-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VwOyucknpek2ZDJTtS2Guw/UN81oSsOzKKEq9DIEe46Muu43Xu3Yi5l5dbkK0G12 ZRMTJH8zKJ/vl87EROS+1A== 0000845613-97-000003.txt : 19970328 0000845613-97-000003.hdr.sgml : 19970328 ACCESSION NUMBER: 0000845613-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN SELECT REALTY TRUST CENTRAL INDEX KEY: 0000845613 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 943095938 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12708 FILM NUMBER: 97565010 BUSINESS ADDRESS: STREET 1: 1800 GATEWAY DR - STE 200 CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: 4153122000 MAIL ADDRESS: STREET 1: P O BOX 7777 CITY: SAN MATEO STATE: CA ZIP: 94403-7777 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN SELECT REAL ESTATE INCOME FUND DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN CALIFORNIA REAL ESTATE FUND DATE OF NAME CHANGE: 19890307 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996. Commission File No. 0-12708 FRANKLIN SELECT REALTY TRUST (Exact Name of Company as Specified in its Charter)
California 94-3095938 - ------------------------------------------------------ ------------------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification number) or incorporation or organization) P.O. Box 7777, San Mateo, CA 94403-7777 (415) 312-2000 - ------------------------------------------------------ ------------------------------------------------- (Address of principal and executive Office) Company's telephone number, including Area Code Securities registered pursuant to Section 12(b) of Act: Title of each class Name of each exchange on which registered Common Stock Series A American Stock Exchange - ------------------------------------------------------ -------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 12 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No At March 3, 1997, 10,529,765 shares of the Company's Series A common stock were held by non-affiliates of the Company. The aggregate market value of the voting stock held by non-affiliates of the Company, based upon the closing price of $5.50 as of March 3, 1997, is $57,913,706. Indicate the number of shares outstanding of each of the Company's classes of common stock at December 31, 1996: 12,250,384 shares of Series A common stock and 745,584 shares of Series B common stock. PART I Item 1. BUSINESS DESCRIPTION OF BUSINESS Franklin Select Realty Trust, formerly Franklin Select Real Estate Income Fund, (the "Company") is a California corporation formed on January 5, 1989, for the purpose of acquiring, managing and holding for investment income-producing real estate assets. The Company is a real estate investment trust ("REIT"). At December 31, 1996, the Company's property portfolio consisted of ownership interests in the following eight properties: (i) two industrial research and development properties containing approximately 356,000 rentable square feet of space; (ii) three suburban office properties containing approximately 403,000 rentable square feet of space; and (iii) three neighborhood shopping centers containing approximately 204,000 rentable square feet of space. The Company's properties are concentrated in the greater San Francisco and Los Angeles areas from which the Company derived 45% and 43% of its 1996 rental revenue respectively. The Company also owns one property in San Diego and one property in Reno, Nevada. The Company's day-to-day operations are managed by Franklin Properties, Inc. (the "Advisor") under the terms of an advisory agreement which is renewable annually. The Company does not have any employees. Seven of the Company's properties are managed by Continental Property Management Co. ("CPMC"), an affiliate of the Advisor, and the remaining property is managed by an unaffiliated company, Cupertino Capital. Both management companies perform the leasing, re-leasing and management-related services for their respective properties. The Advisor is a wholly-owned subsidiary of Franklin Resources, Inc., ("Franklin") whose primary business is the $186 billion Franklin Templeton Group of Funds. In 1995, the Boards of Directors of the Company and of two other real estate investment trusts that the Advisor advised, Franklin Real Estate Income Fund ("FREIF") and Franklin Advantage Real Estate Income Fund ("Advantage"), agreed to the merger of the three real estate investment trusts. At a Special Meeting of Stockholders held on May 7, 1996, the proposed merger of Advantage and FREIF into the Company was approved (the "Merger") by a majority of the outstanding shares of each of the three companies, and the surviving entity was renamed Franklin Select Realty Trust. Shares of the Company were issued in exchange for the shares of Advantage and FREIF on the basis described in a Joint Proxy Statement/Prospectus filed with the Securities and Exchange Commission. The financial and operating results of periods prior to the Merger have been restated to give effect to the Merger. In 1996, the Company formed a limited partnership, FSRT L.P.("FSRT"), in order to acquire two industrial R & D buildings located in Fremont, California (the "Lam Research Buildings"). FSRT assumed the existing financing on the Lam Research Buildings and issued 1,625,000 limited partnership units to the owner of the property in exchange for its equity interest in the property. The limited partnership units are convertible into Series A shares of the Company's common stock on a one-for-one basis commencing October 31, 1997. The Company contributed its fee title interest in the Data General Building to FSRT and approximately $1.4 million in cash to cover transaction and closing costs. The Company is the sole general partner of FSRT and for its contribution, the Company received an approximate 70% ownership interest in FSRT. The Company may contribute all of its remaining properties to FSRT at some later date. The Company is subject to certain restrictions regarding the sale or refinance of properties owned by FSRT. All references to the Company in this report refer to Franklin Select Realty Trust and its majority owned, consolidated limited partnership, FSRT. Unless otherwise specified, information about the Company and the properties includes the operations of FSRT, and refers to the Company after the completion of the Merger, and the combined operations of the Company, FREIF, and Advantage prior to the completion of the Merger. INVESTMENT AND OPERATING STRATEGY The Company acquires income-producing real estate investments located in California with cash flow growth potential, although it has the flexibility to purchase properties elsewhere. The Company's investment focus is on the five major metropolitan areas in California: the Los Angeles metropolitan area, Orange County, San Diego County, the Sacramento metropolitan area and the San Francisco metropolitan area. In addition, the Company may consider strategic acquisitions in other states. The Company's investment program includes providing stockholders with a professionally managed diversified portfolio of income-producing equity real estate investments in strategic markets which represent the potential for current cash flow and for capital appreciation. The Company's business strategy is to expand the size and scope and increase the profitability of its current operations. Traditionally, the Company has identified individual properties suitable for acquisition and acquired them for cash. The Company now also acquires property portfolios in exchange for equity. In particular, the Company seeks to establish strategic relationships with, and acquire property portfolios from, selected real estate operating companies that appear to have competitive advantages within their local market areas. This strategy potentially will allow the Company to increase its asset size, significantly diversify its portfolio and increase its revenues and profitability while reducing its exposure to any single property type or market area. In October 1995, the Company retained Prudential Securities Incorporated as its exclusive financial advisor in connection with the implementation of its portfolio acquisition strategy. The Company anticipates that a portion of its future acquisitions may be achieved through the issuance of common stock or partnership interests. The Company will carefully limit its use of debt financing as discussed under "Financing Policy and Related Matters". It is anticipated that the Company will issue additional limited partnership units of FSRT, or of similarly structured partnerships, to make certain acquisitions. The issuance or exchange of such partnership units can provide important tax benefits to a real estate seller that can enhance the price and other terms of the acquisition, or induce a seller to sell its property when other forms of consideration may not be as attractive. The Company may decide to contribute all of its remaining properties to FSRT at some later date. It is expected that the Company will serve as the general partner and hold a majority ownership interest in any new acquisition partnership vehicles. After properties are acquired, the Company places a strong emphasis on leasing and tenant retention in combination with a program of regular maintenance, periodic renovation and capital improvement. Sophisticated management and accounting systems linked together through a computer network provide detailed and timely reports on property operations to the Advisor's asset management staff. The Company views aggressive and involved property management as crucial to maintaining and improving both cash flow from, and the market value of, its properties. Properties are acquired with a view to holding them as long-term investments. When appropriate, however, the Company seeks to realize the value of its properties through financings, refinancings, sales or exchanges. While the Company currently follows the investment policies described above, they are guidelines only and may be changed by the Board of Directors without a vote of the Company's stockholders. FINANCING POLICY AND RELATED MATTERS The Company's present policy is to maintain a debt to total assets ratio not to exceed 50%. At December 31, 1996, the Company's debt to total assets ratio was 17%. The Company may from time to time modify its debt policy in light of then current economic conditions, relative costs of debt and equity financings, fluctuations in the fair market price of the Company's common stock, growth and acquisition opportunities and other factors. Accordingly, the Company may increase its debt to total assets ratio beyond the limit described above. However, the Company's organizational documents prohibit the aggregate amount of the Company's indebtedness to exceed 300% of its net assets, and prohibit unsecured borrowings which result in asset coverage of less than 300%. The Company expects to fund the cost of acquisitions, capital expenditures, costs associated with lease renewals and reletting of space, repayment of indebtedness, and development of properties from (i) cash flow from operations, (ii) borrowings under its credit facility and, if available, other indebtedness (which may include indebtedness assumed in acquisitions), (iii) the sale of real estate investments, (iv) the sale of the Company's equity securities, and (v) the issuance of partnership interests in connection with acquisitions. The Company is subject to the risks normally associated with debt financing, including the risk that the Company's cash flow will be insufficient to meet required payments of principal and interest, that the Company will not be able to refinance existing indebtedness on the encumbered properties or that the terms of such refinancing will not be as favorable as the terms of existing indebtedness. Debt Financing: Balloon Payments. The Company's mortgage indebtedness has the following balloon payments: 1999-$4.0 million; and 2006-$13.4 million. In addition, the Company's $25 million credit facility, which had no outstanding balance at December 31, 1996, matures in 1998. The Company does not anticipate that its cash flow from operations will be sufficient to make all of the balloon payments of principal when due under its mortgage indebtedness and its credit facility. The Company intends to make such payments by refinancing or extending the indebtedness or by raising funds through the sale of equity securities or properties. If the Company is unable to extend, refinance, or payoff its indebtedness when due, the mortgaged properties could be foreclosed upon by or otherwise transferred to the mortgagee with a subsequent loss of income and asset value to the Company. Debt Financing: Variable Interest Rates. As of December 31, 1996, the Company had approximately $4.2 million of variable rate mortgage indebtedness outstanding which bears interest at a floating rate tied to the Union Bank Reference Rate. In addition, the Company has access to a revolving line of credit in the amount of $25 million which bears interest at a floating rate tied to either (i) the London Interbank Offered Rates ("LIBOR"), or (ii) the Bank of America Reference Rate at the Company's option. Although there were no amounts outstanding under the line of credit at December 31, 1996, the Company intends to use the line of credit to provide short term financing for future acquisitions. An increase in interest rates will have an adverse effect on the Company's net income and Funds from Operations. CASH DISTRIBUTION POLICY Distributions are declared quarterly at the discretion of the Board of Directors. The Company's present distribution policy is to evaluate the current distribution rate, at least annually, in light of anticipated tenant turnover over the next two or three years, the estimated level of associated improvements and leasing commissions, planned capital expenditures, any debt service requirements and the Company's other working capital requirements. After balancing these considerations, and considering the Company's earnings and cash flow, the level of its liquid reserves and other relevant factors, the Company seeks to establish a distribution rate which: i) provides a stable distribution which is sustainable despite short term fluctuations in property cash flows; ii) maximizes the amount of cash flow paid out as distributions consistent with the above listed objective; and iii) complies with the Internal Revenue Code requirement that a REIT annually pay out as distributions not less than 95% of its taxable income. MATTERS THAT MAY AFFECT THE COMPANY'S RESULTS The Company is subject to the risks generally associated with the ownership of real property, including the possibility that operating expenses, debt service payments and fixed costs may exceed property revenues; economic conditions may adversely change in the California, Nevada and the national markets; the real estate investment climate may change; local market conditions may change adversely due to general or local economic conditions and neighborhood characteristics; interest rates may fluctuate and the availability, costs and terms of mortgage financing may change; unanticipated maintenance and renovations may arise; changes in real estate tax rates and other operating expenses may arise; governmental rules and fiscal policies may change; natural disasters, including earthquakes, floods or tornadoes may result in losses beyond the coverage of the Company's insurance policies; the financial condition of the tenants of properties may deteriorate; and other factors which are beyond the control of the Company may occur. All of the Company's properties are located in areas that are subject to earthquake activity. The Company currently carries earthquake insurance coverage for its properties and intends to continue to carry earthquake coverage to the extent that it is available at economically reasonable rates. However, the Company's earthquake insurance coverage may, from time to time, be subject to substantial deductibles. The real estate business is competitive, and the Company is in competition with many other entities engaged in real estate investment activities, many of which have greater assets than the Company. The Company's real estate investments in rental properties are subject to the risk of the Company's inability to attract or retain tenants and a consequent decline in rental income. Furthermore, real estate investments tend to be long-term, and under the REIT provisions of the Internal Revenue Code, might be subject to minimum holding periods to avoid adverse tax consequences; consequently, the Company will have only minimal ability to vary its property portfolio in response to changing economic, financial and investment conditions. To the extent that the Company's rental income is based on a percentage of the gross receipts of retail tenants, its cash flow is dependent on the retail success achieved by such tenants. In connection with any lease renewal or new lease, the Company typically incurs costs for tenant improvements and leasing commissions which will be funded first from operating cash flow and, if necessary, from cash reserves or the line of credit. In addition, while the Company has historically been successful in renewing and releasing space, it will be subject to the risk that leases expiring in the future may be renewed or released at terms that are less favorable than current lease terms. The opportunities for sale, and the profitability of any sale, of any particular property by the Company will be subject to the risk of adverse changes in real estate market conditions, which may vary depending upon the size, location and type of each property. GOVERNMENT REGULATION Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances, the presence of such substances, or the failure to properly remediate such substances, when released. As part of the investigation of properties prior to acquisition, the Company typically has obtained inspection reports concerning the condition of the property, including specialized environmental inspection reports concerning the presence of hazardous substances on the property. The Company intends to continue this practice. None of these inspection reports has revealed any environmental conditions requiring material expenditures for remediation. Such inspection reports, however, do not necessarily reveal all hazardous substances or sources thereof, and substances not considered hazardous when a property is acquired may subsequently be classified as such by amendments to local, state, and federal laws, ordinances, and regulations. If it is ever determined that hazardous substances on or in a Company property must be removed or the release of such substances remediated, the Company could be required to pay all costs of any necessary cleanup work, although under certain circumstances, claims against other responsible parties could be made by the Company. The Company could also experience lost revenues during any such cleanup, or lower lease rates, decreased occupancy or difficulty selling or borrowing against the affected property either prior to or following any such cleanup. The Company believes that it is in compliance in all material respects with all federal, state and local laws regarding hazardous or toxic substances, and the Company has not been notified by any governmental authority of any non-compliance or other claim in connection with any of its present or former properties. The Company does not anticipate that compliance with federal, state and local environmental protection regulations will have any material adverse impact on the financial position, results of operations or liquidity of the Company. The Company is aware of the existence of certain hazardous substances at the Data General Building site. The Data General Building is located on property that was formerly part of a site used for storage of crude oil and various refined petroleum products. As a result, methane gas is present in the soil and the groundwater is contaminated throughout the area where the property is located. According to environmental reports prepared at the time the Data General Building was acquired, a vapor ventilation system on the property, which was installed and is maintained and monitored by a prior owner of the property, Chevron Land Development Company, has mitigated any material risk associated with the presence of the methane gas. The Company has not incurred any costs for monitoring and remediating the presence of methane gas or the groundwater contamination at the Data General Building and does not anticipate incurring any cost with regard to such activities in the future. The contamination in the groundwater generally presents a risk only if the groundwater is used as drinking water, which it is not. The Company has not received any reports from federal or state agencies relieving it of future clean-up responsibilities, but federal and state agencies have investigated these matters and have not, to date, required any clean-up. The Company has no reason to believe at this time that it will be required to take remediation steps in the future, particularly given the geographic scope of the contaminated area. It is therefore difficult to predict what, if any, costs might be incurred by the Company should the position of the federal or state agencies change. In any event, if the Company is required to cure the contamination on the Data General Building site, it would seek full indemnity from the oil companies which were the source of the contamination. The Data General Building's transite exterior panels and roof coverings contain asbestos. Transite is "non-friable," which means that the asbestos fibers are not released into the air, unless the transite is broken, cut or otherwise damaged. The Company believes that absent such breakage or damage, the existence of asbestos in the transite presents no measurable risk of asbestos-related injuries. However, the presence of asbestos in the transite panels means that protective measures may need to be taken if the transite panels are repaired or if they are damaged by the elements. The Americans with Disabilities Act ("ADA"), which generally requires that buildings be made accessible to people with disabilities, has separate compliance requirements for "public accommodations" and "commercial facilities". If certain uses by tenants of a building constitute a "public accommodation", the ADA imposes liability for non-compliance on both the tenant and the owner/operator of the building. The Company has conducted inspections of its properties to determine whether the exterior and common area of such properties are in compliance with the ADA and it believes that its properties are in compliance. If, however, it were ever determined that one or more of the Company's properties were not in compliance, the Company may be subjected to unanticipated expenditures incurred to remove access barriers, or to pay fines or damages related to such non-compliance. The Company's due diligence review of prospective acquisitions of office, industrial and retail property includes an examination of such property's compliance with the ADA, and the cost of remedial work, if any, believed to be required to meet such requirements. Item 2. PROPERTIES PORTFOLIO SUMMARY At December 31, 1996, the Company's property portfolio consisted of eight properties located in the greater San Francisco, Los Angeles and San Diego metropolitan areas of California and in Reno, Nevada. At year-end, the Company's properties were 98% leased compared to 97% leased at the end of 1995. The Company's real estate investments (net of accumulated depreciation) were diversified by property type as follows: Number of Investment Properties -------------- ------------------- Amounts % of Total Industrial R&D Properties 2 $36,834,000 30% Office Properties 3 64,380,000 52% Retail Properties 3 22,828,000 18% Total 8 $124,042,000 100% ============================== The following table describes the Company's properties:
Total Average Rentable Year cupancy 1996 Property Name/ Location Square Acquired During Rental Footage 1996 Revenue Industrial R&D Properties: The Northport Buildings Fremont, California 144,568 1991 96% $1,627,000 The Lam Research Buildings Fremont, California 211,680 1996 100% 407,000 Office Properties: The Shores Redwood City, California 138,546 1989 100% 3,286,000 The Data General Building Manhattan Beach, California 118,443 1989 100% 2,657,000 The Fairway Center Brea, California 146,131 1992 100% 3,286,000 Retail Centers Mira Loma Shopping Center Reno, Nevada 94,026 1988 83% 973,000 Glen Cove Center Vallejo, California 66,000 1994 97% 901,000 Carmel Mountain Gateway Plaza San Diego, California 44,230 1994 77% 789,000 Total 963,624 95% $13,926,000 ==================================
The Company or FSRT owns a fee interest in each property. For information related to the encumbrances of the individual properties, see the Notes to Consolidated Financial Statements on pages 39 and 41. At December 31, 1996, the Company's property portfolio contained a total of 70 leases. The Company's portfolio represents in the aggregate, 963,624 rentable square feet. The following table sets forth for all of the Company's properties the lease expiration dates and the related annual base rental income at December 31, 1996. No. of Leases Total Current Annual % of Current Year Expiring Sq. Ft. Base Rent1 Annual Rent 1997 11 161,892 $3,104,000 22% 1998 13 32,093 632,000 4% 1999 10 92,925 1,884,000 13% 2000 8 38,789 874,000 6% 2001 6 86,163 1,480,000 10% 2002 4 31,380 616,000 4% 2003 4 63,157 579,000 4% 2004 3 63,555 621,000 4% 2005 3 40,525 392,000 3% 2006 1 12,078 193,000 1% 2008 1 22,400 311,000 2% 2009 1 16,648 372,000 3% 2010 1 50,360 552,000 4% 2012 2 6,000 271,000 2% 2013 1 15,025 109,000 1% 2014 1 211,680 2,386,000 17% Total 70 944,670 $14,376,000 100% - ---------- =============================================================================== 1 Annualized Base Rent means the product of (i) the monthly base rent in effect with respect to each property at December 31, 1996 or, if such monthly base rent has been reduced by a temporary rent concession, the monthly base rent that would have been in effect at such date in the absence of such concession, multiplied by (ii) 12. Annualized Base Rent does not reflect any increases or decreases in monthly rental rates or lease expirations which are scheduled to occur or which may occur after the date of calculation or the cost of any leasing commissions or tenant improvements. SIGNIFICANT TENANTS Two of the Company's tenants provide 10% or more of the Company's annual base rental income at December 31, 1996.
Annualized Total % of Tenant Name/Property Square Base Rent Base Lease Renewal Feet at 12/31/96 Rent Expiration Options - --------------------------------------------------------------------------------------------------------------- Lam Research Corporation Lam Research Buildings 211,680 $2,386,000 17% 12/31/2014 2-5 yr. Northport Buildings 58,130 506,000 4% 7/31/2003 1-5 yr. Continental Casualty Company The Fairway Center 74,515 $1,699,000 12% 10/31/97 1-5 yr.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for a discussion of the estimated financial effects of renewing the Continental Casualty Company lease or re-leasing the space. Item 3. LEGAL PROCEEDINGS On December 2, 1996, two stockholders, for themselves and purportedly on behalf of certain other minority stockholders of Advantage, filed a purported class action complaint in the California Superior Court for San Mateo County against Advantage, its directors, the Advisor, Franklin Resources, Inc. and the Massachusetts State Teachers' and Employees' Retirement Systems Trust ("MASTERS"). The complaint alleges that defendants breached fiduciary duties to plaintiffs and other minority stockholders in connection with the purchase by Franklin Resources, Inc. in August 1994 of MASTERS' 46.6% interest in Advantage and in connection with the Merger of Advantage into the Company in May 1996, which was approved by a majority of the outstanding shares of each of the three companies. Plaintiffs also allege that defendants misstated certain material facts or omitted to state material facts in connection with these transactions. The complaint includes a variety of additional claims, including claims relating to the investment of Advantage assets, the suspension of the dividend reinvestment program, the allocation of merger-related expenses, revisions to the investment policies of Advantage, and the restructuring of the contractual relationship with the Advisor. Plaintiffs seek damages in an unspecified amount and certain equitable relief. The defendants deny any wrongdoing in these matters and intend to vigorously defend the action. Management does not believe that the outcome of this litigation will have a material adverse affect on the Company's financial condition or results of operations. The properties are subject to certain routine litigation and administrative proceedings arising in the ordinary course of business, which, taken together, are not expected to have a material adverse impact on the Company's financial condition or results of operations. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the last quarter covered by this report. PART II Item 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company has one class of common stock in two series, designated Series A and Series B (the "Common Stock"). At December 31, 1996, the Company had 12,250,384 Series A common shares outstanding and 745,584 Series B common shares outstanding, and there were approximately 3,750 Series A stockholders of record. The Common Stock votes together as one class with each share being entitled to one vote. The Series B shares are owned by Franklin Properties, the Advisor. There are no restrictions on sales or purchases of the Company's Series A common stock other than those that may be imposed by any applicable federal or state securities laws or by the Company's Articles of Incorporation or Bylaws with respect to maintaining the Company's status as a qualified real estate investment trust under applicable tax rules and regulations. On January 14, 1994, the Company registered its Series A common stock on the American Stock Exchange (AMEX) where it is currently traded under the symbol "FSN". Prior to January 14, 1994, there was no established public trading market for the common stock. Set forth below are the quarterly high and low share reported sales prices for the past two years and the distributions per share declared each quarter. For periods prior to the Merger on May 7, 1996, the amounts shown do not reflect those of FREIF and Advantage. DISTRIBUTIONS QUARTER ENDED HIGH LOW DECLARED - ------------------------------------------------------------------------------- December 31, 1996 $ 5 7/8 $ 4 11/16 .11 September 30, 1996 5 4 1/2 .11 June 30, 1996 5 1/4 4 1/2 .11 March 31, 1996 5 1/8 3 15/16 .11 December 31, 1995 4 5/8 3 15/16 .11 September 30, 1995 4 11/16 3 7/8 .11 June 30, 1995 4 5/8 3 3/4 .11 March 31, 1995 4 3/8 3 3/4 .11 The Company has a policy, subject to the discretion of the Board of Directors, of making quarterly cash distributions to stockholders aggregating on an annual basis at least 95% of its taxable income. For the years ended December 31, 1996, and 1995, the Company declared distributions of approximately $5,860,000 ($.44 per share) and $6,206,000 ($.44 per share). Cash distributions to stockholders are currently paid on approximately the 15th day of January, April, July and October. Stockholders may elect to direct their distributions into any or one of the eligible funds in the Franklin Templeton Group of Funds, which are managed by an affiliate of the Advisor, or participate in the Company's Dividend Reinvestment Plan. DIVIDEND REINVESTMENT PLAN The Company has established a Dividend Reinvestment Plan (the "Plan") which is designed to enable Company Series A stockholders to choose to have distributions automatically invested in additional shares of Company common stock at market value, without the payment of any brokerage commission, service charge or other expense. Under the Plan, the Company's Dividend Reinvestment Agent makes open market purchases of the Company's Series A common stock, administers the Plan and performs other duties related to the Plan. No new shares have been issued in connection with the Plan. In order to participate in the Plan, investors must designate that they would like their distributions reinvested. Company Series A stockholders may elect to participate in the Plan at any time. The Plan does not accept cash contributions from Company stockholders to purchase additional shares of existing Company common stock. Only distributions on existing Company common stock may be reinvested. For information on how to participate in the Dividend Reinvestment Plan, please contact the Company's transfer agent at (800) 851-4217. RETURN OF CAPITAL Because depreciation is a non-cash expense, cash flow will typically be greater than earnings from operations and net income. Therefore, quarterly distributions will generally be higher than quarterly earnings which causes a portion of the distributions to be considered a return of capital. The portion of distributions that represented a return of capital for financial statement purposes on a consolidated basis, for the years ended December 31, 1996, and 1995, were $2,053,000 and $1,744,000, respectively. REIT QUALIFICATION MATTERS The Company is a REIT and elected REIT status commencing with the 1989 tax year pursuant to the provisions of the Internal Revenue Code (the "Code") and applicable state income tax law. Under those provisions, the Company will not be subject to income tax on that portion of its taxable income which is distributed annually to stockholders if at least 95% of its taxable income (which term excludes capital gains) is distributed and if certain other conditions are met. During such time as the Company qualifies as a REIT, the Company intends to make quarterly cash distributions to the stockholders aggregating on an annual basis at least 95% of its taxable income. Among other requirements, the Company must, in order to continue its status as a REIT under the Code, not have more than 50% in value of its outstanding shares owned by five or fewer individuals during the last half of a taxable year (the "5/50 Provision"). In order to meet these requirements, the Company has the power to redeem a sufficient number of shares in order to maintain or to bring the ownership of the shares into conformity with these requirements, and to prohibit the transfer of shares to persons whose acquisition would result in a violation of these requirements. The price to be paid in the event of the redemption of shares will be the last reported sale price of the Series A common stock on the last business day prior to the redemption date on the principal national securities exchange on which the Series A common stock is listed or admitted to trading or otherwise, as determined in good faith by the Board of Directors of the Company. In order to assure compliance with the 5/50 Provision of the Code, described above, the Company's Bylaws permit the Directors of the Company to impose a lower percentage limit on the remaining stockholders, in the event certain stockholders (including Franklin and its affiliates) acquire in excess of 9.9% of the outstanding shares of Common Stock during the offering period. The Directors of the Company have exercised this authority under the Bylaws to lower the percentage limitation such that stockholders may not acquire additional shares if such shareholder then holds, or would then hold, in excess of 7% of the total outstanding voting shares of the Company. Any shares acquired in excess of the foregoing limitation will be deemed to be held in trust for the Company, and will not be entitled to receive distributions or to vote. The Directors of the Company may impose, or seek judicial or other imposition of additional restrictions if deemed necessary or advisable, including but not limited to further reductions in the foregoing percentage limitation with or without notice, or redemption of shares, in order to protect the Company's status as a qualified REIT. Item 6. SELECTED FINANCIAL DATA
(Dollars in 000's except per share amounts) Restated1 Restated1 Restated1 Restated1 1996 1995 1994 1993 1992 Total revenue $14,568 $14,111 $12,990 $12,877 $12,422 Net income $3,807 $4,462 $4,273 $4,438 $4,328 Per Series A common share1: Net income $0.28 $0.32 $0.30 $0.31 $0.30 Distributions declared $.44 $0.44 $0.44 $0.43 $0.47 Weighted average number - ------------------------------------------- of shares of Series A 13,830 14,145 14,145 14,145 14,223 common stock outstanding Balance Sheet Data: Total assets $131,298 $116,457 $117,873 $114,820 $117,057 Notes and bonds payable $22,745 $7,145 $7,279 $3,015 $3,075 Stockholders' equity $96,653 $106,986 $108,316 $111,000 $113,204 Other Data: Funds from operations2 $7,235 $7,795 $7,396 $7,337 $6,079 Cash flow provided by (used in) Operating activities $7,831 $8,359 $8,771 $5,282 $6,039 Investing activities $4,140 $31 ($5,904) $3,940 ($11,986) Financing activities ($15,599) ($6,404) ($3,184) ($6,173) ($6,868) Total rentable square footage of properties at end of period 963,624 751,944 751,944 641,714 641,714 Number of properties at end of period 8 7 7 5 5
1 Amounts reported for 1992 through 1995 have been restated to give effect to the Merger. 2 Funds from operations, as defined by the National Association of Real Estate Investment Trusts, means net income (loss) from operations, excluding gains or losses from debt restructuring and sales of property, plus depreciation and amortization, and after adjustment for unconsolidated joint ventures. The Company considers funds from operations to be a useful measure of the operating performance of an equity REIT because, together with net income and cash flows, funds from operations provides investors with an additional basis to evaluate the ability of a REIT to support general operating expense and interest expense before the impact of certain activities, such as gains and losses from property sales and changes in the accounts receivable and accounts payable. Funds from operations does not represent net income or cash flows from operations as defined by GAAP and does not necessarily indicate that the cash flows will be sufficient to fund cash needs. It should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows from operating, investing or financing activities as a measure of liquidity. Funds from operations does not measure whether income is sufficient to fund all of the Company's cash needs including principal amortization, capital improvements and distributions to stockholders. The Company reports funds from operations in accordance with the revised NAREIT definition. The change in the NAREIT definition in 1995 had no material effect on the amounts previously reported by the Company as funds from operations. Funds from operations disclosed by other REITs may not be comparable to the Company's calculation of funds from operations. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION On May 7, 1996, the Company merged with two other real estate investment trusts that Franklin Properties, Inc. advised, Franklin Real Estate Income Fund ("FREIF"), and Franklin Advantage Real Estate Income Fund ("Advantage"). The consolidated financial information of the Company has been presented as a reorganization of entities under common control; therefore, the historical amounts reported for prior periods have been restated so as to report them on a combined basis. The following discussion is based primarily on the consolidated financial statements of the Company for the year ended December 31, 1996 and the restated, combined financial statements of the Company, FREIF and Advantage for the prior periods presented. The information should be read in conjunction with the accompanying consolidated financial statements and notes thereto. When used in the following discussion, the words "believes," "anticipates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected, including, but not limited to, those set forth in the section entitled "Potential Factors Affecting Future Operating Results," below. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. GENERAL BACKGROUND The Company's rental revenue is generated by investments in the following eight properties: (i) two industrial R&D properties comprising 356,000 rentable square feet of space, (ii) three office properties comprising 403,000 rentable square feet of space, and (iii) three neighborhood shopping centers, comprising 204,000 rentable square feet of space. Six of the properties are concentrated in the greater San Francisco and Los Angeles areas from which the Company derived 45% and 43% of its 1996 rental revenue, respectively. The remaining two properties are located in San Diego, California and Reno, Nevada. The Company's day-to-day operations are managed by Franklin Properties, Inc. (the "Advisor", or "Management") under the terms of an advisory agreement which is renewable annually. The Company does not have any employees. Property management for seven of the Company's eight properties is provided by Continental Property Management Co. ("CPMC"), an affiliate of the Advisor, and the remaining property is managed by an unaffiliated company, Cupertino Capital. Both management companies perform the leasing, re-leasing and management related services for their respective properties. The Advisor is a wholly owned subsidiary of Franklin Resources, Inc. whose primary business is the $186 billion Franklin Templeton Group of Funds. 1996 SUMMARY The Company's property operations were stable with the prior year, both with respect to rental rates and average occupancy. The transactions that had the greatest influence on the Company's reported results in 1996 were: (i) the Merger of the Company with two other real estate investment trusts in May 1996, (ii) the sale of a large portion of the Company's investments in mortgage-backed securities in October 1996, which provided cash used to repurchase approximately 13.4% of the Series A common stock held by stockholders who dissented from the Merger; and, (iii)the acquisition of two industrial research and development buildings in October 1996 (the "Lam Research Buildings"). To acquire the buildings, the Company and the buildings' owner formed a limited partnership, FSRT, which issued convertible limited partnership units to the owner in return for the owner's equity interest in the property. FSRT also assumed the existing indebtedness on the buildings which was subsequently refinanced with fixed rate debt carrying a lower interest rate. The Company holds a 70% interest in FSRT, and it is the sole general partner of the partnership. The Company also arranged for a $25 million line of credit in December 1996, which was unused at year end, but which is expected to provide capital for future acquisitions and for other liquidity needs. RESULTS OF OPERATIONS COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995 Total revenue increased approximately 3% compared to 1995 primarily due to rental revenue provided by the Lam Research Buildings which were acquired on October 31, 1996. Rental revenue for the seven properties that the Company owned for the entire year improved 1% in 1996, reflecting stable rental rates and occupancy rates for both periods. Interest income declined $75,000 compared to 1995 due to the sale of mortgage-backed securities in October 1996. Total expenses increased approximately $1,112,000, or 12%, compared to 1995 primarily due to an increase in expenses related to the Merger, and due to interest expense, depreciation expense and minority interest expense related to the Lam Research Buildings which were acquired in 1996. During 1996, the Company incurred non-recurring expenses related to the Merger, totaling approximately $919,000 compared to $456,000 in 1995. The expenses were comprised of: (i) consolidation expense of $695,000 and $394,000, respectively, (ii) general and administrative expenses of $73,000 and $62,000, respectively, and (iii) a loss on the sale of mortgage-backed securities of $151,000 in 1996, which was recorded when the Company sold securities to provide cash for the repurchase of shares dissenting from the Merger. Property operating expenses, which generally include maintenance and repairs, property taxes, utilities, and on-site administrative expense, declined slightly compared to 1995 due to non-recurring expenses recorded in 1995 related to discontinuing operations of a self service car wash at the Mira Loma Center. Excluding those expenses, operating expenses increased approximately 1% compared to 1995. In 1996, minor increases in several expense categories were offset by a decline in electricity expense caused by milder summertime temperatures in Southern California. The acquisition of the Lam Research Buildings did not cause property operating expenses to increase in 1996 since the tenant pays the expenses directly. Related party expense increased $175,000, or 17% in 1996 reflecting an increase in advisory fees of $201,000, and an increase in property management fees of $12,000, which were partially offset by a decline of $38,000 in reimbursements to the Advisor for accounting and data processing costs. The increase in advisory fees was caused by the acquisition of the Lam Research Buildings, and the adoption of the Company's advisory agreement by the two REITs that merged with the Company in May 1996. Prior to the Merger, the REITs operated under advisory agreements containing different methods of compensation to the Advisor. General and administrative expense increased approximately $136,000 in 1996 primarily due to legal and consulting fees related to locating potential property acquisitions, expenses of transferring ownership of the Data General Building to FSRT, and a temporary increase in stock exchange fees that was attributable to the Merger. Partly offsetting these increases were declines in the cost of directors' and officers' insurance coverage and transfer agent expense, reflecting economies of scale after the Merger. Net income declined approximately $655,000, or 15% in 1996 largely due to an increase in Merger related expenses, an increase in advisory fees subsequent to the Merger, and a decline in interest income caused by the sale of mortgage-backed securities. Net income per share also declined, but by a lesser percentage, due to a decline in the number of shares outstanding after the Company purchased the dissenting shares. COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994 Net income for 1995 increased $189,000, or 4%, compared to 1994 primarily as a result of an increase in rental revenues exceeding increases in interest expense, depreciation and amortization, operating expense, related party and consolidation expense, as more fully described below. Total revenue increased $1,121,000, or 9%, in 1995 primarily due to a full year's operations from two properties which were acquired in 1994. The increase in rental revenue was also attributable to increased rental income from Shores Office Complex due to improved occupancy and rental rates at that property. Total expenses increased $932,000, or 11%, in 1995. Increases in interest expense, depreciation and amortization, operating expense, and related party expense were primarily a result of a full year's operations from properties acquired in 1994. Other items affecting the change from year to year included $394,000 of consolidation expense incurred in 1995 and a loss on the sale of mortgage-backed securities of $318,000 recorded in 1994. General and administrative expense decreased $155,000 in 1995 primarily due to non-recurring costs incurred in 1994 associated with listing the Company's, FREIF's and Advantage's stock on the American Stock Exchange. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1996, the Company's cash and cash equivalents aggregated $2,558,000 which the Company believes is adequate to meet its short term operating cash requirements. The Company also has access to a revolving line of credit in the amount of $25 million and holds $578,000 of mortgage-backed securities. At year end, there were no amounts outstanding under the Company's credit facility. During 1996, the Company's cash balance declined to $2,558,000 compared to $6,186,000 at December 31, 1995. This decline in cash reflects cash provided by operating activities of $7,831,000, plus cash provided by investing activities of $4,140,000, and reduced by cash used by financing activities of $15,599,000. The $4,140,000 of net cash provided by investing activities reflects $6,534,000 of proceeds from the sale of mortgage-backed securities, which was partially offset by $1,428,000 used to acquire the Lam Research Buildings, $627,000 used for improvements to rental properties, and $339,000 used for leasing commissions. The mortgage-backed securities were sold in order to provide funds to purchase the dissenting shares as described below, and to pay for transaction and closing costs related to the property acquisition. The $15,599,000 of net cash used in financing activities primarily reflects $8,408,000 of funds used to purchase the dissenting shares, and $6,033,000 of cash distributions. The Company's investment in mortgage-backed securities at December 31, 1996, is represented by a FNMA adjustable rate pass-through certificate with a market value of approximately $578,000. Although payments of principal and interest are guaranteed by FNMA, changes in market interest rates may cause the security's market value to fluctuate, which could result in a gain or loss if the security is sold before maturity. In 1996, the Company formed a limited partnership, FSRT, in order to acquire two industrial R & D buildings located in Fremont, California (the "Lam Research Buildings"). FSRT assumed the existing financing on the Lam Research Buildings, which was subsequently refinanced, and issued 1,625,000 limited partnership units to the prior owner in exchange for its equity interest in the buildings. The limited partnership units are convertible into Series A shares of the Company's common stock on a one-for-one basis after November 1, 1997. The Company contributed its fee title interest in the Data General Building to FSRT and approximately $1.4 million in cash to cover transaction and closing costs. The Company is the sole general partner of FSRT and for its contribution, the Company received an approximate 70% ownership interest in the partnership. The Company may contribute all of its remaining properties to FSRT at some later date. The Company is subject to certain restrictions regarding the sale or refinance of properties owned by FSRT. In connection with the Merger, stockholders representing approximately 635,638 shares of FREIF Series A common stock and 1,077,677 shares of Company Series A common stock elected to exercise dissenter's rights pursuant to Chapter 13 of the California General Corporation Law. No Advantage stockholders elected to exercise dissenter's rights. On November 1, 1996, the Company purchased all of the remaining dissenting shares of Series A common stock arising from the Merger for an aggregate price of $8.4 million. After giving effect to the transaction, the total number of shares of Series A common stock of the Company outstanding is 12,250,384. Cash for the purchase price was provided by the sale of a portion of the Company's mortgage-backed securities. On December 10, 1996, the Company entered into an agreement with the Bank of America for a $25 million secured revolving line of credit to provide funding for future acquisitions and general business purposes. Borrowings under the line of credit bear interest at the London Interbank Offered Rate ("LIBOR") plus 1.90%, or at the bank's Reference rate at the Company's option. The credit facility is secured by mortgages on three of the Company's properties (which collectively accounted for 52% of the Company's annualized base rent as of December 31, 1996), together with the rental proceeds from such properties. At December 31, 1996, these properties comprised approximately 45% of the Company's gross real estate assets. The credit agreement contains customary representations, restrictive covenants, and events of default, including a covenant limiting quarterly distributions to 98% of funds from operations. The Company does not anticipate that this covenant will adversely affect the ability of the Company to declare distributions under the Company's current distribution policy. At December 31, 1996, the Company had no borrowings outstanding under the line of credit. In connection with any lease renewal or new leasing, the Company would incur costs for tenant improvements and leasing commissions which would be funded first from operating cash flow and, if necessary, from cash reserves or the line of credit. IMPACT OF INFLATION The Company's policy of negotiating leases which incorporate operating expense "pass-through" provisions is intended to protect the Company against increased operating costs resulting from inflation. Inflation, however, would increase the Company's borrowing costs. POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS DECLINE IN INTEREST INCOME, LOSS ON SALE OF MORTGAGE-BACKED SECURITIES In prior years, net income has been positively affected by interest income that the Company earned on its investments in mortgage-backed securities. In addition, the Company periodically incurred losses upon the sale of certain of the securities. Late in 1996, the Company liquidated substantially all of its mortgage-backed securities in order to provide funds to repurchase a portion of its outstanding common stock. Therefore, the Company does not anticipate generating significant amounts of interest income, or losses on the sale of mortgage-backed securities, in future years. The repurchase of the Company's common stock was not detrimental to the Company's operating results in 1996 calculated on a per share basis, due to the related decline in the number of shares outstanding. LEASING TURNOVER In connection with any lease renewal or new lease, the Company typically incurs costs for tenant improvements and leasing commissions which will be funded first from operating cash flow and, if necessary, from cash reserves or the line of credit. In addition, while the company has historically been successful in renewing and releasing space, the Company will be subject to the risk that leases expiring in the future may be renewed or released at terms that are less favorable than current lease terms. LEASING TURNOVER - CONTINENTAL CASUALTY COMPANY An important event in the near term is the expiration of the Continental Casualty Company ("CNA") lease in November, 1997. The lease covers 74,515 square feet of space and represents approximately 12% of the Company's current base rental income. The Company has commenced renewal negotiations with CNA; however, it is currently unknown whether an agreement will be consummated. Currently, the base annual rental rate of this lease is $22.80 per square foot, and the Company has offered to extend the tenant's lease for five years at a lower rental rate. The Company has also offered to provide the tenant with tenant improvements and to pay leasing commissions, which total approximately $870,000. Although it is impossible to predict the final outcome of negotiations with CNA, if the tenant were to accept the Company's proposal, the Company's annual rental income and expense reimbursements would decline by approximately $420,000, or 2.9% of the Company's total revenue in 1996. Alternatively, if CNA were to vacate its space and a single replacement tenant could not be located, the Company may have to reconfigure the space for multiple tenants at a cost which could exceed $2 million. The most likely sources for such funds are the Company's cash reserves, debt financing, or the sale of an undeveloped parcel of land at the Fairway Center. No assurance can be given that CNA will renew under the terms set forth above or whether the space currently occupied by CNA can be rented without detrimental impact to the Company's current annual rental income and expense reimbursements. LEASING TURNOVER - DATA GENERAL BUILDING The Data General Building is located in an area of Los Angeles County that is dominated by aerospace and defense related companies. Because many of the defense programs that these companies are engaged in have been curtailed, their office space requirements were substantially reduced, causing greater vacancies and lower market rental rates. Based on reports from CB Commercial Real Estate Group, at December 31, 1996, the Manhattan Beach/El Segundo sub-market, had a total vacancy factor of 31% and an average asking full service rental rate of $19.32 per square foot. New leases and renewals that the Company executes while these soft market conditions persist may be at lower rental rates and require greater tenant improvements than current leases at the property. However, according to the CB Commercial reports, the severe job losses experienced by the aerospace and defense industries appear to have bottomed out in February of 1996, and occupancy rates in the El Segundo market are expected to increase in 1997. No assurance can be given, however, that this will occur. Over the next two years, the Company's leasing exposure at the Data General Building consists of two leases each covering 48,000 square feet, which expire in November, 1997 and January 1999. The Company believes that the effective rental rate that is provided by the lease expiring in 1997 is substantially at the current market rate. However, the lease expiring in 1999 carries a triple net rental rate that is equivalent to approximately $28.00 per square foot on a full service basis. Compared to the current market asking rate of $19.32 per square foot, this lease provides overmarket rent of approximately $417,000 annually, or 2.9% of the Company's total revenue in 1996. It is impossible to predict the market rental rate in 1999; however, the Company expects that when this lease expires, the rental income related to this space will be less than $28.00 per square foot regardless of whether the lease is renewed or new leases are signed. The Company will also incur costs for tenant improvements and leasing commissions related to both spaces upon the renewal or re-leasing of the spaces, however, the amounts are unknown at this time. Management believes that the Company's sources of capital as described under Liquidity and Capital Resources are adequate to meet its liquidity needs in the foreseeable future. FUNDS FROM OPERATIONS The Company considers funds from operations to be a useful measure of the operating performance of an equity REIT because, together with net income and cash flows, Funds from Operations provides investors with an additional basis to evaluate the ability of a REIT to support general operating expense and interest expense before the impact of certain activities, such as gains and losses from property sales and changes in the accounts receivable and accounts payable. However, it does not measure whether income is sufficient to fund all of the Company's cash needs including principal amortization, capital improvements and distributions to stockholders. Funds from operations should not be considered an alternative to net income or any other GAAP measurement of performance, as an indicator of the Company's operating performance or as an alternative to cash flows from operating, investing or financing activities as a measure of liquidity. As defined by the National Association of Real Estate Investment Trusts, funds from operations is net income (computed in accordance with GAAP), excluding gains or losses from debt restructuring and sales of property, plus depreciation and amortization, and after adjustment for unconsolidated joint ventures. The Company reports funds from operations in accordance with the revised NAREIT definition. The change in the NAREIT definition in 1995 had no material effect on the amounts reported by the Company as funds from operations in prior periods. The measure of funds from operations as reported by the Company may not be comparable to similarly titled measures of other companies that follow different definitions. FUNDS FROM OPERATIONS (dollars in thousands) Year ended December 31, 1996 1995 1994 Net income $3,807 $4,462 $4,273 Add: Depreciation and Amortization 3,428 3,333 3,123 Funds from Operations $7,235 $7,795 $7,396 =============================================================================== The primary difference between the periods reflects the changes in Merger related expenses and losses on the sale of mortgage-backed securities as discussed under "Results of Operations". Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND SCHEDULES PAGE Report of Independent Accountants 29 Consolidated Balance Sheets as of December 31, 1996 and 1995 30 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 32 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 33 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 35 Notes to Financial Statements 36 Schedule III - Real Estate and Accumulated Depreciation 49 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors and Stockholders Franklin Select Realty Trust We have audited the accompanying consolidated balance sheets of Franklin Select Realty Trust as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996, and the financial statement schedule of Real Estate and Accumulated Depreciation. These financial statements and financial statement schedule are the responsibility of Franklin Select Realty Trust's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Franklin Select Realty Trust as of December 31, 1996, and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. San Francisco, California February 7, 1997 C O N S O L I D A T E D B A L A N C E S H E E T S
FRANKLIN SELECT REALTY TRUST Restated - ------------------------------------------------------------------ ----------------- ------------------- as of December 31, 1996 and 1995 (Amounts in 000's except per share amounts) 1996 1995 - ------------------------------------------------------------------ ----------------- ------------------- ASSETS Rental property: Land $38,286 $30,949 Buildings and improvements 103,339 83,121 ----------------- ------------------- 141,625 114,070 Less: accumulated depreciation 17,583 14,416 ----------------- ------------------- 124,042 99,654 Cash and cash equivalents 2,558 6,186 Mortgage-backed securities, available for sale 578 7,135 Deferred rent receivable 1,916 1,970 Deferred costs and other assets 2,204 1,512 ================= =================== Total assets $131,298 $116,457 ================= =================== LIABILITIES AND STOCKHOLDERS' EQUITY Notes and bonds payable $22,745 $7,145 Tenant deposits, accounts payable and accrued expenses 1,197 741 Advance rents 26 64 Distributions payable 1,348 1,521 ----------------- ------------------ Total liabilities 25,316 9,471 ----------------- ------------------ Minority interest 9,329 - ----------------- ------------------ Commitments and contingencies Stockholders' equity: Common stock, Series A, without par value; stated value $10 per share; 110,000 shares authorized; 12,250 and 14,145 shares issued and outstanding, respectively 103,161 111,569 Common stock, Series B, without par value; stated value $10 per share; 2,500 shares authorized; 746 shares issued and outstanding 6,294 6,294 Unrealized loss on mortgage-backed securities (36) (164) Accumulated distributions in excess of net income (12,766) (10,713) ----------------- ------------------ Total stockholders' equity 96,653 106,986 ----------------- ------------------ Total liabilities and stockholders' equity $131,298 $116,457 ================= ==================
The accompanying notes are an integral part of these consolidated financial statements. C ON S O L I D A T E D S T A T E M E N T S O F O P E R A T I O N S
FRANKLIN SELECT REALTY TRUST Restated Restated - ------------------------------------------------------------- -------------- ---------------- -------------- for the years ended December 31, 1996, 1995 and 1994 (Amounts in 000's except per share amounts) 1996 1995 1994 - ------------------------------------------------------------- -------------- ---------------- -------------- REVENUE: Rent $13,926 $13,383 $12,099 Interest, dividends, and other 642 728 891 -------------- ---------------- -------------- Total revenue 14,568 14,111 12,990 -------------- ---------------- -------------- EXPENSES: Interest 886 679 466 Depreciation and amortization 3,440 3,335 3,124 Property operating 3,635 3,705 3,246 Related party 1,205 1,030 897 Consolidation expense 695 394 5 General and administrative 642 506 661 Loss on sale of mortgage-backed securities 151 - 318 Minority interest 107 - - -------------- ---------------- -------------- Total expenses 10,761 9,649 8,717 -------------- ---------------- -------------- NET INCOME $3,807 $4,462 $4,273 ============== ================ ============== Net income per share, based on the weighted average shares outstanding of Series A common stock of 13,830, 14,145 and 14,145 for the years ended December 31, 1996, 1995 and 1994, respectively $ .28 $ .32 $ .30 ============== ================ ============== Distributions per share, based on the weighted average shares outstanding of Series A common stock of 13,343, 14,145 and 14,145 for the years ended December 31, 1996, 1995 and 1994, respectively $ .44 $ .44 $ .44 ============== ================ ============== - ------------------------------------------------------------- -------------- ---------------- --------------
The accompanying notes are an integral part of these consolidated financial statements. C O N S O L I D A T E D S T A T E M E N T S O F S T O C K H O L D E R S' E Q U I T Y
FRANKLIN SELECT REALTY TRUST for the years ended December 31, 1996, 1995, and 1994 (Amounts in 000's) Unrealized Accumulated COMMON STOCK (loss)/gain on distributions Series A Series B mortgate- in excess Shares Amount Shares Amount securities of net income Total --------------------------------------------------- ----------------- -------------------- ------------ Balance, December 31, 1993, Restated 14,146 $111,574 746 $6,294 - $(7,076) $110,792 Redemption of Series A common stock (1) (2) - - - - (2) Unrealized loss on mortgage- backed securities - - - - $(581) - (581) Net income - - - - - 4,273 4,273 Distributions declared - - - - - (6,166) (6,166) Balance, December 31, 1994, Restated 14,145 111,572 746 6,294 (581) (8,969) 108,316 Redemption of Series A common stock - (3) - - - - (3) Unrealized gain on mortgage- backed securities - - - - 417 - 417 Net income - - - - - 4,462 4,462 Distributions declared - - - - - (6,206) (6,206) Balance, December 31, 1995, restated 14,145 111,569 746 6,294 (164) (10,713) 106,986 Dissenting stockholders' interest (1,895) (8,408) - - - - (8,408) Unrealized gain on mortgage- backed securities - - - - 128 - 128 Net income - - - - - 3,807 3,807 Distributions declared - - - - - (5,860) (5,860) Balance, December 31, 1996 12,250 $103,161 746 $6,294 $(36) $(12,766) $96,653 =========================== ============= ============== ========== ======================= ======================== ============== The accompanying notes are an integral part of these consolidated financial statements.
C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S
FRANKLIN SELECT REALTY TRUST Restated Restated - ---------------------------------------------------------- ------------- -------------- -------------- for the years ended December 31, 1996,1995 and 1994 (Dollars in 000's) 1996 1995 1994 - ---------------------------------------------------------- ------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $3,807 $4,462 $4,273 ------------- -------------- -------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,440 3,335 3,124 Loss on sale of mortgage-backed securities 151 - 318 Minority interest 107 - - Loss on disposition of rental property - 100 - Decrease in deferred rent receivable 54 44 - (Increase) decrease in other assets (27) 309 873 Increase in tenant deposits, accounts payable, and accrued expenses 337 148 125 (Decrease) increase in advance rents (38) (39) 58 ------------- -------------- -------------- 4,024 3,897 4,498 ------------- -------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 7,831 8,359 8,771 ------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of rental property (1,428) - (12,910) Improvements to rental property (627) (390) (1,120) Leasing commissions paid (339) (371) (467) Investment in mortgage-back securities - - (3,235) Disposition of mortgage-back securities 6,534 792 11,828 ------------- -------------- -------------- ------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 4,140 31 (5,904) ------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under notes payable 16,222 - 2,000 Repayment of notes payable (16,781) (134) (86) Payment of loan costs (599) - (12) Repurchase of dissenting stockholders' interest (8,408) - - Redemption of Series A common stock - (3) (2) Distributions paid (6,033) (6,267) (5,084) -------------- -------------- ------------- NET CASH USED IN FINANCING ACTIVITIES (15,599) (6,404) (3,184) ------------- -------------- -------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,628) 1,986 (317) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,186 4,200 4,517 ============= ============== ============== CASH AND CASH EQUIVALENTS, END OF YEAR $2,558 $6,186 $4,200 ============= ============== ==============
Supplemental cash flow information and non-cash investing and financing activities - Notes 2 and 4. The accompanying notes are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS ACTIVITY Franklin Select Realty Trust (the "Company") (formerly Franklin Select Real Estate Income Fund) is a California corporation formed on January 5, 1989 for the purpose of investing in income-producing real property. The Company is a real estate investment trust ("REIT") having elected to qualify as a REIT under the applicable provisions of the Internal Revenue Code since 1989. Under the Internal Revenue Code and applicable state income tax law, a qualified REIT is not subject to income tax if at least 95% of its taxable income is currently distributed to its stockholders and other REIT tests are met. The Company has distributed at least 95% of its taxable income and intends to distribute substantially all of its taxable income in the future. Accordingly, no provision is made for income taxes in these financial statements. On May 7, 1996 Franklin Real Estate Income Fund ("FREIF") and Franklin Advantage Real Estate Income Fund ("Advantage") merged into the Company. In connection with the Merger of the three companies (the "Merger"), the Company issued approximately 7,945,000 shares of Series A common stock and 559,718 shares of Series B common stock in exchange for 3,363,877 and 3,013,713 shares of Series A common stock and 319,308 and 124,240 shares of Series B common stock of FREIF and Advantage, respectively, in each case excluding dissenting shares. Stockholders representing approximately 635,638 shares of FREIF Series A common stock and 1,077,667 shares of Company Series A common stock elected to exercise dissenter's rights pursuant to Chapter 13 of the California General Corporation Law. On November 1, 1996, the Company paid the dissenting stockholders approximately $8.4 million for their shares. The dissenting shares were repurchased by the Company as more fully described under Note 6 Repurchase of Dissenting Shares. At December 31, 1996, the Company's real estate portfolio consisted of fee interests in the Shores Office Complex, a three-building office complex located in Redwood City, California; the Data General Building located in Manhattan Beach, California; the Mira Loma Shopping Center, a shopping center located in Reno, Nevada; three separate research and development buildings in the Northport Business Park, located in Fremont, California; the Glen Cove Shopping Center located in Vallejo, California; the Fairway Center, a two story office building located in Brea, California; the Carmel Mountain Gateway Plaza, a retail center located in San Diego, California; and the LAM Research Buildings, two separate research and development buildings also located in the Northport Business Park, located in Fremont, California. BASIS OF PRESENTATION The accompanying consolidated financial statements of the Company include all accounts of the Company and its majority owned partnership, FSRT L.P. All significant intercompany amounts and transactions have been eliminated. Certain 1995 and 1994 amounts have been reclassified to conform to the 1996 presentation. Such reclassifications had no effect on previously reported results. The accompanying consolidated financial statements have been presented as a reorganization of entities under common control due to the common management of the Company, FREIF and Advantage by the Advisor and are reflected in the financial statements at their historical bases. Prior periods have been restated to give effect to the Merger. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RENTAL PROPERTY Rental property is stated at cost and depreciated using the straight-line method over an estimated useful life of 35 years for buildings and improvements. Tenant improvements are generally amortized over the lesser of the improvements' useful life or the lease term. Significant improvements and betterments are capitalized. Maintenance, repairs and minor renewals are charged to expense when incurred. Pursuant to the Company's investment objectives, property purchased is generally held for extended periods. During the holding period, management periodically, but at least annually, evaluates whether rental property has suffered an impairment in value. Management's analyses include consideration of estimated undiscounted future cash flows during the expected holding period in comparison with carrying values, prevailing market conditions and other economic matters. If the current carrying value of an individual property exceeds estimated future undiscounted cash flows, the Company would reduce the carrying value of the asset to fair value; however, to date, such adjustments have not been required. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, demand deposits with banks, debt instruments with original maturities of three months or less, and money market funds, which are readily convertible into cash. Due to their relatively short-term nature, the carrying value of these instruments approximates fair value. MORTGAGE-BACKED SECURITIES Mortgage-backed securities held by the Company are classified as available for sale and are carried at fair value. The resulting unrealized gains and losses are reported as a separate component of stockholders' equity until realized. Realized gains and losses are recognized on the specific identification method and are included in earnings. DEFERRED COSTS Lease commissions are deferred and amortized using the straight-line method over the term of the related lease. Loan fees and loan costs are deferred and amortized using the straight-line method, which approximates the effective interest method, over the term of the related loan. RENTAL REVENUES Rental revenues are recorded on the straight-line method to reflect scheduled rent increases and free rent over the related lease term. As a result, a deferred rent receivable is created when rental receivables are less than the amount earned using the straight-line method or when rental income is recognized during free rent periods of a lease. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of mortgage-backed securities and operating leases with tenants. The Company places excess cash in short-term deposits with Franklin Money Fund, an investment company managed by an affiliate of the Advisor, and in money market securities of companies with strong credit ratings and, by policy, limits credit exposure to any one issuer. The Company performs ongoing credit evaluations of its tenants and generally does not require collateral for commercial tenants. The Company reserves for potential credit losses, as appropriate. NOTE 2 - RENTAL PROPERTY ACQUISITION In October, 1996, the Company formed FSRT, L.P. ("FSRT"), a limited partnership in which the Company is the sole general partner. Upon formation, an unaffiliated party contributed the Lam Research Buildings in exchange for 1,625,000 limited partnership units (the "FSRT Units"), representing an approximate 30% interest in FSRT. In addition, FSRT assumed approximately $16.6 million of existing non-recourse debt which was subsequently refinanced with new debt at a reduced interest rate. The limited partner contribution was recorded based on the fair value of the LAM Research Buildings of approximately $25.5 million. The Company contributed its interest in the Data General Building and $1.4 million in cash to FSRT to cover transaction and closing costs in connection with the Lam Research Building. The FSRT Units, which are convertible into a like number of the Company's Series A common shares after one year, are entitled to receive quarterly distributions of $.11 per unit, subject to periodic annual increases commencing in June, 1998, as specified in the partnership agreement. Residual cash flow after distributions to the FSRT Units is distributable to the Company. In the future, the Company may contribute its remaining assets to FSRT at which time the distribution rate on the FSRT Units may be modified at the Company's discretion in accordance with the partnership agreement. The Company is subject to certain restrictions regarding the sale or refinance of the properties owned by FSRT. NOTE 3 - MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE Mortgage-backed securities, available for sale at December 31, 1996, had a coupon rate of 7.18% and a maturity date of July 17, 2001. Amortized cost was $614,000 and the fair value was $578,000 resulting in a gross unrealized loss of $36,000 at December 31, 1996. Mortgage-backed securities at December 31, 1995 had an aggregate market value of $7,135,000 and an amortized cost of $7,298,000 resulting in a gross unrealized loss of $164,000. NOTE 4 - NOTES AND BONDS PAYABLE Notes and bonds payable at December 31, 1996, 1995 and 1994 are comprised of the following:
Restated In thousands 1996 1995 ----------------- ---------------- FAIRWAY CENTER Note payable, collateralized by a deed of trust, payable interest only until maturity in March, 1996. Interest is paid monthly at a rate of 9% annually. - $480 Bonds payable, net of prepaid reserve of $300,000, collateralized by a lien, including serial bonds maturing through October 1, 2000, at interest rates ranging from 5.75% to 7.60%, and term bonds maturing October 1, 2006, and October 1, 2013, at interest rates of 8% and 8.125%, respectively. The payments on the bonds are calculated in an amount sufficient to fully amortize the indebtedness. $2,335 2,405 GLEN COVE Note payable, collateralized by a deed of trust. The note bears interest, payable monthly, at the Union Bank Reference Rate plus 1.5%, together with monthly principal payments of $3,700 until maturity in 1999. 1,893 1,937 CARMEL MOUNTAIN Note payable, collateralized by a deed of trust. The note bears interest, payable monthly, at the Union Bank Reference Rate plus 1.5%, together with variable monthly principal payments until maturity in 1999. 2,295 2,323 LAM RESEARCH BUILDINGS Notes payable, collateralized by deeds of trust. The two notes bear interest at a fixed rate of 8.44%. The combined principal and interest payment of $129,969 is payable monthly until maturity in 2006. 16,222 - ================= ================ $22,745 $7,145 ================= ================
Aggregate principal payments required in future years are as follows: In thousands 1997 $347 1998 378 1999 4,360 2000 350 2001 383 Thereafter 16,927 =================== $22,745 =================== For the years ended December 31, 1996, 1995 and 1994, interest paid was $773,000, $687,000 and $444,000, respectively. Subsequent to December 31, 1996, the bonds payable were refinanced lowering the interest rate and extending the maturity date of the bonds to October 1, 2026. Management estimates that the carrying amount of aggregate notes and bonds payable approximate fair value. In December 1996, the Company entered into a $25 million secured line of credit agreement with a bank to provide funding for future acquisitions and working capital. Borrowings under the line of credit bear interest at the applicable London Interbank Offered Rate plus 1.9%, or at the bank's reference rate, and is secured by three of the Company's rental properties. Among other covenants, the agreement restricts payment of quarterly dividends to an amount not to exceed 98% of funds from operations, as defined. In addition, the Company pays an annualized fee of .25% of the unused portion of the line of credit, payable quarterly. At December 31, 1996, no borrowings were outstanding under the line of credit. NOTE 5 - COMMON STOCK AND INCOME PER SHARE In 1994, the Company issued to the Advisor an exchange right to exchange the Series B common stock held by the Advisor (Note 8) for Series A common stock. In connection with the Merger, the Company issued an additional exchange right to the Advisor with respect to the shares of Series B common stock held by Advisor in FREIF and Advantage which were exchanged in the Merger for Series B shares of the Company, The exchange rights are exercisable only when the Series A common stock achieves certain trading prices for 20 consecutive trading days. The number of shares of Series B common stock that will exchange for Series A common stock, and the related trading prices are as follows: 149,088 Series B shares will be exchanged for 149,088 Series A shares at $8.42, 185,866 Series B shares will be exchanged for 185,866 Series A shares at $10.35, and 410,630 Series B shares will be exchanged for 287,441 Series A share at $11.33. The rates of exchange and trading prices will be subject to change under certain circumstances as provided in the Exchange Rights Agreement. No distribution may be paid on the Series B shares prior to exercise of the exchange rights. After exercise of the exchange rights, the Advisor will receive distributions on its Series A shares. Series A and Series B common stock have the same voting rights. Distributions on Series A common stock are declared at the discretion of the Board of Directors. For the purpose of calculating net income per share for the year ended December 31, 1996, the weighted average number of shares outstanding of Series A common stock has been calculated assuming the shares attributable to dissenting stockholders (equivalent to approximately 1.9 million shares of the Company's common stock) were converted into the Company's common stock and were outstanding for the period May 7, 1996 to the repurchase date of November 1, 1996. For the period May 7, 1996, to November 1, 1996, the Company was not obligated to, and did not, pay dividends related to 635,638 Series A shares of FREIF that dissented from the Merger. NOTE 6 - REPURCHASE OF DISSENTING SHARES On November 1, 1996 the Company purchased all the remaining "dissenting shares" of Class A common stock arising from the Merger for an aggregate price of $8.4 million. After giving effect to the transaction, the total number of shares of Series A common stock of the Company outstanding is approximately 12.25 million. Cash for the purchase price was provided by the sale of a portion of the Company's mortgage-backed securities. The Company incurred a loss on the sale of the securities of approximately $151,000. NOTE 7 - RENTAL INCOME The Company's rental income from commercial property is received principally from tenants under non-cancelable operating leases. The tenant leases typically provide for guaranteed minimum rent plus contingent rents. Minimum future rentals on non-cancelable tenant operating leases at December 31, 1996 are as follows: In thousands 1997 13,723 1998 11,167 1999 9,780 2000 8,540 2001 7,204 Thereafter 52,348 ------------------- 102,762 =================== Minimum future rentals do not include contingent rents which represent reimbursements of property operating expenses. Contingent rents amounted to $1,725,000, $1,567,000 and $1,452,000 for the years ended December 31, 1996, 1995 and 1994, respectively. During the years ended December 31, 1996, 1995 and 1994, one of the Company's tenants, the Continental Casualty Company, provided 13.8%, 14.3% and 15.8% of the Company's base rental income under a lease which expires in October 1997. Late in 1996, the Company acquired two industrial buildings that are occupied by Lam Research Corporation under leases that expire in 2014. In addition, Lam Research Corporation leases other space from the Company at the Northport Buildings under a lease that expires in 2003. Subsequent to the acquisition of the Lam Research Buildings, the percentage of the Company's base rental income that is received from Lam Research Corporation increased to a total of approximately 20%, based upon leases in effect at December 31, 1996. Leases covering 162,000 square feet, and representing approximately 22%, of the Company's base rental income at December 31, 1996, are scheduled to expire during 1997. The Company may incur significant costs related to the releasing or renewing of the leases. In addition, the Company anticipates releasing 75,000 square feet of this space at a rental rate substantially below the existing lease rate. NOTE 8 - RELATED PARTY TRANSACTIONS The Company has an agreement with Franklin Properties, Inc. (the "Advisor") to administer the day-to-day operations of the Company. Under the terms of the agreement, which is renewable annually, the Advisor will receive an annualized fee equal to .5% of the Company's gross real estate assets, defined generally as the book value of the assets before depreciation, payable quarterly. The fee will be reduced to .4% for gross real estate assets exceeding $200 million. Prior to October 1, 1994, the Advisor received an annualized fee equal to 1% of invested assets and .4% of mortgage investments, paid quarterly. One half of the fee was subordinate to declaring distributions to Series A common stockholders totaling at least 7% per annum on their adjusted price per share, as defined. Prior to the Merger, fees paid to the Advisor by FREIF and Advantage were calculated in a manner similar to that used by the Company prior to October 1, 1994, except that for FREIF, the entire fee was subordinated to declaring distributions to the Series A common stockholders totaling 8% of the adjusted price per share. If the advisory fees for FREIF and Advantage had been calculated under terms of the Company's current advisory agreement, the aggregate advisory fees for the Company, FREIF and Advantage would have been $606,000, $570,000 and $528,000 for the years ended December 31, 1996, 1995 and 1994, respectively. In addition, FREIF and Advantage paid the Advisor acquisition fees equal to 6% of the asset purchase price which are not payable under the terms of the Company's current advisory agreement. Seven of the Company's properties are managed by Continental Property Management Co. ("CPMC"), an affiliate of the Advisor, and the remaining property is managed by an unaffiliated company, Cupertino Capital. The Company pays a property management fee, leasing commission and construction supervision fee to CPMC based on actual services performed. The fees paid to CPMC do not include any fees or expenses paid to on-site property managers or leasing commissions paid to third parties, both of which are borne by the Company. The agreements between the Company and the Advisor, or affiliates of the Advisor, provide for certain types of compensation and payments including, but not limited to, the following for the years ended December 31, 1996, 1995 and 1994: Restated Restated In thousands 1996 1995 1994 ------- ----------------- ---------------- Advisory fee, charged to related party expense $551 $350 $264 Reimbursement for data processing, accounting and certain other expenses, charged to related party expense 63 101 109 Property management fee, charged to related party expense 591 579 524 Property acquisition fee, capitalized and amortized over the life of the related investment - - 730 Leasing commissions, capitalized and amortized over the term of the related lease 97 187 99 Construction supervision fee, capitalized and amortized over the life of the related investment or the term of the related lease, as applicable 33 30 47 The Company's Board of Directors (including all of its Independent Directors) have determined that the compensation paid to the Advisor and to CPMC is fair and reasonable to the Company. At December 31, 1996 and 1995, cash equivalents included $1,764,000 and $1,014,000, respectively, which was invested in Franklin Money Fund, an investment company managed by an affiliate of the Advisor. Distributions earned from Franklin Money Fund totaled $60,000, $23,000 and $21,000 for the years ended December 31, 1996, 1995 and 1994, respectively. At December 31, 1996 and 1995, accrued expenses included $177,000 and $103,000, respectively, payable to the Advisor or affiliates. NOTE 9 - DISTRIBUTIONS The allocation of cash distributions per share for individual stockholders' income tax purposes, as reported on Internal Revenue Service Form 1099-DIV, for the years ended December 31, 1996, 1995 and 1994 was as follows: Ordinary Return of Total Year Paid Income Capital Paid - ------------------------ ------------------ -------------------- -------------- Franklin Select Realty Trust 1996 $.42 $.02 $.44 1995 $.35 $.09 $.44 1994 $.34 $.07 $.41 Franklin Real Estate Income Fund 1996(to May 7, 1996) $.18 $.03 $.21 1995 $.49 $.01 $.50 1994 $.41 $.09 $.50 Franklin Advantage Real Estate Income Fund 1996 (to May 7, 1996) $.19 $.03 $.22 1995 $.60 $.01 $.61 1994 $.51 $.14 $.65 In December 1994, the Company implemented a Dividend Reinvestment and Share Purchase Plan (the "Plan"), under which a stockholder's cash distributions may be reinvested in shares of Series A common stock of the Company, subject to the terms and conditions of the Plan. Under the Plan, the Company's Dividend Reinvestment Agent makes open market purchases of the Company's Series A common stock, administers the Plan and performs other duties related to the Plan. No new shares have been issued in connection with the Plan. NOTE 10 - SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED) In thousands, except per share amounts, as restated to give effect to the merger.
THREE MONTHS ENDED -------------------- ------------------ ------------------------- --------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1996 1996 1996 1996 -------------------- ------------------ ------------------------- --------------------- Revenue $3,474 $3,613 $3,597 $3,884 Net income $753 $1,078 $1,187 $789 Net income per share $ .05 $ .08 $ .08 $ .06 THREE MONTHS ENDED -------------------- ------------------ ------------------------- --------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1995 1995 1995 1995 -------------------- ------------------ ------------------------- --------------------- Revenue $3,452 $3,569 $3,597 $3,493 Net income $1,279 $1,318 $893 $972 Net income per share $ .09 $ .09 $ .06 $ .07
NOTE 11 - PRO FORMA FINANCIAL INFORMATION The pro forma financial information set forth below is presented as if: (i) the Merger and the related repurchase of dissenting shares and (ii) the formation of FSRT and the limited partners' contribution of the LAM Research Buildings had occurred on January 1, 1995. The pro forma financial information is not necessarily an indication of what actual results of operations of the Company would have been assuming the transaction had occurred on January 1, 1995, nor does it purport to present the results of operations for future periods. December 31 Dollars in thousands 1996 1995 (Unaudited) - ------------------------------------ Rent $15,867 $15,731 Net income $3,023 $3,479 Net income per share $ .25 $ .28 Weighted average Series A common stock outstanding 12,250 12,250 NOTE 12 - LITIGATION On December 2, 1996, two stockholders, for themselves and purportedly on behalf of certain other minority stockholders of Advantage, filed a purported class action complaint in the California Superior Court for San Mateo County against Advantage, its directors, the Advisor, Franklin Resources, Inc. and the Massachusetts State Teachers' and Employees' Retirement Systems Trust ("MASTERS"). The complaint alleges that defendants breached fiduciary duties to plaintiffs and other minority stockholders in connection with the purchase by Franklin Resources, Inc. in August 1994 of MASTERS' 46.6% interest in Advantage and in connection with the Merger of Advantage into the Company in May 1996, which was approved by a majority of the outstanding shares of each of the three companies. Plaintiffs also allege that defendants misstated certain material facts or omitted to state material facts in connection with these transactions. The complaint includes a variety of additional claims, including claims relating to the investment of Advantage assets, the suspension of the dividend reinvestment program, the allocation of merger-related expenses, revisions to the investment policies of Advantage, and the restructuring of the contractual relationship with the Advisor. Plaintiffs seek damages in an unspecified amount and certain equitable relief. The defendants deny any wrongdoing in these matters and intend to vigorously defend the action. Management does not believe that the outcome of this litigation will have a material adverse affect on the Company's financial condition or results of operations. The properties are subject to certain routine litigation and administrative proceedings arising in the ordinary course of business, which, taken together, are not expected to have a material adverse impact on the Company's financial condition or results of operations. - -------------------------------------------------------------------------------- R E A L E S T A T E A N D A C C U M U L A T E D D E P R E C I A T I O N - --------------------------------------------------------------------------------
FRANKLIN SELECT REALTY TRUST as of, and for the years ended December 31, 1996, 1995 and 1994 Dollars in thousands Cost Capitalized Initial Subsequent To Gross Amount at Which Cost to Carried at Fund Acquisition Close of Period Life on Which Deprec- iation in Latest Build- Date Operat- ings Accumu- of ions Carry- and lated con- Date State- Encum- Build- Improve- ing Improve- Depreci- struc- Acqu- ment is Description brances Land ings ments Costs Land ments Total ation tion ired Computed ---------------------------------------------------------------------------------------------------------------------------------- The Shores Redwood City, CA - (4) $7,033 $20,499 $2,108 - $7,033 $22,607 $29,640 $5,488 82-87 09/89 35 Data General Building Manhattan Beach, CA - 5,372 16,994 2,707 - 5,372 19,701 25,073 4,985 82 12/89 35 Mira Loma 11/88 Shopping Center & Reno, Nevada - 2,233 7,006 801 - 2,233 7,807 10,040 1,926 85-88 09/92 35 Northport Buildings Fremont, CA - (4) 2,874 8,708 534 - 2,874 9,242 12,116 2,116 85 01/91 35 Glen Cove Shopping Center Vallejo, CA $1,893 2,500 4,200 104 - 2,500 4,304 6,804 361 89 01/94 35 Fairway Center Brea, CA 2,335 (4) 7,430 14,273 729 - 7,430 15,002 22,432 2,292 87 01/92 35 Carmel Mountain Gateway Plaza San Diego, CA 2,295 3,507 5,053 32 - 3,507 5,085 8,592 321 94 11/94 35 Lam Research Buildings Fremont, CA 16,222 7,337 19,591 - - 7,337 19,591 26,928 94 96 10/96 35 - ------------------------------------------------------------------------------------------------------------------------------------ $22,745 $38,286 $96,324 $7,015 - $38,286 $103,339 $141,625 $17,583 (1) (2) (3)
================================================================================ R E A L E S T A T E A N D A C C U M U L A T E D D E P R E C I A T I O N ================================================================================ NOTES: (1) The aggregate cost for federal income tax purposes is $123,528. (2) RECONCILIATION OF REAL ESTATE
Restated Restated 1996 1995 1994 -------------- ---------------- ------------------- Balance at beginning of period $114,070 $113,833 $97,453 Dispositions - (153) - Additions during period: Acquisitions 26,928 - 15,260 Improvements 627 390 1,120 -------------- -------------- ----------------- Balance at end of period $141,625 $114,070 $113,833 ============== =============== ================= (3) RECONCILIATION OF ACCUMULATED DEPRECIATION Restated Restated 1996 1995 1994 ------------- ---------------- ------------------- Balance at beginning of period $14,416 $11,383 $8,488 Dispositions - (53) - Depreciation expense for the period 3,167 3,086 2,895 ------------- ------------- ----------------- Balance at end of period $17,583 $14,416 $11,383 ============= ============= =================
(4) These assets are pledged as collateral under the Company's $25 million line of credit. At December 31, 1996, no borrowings were outstanding under the line of credit. Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III The information required by Items 10 through 12 of Part III is incorporated herein by reference from the Company's Proxy Statement which will be mailed to stockholders in connection with the Registrant's annual meeting of stockholders scheduled to be held on June 5, 1997. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company is managed by the Advisor under the terms of an Advisory Agreement, which is renewable annually and is subject to the overall approval of the Board of Directors, a majority of whom are independent of the Advisor. The Company pays the Advisor, as an asset management fee, an annualized fee of .5% of the book value of its real estate assets before depreciation. This fee is reduced to .4% of the book value before depreciation of real estate assets exceeding $200 million. The fee is calculated and paid at the end of each fiscal quarter of the Company, based on the real estate assets at the end of such quarter. The Company changed its advisory fee structure after its conversion to an infinite life REIT in 1994. The properties formerly owned by FREIF and Advantage became subject to the Company's advisory fee structure upon the Merger of FREIF and Advantage into and with the Company in May 1996. The Advisory fee paid to the Advisor during the year ended December 31, 1996, is stated in the table below. The Company pays all expenses of its operations except for the following, which are borne by the Advisor (i) employment expenses of the Company's Chairman, President, Senior Vice President, Chief Financial Officer, Secretary and of the Company's directors who are also officers of the Advisor, (ii) office expenses of the Advisor, and (iii) overhead expenses of the Advisor not properly attributable to the performance of its duties and obligations under the Advisory Agreement. Seven of the Company's properties are managed by Continental Property Management Co. ("CPMC"), an affiliate of the Advisor, and the remaining property is managed by an unaffiliated company, Cupertino Capital. The Company pays a property management fee, leasing commission and construction supervision fee to CPMC based on actual services performed. The fees paid to CPMC do not include any fees or expenses paid to on-site property managers or leasing commissions paid to third parties, both of which are borne by the Company. The fees paid to CPMC for the year ended December 31, 1996, are listed in the table below. During the year ended December 31, 1996, the Company paid or accrued the following amounts for the reimbursements and services noted above: Advisory fee, charged to related party expense $551,000 Reimbursement for data processing, accounting and certain other expenses charged to related party expense 63,000 Property management fee, charged to related party expense 591,000 Leasing commission, capitalized and amortized over the term of the related lease 97,000 Construction supervision fee, capitalized and amortized over the life of the related investment or the term of the related lease 33,000 The Company's Board of Directors (including all of its Independent Directors) have determined that the compensation paid to the Advisor and to CPMC is fair and reasonable to the Company. David P. Goss, Mark A. TenBoer and Richard S. Barone, who are officers of the Company, are also officers of the Advisor. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. The financial statements of the Company included in Item 8 of this report are listed on the index on page 28. 2. The supplemental financial statement schedule of the Company included in Item 8 of this report is listed on the index on page 28. 3. Exhibits: Exhibit NO. LIST OF EXHIBITS FOOTNOTE 3.1 Articles of Incorporation (1) 3.2 First Amendment to Articles of Incorporation (2) 3.2a Second Amended and Restated Bylaws of Franklin Select Realty Trust (2) 10.1* Amended and Restated Advisory Agreement 10.2 Property Management Agreement (3) 10.3 Agreement of Limited Partnership of FSRT, L.P. between the Company and (4) Northport Associates No. 18, a California limited liability company, dated as of October 30, 1996. 10.4 Contribution Agreement, dated as of October 30, 1996, between FSRT, L.P., (4) the Company, Northport Associates No. 18, a California limited liability company, and the members of Northport Associates No. 18. 10.5 Exchange Rights Agreement, dated as of October 30, 1996, among the Company, (4) FSRT, L.P., and Northport Associates No. 18, a California limited liability company. 10.6 Registration Rights Agreement, dated as of October 30, 1996, among the (4) Company and Northport Associates No. 18, a California limited liability company. 10.7* Secured line of credit loan agreement, dated December 10, 1996, by and between the Company and Bank of America. 21.1* Subsidiaries of the Company. * Filed herewith. FOOTNOTES (1) Documents were filed in the Company's Form S-11 Registration Statement, dated March 30, 1989 (Registration No. 033-26562) and are incorporated herein by reference. (2) Documents were filed in the Company's Form S-4 Registration Statement, dated November 13, 1995, (Registration No. 033-64131), and are incorporated herein by reference. (3) Documents were filed in the Company's Form 10-K for the year ended December 31, 1994, and are incorporated herein by reference. (4) Documents were filed in the Company's Form 8-K, dated October 31, 1996, and are incorporated herein by reference. (b) Reports filed on Form 8-K. During the quarter ended December 31, 1996, the Company filed a report dated October 31, 1996, (date of earliest event reported) on Form 8-K, with respect to the acquisition of the Lam Research Buildings and the repurchase of dissenting shares. SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRANKLIN SELECT REALTY TRUST (Company) Date: 03/27/97 By: /S/ DAVID P. GOSS David P. Goss Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company, and in the capacities and on the dates indicated. SIGNATURE TITLE DATE Chief Executive Officer, and Director s/David P. Goss 3/27/97 - ----------------------------- ------------------- David P. Goss s/Barry C. L. Fernald Director1 3/27/97 - ----------------------------- ------------------- Barry C. L. Fernald s/Lloyd D. Hanford, Jr. Director1 3/27/97 - ----------------------------- ------------------- Lloyd D. Hanford, Jr. s/Egon H. Kraus Director1 3/27/97 - ----------------------------- ------------------- Egon H. Kraus s/Frank W. T. LaHaye Director1 3/27/97 - ----------------------------- ------------------- Frank W. T. LaHaye s/Larry D. Russel Director1 3/27/97 - ----------------------------- ------------------- Larry D. Russel s/E. Samuel Wheeler Director1 3/27/97 - ----------------------------- ------------------- E. Samuel Wheeler 1 Independent Director Exhibit 21.1 Subsidiaries of Franklin Select Realty Trust State of Name under which SUBSIDIARY NAME ORGANIZATION SUBSIDIARYIS DOING BUSINESS FSRT, L.P. Delaware FSRT, L.P. EX-10.1 2 AMENDED AND RESTATED ADVISORY AGREEMENT between FRANKLIN SELECT REALTY TRUST and FRANKLIN PROPERTIES, INC. THIS AMENDED AND RESTATED ADVISORY AGREEMENT ("Agreement") is dated as of January 1, 1997, between FRANKLIN SELECT REALTY TRUST, a California corporation (the "Company"), and FRANKLIN PROPERTIES, INC., a California corporation (the "Advisor"). WHEREAS, the Company and the Advisor entered into a certain agreement (the "Old Agreement") captioned "Advisory Agreement between Franklin Select Real Estate Income Fund and Franklin Properties, Inc.," dated as of March 1, 1989. WHEREAS, the Company and the Advisor entered into a certain agreement captioned "First Amendment to Advisory Agreement between Franklin Select Real Estate Income Fund and Franklin Properties Inc.," dated as of October 1, 1994, pursuant to which the Agreement was amended to reflect certain changes in the compensation paid to the Advisor as approved by the shareholders. WHEREAS, the Company and the Advisor desire to amend and restate the Old Agreement so that all of the terms between the Company and the Advisor are set forth in one agreement, as hereinafter set forth. NOW, THEREFORE, in consideration of the premises and of the mutual covenants in the Old Agreement and this Agreement, the parties agree as follows: 1. DUTIES OF ADVISOR. The Advisor agrees to use its best efforts to present to the Company (a) a continuing and suitable investment program consistent with the investment policies and objectives of the Company and (b) investment opportunities of a character consistent with the investment program as the Directors may adopt from time to time. In performance of this undertaking, subject to the supervision of the Directors and upon their direction, and consistent with the provisions of the Articles of Incorporation and Bylaws of the Company, the Advisor shall: (a) furnish or obtain and supervise the day-to-day operations of the Company; (b) serve as the Company's investment and financial advisor and provide research, economic and statistical data in connection with the Company's investments and investment and financial policies; (c) on behalf of the Company, investigate, select and conduct relationships with consultants, investment banks, lenders, mortgagors, brokers, investors, shareholders, transfer agents, builders, developers and others; (d) consult with the Directors and furnish the Directors with advice and recommendations with respect to making, acquiring (by purchase, investment, exchange or otherwise), holding and disposing (through sale, exchange or otherwise) of investments consistent with the policies and provisions of the Company; (e) on behalf of the Company, investigate, select and commit to purchase (subject to board approval) investments consistent with the policies and provisions of the Company and in accordance with the policies and guidelines established by the Directors, provided that actual investments shall be made only with the prior approval of a majority of a quorum of the Directors or by written consent of all Directors; (f) obtain for the Directors such services as may be required in acquiring and disposing of investments, disbursing and collecting the funds of the Company, paying the debts and fulfilling the obligations of the Company and handling, prosecuting and settling any claims of the Company; (g) obtain for the Company such services as may be required for property management, including property management services rendered by an affiliate of the Advisor, and other activities relating to the investment portfolio of the Company; (h) advise in connection with and conduct negotiations by or on behalf of the Company with investment banking firms, securities brokers or dealers and other institutions or investors for public or private sales of Shares or other securities of the Company, or obtain loans for the Company, but in no event in such a way that the Advisor could be deemed to be acting as a broker-dealer or underwriter; (i) provide, at the Company's expense, office space, office furnishings, personnel and other overhead items necessary and incidental to the Company's business and operations; (j) from time to time or at any time requested by the Directors, make reports to the Directors of its performance of services under this Agreement; (k) obtain appraisal reports, where appropriate, on investments or contemplated investments of the Company; (l) provide, at the Company's expense and at the direction of the Board of Directors, accounting and related services necessary to the preparation of the Company's financial statements, regulatory filings, and tax returns; and (m) do all things necessary to assure its ability to render the services described in this Agreement. 2. NO PARTNERSHIP OR JOINT VENTURE. The Company and the Advisor are not partners or joint venturers with each other and nothing in this Agreement shall be construed to make the parties partners or joint venturers or impose any liability as a partner or joint venturer on either of them. 3. RECORDS. At all times, the Advisor shall keep proper books of account and records relating to services performed under this Agreement, which shall be accessible for inspection by the Company at any time during ordinary business hours. 4. REIT QUALIFICATIONS. Notwithstanding anything else in this Agreement, the Advisor shall refrain from any action (including, without limitation, performing services for tenants of property or managing or operating real property) which, in its sole judgment made in good faith or in the judgment of the Directors of which the Advisor has written notice, would adversely affect the status of the Company as a real estate investment trust as defined and limited in the Code, which would violate any law, rule, regulation or statement of policy of any governmental body or agency having jurisdiction over the Company or over its securities, or which would otherwise not be permitted by the Company's Bylaws. 5. BANK ACCOUNTS. The Advisor, at the expense of the Company, may establish and maintain one or more bank accounts in its own name, and may collect and deposit into any one or more accounts, and disburse from any account or accounts, any money on behalf of the Company, on the terms and conditions as the Directors may approve, provided that no funds shall be commingled with funds of the Advisor; and the Advisor shall from time to time give an appropriate accounting of collections and payments to the Directors and to the auditors of the Company. 6. BOND. The Advisor, if and to the extent that the Directors require, shall maintain a fidelity bond with a responsible surety company in such amount as the Directors may require from time to time, covering all directors, officers, employees and agents of the Advisor handling funds of the Company and any investment documents or records pertaining to investments of the Company. The bond shall inure to the benefit of the Company in respect of losses of any property from acts of the directors, officers, employees and agents of the Advisor through theft, embezzlement, fraud, negligence, error or omission or otherwise. The premium for the bond shall be an expense of the Company. 7. INFORMATION FURNISHED ADVISOR. The Directors shall at all times keep the Advisor fully informed with regard to the investment policy of the Company, the capitalization policy of the Company and, generally, their current intentions as to the future of the Company. In particular, the Directors shall notify the Advisor promptly of their intention to sell or otherwise dispose of any of the Company's investments or to make any new investment. The Company shall furnish the Advisor with a certified copy of all financial statements, a signed copy of each report prepared by independent certified public accountants and all other information with regard to the Company's affairs as the Advisor may reasonably request. 8. CONSULTATION AND ADVICE. In addition to the services described elsewhere in this Agreement, the Advisor shall consult with the Directors, and shall, at the request of the Directors or the officers of the Company, give advice and recommendations with respect to other aspects of the business and affairs of the Company. In general, the Advisor shall inform the Directors of any factors, which come to its attention which the Advisor believes would influence the policies of the Company, except to the extent that giving that information would involve a breach of fiduciary duty. 9. DEFINITIONS. As used in this Agreement, the following terms shall have the meanings indicated: (a) "Affiliate" means as to any Person (i) any other Person directly or indirectly controlling, controlled by or under common control with such Person, (ii) any other person owning or controlling 10% or more of the outstanding voting securities or beneficial interest of such Person, (iii) any officer, director, trustee or general partner of such Person and (iv) if such other Person is an officer, director, trustee or partner of another entity, then the entity for which that Person acts in any such capacity. (b) "Average Invested Assets" means for any period the average of the aggregate book value of the assets of the Company invested, directly or indirectly, in equity interests in and loans secured by real estate, before reserves for depreciation or bad debts or other similar non-cash reserves computed by taking the average of such values at the end of each month during such period. (c) "Fiscal Year" means any period for which an income tax return is submitted to the Internal Revenue Service and which is treated by the Internal Revenue Service as a reporting period for the Company. (d) "Mortgage Investment" means the assets of the Company invested in any mortgage loans, mortgage-backed securities, notes, bonds or other evidences of indebtedness or obligations which are secured or collateralized by interests in real estate. (e) "Net Income" means the total revenues of the Company for any period, computed on the basis of its results of operations for that period, after deduction of all expenses, excluding, however, any additions to reserves for depreciation or bad debts or other similar non-cash reserves. (f) "Person" means an individual, corporation, partnership, joint venture, association, company, trust, bank or other entity, or government and any agency and political subdivision of a government. (g) "Real Estate Assets" means for any calendar quarter, the aggregate book value of the assets of the Company on the last day of the quarter, invested directly or indirectly in interests in real estate, before reserves for depreciation, bad debts, or other similar non-cash reserves, as set forth in the Company's financial statements (which may be unaudited except as elsewhere provided in this Agreement), prepared quarterly on an accrual basis in accordance with generally accepted accounting principles. Real Estate Assets do not include Mortgage Investments. 10. ADVISOR COMPENSATION. At the end of each calendar quarter or such other interval as the parties shall agree, the Company shall pay to the Advisor as compensation for the advisory services rendered to the Company hereunder an annualized fee equal to the sum of (a) one-half of one percent (.5%) of the Real Estate Assets up to and including $200,000,000 and (b) four-tenths of one percent (.4%) of the Real Estate Assets, if any, in excess of $200,000,000. 11. STATEMENTS. The Advisor shall furnish to the Company at least quarterly, beginning with the second calendar quarter of the term of this Agreement, a statement showing the computation of the fee payable in respect of the preceding calendar quarter under Section 10, even after the termination of this Agreement. The final settlement of any fees for each Fiscal Year shall be subject to adjustment in accordance with, and upon completion of, the annual audit of the Company's financial statement; any payment by the Company or repayment by the Advisor indicated as a result of the audit shall be made promptly after the completion of the audit and shall be reflected in the audited statements to be published by the Company. 12. COMPENSATION FOR ADDITIONAL SERVICES. (a) Where appropriate in the sole judgment of the Directors or the Advisor, an Affiliate of the Advisor may be retained to perform property management services for the Company. (b) If and to the extent that the Company shall request the Advisor, or any director, officer, partner or employee of the Advisor, to perform services for the Company other than those required under this Agreement, the additional services, if performed, will be compensated separately on terms to be agreed between that party and the Company. 13. EXPENSES OF THE ADVISOR. Without regard to the amount of compensation received under this Agreement by the Advisor, the Advisor shall bear the following expenses: (a) employment expenses of the officers and directors of the Advisor; (b) telephone, utilities, office furniture and furnishings and other office expenses of the Advisor; and (c) miscellaneous administrative and other expenses of the Advisor not relating to the performance by the Advisor of its functions hereunder. 14. EXPENSES OF THE COMPANY. Except as expressly otherwise provided in this Agreement, the Company shall pay all its expenses not expressly assumed by the Advisor, and without limiting the generality of the foregoing it is specifically agreed that the following expenses of the Company shall be paid by the Company and shall not be paid by the Advisor: (a) the cost of money borrowed by the Company; (b) taxes on income and taxes and assessments on real property and all other taxes applicable to the Company; (c) real estate brokerage and sales commissions with respect to the purchase or sale of real estate assets of the Company payable to real estate brokers who cooperate with the Advisor in such transactions, and brokerage and sales commissions with respect to the purchase or sale of Mortgage Investments payable to mortgage brokers who cooperate with the Advisor in such transactions; (d) legal, accounting, underwriting commissions and fees and any other fees and costs, including due diligence, qualification of securities for sale in various states, listing of securities on a securities exchange, printing, engraving and other expenses and taxes incurred in connection with the issuance, distribution, transfer, registration, marketing and listing of the Company's securities, including compensation of employees of the Advisor and direct expenses of officers and employees of the Advisor and affiliates while directly engaged in such activities on behalf of the Company; (e) fees, salaries and other employment costs, taxes and expenses paid to Directors, officers and employees of the Company, including persons who may be employees of the Advisor, other than officers of the Advisor, or of any company which controls, is controlled by or is under common control with the Advisor, incurred with respect to and allocable to the prudent operation and business of the Company, other than as provided under Section 13(a) above. (f) fees and expenses paid to independent contractors, appraisers, consultants, managers and other agents retained by or on behalf of the Company and expenses (including expenses for Persons who may also be officers or employees of the Advisor) connected with the acquisition, financing, refinancing, disposition and ownership of real estate interests or other property, including insurance premiums, legal services, brokerage and sales commissions, maintenance, repair and improvement of property; (g) expenses of maintaining and managing real estate interests; (h) insurance as required by the Directors (including Directors' liability insurance); (i) the expenses of organizing, revising, amending, converting, modifying or terminating the Company; (j) expenses connected with payments of dividends or interest or distributions in cash or any other form made or caused to be made by the Directors to holders of securities of the Company; (k) all expenses connected with communications to holders of securities of the Company and the other bookkeeping and clerical work necessary in maintaining relations with holders of securities, including the cost of printing and mailing certificates for securities, proxy solicitation materials and reports to holders of the Company's securities; (1) the cost of any accounting, statistical or bookkeeping equipment necessary for the maintenance of the books and records of the Company; (m) transfer agent's, registrar's, dividend disbursing agent's, dividend reinvestment plan agent's and indenture trustee's fees and charges; (n) legal, accounting and auditing fees and expenses not included in (d) and (f) of this Section 14; and (o) other ordinary and necessary expenses of the business and affairs of the Company, other than those allocable to the Advisor under Section 13 above. The Company shall reimburse the Advisor or its affiliates for the cost of rent, goods or materials furnished or advanced by them for the benefit of the Company, and for services rendered for the benefit of the Company. The Company's costs for services and goods provided by the Advisor to the Company shall be based upon the cost to the Advisor and an allocable portion of the actual compensation (including employment taxes and benefits) of Persons involved plus an appropriate share of overhead allocable to each Person who rendered services for the benefit of and on the business affairs of the Company. The amounts charged to the Company by the Advisor and its Affiliates shall not exceed those which the Company would be required to pay to independent parties for comparable rent, materials, goods or services. 15. REFUND BY ADVISOR. In addition to the provisions of Section 10 hereof, within 60 days after the end of any calendar year which begins following the date the Company first commences operations after reaching its minimum capital subscription amount, the Advisor will refund to the Company the amount, if any, by which the Operating Expenses (as defined in this Section 15) of the Company during such Calendar Year exceeded the greater of (a) 2% of the Average Invested Assets or (b) 25% of Net Income unless the Independent Directors of the Company shall have affirmatively determined that due to unusual and non-recurring factors, such higher level of Operating Expenses is justified for such year. For the purposes of this Section 15, "Operating Expenses" during the Calendar Year means the aggregate annual expenses of every character regarded as Operating Expenses in accordance with generally accepted accounting principles, as determined by independent accountants selected by the Directors, including regular compensation payable to the Advisor, excluding, however, the following: (i) the cost of money borrowed by the Company; (ii) taxes on income and taxes and assessments on real property and all other taxes applicable to the Company; (iii) expenses of acquiring, financing, refinancing, disposing of, maintaining, managing and owning real estate equity interests or other property (including the costs of legal services, brokerage and sales commissions, maintenance, repair and improvement of property); (iv) insurance as required by the Directors (including any Directors' liability insurance); (v) expenses of organizing, revising, amending, converting, or terminating the Company; (vi) expenses connected with payments of dividends or interest or distributions in cash or any other form made or caused to be made by the Directors to holders of securities of the Company; (vii) all expenses connected with communications to holders of securities of the Company and the other bookkeeping and clerical work necessary in maintaining relations with holders of securities of the Company, including the cost of printing and mailing certificates for securities and proxy solicitation materials and reports to holders of securities of the Company; (viii) transfer agent's, registrar's, dividend disbursing agent's, warrant agent's, dividend reinvestment plan agent's and indenture trustee's fees and charges, (ix) other legal, accounting and auditing fees and expenses; and (x) non-cash expenditures (including depreciation, amortization and bad debt reserve). 16. OTHER ACTIVITIES. Nothing in this Agreement shall prevent the Advisor or any of its officers, directors or employees or any of its affiliates from engaging in other business activities related to real estate investments, from making investments permitted to the Company by the Company's Bylaws or from acting as advisor to any other person or entity even though having investment policies similar to the Company (including another real estate investment trust). The Advisor and its officers, directors or employees and any of its Affiliates shall be free from any obligation to present to the Company any particular investment opportunity which comes to the Advisor or such persons, regardless of whether such opportunity is within the Company's investment policies, provided, that the Advisor will give due consideration to the investment objectives and financial capabilities of the Company in determining whether to present an investment opportunity to the Company or to another entity for which the Advisor provides similar services. 17. TERM: TERMINATION OF AGREEMENT. This Agreement shall continue in force through December 31, 1997, and thereafter it may be renewed annually, subject to the approval thereof by a majority of the Independent Directors. Notice of renewal shall be given in writing by the Directors to the Advisor not less than 60 days before the expiration of this Agreement or of any extension of this Agreement. Notwithstanding any other provision to the contrary, this Agreement may be terminated for any reason upon 60 days' written notice by the Company to the Advisor or 120 days' written notice by the Advisor to the Company, in the former case by the action of the Directors, the Independent Directors or a majority of the shareholders of the Company. 18. AMENDMENTS. This Agreement shall not be changed, modified, terminated or discharged in whole or in part except by an instrument in writing signed by both parties, or their respective successors or assigns, or otherwise as provided in this Agreement. 19. ASSIGNMENT. This Agreement shall not be assignable by the Advisor without the consent of the Company, except an assignment to an Affiliate of the Advisor, or to a corporation, association, trust or other successor organization which may take over the property and carry on the affairs of the Advisor. A proper assignment or any other assignment of this Agreement by the Advisor shall bind the assignee under this Agreement and by the terms of the assignment in the same manner as the Advisor is bound. This Agreement shall not be assignable by the Company without the consent of the Advisor, except in the case of assignment by the Company to a corporation, association, trust or other organization which is a successor to the Company. The successor shall be bound under this Agreement and by the terms of said assignment in the same manner as the Company is bound. 20. DEFAULT, BANKRUPTCY, ETC. At the option solely of the Directors, this Agreement shall be and become terminated immediately upon written notice of termination from the Directors to the Advisor if any of the following events shall occur: (a) If the Advisor shall violate any provision of this Agreement, and after notice of the violation shall not have cured the default within thirty (30) days or begun action within thirty (30) days to cure the default which shall be completed with reasonable diligence; or (b) If the Advisor shall be adjudged bankrupt or insolvent by a court of competent jurisdiction, or an order shall be made by a court of competent jurisdiction for the appointment of a receiver, liquidator or trustee of the Advisor or of all or substantially all of its property by reason of the foregoing, or approving any petition filed against the Advisor for its reorganization, and the adjudication or order shall remain in force or unstayed for a period of thirty (30) days; or (c) If the Advisor shall institute proceedings for voluntary bankruptcy or shall file a petition seeking reorganization under the federal bankruptcy laws, or for relief under any law for the relief of debtors, or shall consent to the appointment of a receiver for itself or for all or substantially all its property, or shall make a general assignment for the benefit of its creditors, or shall admit in writing its inability to pay its debts generally as they become due. The Advisor agrees that if any of the events specified in subsections (b) and (c) of this Section 20 shall occur, it will give written notice of the event to the Directors within seven (7) days after the occurrence of the event. 21. ACTION UPON TERMINATION. From and after the effective date of termination of this Agreement, pursuant to Sections 17, 19 or 20 herein, the Advisor shall not be entitled to compensation for further services performed after the date of termination, but shall be paid all compensation accruing to the date of termination, including compensation which may have been earned but deferred. The Advisor shall promptly upon termination: (a) pay over to the Company all moneys collected and held for the account of the Company pursuant to this Agreement, after deducting any accrued compensation and reimbursement for its expenses to which it is then entitled; (b) deliver to the Directors a full accounting, including a statement showing all payments collected by it and a statement of all moneys held by it, covering the period following the date of the last accounting furnished to the Directors; (c) deliver to the Directors all property and documents of the Company then in the custody of the Advisor except for copies of documents, which the Advisor may keep; and (d) cooperate with the Directors to provide an orderly management transition. 22. CHANGE OF NAME. Upon termination of this Agreement by either party, the Directors shall forthwith cause the name of the Company to be changed to a name not containing the name "Franklin" or any approximations or abbreviations of that name and sufficiently dissimilar to that name as to be unlikely to cause confusion with that name. 23. INDEMNIFICATION. The Advisor, its officers, directors, shareholders, employees, agents, subsidiaries and assigns shall be indemnified by the Company against any liability to the Company or its shareholders resulting from errors in judgment or other acts or omissions, whether or not disclosed, unless a court of competent jurisdiction determines that the liabilities or losses resulted from fraud, negligence, misconduct or other breach of fiduciary duty by that Person. 24. MISCELLANEOUS. The Advisor assumes no responsibility under this Agreement other than to perform the services called for in good faith, and shall not be responsible for any action of the Directors in following or declining to follow any advice or recommendations of the Advisor. Neither the Advisor nor its shareholders, directors, officers or employees shall be liable to the Company, the Directors, the holders of securities of the Company or to any successor or assigns of the Company except by reason of acts constituting the negligent performance of their duties. 25. NOTICES. Any notice, report or other communication required or permitted to be given hereunder shall be in writing unless some other method of giving such notice, report or other communication is accepted by the party to whom it is given, and shall be given by being delivered at the following addresses: The Directors and/or the Company: Franklin Select Realty Trust 777 Mariners Island Boulevard San Mateo, California 94403-7777 The Advisor: Franklin Properties, Inc. 777 Mariners Island Boulevard San Mateo, California 94403-7777 Either party may at any time give notice in writing to the other party of a change of its address for the purpose of this Section 25. 26. HEADINGS. The section headings have been inserted for convenience of reference only and shall not be construed to affect the meaning, construction or effect of this Agreement. 27. GOVERNING LAW. The provisions of this Agreement shall be construed and interpreted in accordance with the laws of the State of California as they apply to agreements solely among California residents to be executed and performed entirely in California. 28. EXECUTION. This instrument is executed and made on behalf of the Company by an officer who is a Director of the Company, not individually but solely as an officer pursuant to the Company's Bylaws and the obligations under this Agreement are not binding upon, nor shall resort be had to the private property of, any of the Directors, shareholders, officers, employees or agents of the Company personally, but bind only the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. COMPANY: FRANKLIN SELECT REALTY TRUST By __________________________ President ADVISOR: FRANKLIN PROPERTIES, INC. By __________________________ President EX-10.7 3 SECURED LINE OF CREDIT LOAN AGREEMENT By and Between FRANKLIN SELECT REALTY TRUST, as Borrower and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Lender Dated as of December 10, 1996 LINE OF CREDIT LOAN AGREEMENT (Secured) This Line of Credit Loan Agreement (the "Agreement") dated as of December 10, 1996, is between BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank") and FRANKLIN SELECT REALTY TRUST, a California corporation (the "Borrower"). WHEREAS, Bank has agreed to provide a line of credit to Borrower on the terms and conditions set forth herein. Subject to the terms and conditions of this Agreement, the line of credit is to be revolving and is to be secured by collateral. NOW, THEREFORE, in consideration for the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. DEFINITIONS 1.1 CERTAIN DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined; other terms are defined elsewhere in this Agreement): "ACCOUNTANTS" means Coopers & Lybrand LLP, or any other "big six" accounting firm or other firm of certified public accountants of national standing selected by Borrower and acceptable to the Bank. "AFFILIATE" means, as to any Person, (a) any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person; or (b) any Person five percent (5%) or more of the equity interest of which is held beneficially or of record by such Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, partnership or membership interests, by contract, by family relationship or otherwise. "APPRAISAL" means a written appraisal of the market value of a Real Property in its condition existing as of the date of such appraisal prepared by an independent MAI appraiser acceptable to the Bank in its sole discretion (which may be the Bank's in-house appraisal department), subject to the Bank's customary independent appraisal requirements and prepared in compliance with all Requirements of Law applicable to the Bank, including FIRREA. "APPRAISED VALUE" means, as to any Real Property, the market value of such Real Property as reflected in the then most recent Appraisal of such Real Property, as the same may have been adjusted by the Bank based upon its internal review of such Appraisal. "BANKING DAY" has the meaning given to such term in the Note. "CLOSING DATE" means the date on which all conditions precedent to the Bank's obligations set forth in Section 6 shall have been satisfied as determined by the Bank in its sole distinction. "CODE" means the Internal Revenue Code of 1986, as amended from time to time. "COLLATERAL" means, collectively, the Real Property, the Personal Property and any other real or personal property in or upon which a Lien is granted in favor of the Bank, or as to which an assignment for security purposes is made in favor of the Bank, under this Agreement, the Deeds of Trust or any other Loan Document. "COMMITMENT" means the Bank's agreement to make advances to the Borrower under the Loan in accordance with the terms and conditions of this Agreement in an aggregate outstanding amount not to exceed the Commitment Amount. "COMMITMENT AMOUNT" means Twenty-Five Million Dollars ($25,000,000). "COMPLIANCE CERTIFICATE" means a certificate in the form of EXHIBIT C to this Agreement duly completed and executed by a Responsible Officer in accordance with this Agreement. "CONTRACTUAL OBLIGATION," as applied to any Person, means any provision of any securities issued by that Person or any indenture, mortgage, deed of trust, lease, contract, undertaking, document or instrument to which that Person is a party or by which it or any of its properties is bound, or to which it or any of its properties is subject. "DEBT SERVICE" means, for any period, Interest Expense for such period PLUS all regularly scheduled principal payments due and payable during such period on all of the Borrower's Indebtedness. "DEEDS OF TRUST" means, collectively, the Deeds of Trust with Assignments of Rents, Security Agreements and Fixture Filings executed, acknowledged and delivered by the Borrower in favor of the Bank pursuant to this Agreement and encumbering the Real Property. "EBITDA" means, for any period, (a) the sum of (i) net income, (ii) depreciation and amortization expense as shown on the Borrower's financial statements, (iii) Interest Expense, (iv) taxes imposed by any jurisdiction upon the Borrower's net income, (v) losses on sales of assets and other non-recurring expenses, LESS (b) (i) interest income, (ii) dividend income, and (iii) gains on sales of assets and other non-recurring income, all as determined on a consolidated basis for the Borrower in accordance with GAAP. "EVENT OF DEFAULT" means those events so designated in Section 11 of this Agreement. "EXCESS BORROWING CONDITION" has the meaning given to such term in Section 2.5 of this Agreement. "EXTENSION OPTION" means the Borrower's right to extend the Maturity Date in accordance with the provisions of Section 8.1 of this Agreement. "FAIRWAY CENTER PROPERTY" means that certain improved real property owned by the Borrower, commonly known as 1800 East Imperial Highway, Brea, California, and more particularly described in EXHIBIT A to this Agreement. "FIRREA" means the Financial Institutions Recovery, Reform and Enforcement Act of 1989, as amended from time to time. "FUNDS FROM OPERATIONS" means, for any period, the Borrower's net income (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of property, PLUS depreciation and amortization expense, and after adjustments for unconsolidated partnerships and joint ventures, if any. (Adjustments for unconsolidated partnerships and joint ventures shall be calculated to reflect funds from operations on the same basis.) "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board, or in such other statements by such other entity as may be in general use by significant segments of the accounting profession, which are applicable to the circumstances as of the date of determination. "GOVERNMENTAL AUTHORITY" means any federal, state or local governmental or quasi-governmental agency, authority, board, bureau, commission, department, instrumentality or public body, court, administrative tribunal or public utility. "GUARANTEED OBLIGATIONS" means, as applied to any Person, any Indebtedness or other Contractual Obligation or liability, contingent or otherwise, of another Person in respect of which that Person is liable, including, without limitation, any such indebtedness, obligation or liability directly or indirectly guaranteed, endorsed (otherwise than for collection or deposit in the ordinary course of business), co-made, discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable, including in respect of any partnership in which that Person is a general partner, Contractual Obligations (contingent or otherwise) arising through any agreement to purchase, repurchase or otherwise acquire such indebtedness, obligation or liability or any security therefor, or to provide funds for the payment or discharge thereof (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain solvency, assets, level of income, or other financial condition, or to make payment other than for value received. "HAZARDOUS MATERIALS" means (a) any chemical, material or substance defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous waste", "restricted hazardous waste" or "toxic substances" or words of similar import under any applicable local, state or federal law or under the regulations adopted or publications promulgated pursuant thereto, including, without limitation, Hazardous Materials Laws; (b) any oil, petroleum, petroleum derived substance or petroleum products; any flammable substances or explosives; any radioactive materials; any hazardous wastes or substances; any toxic wastes or substances or any other similar materials or pollutants; (c) asbestos, urea formaldehyde or polychlorinated biphenyls; and (d) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any Governmental Authority or which poses a hazard to the health and safety of the owners, occupants or any other Persons occupying affected property or any property abutting any affected property. "HAZARDOUS MATERIALS LAWS" means all federal, state and local statutes, ordinances, rules and regulations relating to environmental matters, including, without limitation, those relating to fines, orders, injunctions, penalties, damages, contribution, cost recovery, compensation, losses or injuries resulting from the release of Hazardous Materials and to the generation, use, storage, transportation or disposal of Hazardous Materials, in any manner applicable to Borrowers or any of the Properties, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (49 U.S.C. ss. 9601 ET SEQ.), the Hazardous Material Transportation Act (49 U.S.C. ss. 1801 ET SEQ.), the Resource Conservation and Recovery Act (42 U.S.C. ss. 6901 ET SEQ.), the Federal Water Pollution Control Act (33 U.S.C. ss. 1251 ET SEQ.), the Clean Air Act (42 U.S.C. ss. 7401 ET SEQ.), the Toxic Substances Control Act (15 U.S.C. ss. 2601 ET SEQ.), the Occupational Safety and Health Act (29 U.S.C. ss. 651 ET SEQ.), and the Emergency Planning and Community Right-to-Know Act (42 U.S.C. ss. 11001 ET SEQ.), each as amended or supplemented, and any analogous future or present local, state and federal statutes, ordinances, rules and regulations promulgated pursuant thereto, each as in effect as of the date of determination. "IMPUTED LOAN MAXIMUM AMOUNT" means the principal amount of the loan for which the ratio of the Net Operating Income from all Real Property for the twelve (12) month period immediately preceding the Closing Date or any other date for which the Bank shall make such determination to Annual Debt Service would be equal to 1.35:1, where (a) the per annum interest rate on such loan were equal to the greater of (i) nine percent (9%) per annum, or (ii) two and fifty one-hundredths percent (2.50%) per annum, plus the interest rate as of or about the Closing Date or any other date for which the Bank shall make such determination on U.S. Treasury securities having a maturity of ten (10) years, as determined by the Bank in its sole discretion; (b) such loan provided for monthly principal and interest payments based upon an amortization of the principal amount thereof over a twenty-five (25) year period, with interest thereon at the interest rate specified in the foregoing clause (a); and (c) "Annual Debt Service" means the principal and interest payments required under such loan for a twelve (12) month period. The determination of the Imputed Loan Maximum Amount shall be made by the Bank in its sole discretion as of the Closing Date, as of each of the dates provided for in Section 9.4(f) below and upon the occurrence of a Reappraisal Event (as defined below). "INDEBTEDNESS", as applied to any Person means (a) all indebtedness, obligations or other liabilities for borrowed money, (b) all indebtedness, obligations or other liabilities evidenced by notes, bonds, debentures or other similar instruments, (c) all reimbursement obligations and other liabilities with respect to letters of credit, banker's acceptances, surety bonds or similar instruments issued for such Person's account, (d) all obligations to pay the deferred purchase price of property or services, (e) all obligations in respect of capital leases, (f) all Guaranteed Obligations, and (g) all indebtedness, obligations or other liabilities of such Person or others secured by a Lien on any asset of such Person, whether or not such indebtedness, obligations or liabilities are assumed by, or are a personal liability of, such Person (including, without limitation, the principal amount of any assessment or similar indebtedness encumbering any asset). "INTEREST EXPENSE" means, for any period, total interest expense of the Borrower calculated in accordance with GAAP. "LEASE" means any lease, rental agreement, occupancy agreement or other agreement pursuant to which any Person is provided with a right to occupy or possess all or any portion of a Real Property. "LEVERAGE" means, at any time, the ratio of (a) Total Liabilities as of such date, to (b) Total Capital as of such date. "LIBOR SPREAD" means, with respect to any amount outstanding under the Loan which bears interest at a rate based upon LIBOR, (a) if the ratio of the Commitment Amount to the aggregate Appraised Value of the Real Property as of the Closing Date shall exceed fifty percent (50%), 1.90%, and (b) if the ratio of the Commitment Amount to the aggregate Appraised Value of the Real Property as of the Closing Date shall be equal to or less than fifty percent (50%), 1.75%. "LIEN" means any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever, including without limitation any conditional sale or other title retention agreement, the interest of a lessor under a capital lease, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement or document having similar effect (other than a financing statement filed by a "true" lessor pursuant to Section 9408 of the Uniform Commercial Code) naming the owner of the asset to which such Lien relates as debtor, under the Uniform Commercial Code or other comparable law of any jurisdiction. "LOAN" means the secured revolving credit facility and, if the Borrower exercises the Term Out Option in accordance with this Agreement, term loan in the Commitment Amount which the Bank has agreed to provide to the Borrower pursuant to this Agreement. "LOAN AVAILABILITY" means, at any time, (a) the lowest of (i) the Commitment Amount, (ii) the Real Property Collateral Value, and (iii) the Imputed Loan Maximum Amount, less (b) the sum of any Termed Loan Amounts. "MAJOR LEASE" means any Lease covering twenty-five percent (25%) or more of the net rentable area of the improvements included in any Real Property. "MATERIAL ADVERSE EFFECT" means, with respect to a Person, a material adverse effect upon the condition (financial or otherwise), operations, performance or properties of such Person. The phrase "has a Material Adverse Effect" or "will result in a Material Adverse Effect" or words substantially similar thereto shall in all cases be intended to mean "has resulted, or will or could reasonably be anticipated to result, in a Material Adverse Effect", and the phrase "has no (or does not have a) Material Adverse Effect" or "will not result in a Material Adverse Effect" or words substantially similar thereto shall in all cases be intended to mean "does not or will not or could not reasonably be anticipated to result in a Material Adverse Effect". "MATURITY DATE" means December 1, 1998, as the same may be extended in accordance with this Agreement. "MINORITY INTEREST" means the interests held by other Persons and shown as minority interest on the Borrower's financial statements prepared in accordance with GAAP. "NDA AGREEMENTS" means the Non-Disturbance and Attornment Agreements to be executed by the tenants under the Required Leases as a condition to the Bank's obligations, as provided in this Agreement. "NET OPERATING INCOME" means, for any Real Property at any time, the actual cash-basis net operating income of such Real Property for the period in question, determined on a basis consistent with the operating statements provided by the Borrower to the Bank prior to the Closing Date, LESS an amount equal to three percent (3%) of gross rental revenue for such period for capital expense. "NORTHPORT PROPERTY" means the improved real property owned by the Borrower, commonly known as 4545 Cushing Road, 45635 Northport Loop East and 45865 Northport Loop East, Fremont, California, and more particularly described in EXHIBIT A attached hereto. "NOTE" means the Promissory Note (Secured by Deeds of Trust) executed and delivered by the Borrower to the Bank pursuant to this Agreement. "PERSON" means any natural person, corporation, limited partnership, general partnership, joint stock company, limited liability company, joint venture, association, company, trust, bank, trust company, land trust, business trust or other organization, whether or not a legal entity, or any Governmental Authority. "PERSONAL PROPERTY" means any tangible and intangible personal property of the Borrower in which the Bank shall be granted a Lien pursuant to the Deeds of Trust or any of the other Loan Documents. "POTENTIAL DEFAULT" means an event or condition which, with the giving of notice or the lapse of time, or both, would constitute an Event of Default if that event or condition were not cured within any applicable cure period. "REAL PROPERTY" means, collectively, the Fairway Center Property, the Northport Property and the Shores Property, all of which, if accepted by the Bank in its sole discretion, shall be subject to the Lien of a Deed of Trust granted by Borrower in favor of the Bank pursuant to this Agreement. "REAL PROPERTY COLLATERAL VALUE" means an amount equal to sixty percent (60%) multiplied by the aggregate Appraised Value of all Real Property as of the Closing Date or any other date for which the Bank shall make such determination. "REQUIRED LEASES" means each Lease for which the Bank shall require the tenant thereunder to execute an NDA Agreement as a condition to the Bank's obligations as provided in this Agreement, which Leases are listed on EXHIBIT D hereto. "REQUIREMENTS OF LAW" mean, as any Person, all statutes, ordinances, rules and regulations of any Governmental Authority applicable to such Person or its property; any development agreement, subdivision agreement, improvement agreement, loan agreement, indenture or other agreement or undertaking with a Governmental Authority to which such Person is a party or otherwise binding upon such Person; and the provisions of any license, permit or approval issued by a Governmental Authority and applicable to such Person or its properties. "RESPONSIBLE OFFICER" means (a) the chief executive officer or the president of the Borrower; (b) with respect to compliance with financial covenants, the chief financial officer of the Borrower; or (c) any other officer of the Borrower approved as a "Responsible Officer" by the Bank. "SHORES PROPERTY" means the improved real property owned by the Borrower, commonly known as 1 and 3 Twin Dolphin Drive and 100 Marine World Parkway, Redwood City, California, and more particularly described in EXHIBIT A attached hereto. "TANGIBLE NET WORTH" means, at any time, shareholders' equity, as shown on the Borrower's financial statements prepared in accordance with GAAP, MINUS intangible assets. "TERM OUT OPTION" means the Borrower's right to convert all or a portion or portions of the line of credit into a term loan in accordance with the provisions of Section 8.2 of this Agreement. "TERMED LOAN AMOUNT" means each portion of the Loan for which the Borrower shall exercise the Term Out Option in accordance with the provisions of Section 8.2 of this Agreement. "TOTAL ASSETS" means, at any time, the book value (net of any applicable reserves) of all tangible assets of the Borrower as shown on its most recent quarterly financial statements prepared in accordance with GAAP. "TOTAL CAPITAL" means, at any time, an amount equal to the sum of (a) Total Liabilities as of such date, PLUS (b) Tangible Net Worth as of such date, PLUS (c) Minority Interest as of such date. "TOTAL LIABILITIES" means (a) all liabilities of the Borrower shown on the balance sheet of the Borrower prepared in accordance with GAAP, PLUS (b) all Guaranteed Obligations and all contingent liabilities of the Borrower that would be disclosed in accordance with GAAP. "UNSECURED INDEMNITY AGREEMENT" means the Indemnity Agreement (Borrower) to be executed by the Borrower in favor of the Bank pursuant to this Agreement. "UPREIT" means any limited partnership formed by the Borrower as general partner and other Persons to own and operate the Real Property, and to which the Borrower shall have the right to transfer title to the Real Property in accordance with the provisions of Section 8.3 of this Agreement. 1.2 COMPUTATION OF TIME PERIODS. In this Agreement, in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" shall mean "to and not including." Periods of days referred to in this Agreement shall be counted in calendar days unless Banking Days are expressly prescribed. 1.3 ACCOUNTING TERMS. Any accounting terms used in this Agreement which are not specifically defined herein shall have the meanings customarily given to such terms in accordance with GAAP. 2. LINE OF CREDIT AMOUNT AND TERMS 2.1 LINE OF CREDIT AMOUNT. (a) Subject to the terms and conditions contained in this Agreement, the Bank hereby agrees to make advances under the Loan to the Borrower from time to time during the Availability Period (as defined below) in an aggregate principal amount not to exceed at any time the Loan Availability. (b) Except as otherwise provided in this Agreement, the Loan is a revolving line of credit. During the Availability Period, subject to the provisions of this Agreement and the other Loan Documents (as defined below), the Borrower may from time to time repay principal amounts and reborrow such principal amounts. (c) Each advance must be for at least One Million Dollars ($1,000,000), or for the amount of the remaining available under the line of credit, if less. 2.2 AVAILABILITY PERIOD. The line of credit is available (the "Availability Period") between the Closing Date and the Maturity Date. The Bank shall have no obligation to make advances under the line of credit following the occurrence and during the continuance of an Event of Default or Potential Default. 2.3 INTEREST RATE. Borrower is executing the Note in the Commitment Amount evidencing the Loan and payable to the Bank. The Note sets forth the interest rates, the payment terms and certain other terms and conditions applicable to the Loan. 2.4 LOAN DOCUMENTS. The "Loan Documents" are the documents indicated below, each dated as of the date of this Agreement unless indicated otherwise. A capitalized term used in this Agreement but not defined herein has the meaning given in the other Loan Documents. (a) This Agreement; (b) The Note; (c) The Deeds of Trust; (d) State of California Uniform Commercial Code Financing Statement Form UCC-1, executed by Borrower as debtor; (e) Unsecured Indemnity Agreement; (f) NDA Agreements executed by the tenants under the Required Leases; and (g) Corporate Resolution to borrow certified by the Corporate Secretary of the Borrower. The Corporate Resolution shall also contain a Certificate of Incumbency for the authorized signing officers, containing their specimen signatures and certified by the Corporate Secretary. 2.5 EXCESS BORROWING CONDITION. The Borrower agrees not to permit the outstanding principal balance of the Loan to exceed the lowest of (i) the Commitment Amount, (ii) the Real Property Collateral Value or (iii) the Imputed Loan Maximum Amount. If at any time and for any reason the outstanding principal balance of the Loan shall exceed such amount ("Excess Borrowing Condition"), the Borrower shall cause such Excess Borrowing Condition to be eliminated not later than three (3) days following the date of written notice thereof from the Bank to the Borrower, by repaying to the Bank an amount on account of the Loan sufficient to eliminate such Excess Borrowing Condition. The failure by the Borrower to do so shall constitute an Event of Default without further notice or opportunity to cure hereunder. No further advances under the line of credit shall be permitted so long as such Excess Borrowing Condition shall continue to exist. Nothing contained in this section shall excuse the Borrower's compliance with all terms, conditions, covenants and other obligations imposed upon the Borrower under this Agreement or the other Loan Documents during the period of any Excess Borrowing Condition, nor in any manner condition or impair the Bank's rights with respect to any such breach thereof by the Borrower. 3. FEES, EXPENSES 3.1 FEES. (a) COMMITMENT FEE. The Borrower agrees to pay to the Bank a fee equal to 0.5% of the Commitment Amount, payable in advance. This fee is due on the Closing Date and shall be nonrefundable. (b) UNUSED COMMITMENT FEE. The Borrower agrees to pay to the Bank a fee on any difference between the Commitment Amount and the amount of credit it actually uses, determined by the weighted average Loan balance maintained during the specified period. The fee will be calculated at 0.25% per year. This fee is due quarterly in arrears and on the date of the expiration of the Availability Period. 3.2 EXPENSES AND COSTS. (a) Borrower shall pay all reasonable costs and expenses incurred by Bank in connection with the making, disbursement and administration of the Loan, and in the exercise of any of Bank's rights or remedies under the Loan Documents. Such costs and expenses include title insurance, recording and escrow charges, fees for Appraisals, environmental services, legal fees and expenses of Bank's counsel and any other reasonable fees and costs for services, regardless of whether such services are furnished by Bank's employees or by independent contractors. Borrower acknowledges that the fees payable to Bank as provided above do not include amounts payable by Borrower under this Section 3.2. (b) The Borrower agrees to indemnify the Bank from and hold it harmless against any transfer taxes, documentary and mortgage taxes, assessments or charges imposed by any governmental authority by reason of the execution, delivery and performance of the Loan Documents, the Loan and security therefor. Borrower's obligations under this Section 3.2 shall survive payment of the Loan and assignment of any rights hereunder. 4. REAL PROPERTY VALUE 4.1 ACCEPTANCE, DETERMINATIONS. (a) The decision of whether or not the Bank will accept any Real Property as Collateral shall be made by the Bank in its sole discretion. The Borrower shall have the right from time to time to propose additional real property as collateral for the Loan. The decision of whether to accept such additional real property, and, if the Bank decides to accept such additional real property, the terms and conditions of the Bank's acceptance, shall be made by the Bank in its sole discretion. (b) All other determinations to be made with respect to the Real Property, including, without limitation, the determinations of the Real Property Collateral Value, the Imputed Loan Maximum Amount, the Appraised Values and the LIBOR Spread, shall be made by the Bank in its sole discretion. Without limiting the foregoing, the Real Property Collateral Value as of the Closing Date or any other date shall be established on the basis of the Appraised Value of the Real Property as of such date, as determined by the Bank in its sole discretion. 4.2 ADDITIONAL VALUE DETERMINATIONS. (a) In addition to the Bank's determination of the Appraised Value of the Real Property as of the Closing Date as provided above, the Bank shall have the right to redetermine the Appraised Value of the Real Property on the basis of new Appraisals of the Real Property or any portion thereof obtained by the Bank under each of the following circumstances: (i) upon any exercise by Borrower of the Term Out Option, if the value date used in any of the most recent Appraisals of the Real Property is more than twelve (12) months prior to such date; (ii) upon the Borrower's exercise of the Extension Option, if the value date used in any of the most recent Appraisals of the Real Property is more than twelve (12) months prior to such date; (iii) if necessary in order to enable the Bank to comply with any Requirements of Law applicable to the Bank, including, without limitation, FIRREA; or (iv) upon the occurrence of a Reappraisal Event (as defined below), provided that in such event, the Bank shall have the right to obtain new Appraisals only on (A) the Real Property subject to the Reappraisal Event, and (B) any other Real Property if the value date used in the most recent Appraisal of such Real Property is more than twelve (12) months prior to the date the Bank receives written notice of the Reappraisal Event. (b) Subject to subparagraph (c) below, upon the Bank's redetermination of the Appraised Value of the Real Property under subparagraph (a) above, the Loan Availability shall be adjusted, if necessary, on the basis of the resulting Real Property Collateral Value. If any change in the Real Property Collateral Value shall cause the occurrence of an Excess Borrowing Condition, the Borrower shall cause such excess Borrowing Condition to be eliminated as provided in Section 2.5 above. (c) Upon the occurrence of a Reappraisal Event with respect to any Real Property, if the Bank shall require that the Appraised Value of such Real Property and/or any other Real Property be redetermined under subparagraph (a) above, and if the Bank shall be prevented from causing such Appraised Value to be redetermined within forty-five (45) days following the Bank's notice thereof to the Borrower through no fault of the Bank, then effective as of the expiration of such 45-day period and until the date on which such Appraised Value shall have been redetermined by the Bank in its sole discretion, (i) for purposes of the Real Property Collateral Value, the Real Property subject to the Reappraisal Event shall have an Appraised Value of zero, and (ii) for purposes of the Imputed Loan Maximum Amount, the Net Operating Income from the Real Property subject to the Reappraisal Event shall not be included. The Bank shall redetermine the Real Property Collateral Value and the Imputed Loan Maximum Amount as of the date of such notice by the Bank to the Borrower, and the Loan Availability shall be adjusted, if necessary, to account for any change in the Real Property Collateral Value and/or the Imputed Loan Maximum Amount. The Borrower shall continue to have the right to request advances under the Loan following a Reappraisal Event, subject to the adjusted Loan Availability. If any change in the Real Property Collateral Value and/or Imputed Loan Maximum Amount shall cause the occurrence of an Excess Borrowing Condition, the Borrower shall cause such Excess Borrowing Condition to be eliminated as provided in Section 2.5 above. Upon the Bank's redetermination of the Appraised Value of the Real Property subject to the Reappraisal Event and, if applicable, other Real Property under subparagraph (a) above, the Bank shall also redetermine the Real Property Collateral Value by using the new Appraised Value, and the Imputed Loan Maximum Amount by including the Net Operating Income from the Real Property subject to the Reappraisal Event. The Loan Availability shall then be adjusted again, if necessary, and the Borrower shall be entitled to request advances under the Loan, subject to the adjusted Loan Availability. (d) Upon the occurrence of a Reappraisal Event, the Borrower may propose to provide the Bank with other real property or other collateral ("Replacement Collateral") for the Loan in replacement of the Real Property subject to such Reappraisal Event. Any such Replacement Collateral shall be acceptable to the Bank in its sole discretion, and the Bank's acceptance thereof shall be subject to a satisfactory Appraisal and such other conditions as the Bank may require, including, without limitation, that the Bank receive a first priority Lien on such Replacement Collateral as security for the Loan. (e) For the purposes of this Agreement, "Reappraisal Event" shall mean the occurrence of any one of the following events or circumstances with respect to any Real Property: (i) a major casualty or a taking in condemnation or under threat of condemnation; (ii) a tenant under a Major Lease shall become insolvent or shall otherwise default under its Lease; or (iii) the discovery of Hazardous Materials in, on, under or about the Real Property or the soils or groundwaters thereof, and the Bank's determination, in its sole discretion, that the costs of investigation, characterization, remediation and/or monitoring of such Hazardous Materials in compliance with Hazardous Materials Laws would equal or exceed twenty-five percent (25%) of the then-current Appraised Value of such Real Property. 5. DISBURSEMENTS, PAYMENTS, COSTS 5.1 REQUESTS FOR CREDIT. (a) BORROWING NOTICE. Each request by the Borrower for an advance under the line of credit shall be made by irrevocable written notice of Borrower (including notice via facsimile confirmed by a mailed copy) pursuant to a Borrowing Notice in the form attached hereto as EXHIBIT B as follows: (i) Each Borrowing Notice shall contain a certification from a Responsible Officer or an authorized representative of the Borrower that (A) no Event of Default or Potential Default, after giving effect to the requested borrowing, will exist, (B) the aggregate outstanding balance of the line of credit after giving effect to the requested borrowing will not exceed the Loan Availability, and (C) the proceeds from the requested borrowing will be used only for purposes permitted under the Agreement. The truth and accuracy of the certification made in the Borrowing Notice shall be a condition precedent to Bank's obligation to make to the Borrower the advance requested thereunder. (ii) Each Borrowing Notice shall be submitted to and received by Bank prior to 9:00 a.m. (California time) on the Banking Day specified as the borrowing date. (iii) The Borrower hereby authorizes the Responsible Officers whose names and specimen signatures are set forth below to execute and deliver to the Bank Borrowing Notices in accordance with this Agreement: Responsible Officers AUTHORIZED REPRESENTATIVES SPECIMEN SIGNATURES David P. Goss _____________________________ Mark A. TenBoer _____________________________ (b) ADDITIONAL CONDITIONS TO DISBURSEMENT. Each advance by the Bank under the line of credit, including the first one, shall be conditioned upon the Bank's receipt of such additional documents and information as the Bank may require, in form and content satisfactory to Bank. 5.2 DISBURSEMENT AND PAYMENT RECORDS. Each disbursement by the Bank and each payment by the Borrower will be evidenced by records kept by the Bank. 5.3 AUTHORIZATION. (a) The Bank may honor telefax or mailed instructions for advances or repayments (or for the designation of any optional interest rates that may be permitted by the Note) given by any one of the individuals authorized to sign Loan Documents on behalf of the Borrower, or any other individual designated by any one of such authorized signers. (b) Advances will be deposited in and repayments will be withdrawn from the Borrower's account number 14220-01705 ("Account"), or such other of the Borrower's accounts with the Bank as designated in writing by the Borrower. (c) The Borrower indemnifies and releases the Bank (including its officers, employees, and agents) from all liability, loss, costs, claims and damages in connection with any act resulting from any instructions Bank reasonably believes are made by any individual authorized by the Borrower to give such instructions. This indemnity and release shall survive this Agreement's termination. 5.4 DIRECT DEBIT TO LINE OF CREDIT. (a) The Borrower agrees that the Bank may create advances under the line of credit to pay interest and any fees that are due under the Loan Documents. (b) The Bank will create such advances on the dates the payments become due. If a due date does not fall on a Banking Day, the Bank will create the advance on the first Banking Day following the due date. (c) If the creation of an advance under the line of credit causes an Excess Borrowing Condition, the Borrower shall immediately cause the Excess Borrowing Condition to be eliminated. 5.5 PAYMENTS. Borrower hereby authorizes and requests Bank to use Loan funds to pay Loan fees owing to Bank, interest on the Loan, legal fees and expenses of Bank's attorneys which are payable by Borrower, and such other sums as may be owing from time to time by notice to or authorization by Borrower. Bank at its option may make any such payment on Borrower's behalf by debiting the Loan itself. Alternatively, Bank may disburse all or part of the payment amount into the Account, and then may either debit the Account or invoice Borrower in the amount of the payment. In the event such disbursement under the line of credit causes an Excess Borrowing Condition, the Borrower shall immediately cause the Excess Borrowing Condition to be eliminated. 5.6 BANKING DAYS. All payments and disbursements which would be due on a day which is not a Banking Day will be due on the next Banking Day. All payments received on a day which is not a Banking Day will be applied to the Loan on the next Banking Day. 6. CONDITIONS The Bank's obligations under this Agreement are subject to the Bank's receipt, on or before December 15, 1996, of the following items, in form and content acceptable to the Bank in its sole discretion, and the satisfaction as of such date, of the following additional conditions precedent: 6.1 AUTHORIZATIONS. The Bank shall have received evidence that the execution, delivery and performance by the Borrower of the Loan Documents have been duly authorized. 6.2 GOVERNING DOCUMENTS; GOOD STANDING CERTIFICATES.ERTIFICATES The Bank shall have received a copy of the Borrower's articles of incorporation, together with a certificate of good standing for the Borrower from the state where formed and from any other state in which the Borrower is required to qualify to conduct its business. 6.3 LOAN DOCUMENTS. The Bank shall have received duly executed Loan Documents. 6.4 EVIDENCE OF PRIORITY; TITLE INSURANCE. (a) The Bank shall have received evidence that the Liens in favor of the Bank under the Loan Documents are valid, enforceable, and prior to all others' rights and interests, except those the Bank consents to in writing, including those shown in the Title Policies (as defined below). (b) The Bank shall have received 1970 ALTA extended coverage lender's title insurance policies in form and issued by a title company satisfactory to Bank in the Commitment Amount ("Title Policies"), showing Borrower as the owner of the fee estate in and to the Real Property, and insuring the Bank that the Deeds of Trust constitute first priority Liens on the Real Property, subject to no exceptions except as otherwise approved by Bank in writing, with such endorsements as may be required by Bank; and (c) The Bank shall have received an ALTA survey of the Real Property meeting Bank's customary requirements. 6.5 INSURANCE. The Bank shall have received evidence of insurance coverage required by the Loan Documents. 6.6 ENVIRONMENTAL QUESTIONNAIRE. The Bank shall have received a completed Bank form Environmental Questionnaire and Disclosure Statement, together with an environmental site assessment of the Real Property, acceptable to Bank, concerning any potential toxic or hazardous conditions. 6.7 APPRAISAL. The Bank shall have completed Appraisals of the Real Property, which Appraisals shall be satisfactory in all respects to Bank. 6.8 PAYMENT OF FEES. The Bank shall have received payment of all accrued and unpaid fees and expenses payable to the Bank as provided for by the Loan Documents. 6.9 ENGINEERING. The Bank shall have received structural reports on all Real Property. 6.10 CREDIT. The Bank shall have satisfactorily completed its credit approval process on the Borrower. 6.11 OTHER ITEMS. The Bank shall have received any other documents and other items Bank may reasonably require as conditions precedent to this Agreement. 6.12 NO DEFAULT. No Event of Default or Potential Default shall exist. 6.13 MATERIAL ADVERSE CHANGES. No change in the Borrower or any Real Property shall have occurred which has a Material Adverse Effect, as determined by the Bank. 6.14 REPRESENTATIONS AND WARRANTIES. All representations and warranties of the Borrower contained in this Agreement or the other Loan Documents shall be true and correct. 6.15 LEASES. The Bank shall have reviewed and approved all Leases. 7. REPRESENTATIONS AND WARRANTIES When the Borrower signs this Agreement, and until all indebtedness and obligations of the Borrower under the Loan Documents shall be fully satisfied, the Borrower makes the following representations and warranties to the Bank. Each request by the Borrower for an advance under the line of credit constitutes a renewed representation and warranty. 7.1 ORGANIZATION OF BORROWER; GOOD STANDING. The Borrower is a corporation duly formed and validly existing under the laws of the State of California. In each state in which the Borrower does business, it is properly licensed, in good standing, and, where required, in compliance with any fictitious name statute. 7.2 AUTHORIZATION; ENFORCEABLE AGREEMENT. This Agreement and the other Loan Documents are within the Borrower's powers, have been duly authorized, and do not conflict with any of its organizational documents. The Loan Documents do not conflict with any law, agreement, or obligation by which the Borrower is bound. This Agreement is a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, and any instrument or document required hereunder, when executed and delivered, will be similarly legal, valid, binding and enforceable, subject in each case to bankruptcy, insolvency, reorganization, arrangement, moratorium and other loans of general applicability relating to or affecting creditor's rights and to general principles of equity. 7.3 FINANCIAL INFORMATION. (a) The Form 10-Q Quarterly Report filed by the Borrower with the Securities and Exchange Commission for the period ending September 30, 1996, and the Form 8-K Current Report filed by the Borrower with the Securities and Exchange Commission for the period ending October 31, 1996, copies of which have been delivered by the Borrower to the Bank, and all other financial statements and data submitted in writing by the Borrower to the Bank in connection with the Borrower's request for the Loan, are true, correct and complete, and all such financial information presents fairly the financial condition of the Borrower as of the date thereof and the results of the operations of the Borrower for the period covered thereby, and has been prepared in accordance with GAAP on a basis consistently applied. The Borrower has no knowledge of any material liabilities, contingent or otherwise, at said date not reflected in said financial information and the Borrower has not entered into any material commitments or material contracts which are not reflected in said financial information which may have a Material Adverse Effect on the Borrower. Since said date there have been no material changes in the assets or liabilities or financial condition of the Borrower other than changes in the ordinary course of business, and no such changes have been materially adverse changes. (b) All financial and other information that has been or will be supplied to the Bank, including the financial statements of the Borrower: (i) is sufficiently complete to give the Bank accurate knowledge of the subject's financial condition; (ii) is in form and content as required by the Bank; (iii) is in compliance with any government regulations that apply; and (iv) does not fail to state any material facts necessary to make the information contained therein not misleading. All such information was and will be prepared in accordance with GAAP, unless otherwise noted. 7.4 LAWSUITS. There is no lawsuit, arbitration, claim or other dispute pending or threatened against the Borrower which, if lost, would materially impair the Borrower's financial condition or ability to repay the Loan, except as has been previously disclosed in writing to the Bank. 7.5 TITLE TO ASSETS. The Borrower has good and clear title to its assets, and the same are not subject to any Liens other than those permitted by Bank in writing, including those shown in the Title Policies. 7.6 COLLATERAL. All Collateral required by this Agreement is owned by the grantor of the security interest free of any title defects or any Liens or interests of others, except as may have been permitted by the Bank in writing. 7.7 PERMITS, FRANCHISES. The Borrower possesses all permits, franchises, contracts and licenses required and all trademark rights, trade name rights, and fictitious name rights necessary to enable it to conduct the business in which it is now engaged, the failure by the Borrower to possess which would have a Material Adverse Effect upon the Borrower or its business. 7.8 INCOME TAX RETURNS. The Borrower has filed all tax returns and reports required to be filed and has paid all applicable federal, state and local franchise, income and property taxes which are due and payable. The Borrower has no knowledge of any pending assessments or adjustments of its income taxes or property taxes for any year, except as have been disclosed in writing to the Bank. Borrower is not a "foreign person" within the meaning of Section 1445(f)(3) of the Code. 7.9 ERISA PLANS. (a) As used herein, (i) "ERISA" means the Employee Retirement Income Act of 1974, as amended; (ii) "PBGC" means the Pension Benefit Guaranty Corporation established pursuant to ERISA; and (iii) "Plan" means any employee pension benefit plan maintained or contributed to by the Borrower and insured by the PBGC. (b) The Borrower has fulfilled its obligations, if any, under the minimum funding standards of ERISA and the Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and has not incurred any liability with respect to any Plan under Title IV of ERISA. (c) No reportable event has occurred under Section 4043(b) of ERISA for which the PBGC requires 30 day notice. No action by the Borrower to terminate or withdraw from any Plan has been taken and no notice of intent to terminate a Plan has been filed under Section 4041 of ERISA. No proceeding has been commenced with respect to a Plan under Section 4042 of ERISA, and no event has occurred or condition exists which might constitute grounds for the commencement of such a proceeding. 7.10 OTHER OBLIGATIONS. The Borrower is not in default on any material Indebtedness or Contractual Obligation of the Borrower. 7.11 NO EVENT OF DEFAULT. There is no Event of Default or Potential Default under the Loan Documents. 7.12 LOCATION OF BORROWER. The Borrower's place of business (or, if the Borrower has more than one place of business, its chief executive office) is located at the address listed under the Borrower's signature on this Agreement. 7.13 STATUS AS A REIT. The Borrower (i) is a real estate investment trust as defined in Section 856 of the Code (or any successor provision thereto), (ii) has not revoked its election to be a real estate investment trust, (iii) has not engaged in any "prohibited transactions" as defined in Section 856(b)(6)(iii) of the Code (or any successor provision thereto), and (iv) for its current "tax year" (as defined in the Code) is and for all prior tax years subsequent to its election to be a real estate investment trust has been entitled to a dividends paid deduction which meets the requirements of Section 857 of the Code. 8. BORROWER OPTIONS 8.1 EXTENSION OPTION. Provided that no Event of Default or Potential Default shall have occurred at any time prior to the Borrower's attempted exercise of such right, the Borrower shall have the right to extend ("Extension Option") the term of the Loan and the Availability Period from the Maturity Date to the date twelve (12) months following the Maturity Date ("Extended Maturity Date"), provided that each of the following conditions shall have been satisfied: (a) The Borrower shall provide the Bank with written notice of the Borrower's request to exercise the Extension Option not more than ninety (90) days or less than thirty (30) days prior to the Maturity Date; (b) On or before the Maturity Date, the Borrower shall pay to the Bank an extension fee in immediately available funds in the amount of .25% of the Commitment Amount; (c) No Event of Default or Potential Default shall exist as of the Maturity Date; (d) The Borrower shall execute all documents reasonably required by the Bank in order to exercise the Extension Option, and shall deliver to the Bank, such title insurance endorsements as the Bank shall require; (e) There shall have occurred no change since the Closing Date, as determined by the Bank in its sole discretion, which could have a Material Adverse Effect on the Borrower or any Real Property; and (f) If the Bank, in its sole discretion, shall require, the Bank shall have obtained new Appraisals of the Real Property in accordance with Section 4.2(a)(ii) above, the Loan Availability shall be adjusted by reason thereof, and the outstanding principal balance of the line of credit as of the Maturity Date shall not exceed the adjusted Loan Availability. 8.2 TERM OUT OPTION. (a) Provided that no Event of Default or Potential Default shall have occurred on more than one occasion at any time prior to the Borrower's attempted exercise of such right, and at any time during the initial term of the Loan, the Borrower shall have the right, exercisable on not more than three (3) occasions ("Term Out Option"), to borrow all or a portion of the amount remaining available for disbursement under the line of credit at such time as, and/or to convert all or a portion of the amount outstanding under the line of credit at such time into, a term loan on the terms and conditions hereinafter provided for. Each amount so borrowed and/or converted by the Borrower is referred to herein as a "Termed Loan Amount." (b) If the Borrower shall desire to exercise the Term Out Option, the Borrower shall give written notice thereof to the Bank. The Borrower shall not be entitled to exercise the Term Out Option as to a principal amount of less than Five Million Dollars ($5,000,000). The term of any Termed Loan Amount shall expire on the Banking Day selected by the Borrower in its notice of exercise of the Term Out Option, which shall be a day on or before five (5) years following the date of such notice. If the Borrower shall validly exercise the Term Out Option, and subject to the satisfaction of the conditions provided for in subparagraph (d) below, the Borrower's borrowing as, and/or conversion of, all or a portion of the Loan into a Termed Loan Amount shall become effective on the Banking Day as of which such conditions shall have been satisfied, as confirmed by the Bank to the Borrower in writing. (c) Each Termed Loan Amount shall bear interest at the per annum interest rates applicable to the Loan as provided in the Note. The Borrower shall pay to the Bank the principal amount of a Termed Loan Amount, and all accrued interest thereon in monthly installments of principal and interest. The principal portion of such monthly installments shall be based upon an amortization of the Termed Loan Amount over a twenty-five (25) year period, with interest thereon at a per annum rate of nine percent (9%); and the interest portion of such monthly installments shall be equal to all accrued and unpaid interest on the outstanding principal balance of the Termed Loan Amount (and not the interest portion of each installment set forth in the foregoing amortization schedule). Such monthly installments shall be payable at the times and in the manner provided for in the Note for monthly interest payments under the line of credit. Subject to the Bank's rights to accelerate the Loan as provided in the Loan Documents, each Termed Loan Amount shall mature on the date for such Termed Loan Amount provided for in subparagraph (b) above, notwithstanding the fact that the Maturity Date may occur on an earlier date. The Loan Availability, and the portion of the Loan made available to the Borrower on a revolving credit basis, shall be reduced by an amount equal to each Termed Loan Amount. If at any time, the sum of the outstanding principal amounts of the Termed Loan Amounts and the amount outstanding under the line of credit shall exceed the lowest of (i) the Commitment Amount, (ii) the Real Property Collateral value, and (iii) the Imputed Loan Maximum Amount, such occurrence shall be an Excess Borrowing Condition, and the Borrower shall cause such Excess Borrowing Condition to be eliminated as provided in Section 2.5 above. (d) The Borrower's right to exercise the Term Out Option shall be subject to the satisfaction of the following conditions: (i) concurrently with the Borrower's delivery of each notice of exercise of the Term Out Option, the Borrower shall pay to the Bank a fee in immediately available funds in the amount of .50% of such Termed Loan Amount; (ii) no Event of Default or Potential Default shall exist as of the effective date of the borrowing and/or conversion of such Termed Loan Amount as provided in subparagraph (b); (iii) the Borrower shall execute all documents reasonably required by the Bank in order to exercise the Term Out Option, and shall deliver to the Bank, at the Borrower's sole cost and expense, such title insurance endorsements as the Bank shall require; (iv) there shall have occurred no change since the Closing Date, as determined by the Bank in its sole discretion, which could have a Material Adverse Effect on the Borrower or any Real Property; and (v) if the Bank, in its sole discretion, shall require, the Bank shall have obtained new Appraisals of the Real Property in accordance with Section 4.2(a)(i) above, the Loan Availability shall be adjusted by reason thereof and the outstanding principal balance of the Loan shall not exceed the lowest of (a) the Commitment Amount; (b) the Real Property Collateral Value; or (c) the Imported Loan Maximum Amount (taking into account such Termed Loan Amount). 8.3 UPREIT TRANSFER.IT TRANSFER Notwithstanding anything to the contrary contained in the Loan Documents, including the Deeds of Trust, the Borrower shall have the right to transfer title to the Real Property to the UPREIT ("UPREIT Transfer"), and the Bank shall not accelerate the Maturity Date or other date for payment in full of the Loan by reason thereof, provided that each of the following conditions shall have been satisfied: (a) The Borrower shall provide the Bank with written notice of the Borrower's intent to make the UPREIT Transfer not less than forty-five (45) days prior to the intended effective date thereof; (b) The Bank shall have reviewed and approved the organizational documents for the UPREIT, and shall have received such certificates, authorizations and legal opinions with respect to the UPREIT as the Bank shall require; (c) The Borrower and the UPREIT shall execute all documents reasonably required by the Bank in connection with the UPREIT Transfer, including, without limitation, assumption agreements and guarantees, and shall deliver to the Bank, at the Borrower's sole cost and expense, such title endorsements as the Bank shall require; and (d) There shall have occurred no change since the Closing Date, as determined by the Bank in its sole discretion, which could have a Material Adverse Effect on the Borrower or any Real Property. 9. COVENANTS The Borrower agrees that, until all indebtedness and obligations of Borrower under the Loan Documents shall be fully satisfied: 9.1 USE OF PROCEEDS. The Borrower shall use the proceeds of the advances made by the Bank under the Loan primarily for the acquisition of and investment in commercial real properties, and for general working capital purposes. 9.2 FINANCIAL INFORMATION. The Borrower shall provide to the Bank the following financial information and statements and such additional information as requested by the Bank from time to time: (a) As soon as available but not later than 90 days after the Borrower's fiscal year end, the Borrower's annual financial statements including balance sheet, income statement, statement of stockholders' equity and source and use of funds statement. These financial statements must be audited (with an unqualified opinion) by the Accountants. The statements shall be prepared on a consolidated basis in accordance with GAAP. (b) As soon as available but not later than 60 days after the period's end, the Borrower's quarterly financial statements, including balance sheet, income statement, statement of stockholders' equity and source and use of funds statement. These financial statements may be Borrower prepared and must be certified by a Responsible Officer. The statements shall be prepared on a consolidated basis in accordance with GAAP. (c) As soon as available but not later than 90 days after the Borrower's fiscal year end, cash flow statement projections for Borrower for the succeeding fiscal year, detailing expected sources and uses of cash for such fiscal year; (d) As soon as available but not later than 60 days after the end of each fiscal quarter, operating statements which detail operating results on a month-by-month basis for the Real Property for the twelve (12) month period ending as of the end of such quarter; rent rolls; and lease status reports for each Real Property, prepared in the Borrower's customary forms or another form required by the Bank. (e) Copies of the Borrower's Form 10-K Annual Report, Form 10-Q Quarterly Report, Form 8-K Current Report and all other filings by the Borrower with the Securities and Exchange Commission, within 15 days after the date of filing. (f) At the time of the delivery of the financial statements provided for in Sections 9.2(a) and (b), a Compliance Certificate executed by a Responsible Officer of the Borrower certifying (i) compliance with all of Borrower's financial covenants contained herein, including appropriate supporting schedules, (ii) that no Event of Default or Potential Default has occurred and is continuing, if any Event of Default or Potential Default has occurred and is continuing, specifying the nature and extent thereof, (iii) that the Borrower is not in default with respect to any other Indebtedness, or if the Borrower is so in default, specifying the nature and extent thereof, (iv) as to the amount and nature of any contingent liabilities to which the Borrower has become subject since the date of the last Compliance Certificate, and (v) that the outstanding principal amount of the Loan as of the date thereof does not exceed Loan Availability. Notwithstanding anything to the contrary contained herein and without limiting the Bank's other rights and remedies, if any Compliance Certificate required under this Section 9.2 is not provided on or before the due date therefor, the Borrower shall be prohibited from any further borrowing under the line of credit until such Compliance Certificate is provided. (g) Such other financial and/or operating reports and other information on the Borrower or any Real Property as the Bank shall reasonably request from time to time. 9.3 OTHER INFORMATION. The Borrower shall also provide to the Bank: (a) Promptly (and in any event within 48 hours) after the Borrower first has knowledge of (i) its failing to continue to qualify as a real estate investment trust as defined in Section 856 of the Code (or any successor provision thereof), (ii) any act by the Borrower causing its election to be taxed as a real estate investment trust to be terminated, (iii) any act causing the Borrower to be subject to the taxes imposed by Section 857(b)(6) of the Code (or any successor provision thereto), or (iv) the Borrower failing to be entitled to a dividends paid deduction which meets the requirements of Section 857 of the Code, a written notice of any such occurrence or circumstance. (b) Such additional information as the Bank may reasonably request from time to time. (c) Such information as the Bank may request regarding the Collateral as provided in Article 10 herein. 9.4 FINANCIAL COVENANTS. (a) TANGIBLE NET WORTH. The Borrower shall at all times maintain a Tangible Net Worth equal to at least Ninety Million Dollars ($90,000,000). (b) EBITDA TO DEBT SERVICE. The Borrower shall at all times maintain a ratio of EBITDA to Debt Service of at least 2:1. This ratio shall be calculated in each of Borrower's fiscal years throughout the term of the Loan as follows: at the end of the first fiscal quarter, using the results of that fiscal quarter; at the end of the second fiscal quarter, using the results of the first two fiscal quarters; at the end of the third fiscal quarter, using the results of the first three fiscal quarters; and at each fiscal year end, using the results of such fiscal year. (c) LEVERAGE. The Borrower shall at all times maintain Leverage of not greater than .50:1.0. (d) DISTRIBUTIONS. (i) Subject to subparagraph (ii) below, aggregate distributions to shareholders of the Borrower as of the end of each fiscal quarter and as of the end of each fiscal year shall not exceed ninety-eight percent (98%) of Funds From Operations for each such period. For purposes of this Section 9.4(d), the term "distributions" shall mean and include all dividends and other distributions to, and the repurchase of shares from, the holder of any equity interests in the Borrower. (ii) No distributions shall be made during the continuance of any Event of Default arising out of the Borrower's failure to pay any monetary obligation when due under any Loan Document (a "Monetary Default"). In the event of any other Event of Default, Borrower shall be entitled to make the regularly scheduled distributions for the fiscal quarter in which such Event of Default shall occur, not to exceed the amount permitted under subparagraph (i) above. For the following fiscal quarter and each fiscal quarter thereafter until any such other Event of Default shall have been cured, the distributions shall not exceed the minimum amount that the Borrower must distribute to its shareholders in order to maintain compliance with Section 9.16 below; provided, however, that if any such other Event of Default shall remain uncured or shall not be waived by the Bank for more than 100 days, as of such date and continuing thereafter, the Borrower shall not be entitled to make any further distributions. (e) DEVELOPMENT. Unless the Borrower shall have obtained the Bank's prior written approval therefor, at no time shall Development Costs (as defined below) exceed an amount equal to ten percent (10%) of the Borrower's cost basis in the Real Property and any other real estate assets owed by the Borrower (meaning the value at which Borrower carries the Real Property and other real estate assets of Borrower on its books in accordance with GAAP, without the effect of any accumulated depreciation). For the purposes of this Agreement, "Development Costs" shall mean the aggregate of all costs and expenses incurred and/or reasonably projected by the Borrower to be incurred by the Borrower in the acquisition of unimproved real property or the development of unimproved or improved real property. For the purposes of this section, "unimproved real property" shall mean any real property other than real property improved with commercial improvements for which a certificate of occupancy or its equivalent has been issued by the applicable Governmental Authority. Without limiting the foregoing, the Borrower shall not acquire or invest in any real property, and shall not commence the construction or development of any improvements on any real property, if the Development Costs relating thereto would cause the limitation established by this section to be exceeded. (f) DEBT COVERAGE RATIO OF PROPERTY. The Imputed Loan Maximum Amount shall be redetermined by the Bank as of the end of each fiscal quarter on the basis of the Net Operating Income from all of the Real Property for the twelve (12) month period ending as of the end of such fiscal quarter, and the Annual Debt Service shall be calculated as of the end of each such fiscal quarter in the manner provided in the definition of "Imputed Loan Maximums Amount" provided in Section 1.1 above. Upon the Bank's redetermination of the Imputed Loan Maximum Amount as of the end of each fiscal quarter, the Loan Availability shall be adjusted, if necessary, on the basis thereof. If any such adjustment shall cause the occurrence of an Excess Borrowing Condition, the Borrower shall cause such Excess Borrowing Condition to be eliminated as provided in Section 2.5 above. (g) CALCULATION. Each of the foregoing ratios and financial requirements shall be calculated as of the last day of each fiscal quarter, but shall be satisfied by the Borrower at all times. 9.5 TAXES AND OTHER LIABILITIES. The Borrower shall pay and discharge, before the same become delinquent and before penalties accrue thereon, all taxes, assessments and governmental charges upon or against it or any of its properties, and all its other liabilities at any time existing, except to the extent and so long as: (a) The same are being contested in good faith and by appropriate proceedings in such manner as not to cause any Material Adverse Effect on Borrower or any Real Property or the loss of any right of redemption from any sale thereunder; and (b) Borrower shall have set aside on its books reserves (segregated to the extent required by GAAP) adequate with respect thereto. 9.6 OTHER LIENS. The Borrower shall not create, assume, or allow any Lien (including judicial Liens) on the Real Property, except: (a) Deeds of trust and security agreements in favor of the Bank; (b) Liens for property taxes not yet due; or (c) Liens outstanding on the date of this Agreement and previously disclosed in writing to and permitted by the Bank, including those shown in the Title Polices. If at any time any Lien other than those referred to above shall be imposed upon or otherwise affect any Real Property without the Bank's prior written consent, the Borrower shall immediately cause such Lien to be removed, either by satisfying the same or causing an appropriate lien release bond to be recorded with respect to such Lien. If the Borrower shall fail to cause such Lien to be removed within forty-five (45) days following the date of its recordation, such failure shall constitute an Event of Default without further notice or opportunity to cure hereunder; and the Bank, in addition to its other rights and remedies by reason thereof under the Loan Documents, shall have the right to advance its own funds in payment of such Lien, and the amount of such advance, together with interest thereon at the Default Rate provided for in the Note shall be immediately due and payable and shall be secured by the Liens granted in favor of Bank under the Loan Documents. 9.7 NOTICES TO BANK. The Borrower shall promptly notify the Bank in writing of: (a) any Event of Default hereunder or any event which would become an Event of Default hereunder upon the giving of notice, the lapse of time, or both; (b) any lawsuit or arbitration over Two Hundred Fifty Thousand Dollars ($250,000) against the Borrower; (c) any significant dispute between the Borrower and any Governmental Authority which may have a Material Adverse Effect upon the Borrower; (d) any event, circumstance or condition which may have a Material Adverse Effect on the Borrower; and (e) any change in the Borrower's name or trade name, legal structure, or place of business, (or chief executive office if the Borrower has more than one place of business). 9.8 AUDITS; BOOKS AND RECORDS. The Borrower shall maintain adequate books and records and to allow the Bank and its agents to inspect the Borrower's properties and examine, audit and make copies of books and records at any reasonable time. If any of the Borrower's properties, books or records are in the possession of a third party, the Borrower hereby authorizes that third party to permit the Bank or its agents to have access to perform inspections or audits and to respond to the Bank's requests for information concerning such properties, books and records. 9.9 COMPLIANCE WITH LAWS. The Borrower shall comply with all Requirements of Law (including any fictitious name statute), applicable to the Borrower's business. 9.10 PRESERVATION OF RIGHTS. The Borrower shall maintain and preserve in all material respects all rights, privileges, and franchises the Borrower now has. 9.11 MAINTENANCE OF PROPERTIES. The Borrower shall make repairs, renewals, or replacements to keep the Borrower's properties in good working condition. 9.12 INSURANCE. The Borrower shall maintain the following insurance: (a) LIABILITY INSURANCE. Commercial general liability coverage in a limit of not less than $5,000,000 for a single occurrence. This policy shall name Bank as an additional insured. Coverage shall be written on an occurrence basis, not claims made. (b) PROPERTY DAMAGE INSURANCE. All risk property damage insurance in nonreporting form on the Real Property, with a policy limit in an amount not less than the full insurable value of the Real Property on a replacement cost basis, including tenant improvements, if any. The policy shall include a business interruption (or rent loss, if more appropriate) endorsement in the amount of twelve months' principal and interest payments, taxes and insurance premiums, a lender's loss payable endorsement (438 BFU or its equivalent) in favor of Bank, and any other endorsements reasonably required by Bank. (c) OTHER INSURANCE. Such additional insurance that Bank in its reasonable judgment may from time to time require, against insurable hazards which at the time are commonly insured against in the case of property similarly situated. Such additional insurance may include flood insurance as required by federal law, but shall not include earthquake insurance. At Bank's request, Borrower shall supply Bank with an original or underlyer of any policy. (d) INSURANCE COMPANIES. All policies of insurance required under the Loan Documents shall be issued by companies having a minimum A.M. Best's rating of A:IX. The limits, coverage, forms, deductibles, inception and expiration dates and cancellation provisions of all such policies shall be acceptable to Bank. In addition, each required property insurance policy shall provide that all proceeds be payable to Bank to the extent of its interest. An approval by Bank is not, and shall not be deemed to be, a representation of the solvency of any insurer or the sufficiency of any amount of insurance. (e) REQUIREMENTS. Each policy of insurance required under the Loan Documents shall provide that it may not be modified or canceled without at least thirty (30) days' prior written notice to Bank. When any required insurance policy expires, Borrower shall furnish Bank with proof acceptable to Bank that the policy has been reinstated or a new policy issued, continuing in force the insurance covered by the policy which expired. Borrower shall also furnish Bank with evidence satisfactory to Bank that all premiums for such policy have been paid at the time of renewal or issuance. If Bank fails to receive such proof and evidence, Bank shall have the right, but not the obligation, to obtain current coverage and advance funds to pay the premiums for it. Borrower shall repay Bank immediately on demand for any advance for such premiums, which shall be considered to be an additional loan to Borrower bearing interest at the Reference-Based Rate, as defined in the Note, and secured by the Deed of Trust and any other Collateral held by Bank in connection with the Loan. Upon the request of the Bank, Borrower shall deliver to the Bank a copy of each insurance policy, or, if permitted by the Bank, a certificate of insurance listing all insurance in force. 9.13 ERISA PLANS. The Borrower shall give prompt written notice to the Bank of the occurrence of any reportable event under Section 4043(b) of ERISA for which the PBGC requires 30 day notice; any action by the Borrower to terminate or withdraw from a Plan or the filing of any notice of intent to terminate under Section 4041 of ERISA; any notice of noncompliance made with respect to a Plan under Section 4041(b) of ERISA; or the commencement of any proceeding with respect to a Plan under Section 4042 of ERISA. 9.14 ADDITIONAL NEGATIVE COVENANTS. The Borrower shall not, without the Bank's written consent: (a) liquidate or dissolve the Borrower's business; (b) enter into any consolidation, merger, pool, syndicate, or other combination where the Borrower is not the surviving Person; (c) (i) master lease all or a substantial part of the Borrower's business or assets, or (ii) dispose of all or a substantial part of the Borrower's business or assets, if any such master lease or disposition would have a Material Adverse Effect on Borrower; (d) acquire or purchase a business or its assets other business or assets of the kind permitted under Section 9.17 of this Agreement; (e) sell or otherwise dispose of any assets for less than fair market value, or enter into any sale and leaseback agreement covering any of its fixed or capital assets; (f) suspend its business activity for more than two days; (g) use any proceeds of the Loan, directly or indirectly, to purchase or carry, or reduce or retire any loan incurred to purchase or carry any "Margin Stock" (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System) or to extend credit to others for the purpose of purchasing or carrying any Margin Stock; or (h) amend its articles of incorporation, by-laws or other organizational documents. 9.15 PERFECTION OF LIENS; COOPERATION. The Borrower shall assist the Bank in perfecting and protecting its Liens in the Real Property and other Collateral, and shall reimburse it for reasonable costs it incurs to protect such Liens; and shall take any action reasonably requested by the Bank to carry out the intent of the Loan Documents. 9.16 CONTINUED STATUS AS A REIT; PROHIBITED TRANSACTIONS. The Borrower (i) shall continue to be a real estate investment trust as defined in Section 856 of the Code (or any successor provision thereto), (ii) shall not revoke its election to be a real estate investment trust, (iii) shall not engage in any "prohibited transactions" as defined in Section 856(b)(6)(iii) of the Code (or any successor provision thereto), and (iv) shall continue to be entitled to a dividend paid deduction meeting the requirements of Section 857 of the Code. 9.17 CONDUCT OF BUSINESS. The Borrower shall engage primarily in the business of the acquisition of or investment in commercial real properties, and other business activities of the Borrower reasonably incidental to business activities otherwise permitted under this section. 9.18 MANAGEMENT OF BORROWER. The Borrower's business affairs and activities are managed by Franklin Properties, Inc. pursuant to an Advisory Agreement dated March 1, 1989 as amended October 1, 1994. The Borrower shall not amend, modify, terminate or surrender such Advisory Agreement, release Franklin Properties, Inc. from any of its obligations thereunder or enter into any other agreement with any other Person for the management of the Borrower's business affairs or activities, without the Bank's prior written consent. 10. COLLATERAL 10.1 REAL PROPERTY. (a) Without notice to or the consent of Borrower, Bank may disclose to any title insurance company which insures any interest of Bank under a Deed of Trust (whether as primary insurer, coinsurer or reinsurer) any information, data or material in Bank's possession relating to Borrower, the Loan, or the Real Property. (b) The Bank may require Appraisals or inspections of the Real Property, as required elsewhere in this Agreement or as separately communicated to the Borrower. The Bank assumes no liability for the accuracy of any Appraisal or inspection and makes no warranty of any kind about the condition or value of the Real Property. (c) Borrower agrees that it shall not make any Accelerating Transfer (as defined in the Deed of Trust) except as otherwise permitted in this Agreement, unless the transfer is preceded by Bank's express written consent to the particular transaction and transferee. Bank may withhold such consent in its sole discretion. If any Accelerating Transfer occurs, Bank in its sole discretion may declare all of the obligations under the Loan Documents to be immediately due and payable, and Bank may invoke any rights and remedies provided by the Deed of Trust, this Agreement and the other Loan Documents. 10.2 PERSONAL PROPERTY. (a) The Borrower's obligations to the Bank under the Loan Documents will be secured by personal property the Borrower now owns or will own in the future, as may be included in a Deed of Trust or other instrument securing the Loan. This Collateral is further defined in security agreement(s) executed by the Borrower either as separate documents or in a deed of trust or mortgage. All personal property collateral securing any other present or future obligations of the Borrower to the Bank shall also secure this Loan. (b) Borrower shall not sell, convey, or otherwise transfer or dispose of its interest in any Personal Property, or agree to do any of the foregoing, other than in the ordinary course of Borrower's business, without the prior written consent of Bank in each instance. 10.3 REAL PROPERTY COVENANTS. (a) MAINTENANCE AND REPAIR. Borrower shall not (i) demolish, alter, remove or add to any improvements located on any Real Property ("Improvements"), or (ii) erect any new buildings, structures or building additions on the Real Property, without the prior written consent of Bank except as may be expressly permitted by this Agreement. Borrower shall pay when due all claims for labor performed and materials furnished therefor in connection with any Improvements or construction activities. Notwithstanding the foregoing, the Borrower shall have the right to make the following Improvements: (A) the repair and restoration of Improvements following damage thereto as required by any Deed of Trust, (B) the construction or installation of non-structural alterations or improvements, provided the same are in all respects consistent with the character and utility of the existing Improvements, and (C) the installation or construction of tenant improvements and related demolition in connection with any Leases entered into by the Borrower in accordance with this Agreement. (b) PRESERVATION OF RIGHTS. Borrower shall obtain, preserve and maintain in good standing, as applicable, all rights, privileges and franchises necessary or desirable for the conduct of Borrower's business and all permits, licenses and approvals (including any subdivision map, if applicable) which are required to be obtained from Governmental Authorities in order to construct, occupy, operate, market and sell real estate. Upon request, Borrower shall promptly deliver copies of all such permits, licenses and approvals to Bank. (c) TAX RECEIPTS; IMPROVEMENT DISTRICT; CC&RS. (i) Throughout the term of the Loan, at Borrower's sole expense, Bank shall be furnished with a tax services contract issued by a tax reporting agency satisfactory to Bank. (ii) Borrower shall not consent to, vote in favor of, or directly or indirectly advocate or assist in the incorporation of any part of the Real Property into any improvement or community facilities district, special assessment district or other district without Bank's prior written consent in each instance. Borrower shall not, without Bank's prior written consent in each instance, execute, amend or modify any covenants, conditions and restrictions affecting any part of the Real Property. (d) SITE VISITS; BOOKS AND RECORDS. In addition to the rights provided Bank and subject to the terms and conditions in the Deed of Trust, Borrower grants Bank, its agents and representatives the right to enter and visit the Real Property at any reasonable time for the purposes of inspecting the Real Property. Borrower shall also allow Bank to examine, copy and audit its books and records. Bank owes no duty of care to protect Borrower or any other party against, or to inform Borrower or any other party of, any adverse condition affecting the Real Property, including any defects in the design or construction of any Improvements on the Real Property or the presence of any Hazardous Materials on the Real Property. Prior to entering the Real Property, Bank shall give Borrower reasonable notice of its intent to enter. Bank shall exercise reasonable efforts to avoid interfering with Borrower's use of the Real Property in connection with the activities permitted under this section. (e) MANAGEMENT AGREEMENTS. Without Bank's prior written consent, Borrower shall not enter into any agreement providing for the management, leasing or operation of any portion of any Real Property with any third party other than Continental Property Management Co., or amend, modify, terminate or surrender any such agreement currently in place. (f) CONDITIONAL SALES CONTRACTS; REMOVAL OF FIXTURES AND EQUIPMENT. Without Bank's prior written consent, Borrower shall not (i) purchase any materials, equipment, furnishings or fixtures to be installed on the Real Property under any agreement where the seller reserves a Lien or title thereto or the right of removal or repossession after such items are installed on the Real Property, or (ii) remove or permit to be removed from the Real Property or the Improvements any equipment, machinery or fixtures used in connection with the management, maintenance, operation or enjoyment thereof unless replaced by articles of equal suitability and value owned by Borrower free and clear of any Lien. (g) USE AND LEASING OF THE PROPERTY. (i) INCOME FROM PROPERTY. Borrower shall first apply all income derived from the Real Property, including all income from Leases, to pay costs and expenses associated with the ownership, maintenance, operation, leasing and financing of the Real Property, including all amounts then required to be paid under the Loan Documents, before using or applying such income for any other purpose. (ii) LEASING. (A) Except as otherwise approved by Bank in writing, all Leases shall be entered into with bona fide third party tenants financially capable of performing their obligations under their Leases, and shall reflect arms-length transactions at the then current market rate for comparable space. Borrower shall perform all obligations required to be performed by it as landlord under any Lease. Borrower shall not accept payment of more than one month's rent in advance from any tenant. Except as may be permitted under this paragraph, without the prior written consent of Bank, Borrower shall not enter into, modify, amend, surrender or terminate any Lease. Notwithstanding the foregoing: (1) Borrower may terminate a Lease without the prior written consent of Bank for non-payment of rent if Borrower would in good faith do so on such default in the ordinary course of its business; (2) The prior approval of Bank shall not be required to any Lease if (a) the proposed use to be made of the premises subject to the Lease does not involve the use, storage, processing, manufacture, generation, disposal or release of any Hazardous Materials as a principal business operation or as a necessary and principal component of a business operation to be conducted at said premises; (b) the Lease is not a Major Lease; and (c) the Lease does not contain one or more of the following types of lease provisions: (i) granting an option, right of first offer or refusal or other peremptory right to purchase all or any portion of the Property, (ii) granting the tenant any right to receive any portion of any insurance or condemnation proceeds, (iii) allowing for rental offsets, or (iv) providing for environmental or Hazardous Materials indemnification by the landlord. (3) The prior approval of Bank shall not be required to any amendment or modification of a Lease other than a Required Lease or Major Lease if the amendment or modification contains no provision which, if originally included in the Lease, would not have required the prior approval of Bank. (B) Borrower shall disclose to Bank any and all Leases which affect the Property. Borrower shall promptly deliver to Bank such rent rolls, leasing schedules and reports, operating statements or other leasing information as Bank from time to time may request, and shall promptly notify Bank of any material tenant dispute or material adverse change in leasing activity on the Real Property. Borrower shall promptly obtain and deliver to Bank such estoppel certificates and subordination, non-disturbance and attornment agreements or non-disturbance and attornment agreements from tenants as Bank from time to time may require. In no event shall any approval by Bank of a Lease be a representation of any kind with regard to the Lease or its enforceability, or the financial capacity of any tenant or Lease guarantor. (C) If Bank's prior written approval is required for any Lease, Borrower shall pay to Bank as a condition to such consent Bank's costs and expenses (including reasonable outside counsel fees and the allocated cost of in-house counsel) incurred in connection therewith. Such costs and expenses shall be due and payable whether or not such consent is given. 11. DEFAULT If any of the following events occurs (an "Event of Default"), the Bank may declare the Borrower in default, stop making any additional advances to the Borrower under the line of credit, and require the Borrower to repay its entire debt immediately and without prior notice. However, if a bankruptcy petition is filed with respect to the Borrower, the entire debt outstanding under this Agreement shall automatically be due immediately. 11.1 FAILURE TO PAY. The Borrower fails to make a payment due under the Loan Documents within 15 days after the date when due. 11.2 LIEN PRIORITY. The Bank fails to have an enforceable first Lien on any Real Property or Personal Property (except for any prior Liens to which the Bank has consented in writing). 11.3 FALSE INFORMATION. The Borrower has given the Bank false or misleading information or representations. 11.4 BANKRUPTCY. The Borrower files a bankruptcy petition or makes a general assignment for the benefit of creditors, or a bankruptcy petition is filed against the Borrower. The default will be deemed cured if any bankruptcy petition filed against the Borrower is dismissed within a period of 45 days after the filing; provided, however, that the Bank will not be obligated to extend any additional credit to the Borrower during that period. 11.5 RECEIVERS. A receiver or similar official is appointed for the Borrower's business, or the business is terminated. 11.6 LAWSUITS. Any lawsuit or lawsuits are filed against the Borrower in an aggregate amount of Ten Million Dollars ($10,000,000) or more as any one time in excess of any insurance coverage. 11.7 JUDGMENTS. Any judgment or arbitration award is entered against the Borrower, or the Borrower enters into any settlement agreement with respect to any litigation, claim or arbitration, in an aggregate amount of Five Million Dollars ($5,000,000) or more in excess of any insurance coverage. 11.8 ERISA PLANS. The occurrence of any of the following events with respect to the Borrower, provided such event could reasonably be expected, in the judgment of the Bank, to subject the Borrower to any tax, penalty or liability (or any combination of the foregoing) which in the aggregate could have a Material Adverse Effect on the Borrower with respect to a Plan: (a) A reportable event occurs with respect to a Plan which in the reasonable judgment of the Bank may result in the termination of such Plan for purposes of ERISA. (b) Any Plan termination (or commencement of proceedings to terminate a Plan) or the Borrower's full or partial withdrawal from a Plan. 11.9 GOVERNMENT ACTION. Any Governmental Authority takes action that the Bank believes has a Material Adverse Effect on the Borrower. 11.10 MATERIAL ADVERSE CHANGE. Any event, circumstance or condition shall occur which the Bank believes has a Material Adverse Effect on the Borrower. 11.11 OTHER DEFAULT. The occurrence of any other event, circumstance or condition which, under this Agreement or the other Loan Documents, constitutes an Event of Default. Except if this Agreement provides that no cure period shall apply to any such event, circumstance or condition, and if in the Bank's opinion, such event, circumstance or condition is capable of being remedied, it will not be considered an Event of Default for a period of thirty (30) days after the date on which the Bank gives written notice of such event, circumstance or condition to the Borrower; provided, however, that the Bank will not be obligated to extend any additional credit to the Borrower during that period. 11.12 OTHER BREACH UNDER THIS AGREEMENT.S AGREEMENT The Borrower fails to meet the conditions of or fails to perform any obligation under any term of this Agreement not specifically referred to in this Article, including, without limitation, compliance with any of the financial covenants set forth in Section 9.4 above. If, in the Bank's opinion, the breach is capable of being remedied, the breach will not be considered an Event of Default under this Agreement for a period of thirty (30) days after the date on which the Bank gives written notice of the breach to the Borrower; provided, however, that the Bank will not be obligated to extend any additional credit to the Borrower during that period. 11.13 CROSS-DEFAULT. Any default occurs under any agreement in connection with any credit the Borrower or any of the Borrower's related entities or Affiliates has obtained from the Bank or any other creditor or which the Borrower or any of the Borrower's related entities or affiliates has guaranteed, and such default shall continue beyond any cure period applicable thereto, if the default consists of a failure to make a payment when due or gives the creditor the right to accelerate the obligation. 12. ENFORCING THIS AGREEMENT; MISCELLANEOUS 12.1 REMEDIES. If an Event of Default occurs under the Loan Documents: (a) Bank may exercise any right or remedy which it has under any of the Loan Documents or which is otherwise available at law or in equity. All of Bank's rights and remedies shall be cumulative. At Bank's option, exercisable in its sole discretion, all of Borrower's obligations under the Loan Documents will become immediately due and payable without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or other notices or demands of any kind. (b) Bank shall have the right in its sole discretion to enter the Real Property and take possession of it, whether in person, by agent or by court-appointed receiver, collect rents and otherwise protect the Collateral and its rights under the Loan Documents. If Bank exercises any of the rights or remedies provided in this subparagraph, that exercise shall not make Bank a partner or joint venturer of Borrower. All sums which are expended by Bank in preserving the Collateral shall be considered an additional advance to Borrower under this line of credit. 12.2 CALIFORNIA LAW. This Agreement is governed by California law but without regard to the choice of law rules of California. 12.3 ARBITRATION AND REFERENCE. (a) MANDATORY ARBITRATION. Except as provided below, any controversy or claim between or among the parties, including those arising out of or relating to this Agreement or the other Loan Documents and any claim based on or arising from an alleged tort, shall at the request of any party be determined by arbitration. The arbitration shall be conducted in accordance with the United States Arbitration Act (Title 9, U.S. Code), notwithstanding any choice of law provision in this Agreement, and under the Commercial Rules of the American Arbitration Association ("AAA"). The arbitrator(s) shall give effect to statutes of limitation in determining any claim. Any controversy concerning whether an issue is arbitrable shall be determined by the arbitrator(s). Judgment upon the arbitration award may be entered into any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. (b) REAL PROPERTY COLLATERAL. Notwithstanding subparagraph (a) above, no controversy or claim shall be submitted to arbitration without the consent of all parties if, at the time of the proposed submission, such controversy or claim arises from or relates to an obligation to Bank which is secured in whole or in part by real property in California. If all parties do not consent to submission of such a controversy or claim to arbitration, the controversy or claim shall be determined as provided in subparagraph (c) below. (c) JUDICIAL REFERENCE. Subject to subparagraph (a) and (b) above, in any judicial action between or among the parties, including but not limited to any action or cause of action arising out of or relating to this Agreement or the other Loan Documents or based on or arising from an alleged tort, all decisions of fact and law shall at the request of any party be referred to a referee in accordance with California Code of Civil Procedure Sections 638 ET SEQ. The parties shall designate to the court a referee or referees selected under the auspices of the AAA in the same manner as arbitrators are selected in AAA-sponsored proceedings. The presiding referee of the panel, or the referee if there is a single referee, shall be an active attorney or retired judge. Judgment upon the award rendered by such referee(s) shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (d) PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. No provision of this Agreement shall limit the right of any party to this Agreement to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or obtaining provisional or ancillary remedies from a court of competent jurisdiction before, after, or during the pendency of any arbitration or other proceeding. The exercise of a remedy does not waive the right of either party to resort to arbitration or reference. At Bank's option, foreclosure under a deed of trust or mortgage may be accomplished either by exercise of power of sale under the deed of trust or mortgage or by judicial foreclosure. 12.4 PRESENTMENT, DEMANDS AND NOTICE. The Bank shall be under no duty or obligation (a) to make or give any presentment, demands for performances, notices of nonperformance, protests, notices of protest or notices of dishonor in connection with any obligation or indebtedness under the Loan Documents or in connection with any obligations or evidences of indebtedness held by the Bank as Collateral or (b) to give the Borrower notice of rights or privileges relating to or affecting any Collateral held by the Bank. 12.5 INDEMNIFICATION. Borrower shall indemnify, save, and hold harmless the Bank and its directors, officers, agents and employees (collectively the "Indemnitees") from and against: (a) Any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, charges, expenses or disbursements (including attorneys' fees) of any kind with respect to the execution, delivery, enforcement, performance and administration of this Agreement and the other Loan Documents, and the transactions contemplated hereby, and with respect to any investigation, litigation or proceeding related to this Agreement, the other Loan Documents, the Loan or the use of the proceeds thereof, whether or not any Indemnitee is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that Borrower shall have no obligation hereunder to any Indemnitee with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of such Indemnitee. (b) Any and all writs, subpoenas, claims, demands, actions, or causes of action that are served on or asserted against any Indemnitee (if directly or indirectly related to a writ, subpoena, claim, demand, action, or cause of action against Borrower or any affiliate of Borrower); and any and all liabilities, losses, costs, or expenses (including attorneys' fees) that any Indemnitee suffers or incurs as a result of any of said matters. The obligations of the Borrower under this section shall survive payment of the Loan and assignment of any rights hereunder. 12.6 ATTORNEYS' FEES. In the event of a lawsuit or arbitration proceeding, including any tort proceeding, between or among the parties hereto, the prevailing party is entitled to recover costs and reasonable attorneys' fees (including any allocated costs of in-house counsel) incurred in connection with the lawsuit or arbitration proceeding, as determined by the court or arbitrator. 12.7 NOTICES. All notices required under this Agreement shall be personally delivered or sent by registered or certified mail, postage prepaid, or facsimile transmission to the addresses on the signature page of this Agreement, or to such other addresses as the Bank and the Borrower may specify from time to time in writing. Notices shall be effective upon receipt or when proper delivery is refused. 12.8 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and the Bank's successors and assignees. The Borrower agrees that it may not assign this Agreement or the other Loan Documents without the Bank's prior consent. The Bank may sell participations in or assign this Loan, and may provide financial information about the Borrower to actual or potential participants or assignees, without notice to or consent of Borrower. 12.9 NO THIRD PARTIES BENEFITED. This Agreement is made and entered into for the sole protection and benefit of Bank and Borrower and their successors and assigns. No trust fund is created by this Agreement and no other persons or entities shall have any right of action under this Agreement or any right to the Loan funds. 12.10 INTEGRATION; RELATION TO ANY LOAN COMMITMENT; HEADINGS. The Loan Documents (a) integrate all the terms and conditions in or incidental to this Agreement, (b) supersede all oral negotiations and prior writings with respect to their subject matter, including any loan commitment to Borrower, and (c) are intended by the parties as the final expression of the agreement with respect to the terms and conditions set forth in those documents and as the complete and exclusive statement of the terms agreed to by the parties. No representation, understanding, promise or condition shall be enforceable against any party unless it is contained in the Loan Documents. If there is any conflict between the terms, conditions and provisions of this Agreement and those of any other agreement or instrument, including any other Loan Document, the terms, conditions and provisions of this Agreement shall prevail. Headings and captions are for reference only and shall not affect the interpretation or meaning of any provisions of this Agreement. The exhibits to this Agreement are hereby incorporated in this Agreement. 12.11 INTERPRETATION. (a) Time is of the essence in the performance of this Agreement by Borrower; and (b) the word "include(s)" means "include(s), without limitation," and the word "including" means "including but not limited to." No listing of specific instances, items or matters in any way limits the scope or generality of any language of this Agreement. 12.12 SEVERABILITY; WAIVERS; AMENDMENTS. This Agreement may not be modified or amended except by a written agreement signed by the parties. Any consent or waiver under this Agreement must be in writing. If any part of this Agreement is not enforceable, the rest of the Agreement may be enforced. If the Bank waives a default, it may enforce a later default. No waiver shall be construed as a continuing waiver. No waiver shall be implied from Bank's delay in exercising or failure to exercise any right or remedy against Borrower or any security. Consent by Bank to any act or omission by Borrower shall not be construed as a consent to any other or subsequent act or omission or as a waiver of the requirement for Bank's consent to be obtained in any future or other instance. The Bank retains all of its rights and remedies, even if it makes an advance after a default. 12.13 COUNTERPARTS. This Agreement may be executed in counterparts each of which, when executed, shall be deemed an original, and all such counterparts shall constitute one and the same agreement. This Agreement is executed as of the date stated at the top of the first page. BANK: BORROWER: BANK OF AMERICA NATIONAL FRANKLIN SELECT REALTY TRUST, TRUST AND SAVINGS ASSOCIATION a California corporation By ______________ By _________________________ Title ______________ Title _________________________ By ______________ By _________________________ Title ______________ Title _________________________ Address where notices to Address where notices to the Bank are to be sent: the Borrower are to be sent: Bank of America NT&SA Franklin Select Realty Trust Commercial Real Estate Services/ 1800 Gateway Drive, 3rd Floor National Accounts 9105 San Mateo, CA 94403 50 California Street, 11th Floor Attn: Mark TenBoer San Francisco, CA 94111 Tel: (415) 312-5862 Attn: Laurence C. Hughes Fax: (415) 312-5830 Tel: (415) 445-4404 Fax: (415) 445-4154 EXHIBIT A REAL PROPERTY COLLATERAL EXHIBIT B BORROWING NOTICE ___________________, 199__ Bank of America National Trust and Savings Association Commercial Real Estate Services Division 9105 50 California Street, 11th Floor San Francisco, CA 94111 Attention: Jane Duelks Re: Secured Line of Credit Loan Agreement dated as of December 10, 1996 (the "Agreement") between BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("Bank") and FRANKLIN SELECT REALTY TRUST ("Borrower") Dear ________________: Reference is made to the Agreement. Capitalized terms used in this Borrowing Notice without definition have the meanings specified in the Agreement. Pursuant to the Agreement, notice is hereby given that the Borrower desires that the Bank make the advance described in attached SCHEDULE 1 (the "Advance"). The Borrower and the undersigned Responsible Officer or other authorized representative of the Borrower hereby certify that: (1) LOAN AVAILABILITY. The outstanding amount of the Line of Credit shall not, after giving effect to the making of the Advance, exceed the Loan Availability; (2) REPRESENTATIONS AND WARRANTIES. All representations and warranties of the Borrower contained in the Agreement and the other Loan Documents are true and correct in all material respects as of the date hereof and shall be true and correct in all material respects on the date of the Advance, both before and after giving effect to the Advance; provided, however, that the representations and warranties of the Borrower set forth in the Agreement regarding financial statements shall be deemed to be made with respect to the financial statements most recently delivered to the Bank pursuant to the Agreement; (3) NO EVENT OF DEFAULT. No Event of Default or Potential Default exists as of the date hereof or will result from the making of the Advance; (4) USE OF PROCEEDS. The proceeds of the Advance will be used only as permitted by the Agreement; (5) NO MATERIAL ADVERSE EFFECT. No act, omission, change or event which would have a Material Adverse Effect on the Borrower or the Collateral has occurred since the date of the Agreement; and (6) OTHER CONDITIONS. Enclosed are the documents and information requested by Bank as a condition to this Advance. FRANKLIN SELECT REALTY TRUST, a California corporation By: __________________________ Its: _________________________ SCHEDULE 1 to Borrowing Notice REQUESTED LOAN 1. AMOUNT OF REQUESTED ADVANCE: $_______________ (Must be a minimum of $1,000,000) 2. PURPOSE OF ADVANCE: EXHIBIT C COMPLIANCE CERTIFICATE This Compliance Certificate is delivered pursuant to the Secured Line of Credit Loan Agreement dated as of December 10, 1996, between Franklin Select Realty Trust ("Borrower") and Bank of America National Trust and Savings Association ("Bank") (as from time to time amended, supplemented or restated, the "Loan Agreement"). Capitalized terms used in this Certificate without definition have the same meanings as in the Loan Agreement. 1. The undersigned hereby certifies that the undersigned is a Responsible Officer and has reviewed the terms of the Loan Agreement and has made a review of the transactions and financial condition of Borrower during _________, the accounting period covered by the financial statements and operating statements being delivered to Bank along with this Compliance Certificate and: (a) Borrower was in compliance with all of Borrower's financial covenants contained in the Loan Agreement, including Section 9.4 of the Loan Agreement, throughout such accounting period; (b) No Event of Default or Potential Default occurred during such accounting period, except as set forth in subparagraph (d) below; (c) Borrower was not in default with respect to any other Indebtedness of Borrower during such accounting period, except as set forth in subparagraph (d) below; (d) The nature and extent of the event or condition that constituted [an Event of Default/Potential Default/a default with respect to other Indebtedness of Borrower] is as follows: (e) Borrower [has taken/is taking/is planning to take] the following action with respect to the event or condition described in subparagraph [(c)/(d)] above; (f) During such accounting period, Borrower did not become subject to any contingent liabilities not disclosed in a previous Compliance Certificate, except as set forth as Schedule 1 hereto. 2. The outstanding principal amount of the Loan as of the date hereof does not exceed Loan Availability. 3. The calculations required to establish compliance with Borrower's financial covenants contained in the Loan Agreement, including Section 9.4 of the Loan Agreement, and to establish that the outstanding principal amount of the Loan does not exceed Loan Availability, are attached hereto as Schedule 1. Date: ______________ __________________________________ [Responsible Officer] SCHEDULE 1 to Compliance Certificate 1. [Calculations establishing compliance with Financial Covenants] 2. [Calculations establishing that Loan amount does not exceed Loan Availability] 3. [Contingent liabilities] EXHIBIT D SCHEDULE OF REQUIRED LEASES SHORES PROPERTY American Management System (Suite 100) American Management System (Suite 150) American Management System (Suite 170) American Management System (Suite 190) American Management System (XL/Data) (Suite 225) American Management System (Suite 200, 300) Am. Telecorp (Suite 100) Oracle Corp Am. Telecorp (Suite 400, 465, 475) Am Teleco (Media) RSA Data Sec RSA (Must) RSA Data Sec NORTHPORT PROPERTY Hereaus Amersil Advanced EPI Lam Research Lam Research FAIRWAY CENTER PROPERTY 20th Cen Indust CA Fed. Bank CNA TABLE OF CONTENTS PAGE 1. DEFINITIONS........................................................... 1 1.1 Certain Defined Terms.......................................... 1 1.2 Computation of Time Periods.................................... 6 1.3 Accounting Terms............................................... 7 2. LINE OF CREDIT AMOUNT AND TERMS....................................... 7 2.1 Line of Credit Amount.......................................... 7 2.2 Availability Period............................................ 7 2.3 Interest Rate.................................................. 7 2.4 Loan Documents................................................. 7 2.5 Excess Borrowing Condition..................................... 8 3. FEES, EXPENSES........................................................ 8 3.1 Fees........................................................... 8 3.2 Expenses and Costs............................................. 8 4. REAL PROPERTY VALUE................................................... 8 4.1 Acceptance, Determinations..................................... 8 4.2 Additional Value Determinations................................ 9 5. DISBURSEMENTS, PAYMENTS, COSTS........................................ 10 5.1 Requests for Credit............................................ 10 5.2 Disbursement and Payment Records............................... 11 5.3 Authorization.................................................. 11 5.4 Direct Debit To Line of Credit................................. 11 5.5 Payments....................................................... 11 5.6 Banking Days................................................... 11 6. CONDITIONS............................................................ 11 6.1 Authorizations................................................. 12 6.2 Governing Documents; Good Standing Certificates................ 12 6.3 Loan Documents................................................. 12 6.4 Evidence of Priority; Title Insurance.......................... 12 6.5 Insurance...................................................... 12 6.6 Environmental Questionnaire.................................... 12 6.7 Appraisal...................................................... 12 6.8 Payment of Fees................................................ 12 6.9 Engineering.................................................... 12 6.10 Credit......................................................... 12 6.11 Other Items.................................................... 13 6.12 No Default..................................................... 13 6.13 Material Adverse Changes....................................... 13 6.14 Representations and Warranties................................. 13 6.15 Leases......................................................... 13 7. REPRESENTATIONS AND WARRANTIES........................................ 13 7.1 Organization of Borrower; Good Standing........................ 13 7.2 Authorization; Enforceable Agreement........................... 13 7.3 Financial Information.......................................... 13 7.4 Lawsuits....................................................... 14 7.5 Title to Assets................................................ 14 7.6 Collateral..................................................... 14 7.7 Permits, Franchises............................................ 14 7.8 Income Tax Returns............................................. 14 7.9 ERISA Plans.................................................... 15 7.10 Other Obligations.............................................. 15 7.11 No Event of Default............................................ 15 7.12 Location of Borrower........................................... 15 7.13 Status as a REIT............................................... 15 8. BORROWER OPTIONS...................................................... 15 8.1 Extension Option............................................... 15 8.2 Term Out Option................................................ 16 8.3 UPREIT Transfer................................................ 17 9. COVENANTS............................................................. 17 9.1 Use of Proceeds................................................ 17 9.2 Financial Information.......................................... 18 9.3 Other Information.............................................. 18 9.4 Financial Covenants............................................ 19 9.5 Taxes and Other Liabilities.................................... 20 9.6 Other Liens.................................................... 20 9.7 Notices to Bank................................................ 21 9.8 Audits; Books and Records...................................... 21 9.9 Compliance with Laws........................................... 21 9.10 Preservation of Rights......................................... 21 9.11 Maintenance of Properties...................................... 21 9.12 Insurance...................................................... 21 9.13 ERISA Plans.................................................... 22 9.14 Additional Negative Covenants.................................. 22 9.15 Perfection of Liens; Cooperation............................... 23 9.16 Continued Status as a REIT; Prohibited Transactions............ 23 9.17 Conduct of Business............................................ 23 9.18 Management of Borrower......................................... 23 10. COLLATERAL............................................................ 23 10.1 Real Property.................................................. 23 10.2 Personal Property.............................................. 24 10.3 Real Property Covenants........................................ 24 11. DEFAULT............................................................... 26 11.1 Failure to Pay................................................. 26 11.2 Lien Priority.................................................. 26 11.3 False Information.............................................. 26 11.4 Bankruptcy..................................................... 27 11.5 Receivers...................................................... 27 11.6 Lawsuits....................................................... 27 11.7 Judgments...................................................... 27 11.8 ERISA Plans.................................................... 27 11.9 Government Action.............................................. 27 11.10 Material Adverse Change........................................ 27 11.11 Other Default.................................................. 27 11.12 Other Breach Under This Agreement.............................. 28 11.13 Cross-default.................................................. 28 12. ENFORCING THIS AGREEMENT; MISCELLANEOUS............................... 28 12.1 Remedies....................................................... 28 12.2 California Law................................................. 28 12.3 Arbitration and Reference...................................... 28 12.4 Presentment, Demands and Notice................................ 29 12.5 Indemnification................................................ 29 12.6 Attorneys' Fees................................................ 30 12.7 Notices........................................................ 30 12.8 Successors and Assigns......................................... 30 12.9 No Third Parties Benefited..................................... 30 12.10 Integration; Relation to Any Loan Commitment; Headings......... 30 12.11 Interpretation................................................. 30 12.12 Severability; Waivers; Amendments.............................. 31 12.13 Counterparts................................................... 31 EX-27 4
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 DEC-31-1996 2,558 578 1,916 0 0 0 141,625 17,583 131,298 0 0 0 0 109,455 (12,802) 131,298 0 14,568 0 9,875 0 0 886 0 0 0 0 0 0 3,807 0 0
-----END PRIVACY-ENHANCED MESSAGE-----