsecured indebtedness of the REIT for borrowed money which by its terms is payable or matures more than one year from the date of its incurrence, including without limitation the Notes. "MLI" shall have the meaning ascribed to it in the first paragraph of this Agreement. "MLI Affiliate" shall mean any Person directly or indirectly controlling or controlled by or under direct or indirect common control with MLI. "MLI Notes" shall have the meaning ascribed to it in Recital A of this Agreement. "Net Proceeds" shall mean the gross sales price received by the REIT from the sale of all or any portion of the Properties, less Selling Expenses and less the amount of any Prior Lien Obligations assumed by the purchaser or repaid in connection with any such sale of any Property. "Net Sales Proceeds" shall mean the gross sales price received by the REIT from the sale of all or any portion of the Properties, less Selling Expenses; provided, however, that with respect to a sale of a Property for which purchase money financing is provided by the REIT, such purchase money financing shall be converted to a cash equivalent based upon comparable loans having similar maturities. -21- 22 "Note A-1" shall have the meaning ascribed to it in Section 1.1 of this Agreement, and shall include each note delivered in substitution or exchange therefor. "Note A-2" shall have the meaning ascribed to it in Section 1.1 of this Agreement, and shall include each note delivered in substitution or exchange therefor. "Note B-1" shall have the meaning ascribed to it in Section 1.1 of this Agreement, and shall include each note delivered in substitution or exchange therefor. "Note B-2" shall have the meaning ascribed to it in Section 1.1 of this Agreement, and shall include each note delivered in substitution or exchange therefor. "Notes" shall mean Note A-1, Note A-2, Note B-1 and Note B-2, and where applicable, shall include the singular number as well as the plural. "Officer's Certificate" shall mean with respect to the REIT, a certificate signed by any Trust Manager or any authorized officer of the REIT or by the Advisor on behalf of the REIT and delivered to MLI. "Operating Cash Flow" shall mean, for any period, the excess of (i) cash receipts from the operation of the Properties or from the sale of any Property (provided that the net proceeds from any such sale are used to reduce indebtedness of the REIT), including interest earned on such receipts, less (ii) cash operating expenses (which shall not include any capital expenditures) paid in connection with the direct operation of each of the Properties, other than interest expense paid with respect to any Prior Lien Obligations with respect to any of the Properties. "Operating Debt Service" shall mean, for any period, the sum of (a) interest expense (other than amortization of original issue discount) required to be paid on all indebtedness of the REIT in such period, and (b) the principal amount of indebtedness of the REIT that was repaid during such period, excluding any such repayment with respect to any indebtedness that was renewed during the period, the repayment of indebtedness arising from the repurchase by REIT of any of its Zero Coupon Notes due 1997 pursuant to this Agreement or otherwise or the repayment of the indebtedness associated with Note A-1 or Note A-2. -22- 23 "Optional Notes" shall mean an aggregate of $23,439,000 principal amount at stated maturity of Zero Coupon Notes due 1997 that were issued under the Indenture and sold in conjunction with the exercise of an overallotment option on the Shares. "Other Secured Debt" shall mean all secured indebtedness of the REIT for borrowed money other than Secured Debt. "Overallotment Investments" shall mean the interests in any one or more real estate investments (a) approved by' a majority of the Independent Trust Managers, (b) located outside Texas, (c) of the same general types and quality as the Specified Investments, (d) developed and owned by TCC Entities, and (e) acquired with the proceeds of the Optional Notes and the Shares sold pursuant to an overallotment option thereon. "Paying Agent" shall mean any Person authorized by the REIT to pay the principal of and interest on the Notes on behalf of the REIT. "Permitted Liens" shall mean (a) Liens for taxes and assessments, both general and special, not yet due and payable or which are due and payable but not yet delinquent or which are currently being contested in good faith by appropriate proceedings; (b) Liens of mechanics, materialmen, warehousemen, carriers or other like Liens for services or materials for which payment is not yet due or which is being contested in good faith by appropriate proceedings; (c) landlords' Liens for rentals not yet due and payable; (d) Liens in respect of judgments or awards with respect to which the REIT shall in good faith currently be prosecuting an appeal or proceedings for review and with respect to which the REIT shall have secured a stay of execution pending such appeal or proceedings for review, provided that the REIT shall have set aside on its books adequate reserves with respect thereto; (e) easements and rights granted by any predecessor in title of the REIT; (f) easements, leases, reservations or other rights of others in any Property of the REIT for streets, roads, bridges, pipes, pipe lines, railroads, electric transmission and distribution lines, telegraph and telephone lines, the removal of oil, gas, coal or other minerals and for other similar purposes, flood rights, river control and development rights, sewage and drainage rights, none of which impair the use of the -23- 24 Property by the REIT in the operation of its business; (g) Liens or privileges of any employees of the REIT for salary or wages earned but not yet payable; (h) any Lien or privilege vested in any lessor, licensor or permittor for rent to become due or for other obligations or acts to be performed, the payment of which rent or the performance of which other obligations or acts is required under leases, subleases, licenses or permits, so long as the payment of such rent or the performance of such other obligations or acts is not delinquent; (i) encumbrances and restrictions consisting of zoning restrictions, assessments or other restrictions on the use of real property, none of which impair the use of the Property by the REIT in the operation of its business; (j) any other conditions, covenants, restrictions or exceptions to the title of the Property specified in any title insurance policy obtained by the REIT upon acquisition of the Property; and (k) leases affecting any Property prior to or simultaneously with its acquisition by the REIT. "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a joint-stock company, a trust, an association, an unincorporated organization and a government or any department or agency thereof. "Prior Lien" shall mean any Lien in any Property which exists at the time of its acquisition by the REIT which is prior to or on a parity with the lien of the Indenture, other than Permitted Liens. "Prior Lien Obligations', shall mean any indebtedness and the evidence thereof, if any, secured by a Prior Lien. "Property", shall mean the interests of the REIT in (a) the Specified Investments, (b) the Overallotment Investments, if any, and (c) the Additional Investments, if any. "Qualified Institutional Investor" shall mean a "qualified institutional buyer" as defined in Rule 144A promulgated under the Securities Act. "Redemption Price shall mean the sum of (a) the principal amount of the Note being redeemed, and (b) all interest accrued on the principal amount being prepaid. -24- 25 "REIT" shall have the meaning ascribed to it in the first paragraph of this Agreement. "REIT Order" shall mean a written order signed in the name of the REIT by any of its Trust Managers, authorized officers or by the Advisor on behalf of the REIT and delivered to MLI. "Secured Debt" shall mean the then-accreted amounts of the Zero Coupon Notes due 1997 issued and outstanding pursuant to the Indenture. "Securities Act" shall mean the Securities Act of 1933, as amended. "Selling Expenses" shall mean all costs, fees and expenses incurred by the REIT in connection with the sale of a Property, including without limitation all transfer, gains and sales taxes, sales commissions, finder's fees, incentive management and advisory fees, title policy premiums, endorsement charges, escrow fees, legal and accounting fees, survey expenses, and title company charges. "Shares" shall mean the shares of beneficial interest, par value $0.10 per share, of the REIT. "Short-Term Indebtedness" shall mean unsecured indebtedness of the REIT for borrowed money which by its terms is payable on demand or matures not more than one year from the date of its incurrence. "Specified Investments" shall mean (a) the fee simple interest in each of the real estate investments listed on Schedule I to the Indenture and (b) the 99.99% interests in each of Crow-Maryland #2, a Texas limited partnership, and Crow-Patapsco Service Center #2 Ltd., a Texas limited partnership. "Stated Maturity" when used with respect to any Notes, shall mean the date specified in such Note as the fixed date on which the principal of such Note is due and payable. "TCC Entity" shall mean the general partnerships, limited partnerships, joint ventures and corporations that operate under the name "Trammell Crow Company" and the individuals who are members of the Management Board of, or are designated as Partners or Managing Directors in, Trammell Crow Company or Chief Executive Officers of the regional operating subsidiaries of Trammell Crow Company. -25- 26 "Total Outstanding Debt" shall mean the aggregate principal amount of indebtedness of the REIT for borrowed money outstanding from time to time, including without limitation the then-accreted amount of Secured Debt, determined in accordance with generally accepted accounting principles. "Transferee" shall mean any direct or indirect transferee of all or any part of any Note or any Person who purchases a participation in such Note from MLI. "Trustee" shall have the meaning ascribed to it in Recital A of this Agreement. "Trust Managers" shall mean the persons named as Trust Managers in the Declaration of Trust. 7.3. Knowledge. "To the knowledge of" or words of similar import shall mean the actual knowledge of any individual officer of the REIT. 7.3. Accounting Terms. All accounting terms not otherwise defined herein shall have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation. VIII. MISCELLANEOUS. 8.1. Form of Documents Delivered to MLI. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the REIT may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable -26- 27 care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or opinion of counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the REIT stating that the information with respect to such factual matters is in the possession of the REIT, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Agreement, they may, but need not, be consolidated and form one instrument. 8.2. Consents to Amendments. This Agreement may be amended, or the observance of any term of this Agreement may be waived, with the written consent of the holder of any Note. Such holder shall be bound by any consent authorized by this Section 8.2, whether or not such Note shall have been marked to indicate such consent, but any Note issued thereafter may bear a notation referring to any such consent. No course of dealing between the REIT and MLI or the holder of any Note nor any delay in exercising any rights hereunder or under such Note shall operate as a waiver of any rights of MLI or such holder. 8.3. Persons Deemed Owners; Participation; Restriction on Transferees. Prior to due presentment for registration of transfer, the REIT may treat the Person in whose name any Note is registered as the owner and holder of such Note for the purpose of receiving payment of principal of and premium, if any, and interest on such Note and for all other purposes whatsoever, whether or not such Note shall be overdue, and the REIT shall not be affected by notice to the contrary. Subject to the preceding sentence and only with the prior written consent of the REIT (which consent shall not be unreasonably withheld), (a) MLI and each other holder of any Note may from time to time grant participations in all or any part of such Note to any Person, on such terms and conditions as may be determined by such holder in its sole and absolute discretion, and (b) MLI and the holder of any Note may from time to time transfer all of its interest in such Note to a Person which is either (i) a subsidiary or affiliate of such holder or (ii) a Qualified Institutional Investor; provided, however, that if the Transferee has a significant lending, financial or other relationship with the REIT or its Advisor, the REIT shall have -27- 28 no obligation, reasonable or otherwise, to consent to such transfer. Each holder agrees to pay and save the REIT harmless from and against liability for the payment of any taxes in connection with the transfer of any Note. Notwithstanding anything contained in this Agreement or the Notes to the contrary, if on or after the Closing Date MLI shall grant participations in all or any part of, or transfer, any Note, the REIT shall only be obligated to deliver to MLI any notices, demands, requests, documents and other information required to be delivered hereunder or under the Notes by the REIT, and MLI shall, promptly upon receipt thereof, distribute to each Transferee such notices, demands, requests, demands and other information. 8.4. Survival of Representations and Warranties; Entire Agreement. All representations and warranties contained herein or made in writing by MLI or the REIT in connection herewith shall survive the execution and delivery of this Agreement and the Notes, the transfer of any Note or interest therein and the payment of any Note, and may be relied upon by any Transferee, regardless of any investigation made at any time by or on behalf of MLI or any Transferee. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between MLI and the REIT and supersede all prior agreements and understandings relating to the subject matter hereof. 8.5. Successors and Assigns. All covenants and other agreements in this Agreement contained by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto. 8.6. Disclosure to Other Persons. The REIT acknowledges that MLI or a holder of any Note may deliver copies of any financial statements and other documents delivered to MLI or such holder and disclose any other information disclosed to MLI or such holder by or on behalf of the REIT in connection with or pursuant to this Agreement to (a) MLI's or such holder's directors, officers, employees, agents and professional consultants, (b) any Person to which MLI or such holder offers to sell any Note, (c) any Person to which MLI or such holder sells or offers to sell a participation in all or any part of any Note, (d) any federal or state regulatory authority having jurisdiction over MLI or such holder, (e) the National Association of Insurance Commissioners or any similar organization, or (f) any other Person to which such delivery or disclosure may be necessary or appropriate (i) in compliance with any law, rule, regulation or order applicable to MLI or -28- 29 such holder, (ii) in response to any subpoena or other legal process, (iii) in connection with any litigation to which MLI or such holder is a party, or (iv) in order to protect MLI's or such other holder's investment in the Note. 8.7. Notices. Any notice or demand permitted or required hereby shall be made in writing and shall be effective and deemed delivered and received upon the earlier of (a) the day of actual receipt via telex, telecopy, telegram or hand delivery (including, without limitation, Federal Express and other overnight courier service) of the written notice or demand by the party to whom the notice or demand is given or (b) three days after the written notice or demand is deposited in the United States mail postage paid, first class, certified or registered mail with return receipt requested and addressed to the party to whom the notice or demand is being given at the address provided herein for notices (whether or not the notice or demand is actually received). The address for notices to MLI shall be the address stated herein for payments and the address for notices to the REIT shall be 3500 Trammell Crow Center, 2001 Ross Avenue, Dallas, Texas 75201, Attention: Managing Partner, Trammell Crow Ventures; provided that either party may change its address for notices to any other location within the continental United States by notifying the other party of the new address in the manner provided herein for the giving of notices, with such change to become effective 10 days after notice of the change of address is given. 8.8. Effect of Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. 8.9. Reproduction of Documents. This Agreement and all documents relating hereto, including without limitation (a) consents, waivers and modifications which may hereafter be executed, (b) documents received by MLI on the Closing Date (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to MLI or any holder of any Note, may be reproduced by any photographic, photostatic, microfilm, micro-card, miniature photographic or other similar process and MLI or such holder may destroy any original document so reproduced. The REIT agrees and stipulates that any such reproduction shall, to the extent permitted by applicable law, be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence) and that any enlargement, facsimile or further reproduction of the reproduction shall likewise be admissible -29- 30 in evidence, whether or not such reproduction was made by MLI or such holder in the regular course of business and, in the case of any such further reproduction, whether or not the original reproduction is in existence and available for inspection at the time of any such proceedings. 8.10. Separability Clause; Limitations on Interest. In case any provision in this Agreement or the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Furthermore, all agreements of the REIT whether now existing or hereafter arising and whether written or oral, are expressly limited so that in no contingency or event whatsoever shall the amount paid, or agreed to be paid to MLI for the use, forbearance or detention of the indebtedness evidenced by the Notes or for the performance or payment of any covenant or obligation contained herein, exceed the maximum amount permissible under applicable law from time to time in effect. If for any reason whatsoever fulfillment of any provision hereof or of any other document evidencing, securing or pertaining to this Agreement at the time performance of such provision shall be due, shall involve transcending the limit of validity, and if under any such circumstances MLI shall ever receive anything of value deemed interest under applicable law from time to time in effect which would exceed interest at the highest lawful rate, such amount that would be excessive interest shall be applied to the reduction of the principal amount owing under the Notes and not to the payment of interest, or if such amount that would be excessive interest exceeds the unpaid balance of Principal of the Notes, such excess shall be refunded to the REIT. 8.11. Benefits of Agreement. Nothing in this Agreement or the Notes, express or implied, shall give to any Person, other than the parties hereto and thereto, their successors hereunder and thereunder, any benefit or any legal or equitable right, remedy or claim under this Agreement or the Notes. 8.12. Brokers and Finders. Neither party has had any contact or dealings with respect to the Notes, or any communication in connection with the subject matter of this transaction, through any broker or other Person who can claim a right to a commission or finder's fee in connection with the sale contemplated herein. In the event that any broker or finder perfects a claim for a commission or finder's fee based upon any such contact, dealings or communication, the party through whom the broker or finder makes its claim shall be -30- 31 responsible for said commission or fee and all costs and expenses (including reasonable attorneys' fees) incurred by the other party in defending against the same. 8.13. Governing Law; Venue. This Agreement and the Notes shall be governed by and construed in accordance with the internal laws of the State of Texas, without giving effect to the principles of conflict of laws thereof. Any legal suit, action or proceeding against the REIT or MLI arising out of or relating to this Agreement or the Notes shall be instituted in any federal or state court in Dallas, Texas, and each of the REIT and MLI waives any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding. 8.14. Legal Holidays. In any case where any payment date or the Stated Maturity of any Note shall not be a Business Day, then (notwithstanding any other provision of this Agreement or of the Notes) payment of principal need not be made on such day, but may be made on the next succeeding Business Day with the same force and effect as if made on such payment date or at the Stated Maturity; provided that no interest shall accrue for the period from and after the Stated Maturity. 8.15. Limitation of Liability. Any obligation or liability whatsoever of the REIT which may arise at any time under this Agreement or the Notes, or any obligation or liability incurred by it pursuant to any other instrument, transaction or undertaking contemplated by this Agreement or the Notes, shall be satisfied, if at all, out of the REIT's property only. No such obligation or liability shall be personally binding upon nor shall there be any resort for the enforcement thereof to the private property of any of its Trust Managers, shareholders, officers, employees or agents, regardless of whether such obligations or liability is in the nature of contract, tort or otherwise. 8.16. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. 8.17. No Joint Venture. The REIT and MLI intend that the relationship created under this Agreement and the Notes be solely that of debtor and creditor. Nothing herein or in the Notes is intended to create a joint venture, partnership, -31- 32 tenancy-in-common or joint tenancy relationship between the REIT and MLI, nor to grant MLI any interest in the Properties or the REIT itself other than that of creditor. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first written above. TRAMMELL CROW REAL ESTATE INVESTORS By: /s/ JAMES S. WASSEL ___________________________________ James S. Wassel, Vice President MANUFACTURERS LIFE INSURANCE COMPANY By /s/ RAYMOND L. BRITT, JR. ___________________________________ Name: RAY BRITT ________________________________ Title: INVESTMENT V.P. ________________________________ -32- 33 SCHEDULE I Actions Pending 1. Teressa L. Marks v. TCREI and Westinghouse Electric Corp. This is an alleged negligence (personal injury) action in which TCREI was wrongly named as a party; TCREI does not own the property in question. TCREI is expected to be removed as the defendant. A settlement conference has been scheduled for March 12, 1992. -33- 34 Exhibit A-1 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFERABILITY AS SET FORTH HEREIN AND IN A NOTE PURCHASE AGREEMENT, DATED AS OF FEBRUARY 27, 1992, A COPY OF WHICH IS ON FILE AT THE OFFICES OF THE REIT. THIS NOTE MAY NOT BE TRANSFERRED IN VIOLATION OF THE SECURITIES ACT, ANY STATE SECURITIES LAWS OR THE RULES AND REGULATIONS UNDER ANY OF THEM, OR THE PROVISIONS OF THIS NOTE OR OF THE NOTE PURCHASE AGREEMENT. Unsecured Promissory Note Due November 27, 1997 $4,889,425.08 February 27, 1992 TRAMMELL CROW REAL ESTATE INVESTORS, a real estate investment trust duly organized and existing under the laws of the State of Texas (the "REIT"), for value received, hereby promises to pay to the order of GERLACH & CO. or its permitted assigns ("MLI") at Citibank, N.A., 111 Wall Street 14th Floor/Zone 5, New York, New York 10043, ABA No. 021000089 (Fed. Wire: CITIBANK NYC/CUST/CONCENTRATION ACCT #36858201 FOR FURTHER CREDIT TO ACCT #846194) (or such other party or place as MLI may from time to time designate in writing to the REIT) the principal sum of FOUR MILLION, EIGHT HUNDRED EIGHTY-NINE THOUSAND, FOUR HUNDRED TWENTY-FIVE AND 08/100THS DOLLARS ($4,889,425.08), together with interest on the principal hereof from time to time remaining unpaid at the interest rates hereinafter stated, at such times and on such terms and conditions as are hereinafter set forth. All capitalized terms used in this Note which are used but not defined herein shall have the respective meanings ascribed to them in the Note Purchase Agreement, dated as of February 27, 1992, between the REIT and MLI (as amended, modified, supplemented, renewed or extended from time to time, the "Note Purchase Agreement"). 1. Rate and Computation of Interest. (a) Interest Rate. The unpaid principal balance of this Note from time to time outstanding shall bear interest from the date hereof until this Note shall have been paid in full at a rate of 8.80% per annum, but in no event higher 35 than the maximum rate of interest permitted under applicable law. (b) Default Rate. Notwithstanding any other provisions hereof, upon an Event of Default in the payment of the principal balance hereof, such unpaid principal shall bear interest at the rate of 11.7% per annum, but in no event higher than the maximum rate of interest permitted under applicable law. (c) Computation. All interest hereunder shall be computed on the basis of a year of 365 or 366 days, as applicable, for the actual number of days elapsed. 2. Payment of Principal and Interest. Payments of principal and interest shall be due and payable as follows: (a) Interest. The accrued but unpaid interest on the outstanding principal balance of this Note as of May 27, 1992 and November 27, 1992 shall, in each case, be deferred and added to the outstanding principal balance of this Note on such dates. Upon any such deferral and addition to the outstanding principal balance of this Note, at the written request of MLI, the REIT will issue a new note for the then-outstanding principal balance hereof in exchange for this Note. The accrued but unpaid interest on the outstanding principal balance of this Note shall be due and payable semi-annually in arrears on the 27th day of each May and November in each year, commencing May 27, 1993, and on the Maturity Date. All interest which accrues at the Default Rate shall be due and payable on demand. (b) Principal. $3,612,000 shall be due and payable to MLI on or before November 27, 1993, and shall be applied to the reduction of principal. The remaining outstanding principal balance of this Note, together with accrued but unpaid interest thereon shall be due and payable to MLI on November 27, 1997 or on such earlier date as may be required or permitted under this Note (the "Maturity Date"). (c) Manner of Payment and Application of Funds. All sums payable hereunder shall be payable by the REIT to MLI on the day when due in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Subject to the provisions hereof regarding legal interest limitations and except as otherwise provided herein, any amount paid to MLI by the REIT pursuant to this Note shall be applied first to -2- 36 the payment of any costs and expenses of collection of this Note, second to accrued but unpaid interest and third to the reduction of principal. (d) Payment on Business Days. If any payment to be made hereunder shall become due on a day other than a Business Day, such payment shall be made on the Business Day immediately following the day on which such payment would otherwise have been due. 4. Prepayment. (a) Voluntary. This Note may be voluntarily prepaid, in whole or in part, without premium or penalty, upon 10 days prior written notice by the REIT to MLI, specifying the date and amount of prepayment. Any voluntary prepayment shall be accompanied by all interest accrued on the principal amount being prepaid. In the event of voluntary prepayment of this Note in part only, a new note or notes for the unpaid portion hereof will be issued. (b) Mandatory. Pursuant to Section 5.14 of the Note Purchase Agreement, MLI may cause the REIT to make a mandatory prepayment on this Note in accordance with the provisions of such Section. In the event of mandatory prepayment of this Note in part only, a new note or notes for the unpaid portion hereof will be issued. 5. Redemption. In the event that the REIT shall breach its obligations under Sections 5.12, 5.13 or 5.14 of the Note Purchase Agreement, and any such breach is not cured within the time period specified in the applicable Section, MLI shall have the right, by delivering to the REIT a written demand for redemption, to require the REIT to redeem this Note at the then applicable Redemption Price. The REIT shall redeem this Note by delivery to MLI of the Redemption Price within 60 days following receipt by the REIT of such demand by MLI for redemption. 6. Default. The occurrence of any Event of Default under the Note Purchase Agreement shall be an "Event of Default" hereunder. 7. Acceleration and Other Remedies. Upon the occurrence and continuance of an Event of Default, the holder of this Note at its option, may declare the entire principal balance hereof and all accrued and unpaid interest due and payable at once, without presentment, demand, protest, notice or grace, all of which are specifically hereby waived. MLI may sue on this Note -3- 37 and pursue any and all other remedies available to MLI at law or equity or pursue any combination of the above, all remedies hereunder or under the Note Purchase Agreement being cumulative. The failure to exercise any of the foregoing options upon the happening of one or more Events of Default shall not constitute a waiver of the right to exercise the same at any subsequent time in respect of the same Event of Default or any other Event of Default. The acceptance by MLI of any payment hereunder which is late or is less than the payment in full of all amounts due and payable an the time of such payment shall not (a) constitute a waiver of the right to exercise any of the foregoing options at that time or at any subsequent time or nullify any prior exercise of such options, (b) constitute a waiver of the right to receive timely payments in the future, or (c) constitute a waiver of the right to receive payment in full of all amounts due and payable at the time of such payment. 8. Waiver. Except as may be specifically otherwise provided herein or in the Note Purchase Agreement, the REIT and any endorsers or guarantors hereof severally waive notice, grace, presentment and demand for payment, notice of dishonor, notice of intent to accelerate maturity, notice of acceleration of maturity, protest and notice of protest and non-payment or bringing of suit and diligence in taking any action to collect any sums owing hereunder. The REIT and any endorsers or guarantors hereof agree that from time to time and without notice, MLI may extend the time for any payments hereunder and accept partial payments of this Note, both before and after the Maturity Date, all without in any manner affecting the liability of the REIT or any endorser or guarantor under or with respect to this Note, even though the REIT or such endorser or guarantor is not a party to such agreement. 9. Collection Expenses. The REIT agrees to pay upon demand, any and all costs incurred in collecting any amounts due under this Note, including, but not limited to, all reasonable attorneys' fees, expenses and court costs, whether or not any legal action shall be instituted to enforce this Note in bankruptcy court, probate court or any other court, or in any other manner. 10. Note Purchase Agreement. This Note is issued pursuant to the Note Purchase Agreement, to which reference is made for a statement of the rights and obligations of MLI and the duties and obligations of the REIT. 11. Applicable Law; Venue. The Note Purchase Agreement and this Note shall be governed by and construed in accordance with -4- 38 the internal laws of the State of Texas, without giving effect to the Principles of conflict of laws thereof. Any legal suit, action or proceeding against the REIT or MLI arising out of or relating to this Note shall be instituted in any federal or state court in Dallas, Texas, and each of the REIT and MLI waives any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding. 12. Legal Interest Limitations. All agreements of the REIT whether now existing or hereafter arising and whether written or oral, are expressly limited so that in no contingency or event whatsoever shall the amount paid, or agreed to be paid to MLI for the use, forbearance or detention of the indebtedness evidenced by this Note or for the performance or payment of any covenant or obligation contained herein, exceed the maximum amount permissible under applicable law from time to time in effect. If for any reason whatsoever fulfillment of any provision hereof or of any other document evidencing, securing or pertaining to this Note, including but not limited to the Note Purchase Agreement, at the time performance of such provision shall be due, shall involve transcending the limit of validity, and if under any such circumstances MLI shall ever receive anything of value deemed interest under applicable law from time to time in effect which would exceed interest at the highest lawful rate, such amount that would be excessive interest shall be applied to the reduction of the principal amount owing under this Note and not to the payment of interest, or if such amount that would be excessive interest exceeds the unpaid balance of principal of this Note, such excess shall be refunded to the REIT. 13. Notices. Any notice or demand permitted or required hereby shall be made in writing and shall be effective and deemed delivered and received upon the earlier of (a) the day of actual receipt via telex, telecopy, telegram or hand delivery (including, without limitation, Federal Express and other overnight courier service) of the written notice or demand by the Person to whom the notice or demand is given or (b) three days after the written notice or demand is deposited in the United States mail postage paid, first class, certified or registered mail with return receipt requested and addressed to the Person to whom the notice or demand is being given at the address provided herein for notices (whether or not the notice or demand is actually received). The address for notices to MLI shall be the address stated herein for payments and the address for notices to the REIT shall be 3500 Trammell Crow Center, 2001 Ross Avenue, Dallas, Texas 75201, Attention: Managing Partner, Trammell Crow Ventures, provided that each of MLI and the REIT -5- 39 may change its address for notices to any other location within the continental United States by notifying the other of the new address in the manner provided herein for the giving of notices, with such change to become effective 10 days after notice of the change of address is given. 14. Non-Recourse Obligation. Recourse for the payment of the principal of this Note or interest on any such principal that is overdue, or for any claim based herein or otherwise in respect hereof, and recourse under or upon any obligations, covenant or agreement of the REIT under the Note Purchase Agreement or this Note shall be satisfied, if at all, out of the REIT's property only. No such obligation or liability shall be personally binding upon, nor shall recourse be had to, the private property of its Trust Managers, shareholders, officers, employees or agents, regardless of whether such obligation or liability is in the nature of contract, tort or otherwise. EXECUTED as of the day and year first above written. TRAMMELL CROW REAL ESTATE INVESTORS By:___________________________________ James S. Wassel, Vice President -6- 40 Exhibit A-2 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFERABILITY AS SET FORTH HEREIN AND IN A NOTE PURCHASE AGREEMENT, DATED AS OF FEBRUARY 27, 1992, A COPY OF WHICH IS ON FILE AT THE OFFICES OF THE REIT. THIS NOTE MAY NOT BE TRANSFERRED IN VIOLATION OF THE SECURITIES ACT, ANY STATE SECURITIES LAWS OR THE RULES AND REGULATIONS UNDER ANY OF THEM, OR THE PROVISIONS OF THIS NOTE OR OF THE NOTE PURCHASE AGREEMENT. Unsecured Promissory Note Due November 27, 1997 $5,939,866.34 February 27, 1992 TRAMMELL CROW REAL ESTATE INVESTORS, a real estate investment trust duly organized and existing under the laws of the State of Texas (the "REIT"), for value received, hereby promises to pay to the order of GERLACH & CO. or its permitted assigns ("MLI") at Citibank, N.A., 111 Wall Street 14th Floor/Zone 5, New York, New York 10043, ABA No. 021000089 (Fed. Wire: CITIBANK NYC/CUST/CONCENTRATION ACCT #36858201 FOR FURTHER CREDIT TO ACCT #845978) (or such other party or place as MLI may from time to time designate in writing to the REIT) the principal sum of FIVE MILLION, NINE HUNDRED THIRTY-NINE THOUSAND, EIGHT HUNDRED SIXTY-SIX AND 34/100THS DOLLARS ($5,939,866.34), together with interest on the principal hereof from time to time remaining unpaid at the interest rates hereinafter stated, at such times and on such terms and conditions as are hereinafter set forth. All capitalized terms used in this Note which are used but not defined herein shall have the respective meanings ascribed to them in the Note Purchase Agreement, dated as of February 27, 1992, between the REIT and MLI (as amended, modified, supplemented, renewed or extended from time to time, the "Note Purchase Agreement"). 1. Rate and Computation of Interest. (a) Interest Rate. The unpaid principal balance of this Note from time to time outstanding shall bear interest from the date hereof until this Note shall have been paid in full at a rate of 8.80% per annum, but in no event higher 41 than the maximum rate of interest permitted under applicable law. (b) Default Rate. Notwithstanding any other provisions hereof, upon an Event of Default in the payment of the principal balance hereof, such unpaid principal shall bear interest at the rate of 11.7% per annum, but in no event higher than the maximum rate of interest permitted under applicable law. (c) Computation. All interest hereunder shall be computed on the basis of a year of 365 or 366 days, as applicable, for the actual number of days elapsed. 2. Payment of Principal and Interest. Payments of principal and interest shall be due and payable as follows: (a) Interest. The accrued but unpaid interest on the outstanding principal balance of this Note as of May 27, 1992 and November 27, 1992 shall, in each case, be deferred and added to the outstanding principal balance of this Note on such dates. Upon any such deferral and addition to the outstanding principal balance of this Note, at the written request of MLI, the REIT will issue a new note for the then-outstanding principal balance hereof in exchange for this Note. The accrued but unpaid interest on the outstanding principal balance of this Note shall be due and payable semi-annually in arrears on the 27th day of each May and November in each year, commencing May 27, 1993, and on the Maturity Date. All interest which accrues at the Default Rate shall be due and payable on demand. (b) Principal. $4,388,000 shall be due and payable to MLI on or before November 27, 1993, and shall be applied to the reduction of principal. The remaining outstanding principal balance of this Note, together with accrued but unpaid interest thereon shall be due and payable to MLI on November 27, 1997 or on such earlier date as may be required or permitted under this Note (the "Maturity Date"). (c) Manner of Payment and Application of Funds. All sums payable hereunder shall be payable by the REIT to MLI on the day when due in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Subject to the provisions hereof regarding legal interest limitations and except as otherwise provided herein, any amount paid to MLI by the REIT pursuant to this Note shall be applied first to -2- 42 the payment of any costs and expenses of collection of this Note, second to accrued but unpaid interest and third to the reduction of principal. (d) Payment on Business Days. If any payment to be made hereunder shall become due on a day other than a Business Day, such payment shall be made on the Business Day immediately following the day on which such payment would otherwise have been due. 4. Prepayment. (a) Voluntary. This Note may be voluntarily prepaid, in whole or in part, without premium or penalty, upon 10 days prior written notice by the REIT to MLI, specifying the date and amount of prepayment. Any voluntary prepayment shall be accompanied by all interest accrued on the principal amount being prepaid. In the event of voluntary prepayment of this Note in part only, a new note or notes for the unpaid portion hereof will be issued. (b) Mandatory. Pursuant to Section 5.14 of the Note Purchase Agreement, MLI may cause the REIT to make a mandatory prepayment on this Note in accordance with the provisions of such Section. In the event of mandatory prepayment of this Note in part only, a new note or notes for the unpaid portion hereof will be issued. 5. Redemption. In the event that the REIT shall breach its obligations under Sections 5.12, 5.13 or 5.14 of the Note Purchase Agreement, and any such breach is not cured within the time period specified in the applicable Section, MLI shall have the right, by delivering to the REIT a written demand for redemption, to require the REIT to redeem this Note at the then applicable Redemption Price. The REIT shall redeem this Note by delivery to MLI of the Redemption Price within 60 days following receipt by the REIT of such demand by MLI for redemption. 6. Default. The occurrence of any Event of Default under the Note Purchase Agreement shall be an "Event of Default" hereunder. 7. Acceleration and Other Remedies. Upon the occurrence and continuance of an Event of Default, the holder of this Note at its option, may declare the entire principal balance hereof and all accrued and unpaid interest due and payable at once, without presentment, demand, protest, notice or grace, all of which are specifically hereby waived. MLI may sue on this Note -3- 43 and pursue any and all other remedies available to MLI at law or equity or pursue any combination of the above, all remedies hereunder or under the Note Purchase Agreement being cumulative. The failure to exercise any of the foregoing options upon the happening of one or more Events of Default shall not constitute a waiver of the right to exercise the same at any subsequent time in respect of the same Event of Default or any other Event of Default. The acceptance by MLI of any payment hereunder which is late or is less than the payment in full of all amounts due and payable at the time of such payment shall not (a) constitute a waiver of the right to exercise any of the foregoing options at that time or at any subsequent time or nullify any prior exercise of such options, (b) constitute a waiver of the right to receive timely payments in the future, or (c) constitute a waiver of the right to receive payment in full of all amounts due and payable at the time of such payment. 8. Waiver. Except as may be specifically otherwise provided herein or in the Note Purchase Agreement, the REIT and any endorsers or guarantors hereof severally waive notice, grace, presentment and demand for payment, notice of dishonor, notice of intent to accelerate maturity, notice of acceleration of maturity, protest and notice of protest and non-payment or bringing of suit and diligence in taking any action to collect any sums owing hereunder. The REIT and any endorsers or guarantors hereof agree that from time to time and without notice, MLI may extend the time for any payments hereunder and accept partial payments of this Note, both before and after the Maturity Date, all without in any manner affecting the liability of the REIT or any endorser or guarantor under or with respect to this Note, even though the REIT or such endorser or guarantor is not a party to such agreement. 9. Collection Expenses. The REIT agrees to pay upon demand, any and all costs incurred in collecting any amounts due under this Note, including, but not limited to, all reasonable attorneys' fees, expenses and court costs, whether or not any legal action shall be instituted to enforce this Note in bankruptcy court, probate court or any other court, or in any other manner. 10. Note Purchase Agreement. This Note is issued pursuant to the Note Purchase Agreement, to which reference is made for a statement of the rights and obligations of MLI and the duties and obligations of the REIT. 11. Applicable Law; Venue. The Note Purchase Agreement and this Note shall be governed by and construed in accordance with -4- 44 the internal laws of the State of Texas, without giving effect to the principles of conflict of laws thereof. Any legal suit, action or proceeding against the REIT or MLI arising out of or relating to this Note shall be instituted in any federal or state court in Dallas, Texas, and each of the REIT and MLI waives any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding. 12. Legal Interest Limitations. All agreements of the REIT whether now existing or hereafter arising and whether written or oral, are expressly limited so that in no contingency or event whatsoever shall the amount paid, or agreed to be paid to MLI for the use, forbearance or detention of the indebtedness evidenced by this Note or for the performance or payment of any covenant or obligation contained herein, exceed the maximum amount permissible under applicable law from time to time in effect. If for any reason whatsoever fulfillment of any provision hereof or of any other document evidencing, securing or pertaining to this Note, including but not limited to the Note Purchase Agreement, at the time performance of such provision shall be due, shall involve transcending the limit of validity, and if under any such circumstances MLI shall ever receive anything of value deemed interest under applicable law from time to time in effect which would exceed interest at the highest lawful rate, such amount that would be excessive interest shall be applied to the reduction of the principal amount owing under this Note and not to the payment of interest, or if such amount that would be excessive interest exceeds the unpaid balance of principal of this Note, such excess shall be refunded to the REIT. 13. Notices. Any notice or demand permitted or required hereby shall be made in writing and shall be effective and deemed delivered and received upon the earlier of (a) the day of actual receipt via telex, telecopy, telegram or hand delivery (including, without limitation, Federal Express and other overnight courier service) of the written notice or demand by the Person to whom the notice or demand is given or (b) three days after the written notice or demand is deposited in the United States mail postage paid, first class, certified or registered mail with return receipt requested and addressed to the Person to whom the notice or demand is being given at the address provided herein for notices (whether or not the notice or demand is actually received). The address for notices to MLI shall be the address stated herein for payments and the address for notices to the REIT shall be 3500 Trammell Crow Center, 2001 Ross Avenue, Dallas, Texas 75201, Attention: Managing Partner, Trammell Crow Ventures, provided that each of MLI and the REIT -5- 45 may change its address for notices to any other location within the continental United States by notifying the other of the new address in the manner provided herein for the giving of notices, with such change to become effective 10 days after notice of the change of address is given. 14. Non-Recourse Obligation. Recourse for the payment of the principal of this Note or interest on any such principal that is overdue, or for any claim based herein or otherwise in respect hereof, and recourse under or upon any obligations, covenant or agreement of the REIT under the Note Purchase Agreement or this Note shall be satisfied, if at all, out of the REIT's property only. No such obligation or liability shall be personally binding upon, nor shall recourse be had to, the private property of its Trust Managers, shareholders, officers, employees or agents, regardless of whether such obligation or liability is in the nature of contract, tort or otherwise. EXECUTED as of the day and year first above written. TRAMMELL CROW REAL ESTATE INVESTORS By: -------------------------------- James S. Wassel, Vice President -6- 46 Exhibit B-1 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFERABILITY AS SET FORTH HEREIN AND IN A NOTE PURCHASE AGREEMENT, DATED AS OF FEBRUARY 27, 1992, A COPY OF WHICH IS ON FILE AT THE OFFICES OF THE REIT. THIS NOTE MAY NOT BE TRANSFERRED IN VIOLATION OF THE SECURITIES ACT, ANY STATE SECURITIES LAWS OR THE RULES AND REGULATIONS UNDER ANY OF THEM, OR THE PROVISIONS OF THIS NOTE OR OF THE NOTE PURCHASE AGREEMENT. Unsecured Promissory Note Due November 27, 1997 $19,143,646.92 February 27, 1992 TRAMMELL CROW REAL ESTATE INVESTORS, a real estate investment trust duly organized and existing under the laws of the State of Texas (the "REIT"), for value received, hereby promises to pay to the order of GERLACH & CO. or its permitted assigns ("MLI") at Citibank, N.A., 111 Wall Street 14th Floor/Zone 5, New York, New York 10043, ABA No. 021000089 (Fed. Wire: CITIBANK NYC/CUST/CONCENTRATION ACCT #36858201 FOR FURTHER CREDIT TO ACCT #846194) (or such other party or place as MLI may from time to time designate in writing to the REIT) the principal sum of NINETEEN MILLION, ONE HUNDRED FORTY-THREE THOUSAND, SIX HUNDRED FORTY-SIX AND 92/100THS DOLLARS ($19,143,646.92), together with interest on the principal hereof from time to time remaining unpaid at the interest rates hereinafter stated, at such times and on such terms and conditions as are hereinafter set forth. All capitalized terms used in this Note which are used but not defined herein shall have the respective meanings ascribed to them in the Note Purchase Agreement, dated as of February 27, 1992, between the REIT and MLI (as amended, modified, supplemented, renewed or extended from time to time, the "Note Purchase Agreement"). 1. Rate and Computation of Interest. (a) Interest Rate. The unpaid principal balance of this Note from time to time outstanding shall bear interest from the date hereof until this Note shall have been paid in full at a rate of 8.80% per annum compounded semi-annually, 47 but in no event higher than the maximum rate of interest permitted under applicable law. (b) Default Rate. Notwithstanding any other provisions hereof, upon an Event of Default in the payment of the principal balance hereof, such unpaid principal shall bear interest at the rate of 11.7% per annum, but in no event higher than the maximum rate of interest permitted under applicable law. (c) Computation. All interest hereunder shall be computed on the basis of a year of 365 or 366 days, as applicable, for the actual number of days elapsed. 2. Payment of Principal and Interest. Payments of principal and interest shall be due and payable as follows: (a) Interest. The accrued but unpaid interest on the outstanding principal balance of this Note as of May 27, 1992 and November 27, 1992 shall, in each case, be deferred and added to the outstanding principal balance of this Note on such dates. The accrued but unpaid interest on the outstanding principal balance of this Note shall be due and payable semi-annually in arrears on the 27th day of each May and November in each year, commencing May 27, 1993, and on the Maturity Date. All interest which accrues at the Default Rate shall be due and payable on demand. (b) Principal. The entire outstanding principal balance of this Note, together with accrued but unpaid interest thereon shall be due and payable to MLI on November 27, 1997 or on such earlier date as may be required or permitted under this Note (the "Maturity Date"). (c) Manner of Payment and Application of Funds. All sums payable hereunder shall be payable by the REIT to MLI on the day when due in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Subject to the provisions hereof regarding legal interest limitations and except as otherwise provided herein, any amount paid to MLI by the REIT pursuant to this Note shall be applied first to the payment of any costs and expenses of collection of this Note, second to accrued but unpaid interest and third to the reduction of principal. (d) Payment on Business Days. If any payment to be made hereunder shall become due on a day other than a - 2 - 48 Business Day, such payment shall be made on the Business Day immediately following the day on which such payment would otherwise have been due. 4. Prepayment. This Note may be voluntarily prepaid, in whole or in part, without premium or penalty, upon 10 days prior written notice by the REIT to MLI, specifying the date and amount of prepayment. Any voluntary prepayment shall be accompanied by all interest accrued on the principal amount being prepaid. In the event of voluntary prepayment of this Note in part only, a new note or notes for the unpaid portion hereof will be issued. 5. Redemption. In the event that the REIT shall breach its obligations under Sections 5.12, 5.13 or 5.14 of the Note Purchase Agreement, and any such breach is not cured within the time period specified in the applicable Section, MLI shall have the right, by delivering to the REIT a written demand for redemption, to require the REIT to redeem this Note at the then applicable Redemption Price. The REIT shall redeem this Note by delivery to MLI of the Redemption Price within 60 days following receipt by the REIT of such demand by MLI for redemption. 6. Default. The occurrence of any Event of Default under the Note Purchase Agreement shall be an "Event of Default" hereunder. 7. Acceleration and Other Remedies. Upon the occurrence and continuance of an Event of Default, the holder of this Note at its option, may declare the entire principal balance hereof and all accrued and unpaid interest due and payable at once, without presentment, demand, protest, notice or grace, all of which are specifically hereby waived. MLI may sue on this Note and pursue any and all other remedies available to MLI at law or equity or pursue any combination of the above, all remedies hereunder or under the Note Purchase Agreement being cumulative. The failure to exercise any of the foregoing options upon the happening of one or more Events of Default shall not constitute a waiver of the right to exercise the same at any subsequent time in respect of the same Event of Default or any other Event of Default. The acceptance by MLI of any payment hereunder which is late or is less than the payment in full of all amounts due and payable at the time of such payment shall not (a) constitute a waiver of the right to exercise any of the foregoing options at that time or at any subsequent time or nullify any prior exercise of such options, (b) constitute a waiver of the right to receive timely payments in the future, or (c) constitute a waiver of the right to receive payment in full of all amounts due and payable at the time of such payment. - 3 - 49 8. Waiver. Except as may be specifically otherwise provided herein or in the Note Purchase Agreement, the REIT and any endorsers or guarantors hereof severally waive notice, grace, presentment and demand for payment, notice of dishonor, notice of intent to accelerate maturity, notice of acceleration of maturity, protest and notice of protest and non-payment or bringing of suit and diligence in taking any action to collect any sums owing hereunder. The REIT and any endorsers or guarantors hereof agree that from time to time and without notice, MLI may extend the time for any payments hereunder and accept partial payments of this Note, both before and after the Maturity Date, all without in any manner affecting the liability of the REIT or any endorser or guarantor under or with respect to this Note, even though the REIT or such endorser or guarantor is not a party to such agreement. 9. Collection Expenses. The REIT agrees to pay upon demand, any and all costs incurred in collecting any amounts due under this Note, including, but not limited to, all reasonable attorneys' fees, expenses and court costs, whether or not any legal action shall be instituted to enforce this Note in bankruptcy court, probate court or any other court, or in any other manner. 10. Note Purchase Agreement. This Note is issued pursuant to the Note Purchase Agreement, to which reference is made for a statement of the rights and obligations of MLI and the duties and obligations of the REIT. 11. Applicable Law; Venue. The Note Purchase Agreement and this Note shall be governed by and construed in accordance with the internal laws of the State of Texas, without giving effect to the principles of conflict of laws thereof. Any legal suit, action or proceeding against the REIT or MLI arising out of or relating to this Note shall be instituted in any federal or state court in Dallas, Texas, and each of the REIT and MLI waives any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding. 12. Legal Interest Limitations. All agreements of the REIT whether now existing or hereafter arising and whether written or oral, are expressly limited so that in no contingency or event whatsoever shall the amount paid, or agreed to be paid to MLI for the use, forbearance or detention of the indebtedness evidenced by this Note or for the performance or payment of any covenant or obligation contained herein, exceed the maximum amount permissible under applicable law from time to time in effect. If for any reason whatsoever fulfillment of any - 4 - 50 provision hereof or of any other document evidencing, securing or pertaining to this Note, including but not limited to the Note Purchase Agreement, at the time performance of such provision shall be due, shall involve transcending the limit of validity, and if under any such circumstances MLI shall ever receive anything of value deemed interest under applicable law from time to time in effect which would exceed interest at the highest lawful rate, such amount that would be excessive interest shall be applied to the reduction of the principal amount owing under this Note and not to the payment of interest, or if such amount that would be excessive interest exceeds the unpaid balance of principal of this Note, such excess shall be refunded to the REIT. 13. Notices. Any notice or demand permitted or required hereby shall be made in writing and shall be effective and deemed delivered and received upon the earlier of (a) the day of actual receipt via telex, telecopy, telegram or hand delivery (including, without limitation, Federal Express and other overnight courier service) of the written notice or demand by the Person to whom the notice or demand is given or (b) three days after the written notice or demand is deposited in the United States mail postage paid, first class, certified or registered mail with return receipt requested and addressed to the Person to whom the notice or demand is being given at the address provided herein for notices (whether or not the notice or demand is actually received). The address for notices to MLI shall be the address stated herein for payments and the address for notices to the REIT shall be 3500 Trammell Crow Center, 2001 Ross Avenue, Dallas, Texas 75201, Attention: Managing Partner, Trammell Crow Ventures, provided that each of MLI and the REIT may change its address for notices to any other location within the continental United States by notifying the other of the new address in the manner provided herein for the giving of notices, with such change to become effective 10 days after notice of the change of address is given. 14. Non-Recourse Obligation. Recourse for the payment of the principal of this Note or interest on any such principal that is overdue, or for any claim based herein or otherwise in respect hereof, and recourse under or upon any obligations, covenant or agreement of the REIT under the Note Purchase Agreement or this Note shall be satisfied, if at all, out of the REIT's property only. No such obligation or liability shall be personally binding upon, nor shall recourse be had to, the private property of its Trust Managers, shareholders, officers, employees or agents, regardless of whether such obligation or liability is in the nature of contract, tort or otherwise. -5- 51 EXECUTED as of the day and year first above written. TRAMMELL CROW REAL ESTATE INVESTORS By: -------------------------------- James S. Wassel, Vice President -6- 52 Exhibit B-2 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFERABILITY AS SET FORTH HEREIN AND IN A NOTE PURCHASE AGREEMENT, DATED AS OF FEBRUARY 27, 1992, A COPY OF WHICH IS ON FILE AT THE OFFICES OF THE REIT. THIS NOTE MAY NOT BE TRANSFERRED IN VIOLATION OF THE SECURITIES ACT, ANY STATE SECURITIES LAWS OR THE RULES AND REGULATIONS UNDER ANY OF THEM, OR THE PROVISIONS OF THIS NOTE OR OF THE NOTE PURCHASE AGREEMENT. Unsecured Promissory Note Due November 27, 1997 $23,261,317.66 February 27, 1992 TRAMMELL CROW REAL ESTATE INVESTORS, a real estate investment trust duly organized and existing under the laws of the State of Texas (the "REIT"), for value received, hereby promises to pay to the order of GERLACH & CO. or its permitted assigns ("MLI") at Citibank, N.A., 111 Wall Street 14th Floor/Zone 5, New York, New York 10043, ABA No. 021000089 (Fed. Wire: CITIBANK NYC/CUST/CONCENTRATION ACCT #36858201 FOR FURTHER CREDIT TO ACCT #845978) (or such other party or place as MLI may from time to time designate in writing to the REIT) the principal sum of TWENTY-THREE MILLION, TWO HUNDRED SIXTY-ONE THOUSAND, THREE HUNDRED SEVENTEEN AND 66/100THS DOLLARS ($23,261,317.66), together with interest on the principal hereof from time to time remaining unpaid at the interest rates hereinafter stated, at such times and on such terms and conditions as are hereinafter set forth. All capitalized terms used in this Note which are used but not defined herein shall have the respective meanings ascribed to them in the Note Purchase Agreement, dated as of February 27, 1992, between the REIT and MLI (as amended, modified, supplemented, renewed or extended from time to time, the "Note Purchase Agreement"). 1. Rate and Computation of Interest. (a) Interest Rate. The unpaid principal balance of this Note from time to time outstanding shall bear interest from the date hereof until this Note shall have been paid in full at a rate of 8.80% per annum compounded semi-annually, 53 but in no event higher than the maximum rate of interest permitted under applicable law. (b) Default Rate. Notwithstanding any other provisions hereof, upon an Event of Default in the payment of the principal balance hereof, such unpaid principal shall bear interest at the rate of 11.7% per annum, but in no event higher than the maximum rate of interest permitted under applicable law. (c) Computation. All interest hereunder shall be computed on the basis of a year of 365 or 366 days, as applicable, for the actual number of days elapsed. 2. Payment of Principal and Interest. Payments of principal and interest shall be due and payable as follows: (a) Interest. The accrued but unpaid interest on the outstanding principal balance of this Note as of May 27, 1992 and November 27, 1992 shall, in each case, be deferred and added to the outstanding principal balance of this Note on such dates. The accrued but unpaid interest on the outstanding principal balance of this Note shall be due and payable semi-annually in arrears on the 27th day of each May and November in each year, commencing May 27, 1993, and on the Maturity Date. All interest which accrues at the Default Rate shall be due and payable on demand. (b) Principal. The entire outstanding principal balance of this Note, together with accrued but unpaid interest thereon shall be due and payable to MLI on November 27, 1997 or on such earlier date as may be required or permitted under this Note (the "Maturity Date"). (c) Manner of Payment and Application of Funds. All sums payable hereunder shall be payable by the REIT to MLI on the day when due in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Subject to the provisions hereof regarding legal interest limitations and except as otherwise provided herein, any amount paid to MLI by the REIT pursuant to this Note shall be applied first to the payment of any costs and expenses of collection of this Note, second to accrued but unpaid interest and third to the reduction of principal. (d) Payment on Business Days. If any payment to be made hereunder shall become due on a day other than a -2 - 54 Business Day, such payment shall be made on the Business Day immediately following the day on which such payment would otherwise have been due. 4. Prepayment. This Note may be voluntarily prepaid, in whole or in part, without premium or penalty, upon 10 days prior written notice by the REIT to MLI, specifying the date and amount of prepayment. Any voluntary prepayment shall be accompanied by all interest accrued on the principal amount being prepaid. In the event of voluntary prepayment of this Note in part only, a new note or notes for the unpaid portion hereof will be issued. 5. Redemption. In the event that the REIT shall breach its obligations under Sections 5.12, 5.13 or 5.14 of the Note Purchase Agreement, and any such breach is not cured within the time period specified in the applicable Section, MLI shall have the right, by delivering to the REIT a written demand for redemption, to require the REIT to redeem this Note at the then applicable Redemption Price. The REIT shall redeem this Note by delivery to MLI of the Redemption Price within 60 days following receipt by the REIT of such demand by MLI for redemption. 6. Default. The occurrence of any Event of Default under the Note Purchase Agreement shall be an "Event of Default" hereunder. 7. Acceleration and Other Remedies. Upon the occurrence and continuance of an Event of Default, the holder of this Note at its option, may declare the entire principal balance hereof and all accrued and unpaid interest due and payable at once, without presentment, demand, protest, notice or grace, all of which are specifically hereby waived. MLI may sue on this Note and pursue any and all other remedies available to MLI at law or equity or pursue any combination of the above, all remedies hereunder or under the Note Purchase Agreement being cumulative. The failure to exercise any of the foregoing options upon the happening of one or more Events of Default shall not constitute a waiver of the right to exercise the same at any subsequent time in respect of the same Event of Default or any other Event of Default. The acceptance by MLI of any payment hereunder which is late or is less than the payment in full of all amounts due and payable at the time of such payment shall not (a) constitute a waiver of the right to exercise any of the foregoing options at that time or at any subsequent time or nullify any prior exercise of such options, (b) constitute a waiver of the right to receive timely payments in the future, or (c) constitute a waiver of the right to receive payment in full of all amounts due and payable at the time of such payment. -3- 55 8. Waiver. Except as may be specifically otherwise provided herein or in the Note Purchase Agreement, the REIT and any endorsers or guarantors hereof severally waive notice, grace, presentment and demand for payment, notice of dishonor, notice of intent to accelerate maturity, notice of acceleration of maturity, protest and notice of protest and non-payment or bringing of suit and diligence in taking any action to collect any sums owing hereunder. The REIT and any endorsers or guarantors hereof agree that from time to time and without notice, MLI may extend the time for any payments hereunder and accept partial payments of this Note, both before and after the Maturity Date, all without in any manner affecting the liability of the REIT or any endorser or guarantor under or with respect no this Note, even though the REIT or such endorser or guarantor is not a party to such agreement. 9. Collection Expenses. The REIT agrees to pay upon demand, any and all costs incurred in collecting any amounts due under this Note, including, but not limited to, all reasonable attorneys' fees, expenses and court costs, whether or not any legal action shall be instituted to enforce this Note in bankruptcy court, probate court or any other court, or in any other manner. 10. Note Purchase Agreement. This Note is issued pursuant to the Note Purchase Agreement, to which reference is made for a statement of the rights and obligations of MLI and the duties and obligations of the REIT. 11. Applicable Law; Venue. The Note Purchase Agreement and this Note shall be governed by and construed in accordance with the internal laws of the State of Texas, without giving effect to the principles of conflict of laws thereof. Any legal suit, action or proceeding against the REIT or MLI arising out of or relating to this Note shall be instituted in any federal or state court in Dallas, Texas, and each of the REIT and MLI waives any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding. 12. Legal Interest Limitations. All agreements of the REIT whether now existing or hereafter arising and whether written or oral, are expressly limited so that in no contingency or event whatsoever shall the amount paid, or agreed to be paid to MLI for the use, forbearance or detention of the indebtedness evidenced by this Note or for the performance or payment of any covenant or obligation contained herein, exceed the maximum amount permissible under applicable law from time to time in effect. If for any reason whatsoever fulfillment of any - 4 - 56 provision hereof or of any other document evidencing, securing or pertaining to this Note, including but not limited to the Note Purchase Agreement, at the time performance of such provision shall be due, shall involve transcending the limit of validity, and if under any such circumstances MLI shall ever receive anything of value deemed interest under applicable law from time to time in effect which would exceed interest at the highest lawful rate, such amount that would be excessive interest shall be applied to the reduction of the principal amount owing under this Note and not to the payment of interest, or if such amount that would be excessive interest exceeds the unpaid balance of principal of this Note, such excess shall be refunded to the REIT. 13. Notices. Any notice or demand permitted or required hereby shall be made in writing and shall be effective and deemed delivered and received upon the earlier of (a) the day of actual receipt via telex, telecopy, telegram or hand delivery (including, without limitation, Federal Express and other overnight courier service) of the written notice or demand by the Person to whom the notice or demand is given or (b) three days after the written notice or demand is deposited in the United States mail postage paid, first class, certified or registered mail with return receipt requested and addressed to the Person to whom the notice or demand is being given at the address provided herein for notices (whether or not the notice or demand is actually received). The address for notices to MLI shall be the address stated herein for payments and the address for notices to the REIT shall be 3500 Trammell Crow Center, 2001 Ross Avenue, Dallas, Texas 75201, Attention: Managing Partner, Trammell Crow Ventures, provided that each of MLI and the REIT may change its address for notices to any other location within the continental United States by notifying the other of the new address in the manner provided herein for the giving of notices, with such change to become effective 10 days after notice of the change of address is given. 14. Non-Recourse Obliqation. Recourse for the payment of the principal of this Note or interest on any such principal that is overdue, or for any claim based herein or otherwise in respect hereof, and recourse under or upon any obligations, covenant or agreement of the REIT under the Note Purchase Agreement or this Note shall be satisfied, if at all, out of the REIT's property only. No such obligation or liability shall be personally binding upon, nor shall recourse be had to, the private property of its Trust Managers, shareholders, officers, employees or agents, regardless of whether such obligation or liability is in the nature of contract, tort or otherwise. -5- 57 EXECUTED as of the day and year first above written. TRAMMELL CROW REAL ESTATE INVESTORS By: -------------------------------- James S. Wassel, Vice President EX-24.4 8 CONSENT OF KENNETH LEVENTHAL 1 EXHIBIT 24.4 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of American Industrial Properties REIT, Inc. on Form S-4 of our report on the consolidated financial statement schedules of American Industrial Properties REIT (formerly Trammell Crow Real Estate Investors) dated March 5, 1993, except for the first and last paragraph of Note 1 as to which the date is January 17, 1994, appearing on pages F-7 through F-23 in the Proxy Statement/Prospectus which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in giving said report in such Proxy Statement/Prospectus. Kenneth Leventhal & Company Dallas, Texas January 20, 1994 EX-28.1 9 FORM OF PROXY CARD 1 EXHIBIT 28.1 PRELIMINARY PROXY MATERIALS AMERICAN INDUSTRIAL PROPERTIES REIT THIS PROXY IS SOLICITED ON BEHALF OF THE TRUST MANAGERS OF AMERICAN INDUSTRIAL PROPERTIES REIT SPECIAL MEETING APRIL 28, 1994 The undersigned hereby appoints W. H. Bricker and Charles W. Wolcott, or either of them, as Proxies, each with the power to appoint his substitute, and hereby authorizes either of them to represent and to vote all of the undersigned's Shares of Beneficial Interest in the Trust, held of record on February 28, 1994, at the Special Meeting of Shareholders to be held on April 28, 1994 or at any adjournments thereof, on the proposal (the "Proposal") below, as directed. (1) THE ADOPTION AND APPROVAL OF THE MERGER AGREEMENT AND THE MERGER THEREUNDER OF AMERICAN INDUSTRIAL PROPERTIES REIT (THE "TRUST") WITH AND INTO A MARYLAND CORPORATION WHICH IS A WHOLLY-OWNED SUBSIDIARY OF THE TRUST. / / FOR: / / AGAINST: / / ABSTAIN: (2) IN THEIR DISCRETION, ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY ADJOURNMENTS THEREOF. / / FOR: / / AGAINST: / / ABSTAIN: This Proxy, when properly executed, will be voted in the manner described above. If no direction is made, this Proxy will be voted FOR the Proposal. Please sign exactly as your name appears on your Share certificate. 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. _________________________ ______ Signature of Shareholder Date _________________________ ______ Signature if Shares held Date in more than one name PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY IN THE ENCLOSED ENVELOPE. EX-28.2 10 NOTICE OF SPECIAL MEETING 1 EXHIBIT 28.2 PRELIMINARY PROXY MATERIALS AMERICAN INDUSTRIAL PROPERTIES REIT NOTICE OF SPECIAL MEETING OF SHAREHOLDERS To be held April 28, 1994 TO THE SHAREHOLDERS OF AMERICAN INDUSTRIAL PROPERTIES REIT: You are cordially invited to attend a Special Meeting of Shareholders which will be held at the , Dallas, Texas, on April 28, 1994, at 9:00 a.m. Dallas time, to consider and act upon the following matters: (1) The adoption and approval of the Merger Agreement and the merger thereunder of the Trust with and into a Maryland corporation which is a wholly-owned subsidiary of the Trust. (2) Such other business as may properly come before the Special Meeting or any adjournments thereof. Only holders of record of Shares of Beneficial Interest of the Trust on February 28, 1994 will be entitled to notice of and to vote at the Special Meeting or any adjournments thereof. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING REGARDLESS OF THE NUMBER OF SHARES OF BENEFICIAL INTEREST YOU HOLD. YOU ARE INVITED TO ATTEND THE MEETING IN PERSON, BUT WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE. IF YOU DO ATTEND THE MEETING, YOU MAY, IF YOU PREFER, REVOKE YOUR PROXY AND VOTE YOUR SHARES OF BENEFICIAL INTEREST IN PERSON. BY ORDER OF THE TRUST MANAGERS _________________________ Charles W. Wolcott President and Chief Executive Officer 6220 N. Beltline Suite 205 Irving, TX 75063 (214) 550-6053 , 1994 -----END PRIVACY-ENHANCED MESSAGE-----