-----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, FJ0q8warACrnLhI5AEr9oXFW1Nh9Zc0Zz+w+/ve672KRYW19CVA/gH0Az0/60XIe YFWzqUc3AXl/ykrjTGEVpA== 0000950131-97-002714.txt : 19970423 0000950131-97-002714.hdr.sgml : 19970423 ACCESSION NUMBER: 0000950131-97-002714 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19970422 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQUITY RESIDENTIAL PROPERTIES TRUST CENTRAL INDEX KEY: 0000906107 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 363877868 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-24653 FILM NUMBER: 97584708 BUSINESS ADDRESS: STREET 1: TWO N RIVERSIDE PLZ STREET 2: STE 400 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3124661300 MAIL ADDRESS: STREET 1: TWO N RIVERSIDE PLAZA STREET 2: SUITE 450 CITY: CHICAGO STATE: IL ZIP: 60606 S-4/A 1 AMENDMENT #1 Registration No. 333-24653 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 EQUITY RESIDENTIAL PROPERTIES TRUST (Exact name of registrant as specified in its charter)
Maryland 6513 36-3877868 (State or other jurisdiction of (Primary Standard Industrial (IRS Employer incorporation or organization) Classification Code Number) Identification No.)
Two North Riverside Plaza, Suite 400 Chicago, IL 60606 (312) 474-1300 (Address, including ZIP Code, and telephone number, including area code, of registrant's principal executive offices) Douglas Crocker II President and Chief Executive Officer Two North Riverside Plaza, Suite 400 Chicago, IL 60606 (312) 466-1300 (Name, address, including ZIP Code, and telephone number, including area code, of agent for service) Copies to:
Alan S. Pearce, Esq. Errol R. Halperin, Esq. Steven G. Scheinfeld, Esq. Hal M. Brown, Esq. Robinson Silverman Pearce Aronsohn Rudnick & Wolfe & Berman, LLP 203 North LaSalle Street, Suite 1800 1290 Avenue of the Americas Chicago, Illinois 60601 New York, New York 10104-0053 (312) 368-4000 (212) 541-2000 (312) 236-7516 (telecopier) (212) 541-4630 (telecopier)
EQUITY RESIDENTIAL PROPERTIES TRUST CROSS-REFERENCE SHEET (Pursuant to Item 501(b) of Regulation S-K)
Item Location in Proxy Statement/Prospectus - ---- ----------------------------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus..................... Facing Page; Cross Reference Sheet; Outside Front Cover Page of Proxy Statement/Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus......................................... Table of Contents; Available Information 3. Risk Factors, Ratio of Earnings to Fixed Charges, and Other Information..................... Summary; Risk Factors; Surviving Trust Selected Unaudited Pro Forma Combined Financial Data; Equity Residential Properties Trust Selected Historical and Combined Financial Data; Wellsford Residential Property Trust Selected Historical Financial Data 4. Terms of the Transaction........................... Summary; The Meetings of Shareholders; The Merger; The Contribution and Distribution; Comparison of Rights of Shareholders 5. Pro Forma Financial Information.................... Unaudited Pro Forma Financial Statements of the Surviving Trust 6. Material Contacts with the Company Being Acquired........................................... The Merger 7. Additional Information Required for Reoffering by Persons and Parties Deemed to be Underwriters....................................... Not Applicable 8. Interests of Named Experts and Counsel............. Summary - Interests of Certain Persons; Interests of Certain Persons in the Merger and Distribution 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities........................................ Not Applicable 10. Information with Respect to S-3 Registrants........................................ Not Applicable 11. Incorporation of Certain Information by Reference.......................................... Information Incorporated by Reference 12. Information with Respect to S-2 or S-3 Registrants........................................ Not Applicable 13. Incorporation of Certain Information by Reference.......................................... Not Applicable
Item Location in Proxy Statement/Prospectus - ---- -------------------------------------- 14. Information with Respect to Registrants Other than S-3 or S-2 Registrants........................ Not Applicable 15. Information with Respect to S-3 Companies.......... Information Incorporated by Reference 16. Information with Respect to S-2 or S-3 Companies.......................................... Not Applicable 17. Information with Respect to Companies Other than S-2 or S-3 Companies.......................... Not Applicable 18. Information if Proxies, Consents or Authorizations Are to be Solicited................. Information Incorporated by Reference; Outside Front Cover Page of Proxy Statement/Prospectus; Summary; Meetings of Shareholders; The Merger; Interest of Certain Persons in the Merger and Distribution 19. Information if Proxies, Consents or Authorizations Are Not to be Solicited, or in an Exchange Offer..................................... Not Applicable
REVISED PRELIMINARY COPY EQUITY RESIDENTIAL PROPERTIES TRUST Two North Riverside Plaza Chicago, Illinois 60606 April 25, 1997 Dear Shareholder: You are cordially invited to attend a special meeting of shareholders of Equity Residential Properties Trust ("EQR") to be held at One North Franklin, Chicago, Illinois, on May 28, 1997, at 10:00 a.m., local time (the "EQR Special Meeting"). At the EQR Special Meeting, you will be asked to approve the acquisition of the multifamily property business of Wellsford Residential Property Trust, a Maryland real estate investment trust ("Wellsford"), by EQR through the tax-free merger of EQR and Wellsford (the "Merger"). In the Merger, each outstanding common share of beneficial interest of Wellsford ("Wellsford Common") will be converted into .625 of a common share of beneficial interest of the surviving trust ("Survivor Common"). Each outstanding common share of beneficial interest of EQR ("EQR Common") will be converted into one share of Survivor Common. Details of the proposed Merger and information regarding EQR and Wellsford are contained in the attached Joint Proxy Statement/Prospectus/Information Statement, which you are encouraged to read carefully. Special note should be taken of the risk factors relating to the proposed Merger, which are discussed beginning on page 41 of the attached Joint Proxy Statement/Prospectus/Information Statement and which include the following risks: . The surviving trust is subject to the risks normally associated with debt or preferred equity financings, including the risk that the surviving trust's cash flow will be insufficient to meet required payments of principal, interest and distributions. . A substantial portion of the surviving trust's debt was issued pursuant to indentures which restrict the amount of indebtedness (including acquisition financing) that the surviving trust may incur. . Immediately following consummation of the Merger, the surviving trust will own properties and bonds collateralized by properties that are subject to restrictive covenants or deed restrictions. . Risks associated with (a) a potential change in the relative stock prices of EQR Common and Wellsford Common prior to the effective time of the Merger, and (b) a possible reduction in the market price of Survivor Common following the Merger. . Shareholders of Wellsford and shareholders of EQR are not entitled to dissenting shareholders' appraisal rights under Maryland law. . EQR and Wellsford are large enterprises with operations in a number of different states. There can be no assurance that costs or other factors associated with the integration of the two companies would not adversely affect future combined results of operations or the benefits of expected cost savings. Your Board of Trustees believes that the proposed acquisition of Wellsford by EQR will benefit EQR by making the resulting company better equipped to meet competitive challenges by increasing its diversification and improving its access to capital. The surviving trust in the Merger will be one of the largest publicly traded real estate investment trusts ("REIT") (based on the aggregate market value of its outstanding equity capitalization). EQR, one of the largest publicly traded REITs (based on the aggregate market value of its outstanding equity capitalization), is a self-administered and self-managed equity REIT. EQR was organized as a Maryland real estate investment trust in March 1993 and commenced operations as a publicly traded company on August 18, 1993 upon completion of its initial public offering. EQR was formed to continue the multifamily property business objectives and acquisition strategies of certain affiliated entities controlled by Mr. Samuel Zell, Chairman of the Board of Trustees of EQR. These entities had been engaged in the acquisition, ownership and operation of multifamily properties since 1969. EQR's senior executives average over 23 years of experience in the multifamily property business. Your Board of Trustees has carefully reviewed and considered the terms and conditions of the Merger and has received and considered the written opinion of J.P. Morgan Securities Inc. ("J.P. Morgan") dated January 16, 1997 to the effect that, as of the date of such opinion and based upon and subject to certain matters stated therein, the consideration to be paid by EQR in connection with the Merger was fair to EQR from a financial point of view. A copy of the written opinion of J.P. Morgan is included as Appendix C to the Joint Proxy Statement/Prospectus/Information Statement and should be read carefully in its entirety. Your Board of Trustees has approved the Merger and believes the Merger is in the best interests of EQR and its shareholders, and recommends that all shareholders vote FOR approval of the Merger. The Merger requires the affirmative vote of EQR shareholders owning two- thirds of the outstanding shares of EQR Common. Accordingly, whether or not you plan to attend the EQR Special Meeting, please complete, sign and date the accompanying proxy card and return it in the enclosed prepaid envelope. You may revoke your proxy in the manner described in the accompanying Joint Proxy Statement/Prospectus/Information Statement at any time before it has been voted at the EQR Special Meeting. If you attend the EQR Special Meeting, you may vote in person even if you have previously returned your proxy card. Your prompt cooperation will be greatly appreciated. This solicitation is made on behalf of the Board of Trustees of EQR. Sincerely, Douglas Crocker II, Chief Executive Officer, President and Trustee REVISED PRELIMINARY COPY WELLSFORD RESIDENTIAL PROPERTY TRUST 610 Fifth Avenue New York, New York 10020 April 25, 1997 Dear Shareholder: You are cordially invited to attend a special meeting of shareholders of Wellsford Residential Property Trust ("Wellsford") to be held at The Princeton Club, 15 West 43rd Street, New York, New York, on May 28, 1997, at 10:00 a.m., local time (the "Wellsford Special Meeting"). At the Wellsford Special Meeting, you will be asked to approve the acquisition of the multifamily property business of Wellsford by Equity Residential Properties Trust, a Maryland real estate investment trust ("EQR"), through the tax-free merger of EQR and Wellsford (the "Merger"). In the Merger, each outstanding common share of beneficial interest of Wellsford ("Wellsford Common") will be converted into .625 of a common share of beneficial interest of the surviving trust ("Survivor Common"). Immediately prior to the Merger, and subject to the satisfaction or waiver of all conditions thereto, Wellsford will contribute certain of its assets to its subsidiary (the "Contribution"), Wellsford Real Properties, Inc. ("WRP Newco"), and distribute to its common shareholders, on a pro rata basis, all of the shares it owns in WRP Newco (the "Distribution"). Details of the proposed Merger and Distribution and information regarding EQR, Wellsford and WRP Newco are contained in the attached Joint Proxy Statement/Prospectus/Information Statement, which you are encouraged to read carefully. Special note should be taken of risk factors relating to the proposed Merger, which are discussed beginning on page 41 of the attached Joint Proxy Statement/Prospectus/Information Statement and include the following risks: . Conflicts of interest due to the fact that certain members of the Board of Trustees and management of Wellsford have certain interests that arise in connection with the Merger and the Contribution and Distribution that are in addition to the interests of shareholders of Wellsford generally. . The surviving trust is subject to the risks normally associated with debt or preferred equity financings, including the risk that the surviving trust's cash flow will be insufficient to meet required payments of principal, interest and distributions. . A substantial portion of the surviving trust's debt was issued pursuant to indentures which restrict the amount of indebtedness (including acquisition financing) that the surviving trust may incur. . Immediately following consummation of the Merger, the surviving trust will own properties and bonds collateralized by properties that are subject to restrictive covenants or deed restrictions. . Risks associated with (a) a potential change in the relative stock prices of common shares of beneficial interest of EQR and Wellsford Common prior to the effective time of the Merger, and (b) a possible reduction in the market price of Survivor Common following the Merger. . Shareholders of Wellsford and shareholders of EQR are not entitled to dissenting shareholders' appraisal rights under Maryland law. . The obligation to pay a substantial break-up fee and/or break-up expenses under certain circumstances may adversely affect the ability of Wellsford to engage in another transaction in the event the Merger is not consummated. . Upon consummation of the Merger, holders of shares of Wellsford Common will own approximately 17% of the Survivor Common and will not have separate approval rights with respect to any actions or decisions of the surviving trust. . After the Merger, the distributions payable with respect to Survivor Common are expected to be less than the distributions payable with respect to Wellsford Common. . EQR and Wellsford are large enterprises with operations in a number of different states. There can be no assurance that costs or other factors associated with the integration of the two companies would not adversely affect future combined results of operations or the benefits of expected costs savings. . Ownership of interests in WRP Newco may also involve significant risks. At the Wellsford Special Meeting you will be asked to approve (i) the Merger, including the adoption of an amended and restated declaration of trust for the surviving trust (excluding the Additional Provisions, as defined below) and (ii) certain modifications to the amended and restated declaration of trust of the surviving trust (the "Additional Provisions"), to conform substantially the declaration of trust for the surviving trust to the declaration of trust of EQR. You will also be asked to approve (i) the issuance (the "Additional Share Offering") by WRP Newco of up to 12,000,000 shares of common stock, $.01 par value per share, of WRP Newco and (ii) the adoption of WRP Newco's 1997 Management Incentive Plan. Your Board of Trustees has carefully reviewed and considered the terms and conditions of the Merger and Distribution and has received and considered the written opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") dated January 16, 1997 to the effect that, as of the date of such opinion, and based upon and subject to certain matters stated therein, the proposed consideration to be received by the holders of shares of Wellsford Common pursuant to the Merger and the Distribution, was fair to such shareholders from a financial point of view. A copy of the written opinion of Merrill Lynch dated January 16, 1997 is included as Appendix D to the Joint Proxy Statement/Prospectus/Information Statement and should be read carefully in its entirety. Your Board of Trustees has approved the Merger, the Contribution and the Distribution and believes they are in the best interests of Wellsford and its shareholders, and recommends that all shareholders vote FOR approval of the Merger, including the adoption of an amended and restated declaration of trust for the surviving trust. Shareholders are not being asked to approve the Contribution or the Distribution, which are not subject to shareholder approval. However, approval of the Merger will, in effect, constitute approval of the Contribution and Distribution. Your Board of Trustees also recommends that all shareholders vote FOR the Additional Provisions, and your Board of Trustees and the Board of Directors of WRP Newco recommend that all shareholders vote FOR the Additional Share Offering and FOR the adoption of WRP Newco's 1997 Management Incentive Plan. The Merger requires the affirmative vote of Wellsford shareholders owning a majority of the outstanding Wellsford Common. The approval of the Additional Provisions requires the affirmative vote of Wellsford shareholders owning two- thirds of the outstanding shares of Wellsford Common. The approval of the Additional Share Offering and the adoption of WRP Newco's 1997 Management Incentive Plan each require the affirmative vote of the holders of a majority of the outstanding shares of Wellsford Common voting. Accordingly, whether or not you plan to attend the Wellsford Special Meeting, please complete, sign and date the accompanying proxy card and return it in the enclosed prepaid envelope. You may revoke your proxy in the manner described in the accompanying Joint Proxy Statement/Prospectus/Information Statement at any time before it has been voted at the Wellsford Special Meeting. If you attend the Wellsford Special Meeting, you may vote in person even if you have previously returned your proxy card. Your prompt cooperation will be greatly appreciated. This solicitation is made on behalf of the Board of Trustees of Wellsford. Sincerely, Jeffrey H. Lynford, Chairman EQUITY RESIDENTIAL PROPERTIES TRUST NOTICE OF SPECIAL MEETING OF SHAREHOLDERS NOTICE IS HEREBY GIVEN that a special meeting of shareholders ("EQR Special Meeting") of Equity Residential Properties Trust, a Maryland real estate investment trust ("EQR"), will be held at One North Franklin, Chicago, Illinois, on May 28, 1997 at 10:00 a.m., local time, to consider and vote on a proposal to approve the merger of EQR into Wellsford Residential Property Trust, a Maryland real estate investment trust ("Wellsford"), pursuant to an Agreement and Plan of Merger entered into by EQR and Wellsford on January 16, 1997. Only holders of record of common shares of beneficial interest, $.01 par value per share, of EQR at the close of business on April 14, 1997 will be entitled to vote at the EQR Special Meeting. By Order of the Board of Trustees, Bruce C. Strohm Secretary Chicago, Illinois April 25, 1997 - -------------------------------------------------------------------------------- PLEASE DATE, SIGN AND RETURN YOUR EQR PROXY PROMPTLY IN THE ENCLOSED, SELF- ADDRESSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES - -------------------------------------------------------------------------------- WELLSFORD RESIDENTIAL PROPERTY TRUST NOTICE OF SPECIAL MEETING OF SHAREHOLDERS NOTICE IS HEREBY GIVEN that a special meeting of shareholders ("Wellsford Special Meeting") of Wellsford Residential Property Trust, a Maryland real estate investment trust ("Wellsford"), will be held at The Princeton Club, 15 West 43rd Street, New York, New York, on May 28, 1997 at 10:00 a.m., local time, to consider and vote on the following proposals: (i) the approval of the merger (the "Merger") of Equity Residential Properties Trust, a Maryland real estate investment trust ("EQR"), into Wellsford, pursuant to an Agreement and Plan of Merger entered into by Wellsford and EQR on January 16, 1997, including the adoption of an amended and restated declaration of trust for the surviving trust (excluding the modifications set forth in proposal (ii) below); (ii) the approval of modifications to certain sections, including Sections 2.3, 6.6, 9.1, 9.2 and 9.3 of, and the addition of a new Article VII to, the amended and restated declaration of trust of the surviving trust; (iii) the issuance by Wellsford Real Properties, Inc. ("WRP Newco"), a subsidiary of Wellsford, shares of which are to be distributed to the common shareholders of Wellsford, pro rata, immediately prior to the Merger, of up to 12,000,000 additional shares of common stock, $.01 par value per share, of WRP Newco, to satisfy the requirements of the American Stock Exchange; and (iv) the adoption of WRP Newco's 1997 Management Incentive Plan. Only holders of record of common shares of beneficial interest, $.01 par value per share, of Wellsford at the close of business on April 14, 1997 will be entitled to vote at the Wellsford Special Meeting. By Order of the Board of Trustees, Jeffrey H. Lynford Secretary New York, New York April 25, 1997 - -------------------------------------------------------------------------------- PLEASE DATE, SIGN AND RETURN YOUR WELLSFORD PROXY PROMPTLY IN THE ENCLOSED, SELF-ADDRESSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES - -------------------------------------------------------------------------------- EQUITY RESIDENTIAL PROPERTIES TRUST and WELLSFORD RESIDENTIAL PROPERTY TRUST JOINT PROXY STATEMENT ------ EQUITY RESIDENTIAL PROPERTIES TRUST PROSPECTUS ------ WELLSFORD REAL PROPERTIES, INC. INFORMATION STATEMENT This Joint Proxy Statement/Prospectus/Information Statement is being furnished to the shareholders of Equity Residential Properties Trust, a Maryland real estate investment trust ("EQR"), in connection with the solicitation of proxies on behalf of the Board of Trustees of EQR ("EQR Board of Trustees") for use at a special meeting of the holders of common shares of beneficial interest, $.01 par value per share, of EQR ("EQR Common") to be held on May 28, 1997 and at any adjournment or postponement thereof ("EQR Special Meeting"). At the EQR Special Meeting, holders of EQR Common ("EQR Common Shareholders") will be asked to approve the acquisition of the multifamily property business of Wellsford Residential Property Trust, a Maryland real estate investment trust ("Wellsford"), by approving the merger of EQR and Wellsford (the "Merger") pursuant to an Agreement and Plan of Merger dated as of January 16, 1997 by and between EQR and Wellsford (the "Merger Agreement"). A copy of the Merger Agreement is attached hereto as Appendix A. The surviving trust in the Merger ("Surviving Trust") will be one of the largest publicly traded real estate investment trusts ("REIT") (based on the aggregate market value of its outstanding equity capitalization), and will be a self-administered and self- managed equity REIT. The Surviving Trust intends to continue the multifamily property business objectives and acquisition strategies of EQR. The name of the Surviving Trust will be Equity Residential Properties Trust. This Joint Proxy Statement/Prospectus/Information Statement also is being furnished to the shareholders of Wellsford in connection with the solicitation of proxies on behalf of the Board of Trustees of Wellsford ("Wellsford Board of Trustees") for use at a special meeting ("Wellsford Special Meeting" and, together with the EQR Special Meeting, the "Meetings of Shareholders") of the holders of common shares of beneficial interest, $.01 par value per share, of Wellsford ("Wellsford Common") to be held on May 28, 1997 and at any adjournment or postponement thereof. At the Wellsford Special Meeting, holders of Wellsford Common ("Wellsford Common Shareholders") will be asked to approve (i) the Merger, including the adoption of an amended and restated declaration of trust for the Surviving Trust (excluding the Additional Provisions, as defined below), (ii) modifications to certain sections, including Sections 2.3, 6.6, 9.1, 9.2 and 9.3 of, and the addition of a new Article VII to, the amended and restated declaration of trust of the Surviving Trust (the "Additional Provisions") as described more fully in "Proposal Regarding Additional Declaration of Trust Provisions" below, (iii) the issuance by Wellsford Real Properties, Inc. ("WRP Newco"), a subsidiary of Wellsford, shares of which are to be distributed to the Wellsford Common Shareholders, pro rata, immediately prior to the Merger, of up to 12,000,000 additional shares of common stock, $.01 par value per share, of WRP Newco ("WRP Newco Common"), to satisfy the requirements of the American Stock Exchange ("ASE") (the "Additional Share Offering"), and (iv) the adoption of WRP Newco's 1997 Management Incentive Plan. This Joint Proxy Statement/Prospectus/Information Statement also is being furnished to the shareholders of Wellsford to provide them with information regarding WRP Newco. Immediately prior to the Merger, Wellsford will contribute certain of its assets to WRP Newco, WRP Newco will assume certain liabilities of Wellsford, and Wellsford will distribute to the Wellsford Common Shareholders, pro rata, all of the outstanding shares of WRP Newco Common owned by Wellsford (the "Distribution"). In addition, an affiliate of EQR will enter into certain financial and business arrangements with WRP Newco, as described herein. In considering whether to approve the Merger, the shareholders of EQR and Wellsford voting on the Merger should consider, in addition to the other information in this Joint Proxy Statement/Prospectus/Information Statement, the matters discussed under "Risk Factors." Such matters include: . The surviving trust is subject to the risks normally associated with debt or preferred equity financings, including the risk that the surviving trust's cash flow will be insufficient to meet required payments of principal, interest and distributions. . A substantial portion of the surviving trust's debt was issued pursuant to indentures which restrict the amount of indebtedness (including acquisition financing) that the surviving trust may incur. . Immediately following consummation of the Merger, the surviving trust will own properties and bonds collateralized by properties that are subject to restrictive covenants or deed restrictions. . Risks associated with (a) a potential change in the relative stock prices of EQR Common and Wellsford Common prior to the effective time of the Merger, and (b) a possible reduction in the market price of Survivor Common following the Merger. . EQR and Wellsford are large enterprises with operations in a number of different states. There can be no assurance that costs or other factors associated with the integration of the two companies would not adversely affect future combined results of operations or the benefits of expected cost savings. . Shareholders of EQR and Wellsford do not have appraisal rights in connection with the Merger under Maryland law. Shareholders of Wellsford should also consider the matters discussed under "Risk Factors" and "WRP Newco Risk Factors" in addition to the matters discussed above. Such matters include: . The obligation to pay a substantial break-up fee and/or break-up expenses under certain circumstances may adversely affect the ability of Wellsford to engage in another transaction in the event the Merger is not consummated. . Upon consummation of the Merger, holders of shares of Wellsford Common will own approximately 17% of the Survivor Common and will not have separate approval rights with respect to any actions or decisions of the surviving trust. . After the Merger, the distributions payable with respect to Survivor Common are expected to be less than the distributions payable with respect to Wellsford Common. . Ownership of interests in WRP Newco may also involve significant risks. This Joint Proxy Statement/Prospectus/Information Statement also relates to the common shares of beneficial interest, $.01 par value per share, of the Surviving Trust issuable upon consummation of the Merger. On April 18, 1997, the last reported sales price of a share of EQR Common, on the NYSE was $43.125. On April 18, 1997, the last reported sales price of a share of Wellsford Common on the NYSE was $28.875. This Joint Proxy Statement/Prospectus/Information Statement and the forms of proxy are first being mailed to all of EQR Common Shareholders and Wellsford Common Shareholders on or about April 16, 1997. See "Risk Factors" beginning on page 41 for a discussion of certain factors which should be considered by shareholders of EQR and Wellsford. ___________ THE SECURITIES TO WHICH THIS JOINT PROXY STATEMENT/PROSPECTUS/ INFORMATION STATEMENT RELATE HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/ PROSPECTUS/INFORMATION STATEMENT.ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Joint Proxy Statement/Prospectus/Information Statement is April 25, 1997. AVAILABLE INFORMATION EQR has filed a registration statement on Form S-4 (the "Registration Statement") under the Securities Act of 1933, as amended ("Securities Act"), with the Securities and Exchange Commission (the "Commission") covering the common shares of beneficial interest and preferred shares of beneficial interest of the Surviving Trust to be issued in connection with the Merger. As permitted by the rules and regulations of the Commission, this Joint Proxy Statement/Prospectus/Information Statement omits certain information, exhibits and undertakings contained in the Registration Statement. For further information pertaining to the securities offered hereby, reference is made to the Registration Statement, including the exhibits filed as a part thereof. EQR and Wellsford are subject to the informational requirements of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in accordance therewith, file reports, proxy statements and other information with the Commission. WRP Newco has filed a registration statement on Form 10 and, as of the date of the Distribution, WRP Newco will also be subject to the informational requirements of the Exchange Act. Reports, proxy statements and other information filed by EQR, Wellsford and WRP Newco can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at its Regional Offices located at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661; and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's Web site is: http://www.sec.gov. The EQR Common and preferred shares of beneficial interest of EQR ("EQR Preferred" and, collectively, "EQR Shares") and the Wellsford Common and preferred shares of beneficial interest of Wellsford ("Wellsford Preferred" and, collectively, "Wellsford Shares") are currently listed on the NYSE and such reports, proxy statements and other information concerning EQR and Wellsford can be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005. WRP Newco has applied for listing of the WRP Newco Common on the ASE. All information contained in this Joint Proxy Statement/Prospectus/Information Statement with respect to Wellsford and WRP Newco has been supplied by Wellsford, and all information with respect to EQR and ERP Operating Limited Partnership, an Illinois limited partnership ("ERP Operating Partnership"), has been supplied by EQR. No person is authorized to give any information or to make any representation not contained in this Joint Proxy Statement/Prospectus/ Information Statement, or incorporated in it by reference, and, if given or made, such information or representation should not be relied upon as having been authorized. This Joint Proxy Statement/Prospectus/Information Statement does not constitute an offer to sell, or a solicitation of an offer to purchase, the securities offered by this Joint Proxy Statement/Prospectus/Information Statement, or the solicitation of a proxy, in any jurisdiction where or from any person to whom it is unlawful to make such offer, or solicitation of an offer, or proxy solicitation. Neither the delivery of this Joint Proxy Statement/Prospectus/Information Statement nor any distribution of the securities offered pursuant to this Joint Proxy Statement/Prospectus/Information Statement shall, under any circumstances, create an implication that there has been no change in the affairs of EQR, Wellsford or WRP Newco since the date of this Joint Proxy Statement/Prospectus/Information Statement. All documents that are incorporated by reference in this Joint Proxy Statement/Prospectus/Information Statement but which are not delivered herewith are available without charge (other than exhibits to such documents which are not specifically incorporated by reference therein) upon request from, in the case of documents relating to EQR, Two North Riverside Plaza, Suite 400, Chicago, Illinois 60606, Attention: Cynthia McHugh, telephone (312) 474-1300, and, in the case of documents relating to Wellsford, 610 Fifth Avenue, New York, New York 10020, Attention: Kim Ezzy, telephone (212) 333-2300. In order to insure timely delivery of the documents, any request should be made by May 16, 1997. INFORMATION INCORPORATED BY REFERENCE IN THIS JOINT PROXY STATEMENT/PROSPECTUS/INFORMATION STATEMENT The following documents filed with the Commission by EQR or by Wellsford pursuant to the Exchange Act are hereby incorporated in this Joint Proxy Statement/Prospectus/Information Statement by reference: 1. EQR's current report on Form 8-K dated May 23, 1996, as amended. 2. EQR's current report on Form 8- K dated November 15, 1996, as amended. 3. EQR's annual report on Form 10-K for the year ended December 31, 1996, as amended by Form 10-K/A filed on April 3, 1997. 4. EQR's current report on Form 8-K dated January 16, 1997. 5. EQR's current report on Form 8-K dated March 12, 1997. 6. EQR's current report on Form 8- K dated March 17, 1997. 7. EQR's current report on Form 8-K dated March 19, 1997. 8. EQR's current report on Form 8-K dated March 20, 1997. 9. EQR's current report on Form 8-K dated March 24, 1997. 10. The information prescribed by Items 12, 13, 14, 15 and 16 of Form S-11 contained in EQR's Registration Statement on Form S-11 (No. 33-80420) dated July 20, 1994, as amended. 11. The description of EQR Common contained in EQR's Registration Statement on Form 8-A, as amended, dated August 10, 1993. 12. The description of EQR's 9-3/8% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $.01 per share, contained in EQR's Registration Statement on Form 8-A, as amended, dated May 17, 1995. 13. The description of Depositary Shares each representing a 1/10 fractional interest in EQR's 9-1/8% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $.01 per share, contained in EQR's Registration Statement on Form 8-A dated October 23, 1995. 14. The description of Depositary Shares each representing a 1/10 fractional interest in EQR's 9-1/8% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $.01 per share, contained in EQR's Registration Statement on Form 8-A dated September 10, 1996. 15. Wellsford's annual report on Form 10-K for the year ended December 31, 1996. 16. Wellsford's current report on Form 8-K, dated January 16, 1997. 17. Wellsford's current report on Form 8-K, dated February 3, 1997. 18. The description of Wellsford Common contained in Wellsford's Registration Statement on Form 8-A dated November 10, 1992 and the information thereby incorporated by reference contained in Wellsford's Registration Statement on Form S-11 (No. 33-52406), as amended by Amendment No. 1 thereto dated November 3, 1992, under the heading "Description of Shares of Beneficial Interest." 19. The description of Wellsford's Series A Convertible Preferred Shares of Beneficial Interest, par value $.01 per share, contained in Wellsford's Registration Statement on Form S-11 (No. 33-69868) dated October 1, 1993 and in Amendments Nos. 1 and 2 thereto dated October 22, 1993 and November 4, 1993, respectively, under the heading "Description of Series A Cumulative Convertible Preferred Shares." 20. The description of Wellsford's Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $.01 per share, contained in Wellsford's Registration Statement on Form 8- A dated September 5, 1995, under the heading "Description of Registrant's Securities to be Registered." 21. All documents subsequently filed by EQR or Wellsford pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the date of the meetings of shareholders. Any statement contained herein or in a document incorporated by reference or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Joint Proxy Statement/Prospectus/ Information Statement to the extent that a statement contained in this Joint Proxy Statement/Prospectus/Information Statement or in any other subsequently filed document that also is or is deemed to be incorporated by reference in this Joint Proxy Statement/Prospectus/Information Statement modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Joint Proxy Statement/Prospectus/Information Statement. JOINT PROXY STATEMENT/PROSPECTUS/INFORMATION STATEMENT TABLE OF CONTENTS
SUMMARY..................................................................... 1 RISK FACTORS................................................................ 41 Conflicts of Interest.................................................. 41 Adverse Consequences of Debt Financing................................. 42 Restrictions on Indebtedness of the Surviving Trust.................... 42 Other Restrictive Covenants............................................ 43 Potential Change in Relative Stock Prices.............................. 43 Risks to Wellsford Common Shareholders................................. 43 No Appraisal Rights under Maryland Law................................. 44 Potential Adverse Effects of Combining the Companies................... 44 General Real Estate Investment Considerations ; Changes in Laws........ 44 Potential Environmental Liability Affecting the Surviving Trust........ 45 Consequences of Failure to Qualify as a REIT........................... 46 Dependence on Key Personnel............................................ 47 Distribution Requirements Potentially Increasing Indebtedness of the Surviving Trust.................................................... 47 9.8% Ownership Limit................................................... 47 Limits on Changes in Control........................................... 48 Control and Influence by Significant Shareholders of EQR............... 49 Exemptions for Mr. Zell and Others from Maryland Business Combination Law which Tend to Inhibit Takeovers.................... 50 Tax Termination of ERP Operating Partnership........................... 50 WRP NEWCO RISK FACTORS...................................................... 51
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General Risks...................................................................... 51 Nature of Investments Made by WRP Newco May Involve High Risk; Illiquidity of Real Estate Investments...................................... 51 Difficulty of Locating Suitable Investments; Competition........................... 52 Risks of Acquisition, Development, Construction and Renovation Activities.......... 52 Vacancies at Existing Properties; Dependence on Rental Income from Real Property.................................................................... 53 Operating Risks.................................................................... 54 Adverse Consequences of Debt Financing............................................. 54 Lack of Control and Other Risks of Equity Investments in and with Third Parties..................................................................... 55 Risks of Investments in Debt Instruments........................................... 56 Risks of Investments in Mortgage Loans............................................. 56 Risk of Loss on Investments in Commercial Mortgage-Backed Securities............... 57 Limitations on Remedies............................................................ 57 Third-Party Bankruptcy Risks...................................................... 58 No Prior Operating History......................................................... 58 Risks of Uninsured Loss............................................................ 58 Potential Environmental Liability Related to the Properties........................ 59 Dependence on Key Personnel........................................................ 59 Tax Consequences of the Distribution............................................... 60 Changes in Policies Without Stockholder Approval................................... 60 Absence of Public Market; Risk of Changes in Share Price........................... 60 Costs of Compliance with the Americans with Disabilities Act and Similar Laws........................................................................ 61 Noncompliance with Other Laws...................................................... 61 Effect on Common Stock Price of Shares Available for Future Sale................... 61 Hedging Policies/Risks............................................................. 62 Anti-Takeover Effect Resulting From a Staggered Board/Ability of Newco to Issue Preferred Shares/and Certain Provisions of Maryland Law............... 62 THE MEETINGS OF SHAREHOLDERS............................................................ 63 EQR................................................................................ 63 Wellsford.......................................................................... 64 THE MERGER.............................................................................. 66 Terms of the Merger................................................................ 66 Background of the Merger........................................................... 66 Reasons for the Merger; Recommendation of the EQR Board of Trustees................ 72 Reasons for the Merger; Recommendation of the Wellsford Board of Trustees.......... 74 Opinion of Financial Advisor - EQR................................................. 77 Opinion of Financial Advisor - Wellsford........................................... 84 Effective Time of the Merger....................................................... 92
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Page Representations and Warranties; Conditions to the Merger................................... 92 Appraisal Rights........................................................................... 94 Regulatory Matters......................................................................... 94 Termination Provisions..................................................................... 94 Termination Fee and Expenses............................................................... 95 No Solicitation of Other Transactions...................................................... 96 Conversion of Shares....................................................................... 96 Appointment of Exchange Agent.............................................................. 98 Exchange of Certificates................................................................... 98 Conduct of Business Pending the Merger..................................................... 98 Waiver and Amendment....................................................................... 102 Stock Exchange Listing..................................................................... 102 Anticipated Accounting Treatment........................................................... 102 Shares Available for Resale................................................................ 102 Contribution of Assets of Wellsford to ERP Operating Partnership........................... 103 Federal Income Tax Consequences............................................................ 103 INTERESTS OF CERTAIN PERSONS IN THE MERGER AND DISTRIBUTION..................................... 118 Benefits of Key Executives................................................................. 118 Agreements with the Surviving Trust and ERP Operating Partnership.......................... 121 Agreements with WRP Newco.................................................................. 122 SURVIVING TRUST SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA...................................................................... 124 EQUITY RESIDENTIAL PROPERTIES TRUST SELECTED HISTORICAL AND COMBINED FINANCIAL DATA............................................................. 127 WELLSFORD RESIDENTIAL PROPERTY TRUST SELECTED HISTORICAL FINANCIAL DATA...................................................................... 130 UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF THE SURVIVING TRUST............................................................................... 133 POLICIES OF THE SURVIVING TRUST WITH RESPECT TO CERTAIN ACTIVITIES.......................................................................... 141 Business Objectives and Operating Strategies........................................ 141
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Page Acquisition Strategies.............................................. 142 Disposition Strategies.............................................. 142 Investment Policies................................................. 142 Financing Policies.................................................. 143 Lending Policies.................................................... 144 Policies with Respect to Other Activities........................... 145 MANAGEMENT AND OPERATION OF THE SURVIVING TRUST AFTER THE MERGER.............................................................. 145 Trustees and Executive Officers..................................... 145 Committees of the Board of Trustees................................. 149 Compensation of Trustees............................................ 150 Consulting Agreements............................................... 150 COMPARISON OF RIGHTS OF SHAREHOLDERS..................................... 150 Authorized and Issued Shares........................................ 151 Amendment to Declaration and Bylaws................................. 152 Special Meetings.................................................... 152 Boards of Trustees.................................................. 153 Mergers, Consolidations, and Sale of Substantially all Assets....... 154 Restrictions on the Ownership, Transfer or Issuance of Shares....... 155 PROPOSAL REGARDING ADDITIONAL DECLARATION OF TRUST PROVISIONS.......................................................... 158 THE CONTRIBUTION AND DISTRIBUTION........................................ 161 Background of and Reasons for the Distribution...................... 161 Manner of Effecting the Contribution and Distribution............... 161 Listing and Trading of WRP Newco Common............................. 162 Conditions; Termination............................................. 163 Contribution and Distribution Agreement............................. 163 Tax Consequences of the Distribution................................ 164 WELLSFORD REAL PROPERTIES, INC........................................... 167 General............................................................. 167 Business Strategy................................................... 167 Initial Capital and Financing....................................... 168 WRP Newco Line of Credit............................................ 169 Management.......................................................... 170 Wellsford Acquisitions.............................................. 170 Wellsford Management and Development Practices...................... 170 Wellsford Equity and Debt Financing................................. 171 Wellsford Return to Shareholders.................................... 171 WRP NEWCO PRO FORMA CAPITALIZATION....................................... 171 WRP NEWCO DIVIDEND POLICY................................................ 172
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Page WRP NEWCO'S BUSINESS AND PROPERTIES..................................... 173 Wellsford Commercial Properties.......................................... 173 Wellsford High Yield Investment Portfolio........................... 176 Wellsford Property Development...................................... 177 CERTAIN AGREEMENTS BETWEEN WRP NEWCO AND ERP OPERATING PARTNERSHIP......................................................... 180 Common Stock and Preferred Stock Purchase Agreement................. 180 Registration Rights Agreement....................................... 182 Agreement Regarding Palomino Park................................... 183 Credit Enhancement Agreement........................................ 186 POLICIES WITH RESPECT TO CERTAIN ACTIVITIES OF WRP NEWCO................. 187 Investment Policies................................................. 187 Financing Policies.................................................. 188 Policies with Respect to Other Activities........................... 188 MANAGEMENT OF WRP NEWCO.................................................. 189 Directors and Executive Officers.................................... 189 Key Employee........................................................ 191 Compensation of Directors........................................... 191 Board Committees.................................................... 192 Executive Compensation.............................................. 192 Employment Agreements............................................... 193 Compensation Committee Interlocks and Insider Participation......... 194 PRINCIPAL STOCKHOLDERS OF WRP NEWCO...................................... 195 WRP NEWCO'S CERTAIN TRANSACTIONS......................................... 197 MANAGEMENT'S DISCUSSION AND ANALYSIS OF WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR)...................................... 198 REPORT OF INDEPENDENT AUDITORS........................................... 199
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Page WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR) COMBINED BALANCE SHEETS....................................................... 200 WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR) COMBINED INCOME STATEMENT..................................................... 201 WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR) COMBINED STATEMENTS OF CASH FLOW.............................................. 202 WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR) PRO FORMA COMBINED INCOME STATEMENT............................................ 208 WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR) PRO FORMA COMBINED BALANCE SHEET............................................... 211 DESCRIPTION OF CAPITAL STOCK OF WRP NEWCO................................. 214 General.............................................................. 214 Common Stock......................................................... 215 Preferred Stock...................................................... 215 Classification or Reclassification of Common Stock or Preferred Stock 216 Power to Issue Additional Shares of Common Stock and Preferred Stock. 216 Class A Common Stock................................................. 216 Series A 8% Convertible Redeemable Preferred Stock................... 218 CERTAIN PROVISIONS OF MARYLAND LAW AND OF WRP NEWCO'S CHARTER AND BYLAWS................................................... 223 Classification of the Board of Directors............................. 223 Removal of Directors................................................. 224 Business Combinations................................................ 224 Amendment to the Charter and Bylaws.................................. 225 Merger, Consolidation, Sale of Assets................................ 225 Dissolution of WRP Newco............................................. 225 Advance Notice of Director Nominations and New Business.............. 225 Meetings of Stockholders............................................. 226 Limitation of Liability and Indemnification.......................... 227 PROPOSAL TO APPROVE WRP NEWCO ADDITIONAL SHARE OFFERING................... 228 PROPOSAL TO APPROVE WRP NEWCO'S 1997 MANAGEMENT INCENTIVE PLAN................................................................. 229
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Page LEGAL MATTERS............................................................ 235 EXPERTS.................................................................. 236 SHAREHOLDER PROPOSALS.................................................... 236 APPENDIX A AGREEMENT AND PLAN OF MERGER............................... A-1 APPENDIX B ARTICLES OF MERGER......................................... B-1 APPENDIX C OPINION OF J.P. MORGAN SECURITIES INC...................... C-1 APPENDIX D OPINION OF MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED......................................... D-1
vii SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in the Summary and under captions "Risk Factors," "WRP Newco Risk Factors," "The Merger - Reasons for the Merger; Recommendation of the EQR Board of Trustees" "- Reasons for the Merger; Recommendation of the Wellsford Board of Trustees," "-Opinion of Financial Advisor - EQR" and "-Opinion of Financial Advisor - Wellsford" and elsewhere in this Joint Proxy Statement/Prospectus/Information Statement constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of EQR, Wellsford or WRP Newco or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, which will, among other things, affect demand for multifamily properties, availability and credit worthiness of prospective tenants, lease rents and the availability of financing; adverse changes in the real estate markets including, among other things, competition with other companies, risks of real estate development and acquisition; governmental actions and initiatives; environmental/safety requirements; ability to achieve anticipated cost savings and operating efficiencies from the Merger; and other changes and factors referenced in this Joint Proxy Statement/Prospectus/Information Statement and the documents incorporated herein by reference. With respect to WRP Newco, such factors may also include: difficulty of locating suitable investments; illiquidity of real estate investments; risks regarding the Palomino Park development; limited control of entities in which investments are made; risks of investments in debt instruments, including reduction in the value of collateral and the inability to enforce remedies; risks of highly leveraged transactions; dependence on key personnel; and lack of prior operating history. See "Risk Factors" and "WRP Newco Risk Factors." SUMMARY The following is a summary of certain information contained elsewhere in this Joint Proxy Statement/Prospectus/Information Statement. Reference is made to, and this summary is qualified in its entirety by, the more detailed information and financial statements contained in this Joint Proxy Statement/Prospectus/Information Statement, the Appendices hereto and the documents incorporated by reference herein. Certain capitalized terms used in this summary are defined elsewhere in this Joint Proxy Statement/Prospectus/Information Statement. As used in this Joint Proxy Statement/Prospectus/Information Statement, except where the context requires otherwise, "EQR" means Equity Residential Properties Trust, a Maryland real estate investment trust and its subsidiaries; "ERP Operating Partnership" means ERP Operating Limited Partnership, an Illinois limited partnership of which EQR is the general partner, and its subsidiaries; "Wellsford" means Wellsford Residential Property Trust, a Maryland real estate investment trust, and its subsidiaries; and "WRP Newco" means Wellsford Real Properties, Inc., a Maryland corporation, and its subsidiaries. As used in this Joint Proxy Statement/Prospectus/Information Statement, "Surviving Trust" means the surviving Maryland real estate investment trust in the Merger. The name of the Surviving Trust will be Equity Residential Properties Trust. Parties to the Merger EQR. EQR, one of the largest publicly traded REITs (based on the aggregate market value of its outstanding equity capitalization), is a self-administered and self-managed equity REIT. EQR was organized in March 1993 and commenced operations as a publicly traded company on August 18, 1993 upon the completion of its initial public offering (the "IPO"). EQR was formed to continue the multifamily property business objectives and acquisition strategies of certain affiliated entities controlled by Mr. Samuel Zell, Chairman of the Board of Trustees of EQR. These entities had been engaged in the acquisition, ownership and operation of multifamily properties since 1969. EQR's senior executives average over 23 years of experience in the multifamily property business. EQR is the largest publicly traded REIT owner of multifamily properties (based on the number of apartment units owned and total revenues earned). As of March 31, 1997, EQR owned or had interests in a portfolio of 250 multifamily properties containing 75,100 apartment units and managed 12,804 additional units owned by affiliated entities. As of March 31, 1997, the 250 properties EQR owned or had interests in had an average occupancy rate of approximately 94%. These properties are located in the following 31 states: Arizona, Arkansas, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Missouri, New Hampshire, New Jersey, New Mexico, Nevada, North Carolina, Ohio, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Virginia and Washington. All of EQR's interests in its properties are held directly or indirectly by, and substantially all of its operations relating to the properties are conducted through, ERP Operating Partnership. EQR controls ERP Operating Partnership as the sole general partner and, as of March 31, 1997, owned approximately 88% of ERP Operating Partnership's outstanding partnership interests (excluding preference units) ("OP Units"), which may be exchanged by the holders thereof for either shares of EQR Common, on a one-for-one basis or, at EQR's option, the cash equivalent thereof. EQR's corporate headquarters and executive offices are located at Two North Riverside Plaza, Suite 400, Chicago, Illinois 60606, and its telephone number is (312) 474-1300. In addition, EQR has regional operations centers in Chicago, Illinois; Dallas, Texas; Denver, Colorado; Seattle, Washington; Tampa, Florida and Bethesda, Maryland, and area offices in Atlanta, Georgia; Las Vegas, Nevada; Phoenix, Arizona; Portland, Oregon; San Antonio and 2 Houston, Texas; Irvine, California; Ypsilanti, Michigan; Raleigh, North Carolina; and Ft. Lauderdale, Florida. Wellsford. Wellsford is a publicly traded, self-administered and self- managed equity REIT, formed in 1992, which owns and operates multifamily properties located in the Western, Southwestern and Pacific regions of the United States. As of December 31, 1996, Wellsford owned 72 properties containing 19,004 apartment units. Wellsford's average occupancy rate on March 24, 1997 was approximately 95.3%. Wellsford's properties are located in the following states: Arizona, Colorado, New Mexico, Nevada, Oklahoma, Texas, Utah and Washington. Wellsford's corporate headquarters and executive offices are located at 610 Fifth Avenue, New York, New York 10020, and its telephone number is (212) 333- 2300. In addition, Wellsford has operating headquarters in Denver, Colorado and area offices in Dallas, Texas; San Antonio, Texas; Tulsa, Oklahoma; Oklahoma City, Oklahoma; Phoenix, Arizona; and Tacoma, Washington. Terms of the Merger The Merger Agreement provides that, upon satisfaction or waiver of the conditions set forth therein, EQR will be merged into Wellsford. The name of the Surviving Trust will be Equity Residential Properties Trust. The EQR Board of Trustees and Wellsford Board of Trustees have each approved the Merger as set forth in the Merger Agreement. Upon consummation of the Merger (the "Effective Time"), each outstanding share of Wellsford Common will be converted into .625 (the "Exchange Ratio") of a common share of beneficial interest, $.01 par value per share, of the Surviving Trust ("Survivor Common"). At the Effective Time, each outstanding share of EQR Common will be converted into one share of Survivor Common. At the Effective Time, each outstanding share of Wellsford Preferred and EQR Preferred will be converted into one preferred share of the Surviving Trust ("Survivor Preferred") having the same preferences and other terms as the preferred shares previously outstanding of the same series; provided, however, the conversion ratio for Wellsford's Series A Cumulative Convertible Preferred Shares of Beneficial Interest, $.01 par value per share ("Wellsford Series A") will be adjusted in accordance with its terms. See "The Merger - Terms of the Merger." At the Effective Time, approximately 3.2% of Survivor Common will be owned by affiliates of the Surviving Trust (assuming that no outstanding options are exercised and no OP Units are exchanged for shares of EQR Common). The Distribution of WRP Newco Common Immediately prior to the Merger, Wellsford will contribute certain of its assets, including an 80% interest in phases I and II of, and in options to acquire and develop phases III, IV and V of, a 182-acre five-phase development project located in Denver, Colorado ("Palomino Park"), a $17.8 million mortgage receivable (the "Sonterra Loan"), on a 344-unit multifamily property located in Tucson, Arizona ("Sonterra"), an option to purchase Sonterra and 3 approximately $18 million of cash to WRP Newco and WRP Newco will assume certain obligations of Wellsford (the "Contribution"). Immediately after the Contribution and immediately prior to the Merger, Wellsford will distribute to the holders of Wellsford Common all the outstanding shares of WRP Newco Common owned by Wellsford as a distribution subject to income tax under Section 301 of the Internal Revenue Code of 1986, as amended (the "Code"). Pursuant to the Distribution, the holders of Wellsford Common will receive one share of WRP Newco Common for each four shares of Wellsford Common owned by such holder. Cash will be paid in lieu of fractional shares. The Contribution and the Distribution are not subject to approval by the shareholders of Wellsford. No shares of WRP Newco Common will be distributed to EQR Common Shareholders. EQR Common Shareholders will participate indirectly in WRP Newco through the interests of ERP Operating Partnership in WRP Newco as described under "Certain Agreements between WRP Newco and ERP Operating Partnership." 4 [Chart to be inserted depicting pre-Merger EQR & Wellsford] 5 [Chart to be inserted depicting Surviving Trust & WRP Newco] 6 [Map to be inserted depicting property interests of Surviving Trust] 7 Reasons for the Merger; Recommendations of the Boards of Trustees The EQR Board of Trustees believes that the Merger, including the consideration to be paid by EQR, is fair and in the best interests of EQR and its shareholders. The EQR Trustees who voted on the Merger unanimously approved the Merger and unanimously recommend that the EQR Common Shareholders vote FOR the Merger. The EQR Board of Trustees considered certain potentially negative factors which could arise from the Merger. These included (i) the significant costs involved in connection with consummating the Merger, (ii) the substantial management time and effort required to effectuate the Merger and integrate the businesses of EQR and Wellsford, (iii) the increase in the total debt of the Surviving Trust from the total debt of EQR, (iv) the possible adverse effects upon the market for shares of EQR Common and upon EQR's ability to raise capital and issue equity in both the public and private markets which might result if the Merger were not consummated, and (v) the risk that the anticipated benefits of the Merger might not be fully realized. The favorable factors the EQR Board of Trustees considered in reaching the foregoing conclusions were the beliefs that (i) the Merger would solidify EQR's leadership position in the multifamily property industry and the Surviving Trust will be one of the largest publicly traded REITs (based on the aggregate market value of its outstanding equity capitalization), (ii) the Merger would increase operating efficiencies through economies of scale, (iii) the Merger would provide greater access to the public equity and debt markets, (iv) the Surviving Trust would be a larger and financially stronger company, which would make it easier to combine with other entities, (v) the combination of the Wellsford properties with those of EQR would expand the geographic focus of EQR's operations in the Southwest, Western and Pacific regions of the United States, and (vi) the Merger could be effectuated through the issuance of shares of equity to shareholders in the Merger rather than through the use of cash or a separate public offering of equity or debt securities. The EQR Board of Trustees also received the written opinion, dated January 16, 1997, of J.P. Morgan Securities Inc. ("J.P. Morgan") to the effect that, as of such date and based upon and subject to certain matters stated therein, the consideration to be paid by EQR in connection with the Merger was fair, from a financial point of view, to EQR. See "The Merger-- Reasons for the Merger; Recommendation of the EQR Board of Trustees" and "Opinion of Financial Advisors--EQR." The Wellsford Board of Trustees believes that the Merger and Distribution are fair to, and in the best interests of, Wellsford and its shareholders. By unanimous vote, the Wellsford Board of Trustees approved the Merger, the Distribution and the transactions contemplated thereby, and unanimously recommend that the Wellsford Common Shareholders vote FOR the Merger. Although Wellsford Common Shareholders are not being asked to approve the Distribution, approval of the Merger will, in effect, constitute approval of the Distribution. The Board of Trustees reached its decision after careful consideration of a wide variety of factors, including certain potentially negative factors. These negative factors consisted of the following: (i) the risk that the anticipated benefits of the Merger might not be fully realized; (ii) the significant costs aggregating approximately $23.6 involved in connection with consummating the 8 Merger; (iii) the substantial management time and effort required to effectuate the Merger; (iv) the possibility that Wellsford may be required, if the Merger Agreement is terminated under certain circumstances, to pay EQR a Break-Up Fee (as defined herein) of $14.0 million and to reimburse EQR Break-Up Expenses (as defined herein) of up to $2.5 million; and (v) after the Merger, the distributions payable with respect to the Survivor Common is expected to be approximately 19.5% less than the distributions payable with respect to the Wellsford Common based upon the current annualized distributions per share of EQR Common and Wellsford Common. In making its determination with respect to the Merger and the Distribution, the Wellsford Board of Trustees also considered, among other things, the following advantages: (i) the Merger would afford shareholders a significant participation in a much larger and more geographically diversified REIT with greater potential for long-term appreciation and improved access to capital markets, (ii) the Merger was the best alternative reasonably available to Wellsford Common Shareholders, providing the greatest feasibility and potential to maximize shareholder value, (iii) the Merger offered anticipated cost savings and operating efficiencies to the Surviving Trust, including the anticipated reduction of overhead expenses by approximately $4.1 million per year, (iv) the market capitalization of the Surviving Trust is expected to be approximately $4 billion greater than the then-current market capitalization of Wellsford, (v) the Exchange Ratio fairly reflected the relative contributions of both companies to the combined entity, and (vi) the Merger would be tax-free. The Wellsford Board of Trustees received further confirmation of its decision in the form of the written opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), dated January 16, 1997, to the effect that, as of such date and based upon certain assumptions and considerations, the consideration to be received by Wellsford Common Shareholders pursuant to the Merger and the Distribution was fair to such shareholders from a financial point of view. See "The Merger - Reasons for the Merger" and "Opinion of Financial Advisor - Wellsford." Opinions of Financial Advisors EQR. At the meeting of the Board of Trustees of EQR on January 15, 1997, J.P. Morgan rendered its oral opinion to the Board of Trustees of EQR that, as of such date, the consideration to be paid by EQR in connection with the proposed Merger was fair from a financial point of view to EQR. J.P. Morgan has confirmed its January 15, 1997 oral opinion by delivering its written opinion to the Board of Trustees of EQR, dated January 16, 1997, that as of such date, the consideration to be paid by EQR in connection with the proposed Merger was fair from a financial point of view to EQR. No limitations were imposed by EQR's Board of Trustees upon J.P. Morgan with respect to the investigations made or procedures followed by it in rendering its opinions. See "The Merger -Opinion of Financial Advisor - EQR." Wellsford. At the meeting of the Board of Trustees of Wellsford on January 16, 1997, Merrill Lynch rendered its oral opinion to the Board of Trustees of Wellsford, and subsequently 9 on such date Merrill Lynch delivered its written opinion, that, as of such date and based upon the assumptions made, matters considered and limits of review, as set forth in such opinion, the proposed consideration to be received by the holders of Wellsford Common pursuant to the Merger and the Distribution was fair to such shareholders from a financial point of view. No limitations were imposed by Wellsford's Board of Trustees upon Merrill Lynch with respect to the investigations made or procedures followed by it in rendering its opinions. See "The Merger - Opinion of Financial Advisor - Wellsford." Risk Factors In considering whether to approve the Merger, the shareholders of EQR and Wellsford voting on the Merger should consider, in addition to the other information in this Joint Proxy Statement/Prospectus/Information Statement, the matters discussed under "Risk Factors." Such matters include: . Adverse consequences normally associated with debt or preferred equity financing, including the risk that the Surviving Trust's cash flow will be insufficient to meet required payments of principal and interest. . Risks associated with the potential change in the relative share prices of EQR Common and Wellsford Common prior to the time the Merger becomes effective. . Possible payment of liquidated damages and expenses: the Merger Agreement provides for a "Break-Up Fee" of $14 million (the "Break-Up Fee") plus "Break-Up Expenses" of up to $2.5 million (the "Break-Up Expenses") payable by Wellsford to EQR if the Merger Agreement is terminated by either EQR or Wellsford under certain circumstances and, within one year thereafter, Wellsford enters into an agreement regarding an "Acquisition Proposal," as defined herein, which is consummated. If the Merger Agreement is terminated by either EQR or Wellsford under certain other circumstances, either EQR or Wellsford will be required to pay the other party's Break-Up Expenses of up to $2.5 million. See "The Merger-Termination Provisions." . Possible conflicts of interest due to the fact that certain members of management of Wellsford, pursuant to existing agreements, have certain interests that arise in connection with the Merger and the Distribution that are in addition to the interests of shareholders of Wellsford generally. . Shareholders of EQR and Wellsford do not have appraisal rights in connection with the Merger under Maryland law. 10 Interests of Certain Persons In considering whether to approve the Merger, shareholders should be aware that certain members of the management of Wellsford and the Wellsford Board of Trustees have certain interests that arise in connection with the Merger and the Distribution that are in addition to the interests of shareholders of Wellsford generally. The Board of Trustees considered these interests and deliberated upon any resulting conflicts of interest unanimously concluding that the advantages of the Merger and Distribution and the benefits thereof to the shareholders outweighed any conflicts of interest. These additional interests arise under existing agreements with, and annual compensation awards from, Wellsford, which were approved by Wellsford's independent trustees in prior years, and proposed agreements with WRP Newco and the Surviving Trust relating to, among other things, severance payments to be made to certain executive officers (but not Jeffrey H. Lynford, Chairman of the Board, and Edward Lowenthal, President and Chief Executive Officer), the forgiveness of loans made to certain executive officers incurred to acquire shares of Wellsford Common, the issuance of additional shares of Wellsford Common to certain executive officers, the acceleration of vesting of restricted share grants issued to certain executive officers (but not Messrs. Lynford and Lowenthal), payments to be made to certain executive officers to satisfy income and excise tax obligations resulting from certain monies and other benefits to be paid to them in connection with the Merger and the issuance of WRP Newco stock options to certain executive officers and trustees of Wellsford in replacement of certain existing Wellsford share options and reload options granted in connection with the exercise of vested Wellsford options. In addition, upon completion of the Merger, WRP Newco will enter into employment agreements with Messrs. Lynford and Lowenthal for approximately five and one-half years and employment agreements with Gregory F. Hughes, Chief Financial Officer of Wellsford, and David M. Strong, a Vice President of Wellsford, for two years. WRP Newco will also assume the existing split dollar life insurance arrangements between Wellsford and Messrs. Lynford and Lowenthal. See "Interests of Certain Persons in the Merger and Distribution." Further, upon completion of the Merger, Messrs. Lynford and Lowenthal will each enter into a five-year consulting agreement with ERP Operating Partnership and will be appointed to the Board of Trustees of the Surviving Trust for a three-year term. In addition, Donald D. MacKenzie, Executive Vice President- Director of Operations of Wellsford, will be a Senior Vice President of the Surviving Trust upon completion of the Merger. The Surviving Trust will indemnify each trustee and officer of Wellsford for all actions on or prior to the Effective Time to the same extent such individuals were indemnified by Wellsford prior to the Effective Time. Effective Time of the Contribution and the Distribution As stated in "The Contribution and Distribution," the Contribution and the Distribution will take place immediately prior to the Merger. 11 Effective Time of the Merger and Closing Date The closing ("Closing") of the Merger will take place at 10:00 a.m. on the date to be specified by EQR and Wellsford, which will be no later than the third business day after satisfaction or waiver of the conditions set forth in the Merger Agreement (the "Closing Date"), at the offices of Rudnick & Wolfe, 203 North LaSalle Street, Chicago, Illinois 60601, unless another date or place is agreed to in writing by the parties. The Merger will become effective at the time the State Department of Assessments and Taxation of Maryland (the "Department") accepts for record the Articles of Merger (the "Articles"), or at such time as EQR and Wellsford will agree should be specified in the Articles (not to exceed 30 days after the Articles are accepted for record by the Department). It is currently anticipated that the Merger will be effective on or about May 30, 1997. Conditions to the Merger The obligations of EQR and Wellsford to consummate the Merger are subject to the satisfaction or waiver of certain conditions, including, among others, (i) obtaining the requisite approval of the shareholders of EQR and shareholders of Wellsford, (ii) the absence of any material adverse change in the financial condition, business or operations of Wellsford or EQR, (iii) the receipt of certain legal opinions, including opinions with respect to the tax consequences of the Merger, (iv) the receipt of all material consents, authorizations, orders and approvals of governmental agencies and third parties, (v) the consummation of certain transactions by and between EQR, ERP Operating Partnership and WRP Newco, (vi) the execution of certain agreements between each of Wellsford and EQR and their respective affiliates, and (vii) the consummation of the Contribution and the Distribution. EQR and Wellsford each have the right to waive any conditions to their respective obligations to consummate the Merger. See "The Merger - Conditions of the Merger." Appraisal Rights Shareholders of Wellsford and shareholders of EQR are not entitled to dissenting shareholders' appraisal rights under Maryland law. Maryland law does not provide appraisal rights to shareholders of a REIT in connection with a merger if their shares are listed on a national securities exchange, such as the NYSE, on the record date for determining shareholders entitled to vote on such merger. All of the shares of EQR and Wellsford outstanding on the record date for determining the shareholders entitled to vote on the Merger were listed on the NYSE. Federal Income Tax Consequences Tax Consequences of Merger. The Merger is intended to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). For a more detailed discussion of certain U.S. Federal income tax consequences of the 12 Merger and certain other matters related thereto, see "The Merger -- Federal Income Tax Consequences." Tax Consequences of Distribution. To the extent the fair market value of the shares of WRP Newco Common distributed in the Distribution to Wellsford Common Shareholders exceeds Wellsford's tax basis in such shares, gain will be recognized by Wellsford. Assuming Wellsford qualifies as a REIT and has a dividends paid deduction for distributions to its shareholders at least equal to its REIT taxable income (as computed before taking into account the dividends paid deduction), no REIT level tax will be incurred on account of the Distribution. The distribution of shares of WRP Newco Common will, however, be taxable to Wellsford Common Shareholders to the same extent as any other distribution made by Wellsford to the Wellsford Common Shareholders. Thus, so long as Wellsford qualifies for taxation as a REIT, distributions with respect to its shares, including the Distribution, made out of current or accumulated earnings and profits allocable thereto (and not designated as capital gain dividends) will be includible by the Wellsford Common Shareholders as ordinary income for Federal income tax purposes. For a more detailed discussion, see "Tax Consequences of the Distribution." Termination The Merger Agreement provides that it may be terminated in a number of circumstances at any time prior to the Effective Time, whether before or after the approval of the Merger by the shareholders of EQR and shareholders of Wellsford. See "The Merger - Termination Provisions." Termination Fees Depending on the reason for the Merger Agreement's termination, Wellsford may be required to pay EQR either the Break-Up Fee and Break-Up Expenses or Break-Up Expenses, or EQR may be required to pay Wellsford the Break-Up Expenses. See "The Merger - Termination Fees and Expenses." Anticipated Accounting Treatment The Merger will be treated as a purchase in accordance with Accounting Principles Board Opinion No. 16. No Solicitation of Other Transactions Wellsford has agreed that it (and its subsidiaries) will not, and will use its best efforts to not permit its officers, trustees, employees, agents or financial advisors to, initiate, solicit or encourage, directly or indirectly, any inquiries or the making or implementation of any proposal 13 or offer (including, without limitation, any proposal or offer to its shareholders) with respect to a merger, acquisition, tender offer, exchange offer, consolidation, sale of assets or similar transactions involving all or any significant portion of the assets or any equity securities of, it or any of its subsidiaries, other than the transactions contemplated by the Merger Agreement. The Merger Agreement does not, however, prohibit Wellsford from entering into discussions with respect to an unsolicited proposal if the Board of Trustees of Wellsford determines that such action is required by its duties to its shareholders imposed by law. EQR has agreed that if it enters into negotiations with another entity having a class of equity securities registered under the Exchange Act regarding the acquisition of such entity (whether effected through a merger, consolidation, share exchange, tender offer or other form), then at least three business days prior to executing any definitive agreement with such entity with respect to such acquisition or making a tender offer for the shares or other ownership interests of such entity, EQR will notify Wellsford of such transaction and consult with Wellsford with respect thereto, it being understood, however, that Wellsford will have no approval rights with respect thereto. Conversion of Shares; Exchange of Certificates Each share of Wellsford Common outstanding immediately prior to the Effective Time will be converted into .625 share of validly issued, fully paid and nonassessable Survivor Common. Each share of EQR Common outstanding immediately prior to the Effective Time will be converted into one share of validly issued, fully paid and nonassessable Survivor Common. Each share of EQR Preferred and Wellsford Preferred outstanding immediately prior to the Effective Time will continue as one validly issued, fully paid and nonassessable share of Survivor Preferred, with all the preferences, rights and powers that each share previously had as shares issued by EQR or Wellsford, as the case may be, and will rank pari passu with each other outstanding Survivor Preferred; provided, however, that the conversion ratio relating to the Wellsford Series A will be adjusted in accordance with its terms. All shares of Wellsford Common, when converted pursuant to the Merger, will no longer be outstanding and will automatically be canceled and retired and each holder of a certificate representing Wellsford Common will cease to have any rights with respect thereto, except the right to receive shares of Survivor Common, and cash in lieu of any fractional shares of Survivor Common, as well as any distributions declared with respect thereto with a record date after the Effective Time. At the Effective Time, each certificate representing outstanding shares of Wellsford Preferred will cease to have any rights with respect to such shares, except the right to receive a certificate of the Surviving Trust representing an equal number of Survivor Preferred. Wellsford Common Shareholders should not tender their certificates for Wellsford Common with their proxy. As promptly as practicable after the Effective Time, Boston EquiServe LLP, an affiliate of First National Bank of Boston, as the exchange agent ("Exchange Agent"), will mail to the shareholders of Wellsford transmittal materials for use in exchanging certificates evidencing Wellsford Shares for certificates evidencing shares of the Survivor 14 Common or Survivor Preferred ("Survivor Shares"). See "The Merger - Exchange of Certificates." At the Effective Time, each certificate evidencing outstanding shares of EQR Common and EQR Preferred will, without any action by the holders thereof, thereafter evidence the same number of shares of Survivor Common and Survivor Preferred, as the case may be. Management of the Surviving Trust The Surviving Trust will initially have twelve trustees. The Board of Trustees of the Surviving Trust will be made up of the current trustees of EQR, Jeffrey H. Lynford, the Chairman of the Wellsford Board of Trustees, and Edward Lowenthal, a Trustee and the President of Wellsford. The Board of Trustees of the Surviving Trust will be divided into three equally numbered classes serving staggered three-year terms. One class will serve as trustees until the 1997 annual meeting of shareholders, one class will serve as trustees until the 1998 annual meeting of shareholders, and one class will serve as trustees until the 1999 annual meeting of shareholders. Senior management of the Surviving Trust will be drawn from the present management of EQR. As a condition to the consummation of the Merger, Jeffrey H. Lynford and Edward Lowenthal will enter into consulting agreements with ERP Operating Partnership. In addition, Donald MacKenzie, Executive Vice President- Director of Operations of Wellsford, will be a Senior Vice President of the Surviving Trust upon completion of the Merger. See "The Merger -Interests of Certain Persons in the Merger and Distribution." After the Merger, management and control of ERP Operating Partnership will be vested in the Surviving Trust, which will serve as its sole general partner. The Merger Agreement also contains provisions relating to, among other things, employee benefits and indemnification and liability coverage of former trustees and officers of Wellsford after the Merger. See "The Merger -Interests of Certain Persons in the Merger and Distribution." The Meetings of Shareholders EQR The EQR Special Meeting has been called to consider and vote on the approval of the Merger. The EQR Special Meeting will be held on May 28, 1997 at 10:00 a.m., local time, at One North Franklin, Chicago, Illinois. Only holders of record of EQR Common at the close of business on April 14, 1997 will be entitled to vote at the EQR Special Meeting. Each holder of EQR Common is entitled to one vote per share on the Merger as proposed in the notice of the EQR Special Meeting. EQR had outstanding 53,713,158 shares of EQR Common as of the 15 close of business on April 1, 1997, of which 1,022,666 shares (or approximately 1.9% of the outstanding shares of EQR Common) (excluding 681,534 shares where beneficial ownership is disclaimed) were owned beneficially by the officers and trustees of EQR, and such persons have indicated their intention to vote such shares in favor of each of the proposals. Approval of the Merger requires the affirmative vote of two-thirds of the holders of the outstanding shares of EQR Common. Wellsford The Wellsford Special Meeting has been called to consider and vote on the approval of the Merger, including the adoption of an amended and restated declaration of trust of the Surviving Trust, the approval of the Additional Provisions, the approval of the Additional Share Offering and the adoption of WRP Newco's 1997 Management Incentive Plan. See "--Proposal Regarding Additional Declaration of Trust Provisions," "--Proposals Regarding WRP Newco," "Proposal Regarding Additional Declaration of Trust Provisions," "Proposal to Approve WRP Newco Additional Share Offering" and "Proposal to Approve WRP Newco's 1997 Management Incentive Plan." The Wellsford Special Meeting will be held on May 28, 1997, at 10:00 a.m., local time, at The Princeton Club, 15 West 43rd Street, New York, New York. Only holders of record of Wellsford Common at the close of business on April 14, 1997 will be entitled to notice of and to vote at the Wellsford Special Meeting. Each holder of Wellsford Common is entitled to one vote per share as proposed in the notice of the Wellsford Special Meeting. Wellsford had outstanding 17,261,897 shares of Wellsford Common as of the close of business on April 18, 1997, of which 599,828 shares (or approximately 3.5% of the outstanding shares of Wellsford Common) (excludes 29,727 shares where beneficial ownership is disclaimed) were owned beneficially by the officers and trustees of Wellsford, and such persons have indicated their intention to vote such shares in favor of the proposals. Approval of the Merger requires the affirmative vote of the Wellsford Common Shareholders holding a majority of the Wellsford Common Shares. Approval of the Additional Provisions requires the affirmative vote of the holders of two-thirds of the outstanding shares of Wellsford Common. Approval of the Additional Share Offering and adoption of WRP Newco's 1997 Management Incentive Plan require the affirmative vote of the holders of a majority of the outstanding shares of Wellsford Common voting. Wellsford Common Shareholders may revoke their proxies at any time prior to the voting thereof by giving written notice of such revocation to Wellsford, by executing and delivering a proxy bearing a later date, or by attending the Wellsford Special Meeting and voting in person. 16 Surviving Trust Summary Unaudited Pro Forma Combined Financial Data The following tables set forth the summary unaudited pro forma combined financial data for the Surviving Trust as a combined entity, giving effect to the Merger as if it had occurred on the dates indicated herein, after giving effect to the pro forma adjustments described in the notes to the unaudited pro forma financial statements included elsewhere in the Joint Proxy Statement/Prospectus/Information Statement. The summary unaudited pro forma combined operating data are presented as if the Merger had been consummated at the beginning of the period presented. The summary unaudited pro forma combined balance sheet data is presented as if the Merger had occurred on December 31, 1996. The Merger has been accounted for under the purchase method of accounting in accordance with the Accounting Principles Board Opinion No. 16. In the opinion of management, all significant adjustments necessary to reflect the effects of the Merger have been made. The summary pro forma financial information should be read in conjunction with, and is qualified in its entirety by, the respective historical audited financial statements and notes thereto of EQR and Wellsford incorporated by reference into this Joint Proxy Statement/Prospectus/Information Statement and the unaudited pro forma financial statements and notes thereto included elsewhere in the Joint Proxy Statement/Prospectus/Information Statement. The summary unaudited pro forma operating and balance sheet data are presented for comparative purposes only and are not necessarily indicative of what the actual combined results of EQR and Wellsford would have been for the period and dates presented. Nor does such data purport to represent the results of future periods. 17 SURVIVING TRUST ---------------
OPERATING DATA: Pro Forma Year Ended December 31, 1996 ------------------------ REVENUES: (Amount in thousands except per share data) Rental income $578,820 Fee and asset management 6,749 Interest income-investment in mortgage notes 12,819 Interest and other income 11,061 -------- Total revenues 609,449 -------- EXPENSES: Property and maintenance 167,526 Real estate taxes and insurance 54,010 Property management 21,506 Fee and asset management 3,837 Depreciation 124,211 Interest: Expense incurred 103,538 Amortization of deferred financing costs 4,242 General and administrative 10,353 -------- Total Expenses 489,223 -------- Income before gain on disposition of properties and (loss) on joint venture communities 120,226 Gain on disposition of properties 22,336 (Loss) on joint venture communities (58) -------- Income before extraordinary item and allocation to Minority Interests 142,504 Extraordinary Item: Write-off of unamortized cost on refinanced debt (3,512) -------- Income before allocation to Minority Interests 138,992 Income allocated to Minority Interests (15,706) -------- Net income 123,286 Preferred distributions 41,563 -------- Net income available for Common Shares $ 81,723 ======== Net income per weighted average Common Share outstanding $1.53 ======== Weighted average Common Shares outstanding 53,317 ========
18
Pro Forma ================= December 31, 1996 ----------------- BALANCE SHEET DATA: (at end of period) Real estate, after accumulated depreciation $3,708,310 ========== Total assets $3,968,482 ========== Total debt $1,576,869 ========== Minority Interests $ 190,793 ========== Shareholders' Equity $2,048,133 ==========
19 Equity Residential Properties Trust Summary Historical and Combined Financial Data The following tables set forth summary historical and combined financial data for EQR. The summary historical combined financial data for each of the years ended December 31, 1992, 1993, 1994, 1995 and 1996 are derived from the audited financial statements of EQR as reported in its Annual Reports on Form 10-K. The summary historical financial data should be read in conjunction with, and is qualified in its entirety by, the historical and combined financial statements and notes thereto of EQR incorporated by reference into this Joint Proxy Statement/Prospectus/Information Statement. 20 EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED AND COMBINED HISTORICAL FINANCIAL INFORMATION (Amounts in thousands except per share data)
Year Ended December 31, -------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- -------- --------- OPERATING DATA: REVENUES Rental income $ 454,412 $ 373,919 $ 220,727 $104,388 $ 86,597 Fee and asset management 6,749 7,030 4,739 4,651 4,215 Interest income-investment in mortgage notes 12,819 4,862 -- -- -- Interest and other income 4,405 4,573 5,568 3,031 2,161 ---------- ---------- ---------- -------- --------- Total revenues 478,385 390,384 231,034 112,070 92,973 ----------- ---------- ---------- -------- --------- EXPENSES Property and maintenance 127,172 112,186 66,534 35,324 30,680 Real estate taxes and insurance 44,128 37,002 23,028 11,403 10,274 Property management 17,512 15,213 10,249 4,938 2,912 Property management-non-recurring -- -- 879 -- -- Fee and asset management 3,837 3,837 2,056 2,242 2,403 Depreciation 93,253 72,410 37,273 15,384 13,442 Interest: Expense incurred 81,351 78,375 37,044 26,042 31,926 Amortization of deferred financing costs 4,242 3,444 1,930 3,322 2,702 Refinancing costs -- -- -- 3,284 -- General and administrative 9,857 8,129 6,053 1,994 1,915 ---------- ---------- ---------- -------- --------- Total expenses 381,352 330,646 185,046 103,933 96,254 ---------- ---------- ---------- -------- ---------
21
Year Ended December 31, ------------------------------------------------------------ 1996 1995 1994 1993 1992 ---------- ---------- ---------- --------- --------- Income (loss) before gain on disposition of properties, extraordinary items and allocation to Minority Interests 97,033 59,738 45,988 8,137 (3,281) Gain on disposition of properties 22,402 21,617 -- -- -- ---------- ---------- ---------- -------- --------- Income (loss) before extraordinary items and allocation to Minority Interests 119,435 81,355 45,988 8,137 (3,281) Extraordinary Items: Write-off of unamortized costs on refinanced debt (3,512) -- -- -- -- Gain on early extinguishment of debt -- 2,000 -- -- -- Gain on discharge of indebtedness -- -- -- 1,792 18,203 ---------- ---------- ---------- -------- --------- Income (loss) before allocation to Minority Interests 115,923 83,355 45,988 9,929 14,922 Income allocated to Minority Interests (14,299) (15,636) (11,570) (3,834) -- ---------- ---------- ---------- ------- --------- Net income (loss) 101,624 67,719 34,418 6,095 14,922 Preferred distributions (29,015) (10,109) -- -- -- ---------- ---------- ---------- -------- --------- Net income (loss) available for Common Shares $ 72,609 $ 57,610 $ 34,418 $ 6,095 $ 14,922 ========== ========== ========== ======== ========= Net income per weighted average Common Share outstanding $ 1.70 $ 1.68 $ 1.34 $ .42 -- Weighted average Common Shares outstanding 42,586 34,358 25,621 14,601 -- BALANCE SHEET DATA (at end of period): Real estate, before accumulated depreciation $2,983,510 $2,186,636 $1,963,476 $634,577 $ 358,212 Real estate, after accumulated depreciation $2,681,998 $1,969,453 $1,770,735 $478,210 $ 218,825 Total assets $2,986,127 $2,141,260 $1,847,685 $535,914 $ 238,878 Total debt $1,254,274 $1,002,219 $ 994,746 $278,642 $ 343,282 Minority Interests $ 150,637 $ 168,963 $ 177,438 $ 83,159 $ -- Shareholders' Equity (Net Deficit) $1,458,830 $ 884,517 $ 609,936 $146,485 $(122,094)
22 Wellsford Residential Property Trust Summary Historical Financial Data The following tables set forth summary historical financial data for Wellsford. The summary historical financial data for each of the years ended December 31, 1992, 1993, 1994, 1995 and 1996 are derived from the audited financial statements of Wellsford as reported in its Annual Reports on Form 10-K. The summary historical financial data should be read in conjunction with, and is qualified in its entirety by, the historical financial statements and notes thereto of Wellsford incorporated by reference into this Joint Proxy Statement/Prospectus/Information Statement. Certain reclassifications have been made to Wellsford's historical financial data to conform to EQR's presentation. 23 WELLSFORD RESIDENTIAL PROPERTY TRUST SUMMARY HISTORICAL FINANCIAL DATA
Year Ended December 31, ----------------------- Historical (000s except per share data) -------------------------------------------------------- 1996 1995 1994 1993 1992 -------------------------------------------------------- Revenues $ 131,821 $ 131,232 $ 82,794 $ 42,007 $ 26,229 Expenses (109,035) (113,712) (73,299) (34,816) (26,991) Gain (loss) on sale of investment communities (66) (819) -- 882 -- Loss on joint venture communities (58) (279) -- -- -- --------- --------- -------- -------- -------- Income (loss) before extraordinary item $ 22,662 $ 16,422 $ 9,495 $ 8,073 $ (762) ========= ========= ======== ======== ======== Net income (loss) $ 22,662 $ 10,869 $ 9,495 $ 8,073 $ (762) Preferred dividends (12,548) (8,973) (7,000) (972) -- --------- --------- -------- -------- -------- Net income (loss) available for common shareholders $ 10,114 $ 1,896 $ 2,495 $ 7,101 $ (762) ========= ========= ======== ======== ======== Net income (loss) per common share $ 0.59 $ 0.11 $ 0.25 $ 0.91 $ (0.34) ========= ========= ======== ======== ======== Weighted average number of common shares outstanding 17,057 16,938 10,070 7,813 2,273 ========= ========= ======== ======== ========
24 WELLSFORD RESIDENTIAL PROPERTY TRUST SUMMARY HISTORICAL FINANCIAL DATA
Year Ended December 31, -------------------------------------------------------- Historical (000s except share data) -------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Real Estate assets before accumulated depreciation $795,580 $736,399 $747,519 $301,389 $156,568 Real estate assets after accumulated depreciation 711,614 677,908 712,742 282,224 143,787 Total Assets 756,289 729,638 745,754 322,400 165,963 Mortgages Payable 82,731 77,137 208,858 24,203 17,155 Convertible note payable -- -- -- 46,070 55,358 Unsecured credit facility 18,075 -- 140,000 -- -- Senior unsecured notes 248,496 223,307 -- -- -- Shareholders' equity 376,686 398,359 371,655 239,775 89,986 Cash dividends declared per Series A preferred share $1.75 $1.75 $1.75 $0.24 $ -- ===== ===== ===== ===== ===== Cash dividends declared per Series B preferred share $2.41 $0.86 $ -- $ -- $ -- ===== ===== ===== ===== ===== Cash dividends declared per common share $1.94 $1.92 $1.80 $1.68 $0.16 ===== ===== ===== ===== =====
25 Comparative Per Share Data The following summary presents selected comparative unaudited per share information for EQR and Wellsford on an historical basis and EQR and Wellsford on a pro forma combined basis assuming the combination had been effective throughout the periods presented. Wellsford pro forma equivalent per share amounts are presented with respect to pro forma information. Such per share amounts allow comparison of historical information with respect to the value of one share of Wellsford Common to the corresponding information with respect to the projected value of one share of Survivor Common as a result of the Merger by multiplying the pro forma amounts by the Exchange Ratio of .625 to 1.
Year Ended December 31, 1996 ------------ Net Income Per Common Share EQR $ 1.70 Wellsford .59 Surviving Trust pro forma combined(A) 1.53 Wellsford pro forma equivalent (B) .96 Cash Distributions Declared Per Common Share EQR $ 2.40 Wellsford 1.94 Surviving Trust pro forma combined(A) 2.40 Wellsford pro forma equivalent (B) 1.50 Shareholders' Equity Per Common Share EQR $28.52 Wellsford 22.03 Surviving Trust pro forma combined(A) 33.10 Wellsford pro forma equivalent (B) 20.69 - -----------------------
26 (A) The pro forma combined Net Income Per Common Share and Cash Distributions Declared Per Common Share data for the Surviving Trust has been prepared assuming that in the Merger each share of Wellsford Common is converted into .625 of a share of Survivor Common resulting in total weighted average outstanding shares of Survivor Common of 53,317,000 for the year ended December 31, 1996. For the Shareholder's Equity Per Common Share data, total outstanding shares of Survivor Common was 61,886,000 for the year ended December 31, 1996. (B) The Wellsford pro forma equivalent is determined by multiplying the Exchange Ratio (.625) by the Surviving Trust pro forma combined per share amounts so that the per share amounts are equated to the comparative values for each share of Wellsford Common. 27 Comparative Share Prices EQR The EQR Common has been traded on the NYSE under the symbol "EQR" since August 11, 1993. The following table sets forth the quarterly high and low sales prices per share of EQR Common reported on the NYSE, as well as the quarterly distributions declared per share of EQR Common, from January 1, 1995 through April 18, 1997.
High Low Distributions ------- ------ ------------- 1995 - ---- First Quarter........................... 29 1/8 25 5/8 .53 Second Quarter.......................... 29 3/4 24 7/8 .53 Third Quarter........................... 31 3/4 27 3/4 .53 Fourth Quarter.......................... 31 7/8 28 .59 1996 - ---- First Quarter........................... 33 3/4 28 1/4 .59 Second Quarter.......................... 33 1/2 30 7/8 .59 Third Quarter........................... 36 1/8 32 7/8 .59 Fourth Quarter.......................... 43 3/8 35 5/8 .625 1997 - ---- First Quarter........................... 45 39 3/4 .625(1) Second Quarter (through April 18, 1997). 46 42 3/4 N/A - ----------------
(1) The first quarter distribution was paid on April 11, 1997 to shareholders of record as of March 28, 1997 and represents an annual distribution rate of $2.50 per share. On April 18, 1997, the last reported sale price of a share of EQR Common on the NYSE was 43 1/8 per share. On January 16, 1997, the last full trading day prior to the pubic announcement of the Merger, the last reported sale price of a share of EQR Common on the NYSE was 43 3/8. As of April 18, 1997, EQR's transfer agent reported 544 record holders of EQR Common and, as of April 1997, The Depository Trust Company held EQR Common on behalf of approximately 19,500 beneficial owners. 28 Wellsford The Wellsford Common has been traded on the NYSE under the symbol "WRP" since November 20, 1992. The following table sets forth the quarterly high and low sales prices per share of Wellsford Common reported on the NYSE, as well as the quarterly distributions declared per share of Wellsford Common from January 1, 1995 through April 18, 1997.
High Low Distributions ---- --- ------------- 1995 - ---- First Quarter............................ 21 3/4 19 1/4 $ .48 Second Quarter........................... 22 3/4 20 .48 Third Quarter............................ 22 3/4 21 1/8 .48 Fourth Quarter........................... 23 1/8 19 5/8 .48 1996 - ---- First Quarter............................ 24 1/4 21 3/8 .485 Second Quarter........................... 22 7/8 20 1/2 .485 Third Quarter............................ 23 1/8 20 3/4 .485 Fourth Quarter........................... 25 21 1/2 .485 1997 - ---- First Quarter............................ 31 3/4 24 1/8 .485 Second Quarter (through April 18, 1997).. 30 1/2 28 1/2 N/A - ----------------------
On April 18, 1997, the last reported sale price of a share of Wellsford Common on the NYSE was 28 7/8 per share. On January 16, 1997, the last full trading day prior to the pubic announcement of the Merger, the last reported sale price of a share of Wellsford Common on the NYSE was 25 3/4. As of April 18, 1997, Wellsford's transfer agent reported 629 record holders of Wellsford Common and, as of April 18, 1997, The Depository Trust Company held Wellsford Common on behalf of approximately 13,500 beneficial owners. BECAUSE THE EXCHANGE RATIO IS FIXED AND THE MARKET PRICE OF EQR COMMON IS SUBJECT TO FLUCTUATION, THE MARKET VALUE OF THE SURVIVOR COMMON THAT HOLDERS OF WELLSFORD COMMON WILL RECEIVE IN THE MERGER MAY INCREASE OR DECREASE PRIOR TO AND FOLLOWING THE MERGER. SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR EQR COMMON AND WELLSFORD COMMON. 29 Proposal Regarding Additional Declaration of Trust Provisions The Wellsford Common Shareholders are being asked to separately approve the Additional Provisions to the Surviving Trust Declaration (defined herein) to further conform the Surviving Trust Declaration to the terms of the EQR Declaration (defined herein) and to update the Surviving Trust Declaration to reflect the current approaches in the REIT industry regarding share ownership restrictions necessary to maintain REIT status. Removal of Trustees. Section 2.3 of the Wellsford Declaration currently provides for the removal of Trustees, with or without cause, by the affirmative vote of the holders of not less than two-thirds of the Wellsford Shares then outstanding and entitled to vote on the election of trustees. The Additional Provisions will provide for the removal of Trustees only with cause. Restrictions on Transfer and Ownership of Shares. In order to maintain its status as a REIT under the Code and Title 8, Section 6.6 of the Wellsford Declaration currently imposes a number of restrictions on the transfer and ownership of Wellsford Shares. See "Comparison of Rights of Shareholders - Restrictions on the Ownership, Transfer or Issuance of Shares." Since the adoption of the Wellsford Declaration in 1992, the comparable section of the declarations of other REITs has evolved into more detailed provisions relating to the applicable ownership limits and compliance with the Code. The Additional Provisions will modify the restrictions on transfer to reflect the effects of the Merger and the Surviving Trust's relationship with ERP Operating Partnership. Amendment to Declaration. Section 9.1 of the Wellsford Declaration currently provides for its amendment by the affirmative vote of the holders of not less than a majority of the Wellsford Shares outstanding and entitled to vote thereon, except that amendments related to the removal of trustees, the restrictions on the ownership of Wellsford Shares, the reorganization of Wellsford and the merger, consolidation or sale of all or substantially of Wellsford's property must be approved by the affirmative vote of the holders of two-thirds of the Wellsford's Shares then outstanding and entitled to vote on the matter. The Additional Provisions will require the foregoing to be approved by a two-thirds vote of the Survivor Shares then outstanding and entitled to vote thereon. Mergers, Consolidation, or Sale of Trust Property. Section 9.2 of the Wellsford Declaration currently states that, upon the affirmative vote of the holders of not less than two-thirds of the Wellsford Shares then outstanding and entitled to vote thereon, the trustees of Wellsford may reorganize Wellsford by creating a separate entity into which Wellsford will merge or sell its assets. In addition, Section 9.3 of the Wellsford Declaration currently provides that if Wellsford is not the surviving entity in a merger or consolidation, or in the event of a sale of all or substantially all of Wellsford's property, that transaction must be approved by two-thirds of the Wellsford Shares then outstanding and entitled to vote thereon. In all other cases, such a merger or consolidation need only be approved by a majority of the Wellsford Shares then outstanding and entitled to vote thereon. The Additional Provisions provide that any merger, consolidation, or sale of all or substantially all of the Surviving Trust's property will be required to be approved by the holders of a majority of the Survivor Shares then outstanding and entitled to vote thereon. For a more detailed description of the Additional Provisions, see "Proposal Regarding Additional Declaration of Trust Provisions." 30 Wellsford Real Properties, Inc. WRP Newco was organized to create and realize value by identifying and making opportunistic real estate investments through the direct acquisition, rehabilitation, development, financing and management of real properties and/or participation in these activities through the purchase of debt or equity securities of entities engaged in such real estate businesses. Management will concentrate its efforts on defining and building focused operating businesses with recurring sources of income. WRP Newco intends to maximize shareholder value over time through growth in cash flow and net asset value per share. WRP Newco believes that while liquidity has returned to many real estate markets and that the supply and demand of many real estate asset classes are in relative equilibrium, there are specific opportunities which are expected to continue to exist because of market inefficiencies and impediments to investment, such as transactional complexity, time-consuming regulatory approvals, the prospect of no or limited immediate cash flow and a lack of available property information and market information analysis. In this regard, WRP Newco will initially focus its investments on three distinct aspects of the real estate business which management believes currently offer such opportunities. They are (i) acquiring underperforming office and other commercial properties below replacement cost, renovating and/or repositioning them, and owning, operating and/or reselling such properties, (ii) investing in real estate-related debt instruments with the potential for high-yields or returns more characteristic of equity ownership and (iii) engaging in selective property development when justified by expected returns. As opportunities emerge, WRP Newco may in the future expand its real estate-related businesses and activities. WRP Newco currently does not intend to qualify as a REIT under the Code. Consequently, WRP Newco will have the flexibility to respond quickly to opportunities without the structural limitations inherent in REITs and to operate, when deemed advantageous by management, on a more highly leveraged basis than most REITs. By not qualifying as a REIT under the Code (which would require WRP Newco to distribute each year at least 95% of its net taxable income, excluding capital gains), WRP Newco will have the ability and currently intends to retain for reinvestment its cash flow generated from operations and to sell properties without the substantial income tax penalties which may be imposed on REITs in such transactions. In addition, WRP Newco will differ from opportunity funds that are typically structured as private partnerships. In that regard, the business of WRP Newco will be conducted without the payment of acquisition, disposition or advisory fees to general partners which should result in additional cash flow being available for reinvestment as well as mitigate the potential for conflicts of interest. In addition, unlike investors in opportunity funds, WRP Newco's shareholders are expected to have enhanced liquidity through their ability to sell or margin their stock. WRP Newco also hopes to attract a broader range of investors because there will be no stipulated investment minimum. However, unlike REITs and opportunity funds, WRP Newco will be subject to corporate level taxation. WRP Newco's management will include Jeffrey H. Lynford, Chairman, and Edward Lowenthal, President and Chief Executive Officer, who were co-founders of, and served in the same capacities at, Wellsford, supported by a management team with experience in real estate acquisitions, development, asset management and financing. WRP Newco believes that the over 50 years of combined experience of management in real estate, capital markets and public company operations, their knowledge, credibility, and business relationships, and their demonstrated track record of recognizing and profiting from emerging real estate trends should help WRP Newco accomplish its business objectives. Since the completion by Wellsford of the initial public offering of its common shares of beneficial interest in November 1992 (the "Wellsford IPO"), Messrs. Lynford and Lowenthal, through Wellsford Residential, acquired 69 multifamily properties containing 16,332 units. From calendar year 1992 through calendar year 1996, Wellsford's revenues increased from $26.5 million to $131.8 million, representing a compounded annual growth rate of approximately 49%, and Wellsford's earnings before interest, depreciation and amortization ("Wellsford EBITDA") increased from $13.8 million to $72.8 million, representing a compounded annual growth rate of approximately 52%. In analyzing potential investments and market trends and inefficiencies, management has reviewed, and will continue to review, current economic and market information. To date, WRP Newco has implemented its business strategy by identifying, negotiating and, except in one instance, consummating the following initial investments: (i) six office buildings located in Northern New Jersey containing an aggregate of approximately 940,400 gross square feet, five of which are vacant, acquired below replacement cost for an aggregate of $47.6 million, or $50 per gross square foot of building area, with respect to which WRP Newco currently expects to spend an aggregate of approximately $13.7 million in renovation and repositioning costs; (ii) a $20 million subordinated secured mezzanine loan with respect to a class A office building located at 277 Park Avenue, New York City, expected to close in April 1997, (iii) a $17.8 million mortgage on, and option to purchase, a 344-unit class A residential apartment complex in Tucson, Arizona and (iv) an approximate 80% interest in Phases I and II of, and in options to acquire (at fixed prices) and develop Phases III, IV and V of, a 1,880-unit class A multifamily development in a suburb of Denver, Colorado. See "WRP Newco's Business and Properties". Upon completion of the Distribution and consummation of the Merger, WRP Newco expects to have available various sources of capital, financing and credit support, including (i) the proceeds of $3.5 million from the acquisition by ERP Operating Partnership of WRP Newco's Class A common stock, par value $.01 per share ("WRP Newco Class A Common") at a price equal to the per share sales price to any institutional purchaser of WRP Newco Common Stock on or prior to the Effective Time or, if there is no such purchaser, at a price equal to the book value (the "WRP Newco Book Value") per share of WRP Newco Common Stock (which is currently estimated to be $10.43 per share) at the time of the Merger (the "Issuance Price"), (ii) the commitment of ERP Operating Partnership to acquire at WRP Newco's option up to $25 million of WRP Newco's Series A 8% Convertible Redeemable Preferred Stock ("WRP Newco Series A Preferred"), each share of WRP Newco Series A Preferred being convertible into shares of WRP Newco Common Stock at a premium equal to 8% of the Issuance Price ("ERP Preferred Commitment") and (iii) a $50 million two-year line of credit (extendible for one year) from The First National Bank of Boston ("Bank of Boston") and Morgan Guaranty Trust Company of New York ("Morgan Guaranty") ("WRP Newco Line of Credit") which will initially bear interest at an annual rate equal to LIBOR plus 175 basis points. The ERP Preferred Commitment will be pledged as security for the WRP Newco Line of Credit. See "Wellsford Real Properties, Inc. - Initial Capital and Financing" and "Description of Capital Stock of WRP Newco - Series A 8% Convertible Redeemable Preferred Stock". WRP Newco Risk Factors In addition to general investment and real estate risks and those factors set forth elsewhere in this Joint Proxy Statement/Prospectus/Information Statement under "WRP Newco Risk Factors," in 31 connection with WRP Newco's future business activities, Wellsford Common Shareholders should be aware of, among other things, the following factors: . Nature of investments may involve high risk. . Illiquidity of WRP Newco's real estate investments. . Competition in identifying and making investments and attracting tenants. . Risks of excessive costs and delays associated with the acquisition, development, construction and renovation of properties. . Risks of vacancies at existing properties. . Lack of control and risks associated with equity investments in and with third parties. . Lack of limitation on the amount of debt that may be incurred and risks of highly leveraged investments. . Risks associated with debt instruments held by WRP Newco, including the possibility that borrowers may not be able to make payments when due, that the value of collateral may be less than amounts owed and that interest rates charged may be less than WRP Newco's cost of funds. . Risks associated with investments in mortgage loans and junior mortgages, including lack of control over the collateral and any foreclosure procedures. . Risks associated with investments in commercial mortgage-backed securities, resulting, in part, from the fact that the process of rating and servicing such securities is difficult and existing credit support is inadequate. . WRP Newco is a newly-formed entity without any prior operating history. . Risks of uninsured loss at WRP Newco's properties. . Potential liability for unknown or future environmental liabilities. . WRP Newco is dependent primarily upon the efforts of its Chairman of the Board and President and Chief Executive Officer. . Tax consequences of the Distribution. . The ability of WRP Newco's Board of Directors to amend or revise WRP Newco's investment and other policies without a vote of stockholders. . The lack of a prior market for shares of WRP Newco Common. . The potential antitakeover effect of certain provisions of WRP Newco's Articles of Amendment and Restatement (the "Newco Charter") and Maryland law. 32 Management The management of WRP Newco will be led by substantially all of the current senior management of Wellsford, including, as noted above, Messrs. Lynford and Lowenthal. During the last 11 years Messrs. Lynford and Lowenthal, together with other members of their team, succeeded in accomplishing the following: . Researched and identified multifamily properties in the Southwestern United States as an opportunity for above-market returns with modest risk. . Identified, evaluated and negotiated the acquisition of over 21,000 high-quality multifamily units in eight states. Wellsford currently owns 72 multifamily properties containing 19,004 units. From calendar year 1992 through calendar year 1996, Wellsford's revenues increased from $26.5 million to $131.8 million, representing a compounded annual growth rate of approximately 49%, and Wellsford EBITDA increased from $13.8 million to $72.8 million, representing a compounded annual growth rate of approximately 52%. . Completed a $100 million initial public offering of Wellsford, which was the first publicly-traded REIT dedicated exclusively to the ownership of multifamily properties. . Raised approximately $585 million in eight subsequent offerings of Wellsford's common shares, convertible preferred shares, perpetual preferred shares and senior unsecured debt. . Obtained an investment grade rating for Wellsford's senior unsecured debt and subsequently obtained a rating increase to BBB by Standard & Poor's Rating Services, Inc. ("S&P") and Duff & Phelps, Inc. ("Duff & Phelps"). . Obtained a $150 million unsecured line of credit for Wellsford from a consortium of domestic and foreign banks. . Consummated one of the first public REIT mergers when Wellsford Residential acquired Holly Residential Properties, Inc. . Created an internal property management operation for Wellsford which directly managed 84% of its properties. . Structured the Merger with EQR in a transaction that valued Wellsford at approximately $1 billion. Further, assuming consummation of the Merger, investors who bought their shares of Wellsford Common at the initial public offering in November, 1992, would have received an average annual return of approximately 22.8% on their investment, based upon the April 1, 1997 closing market price of a share of EQR Common on the NYSE and assuming (i) all distributions received on such shares of Wellsford Common were immediately reinvested in Wellsford Common and (ii) a 33 value for each share of WRP Newco Common distributed in the Distribution equal to their book value (which is currently estimated to be $10.43 per share). Business Strategy In furtherance of its business strategy, WRP Newco will initially focus its investments on three distinct aspects of the real estate business. As opportunities emerge, WRP Newco may in the future expand or modify its real estate-related businesses and activities. Commercial Properties. WRP Newco will seek to acquire office and other commercial properties below replacement cost and operate and/or resell the properties after renovation, redevelopment and/or repositioning. WRP Newco believes that appropriate well-located commercial properties which are currently underperforming can be acquired on advantageous terms and repositioned with the expectation of achieving enhanced returns which are greater than returns which could be achieved by acquiring a stabilized property. WRP Newco also believes that there are opportunities available to acquire properties that are not attractive to REITs and institutional investors because the properties have no or limited cash flow as a result of required rehabilitation and their not being substantially leased. High Yield Debt Investments. WRP Newco will make loans that constitute, or will invest in real estate-related senior, junior or otherwise subordinated debt instruments, which may be unsecured or secured by liens on real estate, interests therein or the economic benefits thereof, and which have the potential for high yields or returns more characteristic of equity ownership. These investments may include debt that is acquired at a discount, mezzanine financing, commercial mortgage-backed securities ("CMBS"), secured and unsecured lines of credit, distressed loans, and loans previously made by foreign and other financial institutions. WRP Newco believes that there are opportunities to acquire real estate debt securitized by the use of CMBS, especially in the low or below investment grade tranches, at significant returns as a result of inefficiencies in pricing. Property Development. WRP Newco will engage in selective development activities as opportunities arise and when justified by expected returns. Initially, WRP Newco will continue the development of Palomino Park, its five- phase residential community begun by Wellsford, taking advantage of the fixed- price land purchase options obtained by Wellsford two years ago. This development may be retained for investment and operated by WRP Newco, sold, or converted to condominium ownership. See "WRP Newco's Business and Properties - Wellsford Property Development - Palomino Park". Certain development activities may be conducted in joint ventures with local developers who may bear the substantial portion of the economic risks associated with the construction, development and initial rent-up of properties. As part of its strategy, WRP Newco may seek to obtain bond financing from local governmental authorities which generally bear interest at rates substantially below rates with respect to conventional financing. WRP Newco may in the future make equity investments in entities owned and/or operated by unaffiliated parties and which engage in real estate-related businesses and activities or businesses that service the real estate business. Some of the entities in which WRP Newco may invest may be start-up companies or companies in need of additional capital. WRP Newco may also manage and lease properties owned by it or in which it has an equity or debt investment. 34 Initial Capital and Financing Initially, WRP Newco expects to have available the following sources of capital, financing and credit support: . $3.5 million of proceeds from the sale to ERP Operating Partnership of shares of WRP Newco's Class A Common at a price equal to the Issuance Price. . $25 million pursuant to the ERP Preferred Commitment to acquire up to 1,000,000 shares of WRP Newco Series A Preferred at the request of WRP Newco and subject to certain limited conditions. Each share of WRP Newco Series A Preferred is convertible into shares of WRP Newco Common at a premium equal to 8% of the Issuance Price. The ERP Preferred Commitment will be pledged as security for the WRP Newco Line of Credit. . $50 million under a two-year line of credit as to which Bank of Boston and Morgan Guaranty have issued a commitment. The WRP Newco Line of Credit will initially bear interest at an annual rate equal to LIBOR plus 175 basis points and will be extendible for an additional one-year period. . Approximately $81.6 million in construction financing and credit enhancement with respect to Palomino Park. See "Wellsford Real Properties, Inc. - Initial Capital and Financing," "Description of Capital Stock of WRP Newco" and "Certain Agreements Between WRP Newco and ERP Operating Partnership". Initial Investments In furtherance of its business strategy, WRP Newco has identified, negotiated and, except in one instance, consummated the acquisition of the following investments: . Five properties consisting of six office buildings located in Northern New Jersey, all of which are vacant except for Greenbrook Corporate Center, which was approximately 85.7% occupied at April 1, 1997. WRP Newco currently intends to invest an aggregate of approximately $13.7 million to renovate and reposition such properties. At the time of its acquisition of these properties, WRP Newco obtained the right to develop for no additional consideration an additional 1.1 million square feet of commercial space at these properties. The buildings are described as follows:
Location Purchase Price in Purchase Price/ & Planned Property New Gross Area Purchase Price Planned Impr. Per Sq. Name Jersey (Sq. Ft.) Per Sq. Ft.(1) Improvements Ft.(1) - -------- -------- ---------- ------------------- ------------ --------------- Point View Wayne 560,000 $15.8 million/$28 $9.1 million $ 44.4 Main Campus (two buildings) Greenbrook Corp. Ctr. Fairfield 190,000 23.7 million/125 0.5 million 127.4 1700 Valley Road Wayne 70,600 1.0 million/14 0.2 million 17 Chatham Building(2) Chatham 65,000 5.1 million/78 3.1 million 126.2 1800 Valley Road Wayne 54,800 2.0 million/36 0.8 million 51.1 ------- ------------------- ------------- Total/Weighted average 940,400 $47.6 million/$50.1 $13.7 million $ 65.2 - ------------------
(1) Assumes no allocation of purchase price for undeveloped land. (2) WRP Newco has entered into a ten-year lease for approximately 22,000 square feet in the Chatham Building at an initial gross rent of $26.00 per square foot and rising to approximately $28.00 per square foot in the sixth year. . $20 million of an $80 million subordinated secured mezzanine loan to the owner of the approximately 1.74 million square foot, 52-story class A office building located in mid-town Manhattan at 277 Park Avenue, New York City (the "277 Park Loan"), expected to close in April 1997. The 277 Park Loan will be payable in full in May, 2007 and will bear interest payable monthly at the rate of approximately 12% per annum. . A $17.8 million mortgage loan on, and option (the "Sonterra Option") to purchase for approximately $20.5 million through December, 1997 and for $21 million during 1998, a 344-unit, newly constructed class A residential apartment project located in Tucson, Arizona known as "Sonterra at Williams Centre". The Sonterra Loan was originated in July 1996, and is payable in full on July 1, 1999 and bears interest payable monthly at the rate of 9% percent per annum. . An approximate 80% interest in Phases I and II of, and in options to acquire and develop Phases III, IV and V of, a 1,880-unit class A multifamily development known as "Palomino Park," located on 182 acres, of which 65 acres have been developed, in a suburb of Denver, Colorado. Palomino Park is being constructed around a centrally located 24-acre park and has a 29,000-square-foot recreation center. Phase I, which is to consist of 456 units, is approximately 65% completed and is expected to be completed in late 1997. Construction on Phase II which is to consist of 304 units is expected to be completed in late 1998. An aggregate of approximately $21.3 million has been invested in Palomino Park, exclusive of amounts advanced under the existing construction loan for Phase I. ERP Operating Partnership will have an approximate 20% interest in Palomino Park. 35 Certain Agreements Between WRP Newco and ERP Operating Partnership . Common Stock and Preferred Stock Purchase Agreement - Provides for the purchase by ERP Operating Partnership of (i) $3.5 million of WRP Newco Class A Common and (ii) $25 million of WRP Newco Series A Preferred as requested by WRP Newco over a 3-year period. ERP Operating Partnership is entitled to elect a nominee to the WRP Newco Board of Directors for a minimum of two years. For ten years after the Effective Time, WRP Newco has the right to direct the voting of all shares of WRP Newco Series A Preferred, WRP Newco Class A Common and WRP Newco Common owned by ERP Operating Partnership or any of its affiliates on most matters. See "Certain Agreements Between WRP Newco and ERP Operating Partnership--Common Stock and Preferred Stock Purchase Agreement." . Registration Rights Agreement - Provides for registration rights at WRP Newco's expense with respect to shares of WRP Newco Class A Common, WRP Newco Series A Preferred and WRP Newco Common held by ERP Operating Partnership. See "Certain Agreements Between WRP Newco and ERP Operating Partnership -- Registration Rights Agreement." . Sonterra Option Agreement - Provides ERP Operating Partnership with a right of first offer to acquire the Sonterra Option and a right to acquire the Sonterra Option if WRP Newco does not exercise it. If WRP Newco acquires Sonterra, ERP Operating Partnership will have a "Right of First/Last Offer" for the property. . Agreement Regarding Palomino Park - Governs the relationship between WRP Newco and ERP Operating Partnership as 80% and 20% shareholders, respectively, of the entity 36 controlling Palomino Park, including certain rights of first offer and put/call rights with respect to each other's shares. ERP Operating Partnership has also agreed to be a stand-by purchaser of Phase I if the construction loan thereon is not paid, and to be similarly obligated with respect to Phase II. See "Certain Agreements Between WRP Newco and ERP Operating Partnership -- Agreement Regarding Palomino Park." . Credit Enhancement Agreement - Provides for ERP Operating Partnership to make its own credit available for a period of eight years in the form of a guaranty of WRP Newco's obligations to repay the bonds issued to finance the park and certain infrastructure within Palomino Park. See "Certain Agreements Between WRP Newco and ERP Operating Partnership -- Credit Enhancement Agreement." 37 Wellsford Real Properties, Inc. (Predecessor) Summary Unaudited Pro Forma Combined Financial Data The following tables set forth the summary unaudited pro forma combined financial data for Wellsford Real Properties, Inc. (Predecessor) as a combined entity, giving effect to the Merger, Contribution and Distribution as if they had occurred on the dates indicated herein, after giving effect to the pro forma adjustments described in the notes to the unaudited pro forma combined financial statements included elsewhere in this Joint Proxy Statement/Prospectus/ Information Statement. The summary unaudited pro forma combined operating data are presented as if the Merger, Contribution and Distribution had been consummated on January 1, 1996. In addition to the Merger, Contribution and Distribution, the pro forma combined operating data gives effect to certain material events which occurred between January 1, 1996 and March 31, 1997 as if they had occurred on January 1, 1996. See the notes to the unaudited Pro Forma Combined Income Statement for the year ended December 31, 1996 included elsewhere in this Joint Proxy Statement/Prospectus/Information Statement. The summary unaudited pro forma combined balance sheet data are presented as if the Merger, Contribution and Distribution had occurred on December 31, 1996. In addition to the Merger, Contribution and Distribution, the pro forma combined balance sheet data gives effect to certain material events which occurred between October 1, 1996 and March 31, 1997 as if they had occurred on December 31, 1996. See the notes to the unaudited Pro Forma Combined Balance Sheet at December 31, 1996 included elsewhere in this Joint Proxy Statement/Prospectus/Information Statement. In the opinion of management, all necessary adjustments necessary to reflect the effects of the Merger, Contribution and Distribution have been made. The summary unaudited pro forma financial data should be read in conjunction with, and is qualified in its entirety by, the respective historical financial statements and notes thereto of Wellsford and Wellsford Real Properties, Inc. (Predecessor) incorporated by reference into, and included in, this Joint Proxy Statement/Prospectus/Information Statement, respectively. The summary unaudited pro forma operating and balance sheet data are presented for comparative purposes only and are not necessarily indicative of what the actual combined results of Wellsford Real Properties, Inc. (Predecessor) would have been for the period and as of the date presented; nor does such data purport to represent the results of future periods. 38 Wellsford Real Properties, Inc. (Predecessor) Summary Unaudited Combined Financial Data
Pro Forma Historical Year Year Ended Ended December 31, December 31, 1996 1996 ---- ---- (Unaudited) (In thousands except per share data) OPERATING DATA: Revenues: Rental income $3,632 Other income 250 Interest income 3,952 $757 -------------------------- 7,834 757 -------------------------- Expenses: Property operating and maintenance 852 Real estate taxes 428 Interest 1,550 General and administrative 1,750 Depreciation 510 Property management 181 -------------------------- 5,271 0 -------------------------- Income before income taxes 2,563 757 Provision for income taxes 1,047 Net income $1,516 $757 ========================= Net income per common share $0.31 Weighted average common shares outstanding 4,900 Pro Forma Historical Historical December 31, December 31, December 31, 1996 1996 1995 ---- ---- ---- (Unaudited) (In thousands) BALANCE SHEET DATA: Real estate $68,906 $21,306 $7,955 Mortgage notes and interest receivable $37,934 $17,934 $0 Total assets $113,192 $44,760 $18,369 Total debt $59,755 $14,755 $14,755 Total equity $51,109 $30,005 $3,614
39 Proposals Regarding WRP Newco In order to satisfy the requirements of the ASE, Wellsford Common Shareholders will also be asked to approve the Additional Share Offering. Wellsford Common Shareholders will also be asked to approve the adoption of WRP Newco's 1997 Management Incentive Plan. The Additional Share Offering would dilute the equity of existing stockholders if the purchase price for the Additional Shares is less than the book value of WRP Newco Common on the date of the Distribution. On the other hand, the Board of Trustees of Wellsford and the Board of Directors of WRP Newco believe that the Additional Share Offering will provide more capital available for investment, enhance WRP Newco's capital structure and increase the liquidity of WRP Newco Common. See "Proposal to Approve WRP Newco Additional Share Offering." The issuance of shares of WRP Newco Common pursuant to WRP Newco's 1997 Management Incentive Plan could be dilutive to existing stockholders or could adversely affect prevailing market prices. On the other hand, the Board of Trustees of Wellsford and the Board of Directors of WRP Newco believe that WRP Newco's 1997 Management Incentive Plan will enable WRP Newco to attract and retain personnel and will align the interests of management with those of WRP Newco's stockholders. See "Proposal to Approve WRP Newco's 1997 Management Incentive Plan." 40 RISK FACTORS In considering whether to approve the Merger, the shareholders of EQR and Wellsford should consider, in addition to the other information in this Proxy Statement/Prospectus/Information Statement, the matters described in this section. Conflicts of Interest In considering whether to approve the Merger, shareholders should be aware that certain members of the management of Wellsford and the Wellsford Board of Trustees have certain interests that arise in connection with the Merger and the Contribution and Distribution that are in addition to the interests of shareholders of Wellsford generally. These interests arise under existing agreements with, and annual compensation awards from, Wellsford, which were approved by Wellsford's independent trustees in previous years, and proposed agreements with WRP Newco and the Surviving Trust relating to, among other things, (i) severance payments to be made to Messrs. Kelley, MacKenzie, Hughes and Strong, executive officers of Wellsford, in the amounts of $1,149,563, $764,070, $692,440 and $585,000, respectively, approximately $240,051, $391,062, $347,583 and $260,250 of which (assuming receipt of an annual bonus each year equal to the average annual bonus received for the prior three fiscal years, which bonuses are not guaranteed), respectively, will be received under existing employment agreements if the Merger does not take place, (ii) the forgiveness of approximately $1.5 million, $1.5 million, $281,000, $1.1 million, $1.1 million and $369,000 of loans made to Messrs. Lynford, Lowenthal , Kelley, MacKenzie, Hughes and Strong to acquire shares of Wellsford Common, approximately $659,000, $659,000, $125,000, $503,000, $503,000 and $181,000 of which, respectively, will be forgiven over the remaining terms of the loans if the Merger does not take place, (iii) the issuance of 22,346 shares of Wellsford Common to each of Messrs. Lynford, Lowenthal and Kelley, which will not be issued if the Merger is not approved, (iv) the acceleration of vesting of 2,843 restricted shares issued to each of Messrs. MacKenzie and Hughes, which will not be accelerated if the Merger is not consummated, but would vest in subsequent years if Wellsford satisfied certain performance criteria, (v) payments of $2.6 million, $2.4 million, $420,000, $1.0 million, $1.1 million and $500,000 to be made on behalf of Messrs. Lynford, Lowenthal, Kelley, MacKenzie, Hughes and Strong, respectively, to satisfy income and excise tax obligations resulting from certain monies and other benefits to be paid to them in connection with the Merger, subject to adjustment to the extent the actual value of Wellsford Common at the Effective Time is greater or less than $27.50, which amounts will not be paid if the Merger is not consummated and (vi) the issuance of WRP Newco stock options to certain executive officers and trustees of Wellsford in replacement of certain existing Wellsford share options and reload options granted in connection with the exercise of vested Wellsford share options, which replacement options will not be issued if the Merger is not consummated. See "Interests of Certain Persons in the Merger and Distribution--Benefits of Key Executives." In addition, upon completion of the Merger, WRP Newco will enter into employment agreements with Messrs. Lynford and Lowenthal for approximately five and one-half years at annual base salaries of $275,000 and employment agreements with Messrs. Hughes 41 and Strong for two years at annual base salaries of $175,000 and $125,000, respectively. WRP Newco will also assume the existing split dollar life insurance arrangements between Wellsford and Messrs. Lynford and Lowenthal. Further, upon completion of the Merger, Messrs. Lynford and Lowenthal will each enter into a five-year consulting agreement with ERP Operating Partnership for annual compensation of $200,000. Subsequent to the Merger, Messrs. Lynford and Lowenthal will also be appointed to the Board of Trustees of the Surviving Trust for a three year term. In addition, Mr. MacKenzie, Executive Vice President-Director of Operations of Wellsford, will be a Senior Vice President of the Surviving Trust upon completion of the Merger at an initial salary of $175,000 per annum. The Surviving Trust will indemnify each trustee and officer of Wellsford for all actions on or prior to the Effective Time to the same extent such individuals were indemnified by Wellsford prior to the Effective Time. See "Interests of Certain Persons in the Merger and Distribution." Adverse Consequences of Debt Financing and Preferred Shares The Surviving Trust is subject to the risks normally associated with debt or preferred equity financing, including the risk that the Surviving Trust's cash flow will be insufficient to meet required payments of principal, interest and distributions, the risk that existing indebtedness may not be refinanced or that the terms of such refinancing will not be as favorable as the terms of current indebtedness and the risk that necessary capital expenditures for such purposes as renovations and other improvements may not be financed on favorable terms or at all. If the Surviving Trust were unable to refinance its indebtedness on acceptable terms, or at all, the Surviving Trust might be forced to dispose of one or more of the properties on disadvantageous terms, which might result in losses to the Surviving Trust and might adversely affect the cash available for distributions to shareholders. If interest rates or other factors at the time of the refinancing result in higher interest rates upon refinancing, the Surviving Trust's interest expense would increase, which would affect the Surviving Trust's ability to make distributions to its shareholders. Furthermore, if a property is mortgaged to secure payment of indebtedness and the Surviving Trust is unable to meet mortgage payments, the mortgagee could foreclose upon the property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies, all with a consequent loss of income and asset value to the Surviving Trust. Foreclosures could also create taxable income without accompanying cash proceeds, thereby hindering the Surviving Trust's ability to meet the REIT distribution requirements of the Code. Restrictions on Indebtedness of the Surviving Trust A substantial portion of the Surviving Trust's debt was issued pursuant to five different indentures which restrict the amount of indebtedness (including acquisition financing) the Surviving Trust may incur. Accordingly, in the event that the Surviving Trust is unable to raise additional equity or borrow money because of the debt restrictions in the indentures, the Surviving Trust's ability to acquire additional properties may be limited. If the Surviving Trust is unable to acquire additional properties, its ability to increase the distributions with respect to 42 Surviving Common will be limited to management's ability to increase funds from operations, and thereby cash available for distributions, from the existing properties in the Surviving Trust's portfolio at such time. Other Restrictive Covenants Immediately following consummation of the Merger, the Surviving Trust will own properties that are subject to restrictive covenants or deed restrictions relating to current or previous tax-exempt bond financing and owns the bonds collateralized by additional properties. The Surviving Trust will retain an independent outside consultant to monitor compliance with the restrictive covenants and deed restrictions that affect these properties. The bond compliance requirements may have the effect of limiting the Surviving Trust's income from certain of these properties in the event the Surviving Trust is required to lower its rental rates to attract low or moderate income tenants, or eligible/qualified tenants. Potential Change in Relative Stock Prices In considering whether to approve the Merger, shareholders of Wellsford and EQR should consider the risks associated with (a) a potential change in the relative stock prices of EQR Common and Wellsford Common prior to the Effective Time, and (b) a possible reduction in the market price of Survivor Common following the Merger, due to future sales of shares of Survivor Common or the availability of such shares for future sales, government regulatory action, tax laws, interest rates and market conditions in general. Sales of a substantial number of shares of Survivor Common or the perception that such sales could occur, could adversely affect prevailing market prices for shares of Survivor Common. Risks to Wellsford Common Shareholders Termination Payments if Merger Fails to Occur. The Merger Agreement provides for a Break-Up Fee payable by Wellsford of $14 million plus Break-Up Expenses of up to $2.5 million if the Merger Agreement is terminated by either EQR or Wellsford under certain circumstances and, within one year after such termination, Wellsford enters into an agreement regarding an "Acquisition Proposal" (as hereinafter defined), which is consummated. In addition, if the Merger Agreement is terminated for certain reasons, EQR or Wellsford will be required to pay the other party's Break-Up Expenses of up to $2.5 million. See "The Merger -- Termination Fee and Expenses." The obligation to pay the Break-Up Fee and/or Break-Up Expenses may adversely affect the ability of Wellsford to engage in another transaction in the event the Merger is not consummated. 43 Reduction in Ownership and Voting. Upon consummation of the Merger, Wellsford Common Shareholders will own approximately 17% of the Survivor Common and will not have separate approval rights with respect to any actions or decisions of the Surviving Trust. Reduction in Distributions. After the Merger, the distributions payable with respect to Survivor Common are expected to be less than the distributions payable with respect to Wellsford Common. Based upon the current annualized distributions per share of EQR Common and Wellsford Common, the distributions payable with respect to the Survivor Common would be approximately 19.5% less than the distributions payable with respect to Wellsford Common. No Appraisal Rights under Maryland Law Shareholders of Wellsford and shareholders of EQR are not entitled to dissenting shareholders' appraisal rights under Maryland law. Maryland law does not provide appraisal rights to shareholders of a REIT in connection with a merger if their shares are listed on a national securities exchange, such as the NYSE, on the record date for determining shareholders entitled to vote on such merger. All of the shares of EQR and Wellsford outstanding on the record date for determining the shareholders entitled to vote on the Merger were listed on the NYSE. Potential Adverse Effects of Combining the Companies EQR and Wellsford are large enterprises with operations in a number of different states. There can be no assurance that costs or other factors associated with the integration of the two companies would not adversely affect future combined results of operations or the benefits of expected costs savings. General Real Estate Investment Considerations; Changes in Laws General. Real property investments are subject to varying degrees of risk and are relatively illiquid. Income from real property investments and the Surviving Trust's resulting ability to make expected distributions to shareholders may be adversely affected by the general economic climate, local conditions such as oversupply of apartment units or a reduction in demand for apartment units in the area, the attractiveness of the properties owned by the Surviving Trust to tenants, zoning or other regulatory restrictions, the ability of the Surviving Trust to provide adequate maintenance and insurance, and increased operating costs (including insurance premiums and real estate taxes). The Surviving Trust's income would also be adversely affected if tenants were unable to pay rent or the Surviving Trust were unable to rent apartment units on favorable terms. If the Surviving Trust were unable to promptly relet units or renew the leases for a significant number of apartment units, or if the rental rates upon such renewal or reletting were significantly lower than expected rates, then the Surviving Trust's funds from operations and ability to make expected distributions to shareholders may be 44 adversely affected. In addition, certain expenditures associated with each equity investment (such as real estate taxes and maintenance costs) generally are not reduced when circumstances cause a reduction in income from the investment. Furthermore, real estate investments are relatively illiquid and, therefore, will tend to limit the ability of the Surviving Trust to vary its portfolio promptly in response to changes in economic or other conditions. Changes in Laws. Increases in real estate taxes, income taxes and service or other taxes generally are not passed through to tenants under existing leases and may adversely affect the Surviving Trust's funds from operations and its ability to make distributions to shareholders. Similarly, changes in laws increasing the potential liability for environmental conditions existing on properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures, which would adversely affect the Surviving Trust's funds from operations and its ability to make distributions to shareholders. Potential Environmental Liability Affecting the Surviving Trust Under various Federal, state and local environmental laws, ordinances and regulations, an owner of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on such property. These laws often impose environmental liability without regard to whether the owner knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure properly to remediate such substances, may adversely affect the owner's ability to sell or rent the property or to borrow using the property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain laws impose liability for release of asbestos- containing materials ("ACMs") into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership (direct or indirect), operation, management and development of real properties, the Surviving Trust may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, potentially liable for removal or remediation costs, as well as for certain other related costs, including governmental fines and injuries to persons and property. All of EQR's properties have been the subject of a Phase I and, in certain cases, a supplemental environmental assessment completed by qualified independent environmental consultant companies. All of the environmental assessments were conducted within the last five years and were obtained prior to the acquisition by EQR of each of the properties. These environmental assessments have not revealed, nor is EQR aware of, any environmental liability that EQR's management believes would have a material adverse effect on the Surviving Trust's business, results of operations, financial condition or liquidity. 45 All of Wellsford's properties have been the subject of a Phase I or similar environmental assessment completed by qualified independent environmental consultant companies. Of these environmental assessments, 16 were conducted during the period from 1989 through 1991 and 63 were conducted during the period from 1992 through the present. These environmental assessments have not revealed, nor is Wellsford aware of, any environmental liability that Wellsford's management believes would have a material adverse effect on the Surviving Trust's business, results of operations, financial condition or liquidity. No assurance can be given that existing environmental assessments with respect to any EQR or Wellsford properties reveal all environmental liabilities, that any prior owner of a property did not create any material environmental condition not known to EQR or Wellsford, or that a material environmental condition does not otherwise exist as to any one or more properties of EQR or Wellsford. Consequences of Failure to Qualify as a REIT Taxation as a Corporation. The Surviving Trust intends to operate in a manner so as to qualify as a REIT under the Code. However, no assurance can be given that the Surviving Trust was organized and will be able to operate in a manner so as to qualify or remain so qualified. Qualifications as a REIT involves the satisfaction of numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within the Surviving Trust's control. If the Surviving Trust were to fail to qualify as a REIT in any taxable year, the Surviving Trust would be subject to Federal income tax (including any applicable alternative minimum tax) on its taxable income at corporate rates. Moreover, unless entitled to relief under certain statutory provisions, the Surviving Trust also would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost. This treatment would reduce the net earnings of the Surviving Trust available for investment or distribution to shareholders because of the additional tax liability to the Surviving Trust for the years involved. In addition, distributions to shareholders would no longer be required to be made. See "Federal Income Tax Considerations." Other Tax Liabilities. Even if the Surviving Trust qualifies as a REIT, it will be subject to certain Federal, state and local taxes on its income and property. See "The Merger--Federal Income Tax Consequences--Other Tax Considerations--State and Local Taxes." In addition, the Surviving Trust's management operations, which will be conducted through Equity Residential Properties Management Limited Partnership , Equity Residential Properties Management Limited Partnership II and Equity Residential Properties Management Limited Partnership III (collectively, the "Management Partnerships") generally will be subject to Federal income tax at regular corporate rates. See "The Merger-- Federal Income Tax Consequences - Qualification of Surviving Trust as a REIT." 46 Consequences of Failure to Qualify as Partnerships. The Surviving Trust intends that ERP Operating Partnership, the Management Partnerships and each of the other partnership and limited liability company subsidiaries will be organized as partnerships and will qualify for treatment as such under the Code. If any of such subsidiaries fails to qualify for such treatment under the Code, the Surviving Trust would cease to qualify as a REIT, and such subsidiary would be subject to Federal income tax (including any alternative minimum tax) on its income at corporate rates. See "The Merger--Federal Income Tax Consequences-- Qualification of Surviving Trust as a REIT." Each of EQR and Wellsford believes it has operated in a manner so as to qualify as a REIT under the Code for all taxable years ending on or before December 31, 1996 and for the period beginning January 1, 1997 and ending on the date hereof. Dependence on Key Personnel The Surviving Trust will be dependent on the efforts of its executive officers. While the Surviving Trust believes that it could find replacements for these key personnel, the loss of their services may have a temporary adverse effect on the operations of the Surviving Trust. None of these officers has entered or will enter into employment agreements with the Surviving Trust. Distribution Requirements Potentially Increasing Indebtedness of the Surviving Trust The Surviving Trust may be required from time to time, under certain circumstances, to accrue as income for tax purposes interest and rent earned but not yet received. In such event, or upon the repayment by the Surviving Trust of principal on debt, the Surviving Trust could have taxable income without sufficient cash to enable the Surviving Trust to meet the distribution requirements of a REIT. Accordingly, the Surviving Trust could be required to borrow funds or liquidate investments on adverse terms in order to meet such distribution requirements. See "Federal Income Tax Considerations." 9.8% Ownership Limit; Inapplicability to Mr. Zell and Others In order to maintain its qualification as a REIT under the Code, not more than 50% of the value of the outstanding shares of beneficial interest of the Surviving Trust may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities). Certain beneficial owners (the "Zell Holders") affiliated with Mr. Zell and Equity Properties Management Corp. ("EPMC") (i.e., beneficiaries of trusts established for the benefit of Mr. Zell and his family and trusts established for the benefit of the family of Mr. Robert Lurie, a deceased partner of Mr. Zell (the "Lurie Family Trusts")) and certain entities controlled by Starwood Capital Partners L.P. and its affiliates which contributed 23 of the properties to EQR at the time of EQR's initial public offering (the "IPO") (the "Starwood Original Owners") (through their potential ownership rights of EQR Common) together constitute four individuals for purposes of this test and, under the Code, will be deemed to own approximately 10% 47 of the value of the outstanding shares of beneficial interest of the Surviving Trust. Due to such concentration of ownership of the Surviving Trust, ownership of more than 9.8% of the lesser of the number or value of the outstanding shares of beneficial interest of the Surviving Trust by any single shareholder has been restricted, with certain exceptions, for the purpose of maintaining the Surviving Trust's qualification as a REIT under the Code. The Surviving Trust's Board of Trustees, upon receipt of a ruling from the Internal Revenue Service (the "Service"), an opinion of counsel or other evidence satisfactory to the Board of Trustees and upon such other conditions as the Board of Trustees may direct, may also exempt a proposed transferee from this restriction. See "Comparison of Right of Shareholders --Restrictions on Ownership, Transfer and Issuance of Shares." Additionally, the Surviving Trust's Declaration of Trust will allow certain transfers of such Survivor Common without the transferees being subject to the 9.8% ownership limit, provided such transfers do not result in an increased concentration in the ownership of the Surviving Trust. Finally, if the Additional Provisions are approved by the Wellsford Common Shareholders, such restrictions in the Surviving Trust's Declaration of Trust will be reduced to 5%. See "Proposal Regarding Additional Declaration of Trust Provisions." Limits on Changes in Control Ownership Limit. The 9.8% ownership limit, as well as the ability of the Surviving Trust to issue additional Survivor Common or other shares of beneficial interest (which may have rights and preferences senior to the Survivor Common), may discourage a change of control of the Surviving Trust and may also (i) deter tender offers for the Survivor Common, which offers may be advantageous to shareholders, and (ii) limit the opportunity for shareholders to receive a premium for their Survivor Common that might otherwise exist if an investor were attempting to assemble a block of Survivor Common in excess of 9.8% of the outstanding shares of beneficial interest of the Surviving Trust or otherwise effect a change of control of the Surviving Trust. If the Additional Provisions are approved by the Wellsford Common Shareholders, such restrictions in the Surviving Trust's Declaration of Trust will be reduced to 5%. See "Proposal Regarding Additional Declaration of Trust Provisions." Staggered Board. The Board of Trustees of the Surviving Trust will be divided into three classes of trustees. The terms of the classes will expire in 1997, 1998 and 1999, respectively. As the term of each class expires, trustees for that class will be elected for a three-year term and the trustees in the other two classes will continue in office. The staggered terms for trustees may impede the shareholders' ability to change control of the Surviving Trust even if a change in control were in the shareholders' interest. Preferred Shares. The Surviving Trust's Declaration will authorize the Board of Trustees to issue up to 100,000,000 shares of Survivor Preferred and to establish the preferences and rights (including the right to vote and the right to convert into Survivor Common) of any Survivor Preferred issued. The power to issue Survivor Preferred could have the effect of delaying or preventing a change in control of the Surviving Trust even if a change in control 48 were in the shareholders' interest. There are additional limitations on ownership regarding each outstanding series of EQR Preferred and Wellsford Preferred. Maryland Business Combination Law. Under the Maryland General Corporation Law, as amended ("MGCL"), certain "business combinations" (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland real estate investment trust and any person who beneficially owns 10% or more of the voting power of the trust's shares of beneficial interest or an affiliate of the trust who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the trust's shares of beneficial interest (an "Interested Shareholder"), or an affiliate of such Interested Shareholder, are prohibited for five years after the most recent date on which the Interested Shareholder becomes an Interested Shareholder. Thereafter, any such business combination must be recommended by the board of trustees of such trust and approved by the affirmative vote of at least (a) 80% of the votes entitled to be cast by holders of outstanding voting shares of beneficial interest of the trust and (b) two-thirds of the votes entitled to be cast by holders of voting shares of beneficial interest of the trust other than shares held by the Interested Shareholder with whom (or with whose affiliate) the business combination is to be effected (unless, among other conditions, the holders of the common shares of the trust receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Shareholder for its common shares). Such provisions could have the effect of inhibiting a change in control even if a change in control were in the shareholders' interest. Control and Influence by Significant Shareholders of EQR As of December 31, 1996, the Zell Holders held certain OP Units issued at the time of the IPO ("Original OP Units") to certain affiliates of Mr. Zell which contributed 33 of the properties to EQR at the time of the IPO (the "Zell Original Owners"), EPMC and other affiliates of Mr. Zell owned in the aggregate approximately 7.92% of the shares of EQR Common (assuming that all of the partnership interests in ERP Operating Partnership are exchanged for EQR Common), and the Starwood Original Owners owned in the aggregate approximately 3.47% of the shares of EQR Common (assuming that all of the partnership interests in ERP Operating Partnership are exchanged for EQR Common). The Starwood Original Owners, together with the Zell Original Owners, will be referred to as the "Original Owners." As of December 31, 1996, EQR had options outstanding to purchase approximately 2.33 million shares of EQR Common which it has granted to certain officers, employees and trustees of EQR and consultants to EQR, some of whom are affiliated with Mr. Zell, representing in the aggregate approximately 3.80% of the EQR Common (assuming that all such options are exercised for EQR Common and all of the outstanding partnership interests in ERP Operating Partnership are exchanged for EQR Common). Further, the consent of affiliates of Mr. Zell who are Zell Holders and of the Starwood Original Owners is required for certain amendments to ERP Operating Partnership's partnership agreement. Accordingly, Mr. Zell and 49 the Starwood Original Owners may continue to have substantial influence over the Surviving Trust, which influence might not be consistent with the interests of other shareholders, and on the outcome of any matters submitted to the Surviving Trust's shareholders for approval. In addition, although there is no current agreement, understanding or arrangement for these shareholders to act together on any matter, these shareholders would be in a position to exercise significant influence over the affairs of the Surviving Trust if they were to act together in the future. Exemptions for Mr. Zell and Others from Maryland Business Combination Law which Tend to Inhibit Takeovers As permitted by the MGCL, the Surviving Trust will exempt any business combination involving Mr. Zell, the Zell Holders, EPMC and their respective affiliates and associates, present or future, or any other person acting in concert or as a group with any of the foregoing persons and, consequently, the five-year prohibition and the super-majority vote requirements will not apply to a business combination between any of them and the Surviving Trust. As a result, Mr. Zell, the Zell Holders, EPMC, any present or future affiliate or associate of theirs or any other person acting in concert or as a group with any of the foregoing persons may be able to enter into business combinations with the Surviving Trust, which may not be in the best interest of the shareholders, without compliance by the Surviving Trust with the super-majority vote requirements and other provisions of the MGCL. Tax Termination of ERP Operating Partnership In connection with the Merger, more than 50% of the total interest in ERP Operating Partnership's capital and profits will be exchanged. Therefore, the Merger will result in the termination of ERP Operating Partnership for federal income tax purposes. Under existing Treasury Regulations under the Code, this partnership termination will cause a deemed distribution of all of the assets of ERP Operating Partnership to the partners of ERP Operating Partnership (including the Surviving Trust) followed by a deemed re-contribution of such assets by such partners to a newly formed partnership. See "The Merger - Federal Income Tax Consequences - Tax Termination of ERP Operating Partnership." Such deemed distribution and re-contribution is not expected to cause gain recognition to the Surviving Trust because the amount of cash deemed distributed to the Surviving Trust as a result of the deemed liquidation (including any deemed distribution occurring under Code Section 752 as a result of a shifting of liabilities among the partners of the ERP Operating Partnership) is not expected to exceed the Surviving Trusts's adjusted basis in the ERP Operating Partnership. Moreover, because the taxable years of both the ERP Operating Partnership and the Surviving Trust end on the same date, the closing of the ERP Operating Partnership's taxable year as a result of the termination should have no adverse tax consequences to the Surviving Trust. However, the termination of the ERP Operating Partnership will cause the assets of the ERP Operating Partnership to be depreciated as if they were newly acquired by the ERP Operating Partnership, possibly resulting in lower annual depreciation deductions to the Surviving Trust for federal income tax purposes. This reduction in depreciation deductions could cause a greater proportion of the distribution to holders of Survivor Common and Survivor Preferred to be taxable as dividends at ordinary income rates. See "Federal Income Tax Consequences-- Taxation of Taxable Domestic Shareholders." In addition the deemed re- contribution of the 50 assets to the ERP Operating Partnership could result in a reallocation of the built-in gain attributable to the properties owned by the ERP Operating Partnership. See "Federal Income Tax Consequences -- Tax Aspects of Surviving Trust's Investment in Partnerships -- Tax Allocations With Respect to the Properties." WRP NEWCO RISK FACTORS Ownership of WRP Newco Common involves the following material risks: General Risks If the properties of WRP Newco, of those entities in which it invests or of those entities to which it will lend (collectively, the "WRP Newco Properties") do not generate revenue sufficient to meet operating expenses, including debt service and capital expenditures, the financial condition and results of operations of WRP Newco may be adversely affected. WRP Newco's financial condition and results of operations may be adversely affected by a number of factors, including international and domestic general economic climate and local real estate conditions (such as oversupply of or reduced demand for space and changes in market rental rates); the perceptions of prospective tenants of the safety, convenience and attractiveness of WRP Newco Properties; the ability of the owner to provide adequate management, maintenance and insurance; energy and supply shortages; the ability to collect on a timely basis all rent from tenants and interest from borrowers; the expense of periodically renovating, repairing and reletting spaces; and increasing operating costs (including real estate taxes and utilities) which may not be passed through to tenants. Certain significant expenditures associated with investments in real estate (such as mortgage payments, real estate taxes, insurance and maintenance costs) are generally not reduced when circumstances cause a reduction in rental revenues from the investment. If a WRP Newco Property is mortgaged to secure the payment of indebtedness and if WRP Newco or the entity in which WRP Newco invests or to which it lends is unable to meet its mortgage payments, a loss could be sustained as a result of foreclosure on the property or the exercise of other remedies by the mortgagee. In addition, real estate values and income from properties are also affected by such factors as compliance with laws, including tax laws, interest rate levels and the availability of financing. Nature of Investments Made by WRP Newco May Involve High Risk; Illiquidity of Real Estate Investments WRP Newco may make investments in real estate-related assets and businesses which have experienced severe financial difficulties, which difficulties may never be overcome. Since WRP Newco may only make a limited number of investments and since many of the investments may involve a high degree of risk, poor performance by one of the investments could severely affect the financial condition and results of operations of WRP Newco. Equity and debt investments in real estate may be relatively illiquid. Such illiquidity limits the ability of WRP Newco to modify its portfolio in response to changes in economic or 51 other conditions. Illiquidity may result from the absence of an established market for the investments as well as legal or contractual restrictions on their resale by WRP Newco. Difficulty of Locating Suitable Investments; Competition Identifying, completing and realizing on real estate investments has from time to time been highly competitive, and involves a high degree of uncertainty. WRP Newco will be competing for investments with many public and private real estate investment vehicles, including financial institutions (such as mortgage banks, pension funds and real estate investment trusts) and other institutional investors, as well as individuals. There can be no assurance that WRP Newco will be able to locate and complete investments which satisfy WRP Newco's rate of return objective or realize upon their value or that it will be able to fully invest its available capital. Many of those with whom WRP Newco will compete for investments and its services are far larger than WRP Newco, may have greater financial resources than WRP Newco and may have management personnel with more experience than the officers of WRP Newco. Risks of Acquisition, Development, Construction and Renovation Activities Acquisition. WRP Newco intends to acquire existing properties to the extent that they can be acquired on advantageous terms and meet WRP Newco's investment criteria. Acquisitions of properties entail general investment risks associated with any real estate investment, including the risk that investments will fail to perform as expected, that estimates of the cost of improvements to bring an acquired property up to standards established for the intended market position may prove inaccurate and the occupancy rates and rents achieved may be less than anticipated. Development, Construction and Renovation. WRP Newco also intends to pursue the selective development, construction and renovation of commercial and residential properties for its own account or the account of entities in which it owns an equity interest as opportunities arise. Risks associated with WRP Newco's development, construction and renovation activities include the risks that: WRP Newco may abandon development opportunities after expending resources to determine feasibility; construction and renovation costs of a project may exceed original estimates; occupancy rates and rents at a newly completed property may not be sufficient to make the property profitable; and development, construction, renovation and lease-up may not be completed on schedule (including risks beyond the control of WRP Newco, such as weather or labor conditions or material shortages) resulting in increased debt service expense and construction costs. Development, construction and renovation activities are also subject to risks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations. These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, 52 could prevent completion of development, construction and renovation activities once undertaken, any of which could adversely affect the financial condition and results of operations of WRP Newco. Properties under development or acquired for development may generate little or no cash flow from the date of acquisition through the date of completion of development and may experience operating deficits after the date of completion. In addition, new development and renovation activities, regardless of whether or not they are ultimately successful, typically require a substantial portion of management's time and attention. WRP Newco may elect not to exercise its option to purchase the land underlying Phases III, IV and/or V of Palomino Park, in some cases after having expended money and time to determine the feasibility of developing such Phase. In addition, WRP Newco may elect, after having acquired the land underlying one or more of the Phases and paid the purchase price therefor, not to commence construction, or to delay construction, because of local occupancy rates or rents, excessive construction or renovation costs, lack of satisfactory financing or for any other reason. Any properties developed or renovated by WRP Newco will be subject to the risks associated with the ownership and operation of real estate described elsewhere in this section entitled "WRP Newco Risk Factors." Vacancies at Existing Properties; Dependence on Rental Income from Real Property WRP Newco currently owns five office properties consisting of six buildings, five of which buildings are vacant. The sixth office building is currently approximately 85.7% leased. WRP Newco expects to incur significant costs, including those relating to leasing commissions and tenant improvements, in connection with the leasing of these properties and may be required to offer tenant concessions, including free rental periods. The failure of WRP Newco to lease these properties in a timely manner and on economically favorable terms may have a material adverse effect on WRP Newco. WRP Newco's cash flow, results of operations and value of its assets would be adversely affected if a significant number of tenants of the WRP Newco Properties failed to meet their lease obligations or if WRP Newco or the owner of a WRP Newco Property were unable to lease a significant amount of space on economically favorable terms. In the event of a default by a lessee, the owner may experience delays in enforcing its rights as lessor and may incur substantial costs in protecting its investment. The bankruptcy or insolvency of a major tenant may have an adverse effect on a property. At any time, a tenant may also seek protection under the bankruptcy laws, which could result in rejection and termination of such tenant's lease and thereby cause a reduction in the cash flow of the property. If a tenant rejects its lease, the owner's claim for breach of the lease would (absent collateral securing the claim) be treated as a general unsecured claim. Generally, the amount of the claim would be capped at the amount owed for unpaid pre-petition lease payments unrelated to the rejection, plus the greater of one year's lease payments or 15% of the remaining lease payments payable under the lease (but not to exceed the amount of three years' lease payments). No assurance can be given that the WRP Newco Properties will not experience significant tenant defaults in the future. 53 Operating Risks The WRP Newco Properties are subject to operating risks common to the particular property type, any and all of which may adversely affect occupancy or rental rates. Such properties are subject to increases in operating expenses such as cleaning; electricity; heating, ventilation and air-conditioning; elevator repair and maintenance; insurance and administrative costs; and other general costs associated with security, landscaping, repairs and maintenance. While commercial tenants are often obligated to pay a portion of these escalating costs, there can be no assurance that they will agree to pay such costs or that the portion that they agree to pay will fully cover such costs. If operating expenses increase, the local rental market may limit the extent to which rents may be increased to meet increased expenses without decreasing occupancy rates. To the extent rents cannot be increased or costs controlled, the cash flow of WRP Newco and its financial condition may be adversely affected. Adverse Consequences of Debt Financing Leverage. Some of the WRP Newco real estate equity investments may utilize a leveraged capital structure, in which case a third party lender would be entitled to cash flow generated by such investments prior to WRP Newco receiving a return. As a result of such leverage, WRP Newco would be subject to the risks normally associated with debt financing, including the risk that cash flow from operations and investments will be insufficient to meet required payments of principal and interest, the risk that existing debt (which in most cases will not have been fully amortized at maturity) will not be able to be refinanced or that the terms of such refinancings will not be as favorable to WRP Newco and the risk that necessary capital expenditures for such purposes as renovations and other improvements will not be able to be financed on favorable terms or at all. While such leverage may increase returns or the funds available for investment by WRP Newco, it also will increase the risk of loss on a leveraged investment. If WRP Newco defaults on secured indebtedness, the lender may foreclose and WRP Newco could lose its entire investment in the security for such loan. Because WRP Newco may engage in portfolio financings where several investments are cross-collateralized, multiple investments may be subject to the risk of loss. As a result, WRP Newco could lose its interests in performing investments in the event such investments are cross-collateralized with poorly performing or nonperforming investments. In addition, recourse debt, which WRP Newco reserves the right to obtain, may subject other assets of WRP Newco to risk of loss. Existing Debt Maturities; Foreclosures. WRP Newco anticipates that only a portion of the principal of WRP Newco's indebtedness outstanding from time to time will be repaid prior to maturity. However, WRP Newco may not have sufficient funds to repay such indebtedness at maturity; it may therefore be necessary for WRP Newco to refinance debt through additional debt financing or equity offerings. If WRP Newco is unable to refinance this indebtedness on acceptable terms, WRP Newco may be forced to dispose of properties upon disadvantageous 54 terms, which could result in losses to WRP Newco and adversely affect the amount of cash available for further investment. Risk of Rising Interest Rates. WRP Newco may incur indebtedness in the future that also bears interest at a variable rate or may be required to refinance its debt at higher rates. Outstanding advances under the WRP Newco Line of Credit will bear interest at a variable rate. Accordingly, increases in interest rates could increase WRP Newco's interest expense and adversely effect the financial condition and results of operations of WRP Newco. Covenants. Various credit facilities or other debt obligations may require WRP Newco to comply with a number of customary financial and other covenants on an ongoing basis. Failure to comply with such covenants may limit WRP Newco's ability to borrow funds or may cause a default under its then-existing indebtedness. No Limitation on Debt. The organizational documents of WRP Newco do not contain any limitation on the amount of indebtedness WRP Newco may incur. WRP Newco also has the ability to use a more highly leveraged business strategy than typically used by REITs. Accordingly, WRP Newco could become highly leveraged, resulting in an increase in debt service that could increase the risk of default on WRP Newco's indebtedness. Lack of Control and Other Risks of Equity Investments in and with Third Parties WRP Newco may invest in shares of "REITs" or other equity interests of "REITs" or other entities that invest in real estate assets. In such cases, WRP Newco will be relying on the assets, investments and management of the REIT or other entity in which it is investing. Such entities and their properties will be subject to the other risks affecting the ownership and operation of real estate set forth in this section entitled "WRP Newco Risk Factors." WRP Newco may also co-invest with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity and, therefore, will not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that WRP Newco's partners or co-venturers might become bankrupt or otherwise fail to fund their share of required capital contributions, that such partners or co-venturers might at any time have economic or other business interests or goals which are inconsistent with the business interests or goals of WRP Newco, and that such partners or co-venturers may be in a position to take action contrary to the instructions or the requests of WRP Newco and contrary to WRP Newco's policies or objectives. Such investments may also have the potential risk of impasse on decisions, such as a sale, because neither WRP Newco nor the partner or co-venturer would 55 have full control over the partnership or joint venture. Consequently, actions by such partner or co-venturer might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, WRP Newco may in certain circumstances be liable for the actions of its third-party partners or co-venturers. Risks of Investments in Debt Instruments WRP Newco intends to originate debt investments and may acquire performing or nonperforming debt investments. In general, debt instruments carry the risk that borrowers may not be able to make debt service payments or to pay principal when due, the risk that the value of any collateral may be less than the amounts owed, the risk that interest rates payable on the debt instruments may be lower than WRP Newco's cost of funds, and the risk that the collateral may be mismanaged or otherwise decline in value during periods in which WRP Newco is seeking to obtain control of the underlying real estate. WRP Newco is also dependent on the ability of the borrowers to operate successfully their properties. Such borrowers and their properties will be subject to the other risks affecting the ownership and operation of real estate set forth in this section entitled "WRP Newco Risk Factors". Some of the loans may be structured so that all or a substantial portion of the principal will not be paid until maturity, which increases the risk of default at that time. It is anticipated that a substantial portion of the debt in which WRP Newco invests will not be rated by any nationally-recognized rating agency. Generally, the value of unrated classes is more subject to fluctuation due to economic conditions than rated classes. WRP Newco's acquisition of credit supported classes of securitizations (which generally are expected to be first loss classes) which are unrated at the time of acquisition and which have lower ratings may increase the risk of nonpayment or of a significant delay in payments on these classes. Should rated assets be downgraded, it may adversely affect their value and may adversely affect the financial condition and results of operations of WRP Newco. Risks of Investments in Mortgage Loans To the extent WRP Newco invests in mortgage loans, such mortgage loans may or may not be recourse obligations of the borrower and generally will not be insured or guaranteed by governmental agencies or otherwise. In the event of a default under such obligations, WRP Newco may have to foreclose its mortgage or protect its investment by acquiring title to a property and thereafter making substantial improvements or repairs in order to maximize the property's investment potential. Borrowers may contest enforcement of foreclosure or other remedies, seek bankruptcy protection against such enforcement and/or bring claims for lender liability in response to actions to enforce mortgage obligations. Relatively high "loan-to-value" ratios and declines in the value of the property may prevent WRP Newco from realizing an amount equal to its mortgage loan upon foreclosure. 56 WRP Newco may participate in loans originated by other financing institutions. As a participant, WRP Newco may not have the sole authority to declare a default under the mortgage or to control the property or any foreclosure. Any investments in junior mortgage loans which are subordinate to liens of senior mortgages would involve additional risks, including the lack of control over the collateral and any related foreclosure proceeding. In the event of a default on a senior mortgage, WRP Newco may make payments to prevent foreclosure on the senior mortgage without necessarily improving WRP Newco's position with respect to the subject real property. In such event, WRP Newco would be entitled to share in the proceeds only after satisfaction of the amounts due to the holder of the senior mortgage. Risk of Loss on Investments in Commercial Mortgage-Backed Securities As noted above, WRP Newco may seek to invest in real estate-related debt instruments, which may include CMBS. Many of the risks of investing in CMBS reflect the risks of investing directly in the real estate securing the underlying mortgage loans. This may be especially true in the case of commercial mortgage securities secured by, or evidencing an interest in, a single commercial mortgage loan or a relatively small or less diverse pool of commercial mortgage loans. See "--Risks of Investments in Mortgage Loans". The risks of investing in commercial mortgage securities include risks that the existing credit support will prove to be inadequate, either because of unanticipated levels of losses or, if such credit support is provided by a third party, because of difficulties experienced by such provider. Delays or difficulties encountered in servicing commercial mortgage securities may cause greater losses and, therefore, greater resort to credit support than was originally anticipated, and may cause a rating agency to downgrade a security. WRP Newco may acquire subordinated tranches of CMBS issuances. In general, subordinated tranches of CMBS are entitled to receive repayment of principal only after all principal payments have been made on more senior tranches and also have subordinated rights as to receipt of interest distributions. In addition, an active secondary market for such subordinated securities is not as well developed as the market for certain other mortgage-backed securities. Accordingly, such subordinated CMBS may have limited marketability and there can be no assurance that a more efficient secondary market will develop. Limitations on Remedies Although WRP Newco will have certain contractual remedies upon the default by borrowers under certain debt instruments, such as foreclosing on the underlying real estate or collecting rents generated therefrom, certain legal requirements (including the risks of lender liability) may limit the ability of WRP Newco to effectively exercise such remedies. 57 The right of a mortgage lender to convert its loan position into an equity interest may be limited or prevented by certain common law or statutory prohibitions. Third-Party Bankruptcy Risks Investments made in assets operating in workout modes or under Chapter 11 of the Bankruptcy Code could be subordinated or disallowed, and WRP Newco could be liable to third parties in such circumstances. Furthermore, distributions made to WRP Newco in respect of such investments could be recovered if any such distribution is found to be a fraudulent conveyance or preferential payment. Bankruptcy laws, including the automatic stay imposed upon the filing of a bankruptcy petition, may delay the ability of WRP Newco to realize on collateral for loan positions held by it or may adversely affect the priority of such loans through doctrines such as equitable subordination or may result in a restructure of the debt through principles such as the "cramdown" provisions of the bankruptcy laws. No Prior Operating History It should be noted that WRP Newco is a newly formed entity with no prior operating history and that its properties and assets have only been recently acquired. Risks of Uninsured Loss WRP Newco will carry comprehensive liability, fire, extended coverage and rental loss insurance with respect to all of the properties that it owns, with policy specifications, insured limits and deductibles customarily carried for similar properties. There are, however, certain types of losses (such as losses arising from acts of war or relating to pollution) that are not generally insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, WRP Newco could lose its capital invested in a property, as well as the anticipated future revenue from such property and would continue to be obligated on any mortgage indebtedness or other obligations related to the property. Any such loss would adversely affect the financial condition and results of operations of WRP Newco. With respect to those properties in which WRP Newco holds an interest through a mortgage, as well as those properties owned by entities to whom WRP Newco makes unsecured loans, the borrowers will most likely be obligated to maintain insurance on such properties and to arrange for WRP Newco to be covered as a named insured on such policies. The face amount and scope of such insurance coverage may be less comprehensive than WRP Newco would carry if it held the fee interest in such property. Accordingly in such circumstances, or in the event that the borrowers fail to maintain required coverage, uninsured or underinsured losses may occur, which could have an adverse impact on WRP Newco's cash flow or financial condition. 58 Potential Environmental Liability Related to the Properties Under various Federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property. These laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The cost of any required remediation and the owners's liability therefor as to any property is generally not limited under such enactments and could exceed the value of the property and/or the aggregate assets of the owner. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws govern the removal, encapsulation or disturbance of ACMs when such materials are in poor condition, or in the event of renovation or demolition. Such laws impose liability for release of asbestos-containing materials ("ACMs") into the air and third parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In this regard, it should be noted that the main headquarters building at the Point View office complex contains ACM's. Upon acquisition of the property, WRP Newco intends to proceed with the removal of ACM's in such building. The operation and subsequent removal of certain underground storage tanks are also regulated by federal and state laws. In connection with the ownership (direct or indirect), operation, management and development of real properties, WRP Newco may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances, and, therefore, potentially liable for removal or remediation costs, as well as certain other related costs, including governmental fines and injuries to persons and property. The properties described in this Joint Proxy Statement/Prospectus/Information Statement that are owned or to be acquired by WRP Newco have had recent Phase I or similar environmental audits (which involved general inspections without soil sampling, ground water analysis or radon testing, and for the Properties constructed in 1978 or earlier, survey inspections to ascertain the existence of ACMs were conducted) completed by independent environmental consultant companies. These environmental audits have not revealed any environmental liability that would have a material adverse effect on WRP Newco's business. Dependence on Key Personnel WRP Newco is dependent primarily on the efforts of Jeffrey H. Lynford, Chairman of the Board, and Edward Lowenthal, President, and the loss of either of their services could have an adverse effect on the operations of WRP Newco. Mr. Lynford and Mr. Lowenthal will each enter into employment agreements with WRP Newco having a term of approximately five years. WRP Newco intends to retain the services of individuals with expertise and experience 59 in certain activities to be conducted by WRP Newco, and the loss of the services of any of these individuals could also have an adverse effect on the operations of WRP Newco. Tax Consequences of the Distribution To the extent the fair market value of the shares of WRP Newco Common distributed in the Distribution to Wellsford Common Shareholders exceeds Wellsford's tax basis in such shares, gain will be recognized by Wellsford. Assuming Wellsford qualifies as a REIT and has a dividends paid deduction for distributions to its shareholders at least equal to its REIT taxable income (as computed before taking into account the dividends paid deduction), no REIT level tax will be incurred on account of the Distribution. The distribution of WRP Newco Common will, however, be taxable to Wellsford Common Shareholders to the same extent as any other distribution made by Wellsford to its shareholders. Management of Wellsford estimates that approximately 50% of the value of the shares of WRP Newco Common received in the Distribution will be taxable as ordinary income. Because this estimate is based, in part, on future events, there can be no assurance as to the portion of the value of the Distribution that will be taxable as ordinary income. The remainder of the value of the shares of WRP Newco Common received in the Distribution will either constitute a return of capital (reducing basis in the shares of Wellsford Common that converted in the Merger into Survivor Common) or capital gain. For a more detailed explanation, see "The Contribution and Distribution -- Tax Consequences of the Distribution." Changes in Policies Without Stockholder Approval The investment, financing, borrowing and distribution policies of WRP Newco and its policies with respect to all other activities, growth, debt, capitalization and operations, will be determined by the WRP Newco Board of Directors. Although it has no present intention to do so, the Board of Directors may amend or revise these policies at any time and from time to time at its discretion without a vote of the stockholders of WRP Newco. A change in these policies could adversely affect WRP Newco's financial condition, results of operations and the market price of WRP Newco Common. See "Policies with Respect to Certain Activities of WRP Newco." Absence of Public Market; Risk of Changes in Stock Price Prior to the Distribution, there will be no public market for WRP Newco Common, and there can be no assurance that an active trading market for WRP Newco Common will develop following the Distribution or, if developed, that any such market will be sustained. In the absence of a public trading market, an investor may be unable to liquidate his investment in WRP Newco. The initial valuation of the WRP Newco Common may not be indicative of the market price of the WRP Newco Common after the Distribution. The prices at which WRP Newco Common trades will be determined by the marketplace and may be influenced by many factors, 60 including, among others, the depth and liquidity of the market for WRP Newco Common, investor perception of WRP Newco and its businesses, WRP Newco's dividend policy, interest rates and general economic and market conditions. Prices at which WRP Newco Common may trade after the Distribution cannot be predicted. Costs of Compliance with the Americans with Disabilities Act and Similar Laws Under the Americans with Disabilities Act of 1980 (the "ADA"), places of public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. Compliance with ADA requirements could require both structural and non-structural changes to the properties in which WRP Newco invests and noncompliance could result in imposition of fines by the United States government or an award of damages to private litigants. Although management of WRP Newco believes that its properties are substantially in compliance with present requirements of the ADA, WRP Newco may incur additional costs of compliance in the future. A number of additional Federal, state and local laws exist which impose further burdens or restrictions on owners with respect to access by disabled persons and may require modifications to properties in which WRP Newco invests, or restrict certain further renovations thereof, with respect to access by disabled persons. Final regulations under the ADA have not yet been promulgated and the ultimate amount of the cost of compliance with the ADA or other such laws is not currently ascertainable. While such costs are not expected to have a material effect on WRP Newco, they could be substantial. If required changes involve greater expense than WRP Newco currently anticipates, WRP Newco's financial condition and results of operations could be adversely affected. Noncompliance with Other Laws Real estate properties are also subject to various Federal, state and local regulatory requirements, such as state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. WRP Newco believes that its properties are currently in material compliance with all such regulatory requirements. However, there can be no assurance that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by WRP Newco and could have an adverse effect on WRP Newco's results of operations. Effect on Common Stock Price of Shares Available for Future Sale Sales of a substantial number of shares of WRP Newco Common, or the perception that such sales could occur, could adversely affect prevailing market prices of the WRP Newco Common. Up to 12,000,000 shares of WRP Newco Common may be issued pursuant to the Additional Share Offering and purchasers of the Additional Shares may be able to sell such shares in the public market immediately after purchase. In addition, 1,750,000 shares of WRP Newco Common have been reserved for issuance pursuant to WRP Newco's 1997 Management 61 Incentive Plan, and, when issued, these shares will be available for sale in the public markets from time to time pursuant to exemptions from registration requirements or upon registration. No prediction can be made about the effect that future sales of WRP Newco Common will have on the market prices of WRP Newco Common. Hedging Policies/Risks In connection with the financing of certain real estate investments, WRP Newco may employ hedging techniques designed to protect WRP Newco against adverse movements in currency and/or interest rates. While such transactions may reduce certain risks, such transactions themselves may entail certain other risks. Thus, while WRP Newco may benefit from the use of these hedging mechanisms, unanticipated changes in interest rates, securities prices, or currency exchange rates may result in a poorer overall performance for WRP Newco than if it had not entered into such hedging transactions. Anti-Takeover Effect Resulting From a Staggered Board, Ability of WRP Newco to Issue Preferred Stock and Certain Provisions of Maryland Law WRP Newco's Board of Directors is divided into three classes. The initial terms of the first, second and third classes will expire in 1998, 1999 and 2000, respectively. Beginning in 1998, directors for each class will be chosen for a three-year term upon the expiration of their then current term, and each year one class of directors will be elected by the stockholders. The staggered terms for directors may limit the stockholders' ability to change control of WRP Newco even if a change of control were in the interests of stockholders. The Newco Charter authorizes the Board of Directors to establish one or more series of preferred shares and to determine, with respect to any series of preferred shares, the preferences and other terms of such series. Although the Board of Directors has no intention at the present time, it could issue a series of preferred shares that could, depending on the terms of such series, impede or prevent a merger, tender offer or other transaction that some, or a majority, of WRP Newco's shareholders might believe to be in their best interest or in which shareholders might receive a premium for their shares over the then current market price of such shares. Under the MGCL, certain "business combinations" (including certain issuances of equity securities) between a Maryland corporation and an Interested Stockholder are prohibited for five years after the most recent date on which the Interested Stockholder becomes an Interested Stockholder. Thereafter, unless exempted, any such business combination must be approved by two supermajority stockholder votes. The directors of WRP Newco have exempted from the Maryland statute any business combinations with Jeffrey H. Lynford or Edward Lowenthal or any of their affiliates or any other person acting in concert or as a group with any of such persons and, consequently, the five-year prohibition and the supermajority vote requirements will not apply to business 62 combinations between such persons and WRP Newco. See "Certain Provisions of Maryland Law and of WRP Newco's Charter and Bylaws". The provisions of the MGCL described above and the exemptions granted may discourage a third party from making an acquisition proposal for WRP Newco and may inhibit a change in control under circumstances that could otherwise give the holders of WRP Newco Common the opportunity to realize a premium over then- prevailing market prices. It should also be noted that for ten years after the Closing Date, WRP Newco has the right to direct the voting of all shares of WRP Newco Series A Preferred, WRP Newco Class A Common and WRP Newco Common owned by ERP Operating Partnership or any of its affiliates, except as to the election of the director to be designated by ERP Operating Partnership or any matter relating to the rights, preferences and privileges of WRP Newco Series A Preferred or WRP Newco Class A Common. Such voting right may hinder a change in control. THE MEETINGS OF SHAREHOLDERS EQR The EQR Special Meeting has been called by the EQR Board of Trustees for the purpose of approving the Merger. The EQR Special Meeting will be held on May 28, 1997, at 10:00 a.m., local time, at One North Franklin, Chicago, Illinois. Only shareholders of record of EQR Common at the close of business on April 14, 1997 will be entitled to vote at the EQR Special Meeting. EQR had outstanding 53,713,158 shares of EQR Common as of the close of business on April 1, 1997, of which 1,022,666 shares (or approximately 1.9% of the outstanding) shares of EQR Common (excludes 681,534 shares where beneficial ownership is disclaimed) were owned beneficially by the officers and trustees of EQR, and such persons have indicated their intention to vote such shares in favor of the Merger. No EQR Shares other than EQR Common are entitled to vote on the Merger. Each holder of EQR Common is entitled to one vote per share on the Merger. If the accompanying proxy form is signed and returned, the shares represented thereby will be voted in accordance with any direction on the proxy form, or in the absence of a direction, they will be voted FOR the Merger. The shareholder may revoke the proxy at any time prior to the voting thereof by giving written notice of such revocation to EQR, by executing and delivering a proxy bearing a later date, or by attending the EQR Special Meeting and voting in person. The expenses of the solicitation of EQR Common Shareholders will be paid by EQR. In addition to the use of the mail, proxies may be solicited by trustees, officers, or regular employees of EQR in person, by telecopy or by telephone. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries to forward solicitation material to the beneficial owners of the shares of EQR Common held of record by such persons, and EQR will reimburse such brokerage firms, custodians, nominees and fiduciaries for reasonable out-of-pocket expenses incurred by them in connection therewith. EQR has retained MacKenzie 63 Partners to assist in the solicitation of proxies. The fee of such firm is estimated to be $6000, plus reimbursement for out-of-pocket costs and expenses. The presence at the EQR Special Meeting, in person or by proxy, of the holders of a majority of the outstanding shares of EQR Common is necessary to constitute a quorum under the Amended and Restated Bylaws of EQR (the "EQR Bylaws"). Votes cast by proxy or in person at the meeting will be tabulated by election inspectors appointed for the meeting and will determine whether or not a quorum is present. The election inspectors will treat abstentions and "broker non-votes" (i.e., proxies of brokers who have limited authority to vote on specified proposals) as shares that are present and entitled to vote for purposes of determining the presence of a quorum at the meeting. Under Maryland law and EQR's Amended and Restated Declaration of Trust (the "EQR Declaration"), the affirmative vote of the holders of two-thirds of the outstanding shares of EQR Common is required to approve the Merger. EQR Common Shareholders may mark the accompanying EQR proxy to vote their shares FOR or AGAINST, or to ABSTAIN with respect to, the Merger. Abstentions and broker non-votes will have the effect of a vote against approval of the Merger. The EQR Trustees who voted on the Merger unanimously recommend that EQR Common Shareholders vote FOR the Merger. Pursuant to the EQR Bylaws, no business may be transacted at the EQR Special Meeting except that referred to in the accompanying notice of the EQR Special Meeting. Wellsford The Wellsford Special Meeting has been called by the Wellsford Board of Trustees for the purpose of approving the Merger, including the adoption of an amended and restated declaration of trust of the Surviving Trust, the Additional Provisions, the Additional Share Offering by WRP Newco and the adoption of WRP Newco's 1997 Management Incentive Plan. The Wellsford Special Meeting will be held on May 28, 1997, at 10:00 a.m., local time, at The Princeton Club, 15 West 43rd Street, New York, New York . Only shareholders of record of Wellsford Common at the close of business on April 14, 1997 will be entitled to vote at the Wellsford Special Meeting. Wellsford had outstanding 17,261,897 shares of Wellsford Common as of the close of business on April 18, 1997, of which 599,828 shares (or approximately 3.5% of the outstanding shares of Wellsford Common (excludes 29,727 shares where beneficial ownership is disclaimed)) were owned beneficially by the officers and trustees of Wellsford, and such persons have indicated their intention to vote such shares in favor of the Merger, including the adoption of an amended and restated declaration of trust of the Surviving Trust, the Additional Provisions, the Additional Share Offering and the adoption of WRP Newco's 1997 Management Incentive Plan. No Wellsford Shares other than Wellsford Common are entitled to vote on the matters set forth in the notice of the Wellsford Special Meeting. Each holder of 64 Wellsford Common is entitled to one vote per share on the matters set forth in the notice of the Wellsford Special Meeting. If the accompanying proxy form is signed and returned, the shares represented thereby will be voted in accordance with any direction on the proxy form, or in the absence of a direction, they will be voted FOR the Merger, including adoption of the amended and restated declaration of trust of the Surviving Trust, the Additional Provisions, the Additional Share Offering by WRP Newco and the adoption of WRP Newco's 1997 Management Incentive Plan. The shareholder may revoke the proxy at any time prior to the voting thereof by giving written notice of such revocation to Wellsford, by executing and delivering a proxy bearing a later date, or by attending the Wellsford Special Meeting and voting in person. The expenses of the solicitation of Wellsford Common Shareholders will be paid by Wellsford. In addition to the use of the mail, proxies may be solicited by trustees, officers, or regular employees of Wellsford in person, by telecopy or by telephone. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries to forward solicitation material to the beneficial owners of the shares of Wellsford Common held of record by such persons, and Wellsford will reimburse such brokerage firms, custodians, nominees and fiduciaries for reasonable out-of-pocket expenses incurred by them in connection therewith. Wellsford has retained MacKenzie Partners to assist in the solicitation of proxies. The fee of such firm is estimated to be $7,500, plus reimbursement for out-of-pocket costs and expenses. The presence at the Wellsford Special Meeting, in person or by proxy, of the holders of a majority of the outstanding shares of Wellsford Common is necessary to constitute a quorum under Wellsford's Bylaws (the "Wellsford Bylaws"). Votes cast by proxy or in person at the Wellsford Special Meeting will be tabulated by election inspectors appointed for the meeting who will determine whether or not a quorum is present. The election inspectors will treat abstentions and "broker non-votes" (i.e., proxies of brokers who have limited authority to vote on specified proposals) as shares that are present and entitled to vote for purposes of determining the presence of a quorum at the meeting. Under Maryland law and Wellsford's Amended and Restated Declaration of Trust (the "Wellsford Declaration"), the affirmative vote of the holders of a majority of the outstanding shares of Wellsford Common is required to approve the Merger. The affirmative vote of the holders of two-thirds of the outstanding shares of Wellsford Common is required to approve the Additional Provisions. The affirmative vote of the holders of a majority of shares of Wellsford Common voting thereon is required to approve the Additional Share Offering and the adoption of WRP Newco's 1997 Management Incentive Plan. Wellsford Common Shareholders may mark the accompanying Wellsford proxy to vote their shares FOR or AGAINST, or to ABSTAIN from voting with respect, to the Merger, the Additional Provisions, the Additional Share Offering and WRP Newco's 1997 Management Incentive Plan. Abstentions and broker non-votes will be counted in determining the presence of a quorum and will have the effect of a vote against approval of the Merger and the Additional Provisions. An abstention and a broker non-vote will have no effect on the proposal to approve 65 the Additional Share Offering and adoption of WRP Newco's 1997 Management Incentive Plan. The Wellsford Board of Trustees unanimously recommends that Wellsford Common Shareholders vote FOR the Merger, the Additional Provisions, the Additional Share Offering and WRP Newco's 1997 Management Incentive Plan. The WRP Newco Board of Directors unanimously recommends that Wellsford Common Shareholders vote FOR the Additional Share Offering and WRP Newco's 1997 Management Incentive Plan. The Wellsford Bylaws provide that no business will be transacted at the Wellsford Special Meeting except that referred to in the accompanying notice of the Wellsford Special Meeting. THE MERGER The description of the Merger contained in this Joint Proxy Statement/Prospectus/Information Statement is qualified in its entirety by reference to the Merger Agreement, the full text of which is attached as Appendix A, and is incorporated herein by reference. Terms of the Merger The Merger Agreement provides that, upon satisfaction or waiver of the conditions set forth therein, EQR will be merged into Wellsford. The name of the Surviving Trust will be Equity Residential Properties Trust. At the Effective Time, each outstanding share of Wellsford Common will be converted into .625 of a share of Survivor Common. At the Effective Time, each outstanding share of EQR Common will be converted into one share of Survivor Common. At the Effective Time, each share of Wellsford Preferred and EQR Preferred will be converted into one share of Survivor Preferred, having the same preferences and other terms as the Wellsford Preferred or EQR Preferred previously outstanding of the same series; provided, however, that the conversion ratio for the Wellsford Series A will be adjusted in accordance with its terms. No fractional shares of Survivor Common will be issued in connection with the Merger. In lieu thereof, holders of Wellsford Common will receive a cash payment equal to the average closing price of EQR Common on the NYSE for the five trading days immediately preceding the Effective Time, multiplied by the fraction of the shares of Survivor Common to which the holder would be entitled under the Merger Agreement. Background of the Merger Since 1993, Douglas Crocker, the President and Chief Executive Officer of EQR and Jeffrey H. Lynford, the Chairman of the Board of Wellsford and Edward Lowenthal, President and Chief Executive Officer of Wellsford, have had a personal relationship arising out of their participation in the multifamily property business. At various times during 1994 and 1995 Mr. 66 Crocker, Mr. Lynford and Mr. Lowenthal have discussed the general status of the multifamily property industry. Messrs. Crocker, Lynford and Lowenthal presumed that the multifamily property industry would be the subject of combinations of existing companies in the future, and separately considered whether their respective companies should explore a combination with other companies. On September 16, 1996, a regular quarterly Wellsford board meeting was held at which Messrs. Lynford and Lowenthal reported on their discussions with investment banking firms and other publicly traded REITs regarding possible strategic combinations. They indicated that these discussions related primarily to possible transactions in which Wellsford would acquire another entity or be the survivor in a merger. The Board of Trustees of Wellsford authorized management to engage in discussions regarding possible strategic business combinations. On September 24, 1996, Messrs. Crocker, Lynford and Lowenthal met to discuss the multifamily property industry and real estate market in general and whether combining the property portfolios of EQR and Wellsford made sense for both companies and their shareholders. The parties expressed a general interest in exploring the possibility of a combination of the companies. On October 19, 1996, Messrs. Crocker and Lynford had a meeting at which they specifically discussed each company's interest in pursuing merger discussions. During such meeting, Mr. Crocker and Mr. Lynford considered whether a merger would be in the best interests of both companies and their shareholders. Among the issues considered were whether a merger would combine the talents of their respective companies, reduce corporate overhead by eliminating redundancies and create a larger company which might be attractive to institutional investors and increase access to public equity and debt markets. Mr. Crocker and Mr. Lynford discussed various exchange ratios for Wellsford Common as well as possible funds from operations and adjusted funds from operations ratios. Concluding that a merger might be in the best interests of both companies and their shareholders, Mr. Crocker and Mr. Lynford decided to pursue merger discussions. On October 24, 1996, Mr. Crocker and Mr. Lowenthal met at the National Association of Real Estate Investment Trusts ("NAREIT") Convention in Dallas, Texas. Mr. Crocker and Mr. Lowenthal discussed revised numbers with respect to funds from operations and adjusted funds from operations in connection with possible exchange ratios. Mr. Crocker discussed the fact that he would like to reach agreement on these numbers in order to further pursue a merger transaction. Mr. Crocker and Mr. Lowenthal agreed to have each company's internal accountants discuss exchange ratios and evaluations. On November 13, 1996, Mr. Crocker, Mr. Lowenthal, Gregory F. Hughes, Chief Financial Officer of Wellsford, David H. Lee, Senior Vice President - Capital Markets of EQR, Gerald A. Spector, Executive Vice President of EQR, and David J. Neithercut, Chief Financial Officer of EQR, met. Mr. Lowenthal presented the exchange ratio as a topic for discussion. 67 The parties exchanged views on relative assets and exchange values, but disagreements remained regarding the method of valuation, the exchange ratio and other material issues. On November 27, 1996, Mr. Crocker met with Messrs. Lynford, Lowenthal and Hughes at Wellsford's corporate offices. The parties again discussed valuation and determined that EQR was not willing to value the development assets of Wellsford on a going concern basis in the same manner as the other Wellsford assets. The parties alternatively discussed the formation of a new Wellsford subsidiary to be spun off to the common shareholders of Wellsford funded primarily with the Wellsford development assets. The parties agreed that Mr. Crocker would serve as a director on the proposed subsidiary's board of directors and Messrs. Lowenthal and Lynford would serve as trustees on the EQR Board of Trustees. The parties also discussed estimated financial results of EQR for year-end 1997 and various employment issues, such as possible retention of as many Wellsford employees as possible to meet EQR's staffing needs. On December 9, 1996, a regular quarterly Wellsford board meeting was held at which members of management of Wellsford and its legal counsel were present. At such meeting, Messrs. Lynford and Lowenthal reported on the discussions they had with other publicly traded REITs regarding possible business combination transactions. They indicated that the only ongoing discussions at such time were with EQR, and they reported the status and substance of these discussions, including those relating to a possible spin-off of certain of Wellsford's assets, and the nature and results of management's initial due diligence review of the business and financial condition of EQR. On December 12, 1996, Mr. Crocker, Mr. Lowenthal, Mr. Lynford, Mr. Hughes and attorneys from EQR's legal staff, as well as representatives of Rudnick & Wolfe, special counsel for EQR, and Robinson Silverman Pearce Aronsohn & Berman LLP, special counsel for Wellsford, met to discuss the structure of a possible merger transaction, the formation of the proposed subsidiary and the specific assets to be transferred to the proposed subsidiary, and the possible pricing matrix for the Wellsford Common. General terms were discussed. The tentative Exchange Ratio was determined by establishing relative values for the EQR Common and Wellsford Common. The value for EQR Common was based on its then market value of $42.875 per share. No one specific valuation method was utilized in connection with the determination of the value of the Wellsford Common. The value for Wellsford Common was negotiated based upon, among other things, its then market price of $25.00 per share and each party's evaluation of the value of Wellsford's assets to be acquired in the Merger, which were estimated at approximately $1,032.2 million, the budgeted net operating income, earnings before interest, taxes, depreciation and amortization and funds from operations for 1997 estimated to be generated from the assets to be acquired by EQR in the merger were approximately $79.4 million, $76.7 million and $37.4 million, respectively, the cost savings anticipated from the Merger, which were estimated at $4.1 million per year and the costs associated with the Merger, including employee severance and retention costs, which were estimated at $23.6 million. With respect to the Wellsford Preferred, it was determined to value such shares based upon their liquidation value because the distribution rates on Wellsford Preferred were established as a percentage of their respective liquidation values. It was tentatively agreed, subject to satisfactory resolution of other material issues and completion of due diligence, that the exchange ratio would be determined based upon a value 68 of $27.50 per share for the Wellsford Common and $40.00 per share for the EQR Common, subject to adjustment in the event of a decline in the market price of EQR Common. In addition, it was tentatively agreed, subject to the additional study of the relevant assets and completion of due diligence, that the assets to be contributed to the new subsidiary would have an initial book value of at least $2.50 per share. Although discussions were still ongoing, EQR and Wellsford requested their legal counsel to prepare a draft of a merger agreement and other related documents so that management of the companies could focus on the issues that required resolution. On December 20, 1996, Mr. Crocker and Mr. Lowenthal had a telephone call to discuss certain open issues regarding the possible merger transaction. The costs in connection with the possible merger transaction were discussed in detail. On December 26, 1996, Messrs. Crocker, Lowenthal and Hughes discussed by telephone concerns regarding the capitalization of the proposed subsidiary upon consummation of the possible merger. Mr. Crocker suggested that EQR purchase $3.5 million in shares of common stock of the proposed subsidiary plus an additional 10% interest in Palomino Park. From December 26, 1996 through January 9, 1997, the management of EQR and Wellsford had a number of discussions regarding various business issues. On January 9, 1997, a special EQR board meeting was held at which members of management, representatives of EQR's financial and legal advisors were present in person or by conference telephone call. At such meeting, the trustees were informed of the status of discussions with Wellsford's management and the reasons that a combination with Wellsford would be beneficial. In addition, the trustees discussed with management and EQR's legal advisors, the current operations of EQR and Wellsford, the form of consideration payable in the proposed transaction, the valuation methodologies to be utilized by J.P. Morgan for purposes of its opinion (see "The Merger-Opinion of EQR Financial Advisor"), potential synergies expected by management to result from the proposed transaction, certain governance, tax and due diligence matters and the time table for completion of the transaction. The EQR Board of Trustees also reviewed the tentative terms of the proposed merger between EQR and Wellsford. Mr. Crocker provided the EQR Board of Trustees with a discussion of the background and events leading up to the meeting with respect to the proposed merger with Wellsford. Mr. Crocker then set forth the reasons he believed a possible business combination with Wellsford would be appropriate for EQR. The reasons discussed were (i) the combined entity would be the second largest publicly-traded REIT in the United States and the largest REIT focusing primarily on multifamily properties, with 317 properties, consisting of 90,873 apartment units; (ii) the combined market capitalization, would be approximately $5 billion and would not significantly alter EQR's existing Debt to Total Market Capitalization Ratio; and (iii) the merger would improve access to the public debt and equity markets to support EQR's continued growth. Mr. Crocker also noted that Mr. Lowenthal and Mr. Lynford would be 69 added to the EQR Board of Trustees, assuming approval of the Merger by the shareholders of each company. EQR's legal counsel presented and explained the terms of the Merger Agreement to the EQR Board of Trustees including closing conditions, termination rights and liquidated damages and expense reimbursement provisions, and advised the EQR Board of Trustees of their fiduciary obligations. A discussion followed concerning the proposed merger. The EQR Board of Trustees discussed the advantages and disadvantages to EQR of the Merger, including the factors raised by Mr. Crocker. The principle negative factor that the EQR Board of Trustees considered was the significant costs involved in connection with consummating the Merger and the substantial management time and effort required to effectuate the Merger and integrate the businesses of EQR and Wellsford. The EQR Board of Trustees did not believe that this factor was sufficient to outweigh the advantages of the Merger, particularly in light of the lower payout ratio of the Surviving Trust based upon funds from operations, and the similar Debt to Total Market Capitalization Ratio of the Surviving Trust, as compared with the current ratio for EQR. From January 12, 1997 through January 16, 1997, representatives of management of EQR and Wellsford and their respective counsel met in Chicago to discuss and resolve the remaining open business and legal issues. On January 15, 1997, a special meeting of the EQR Board of Trustees was held. Representatives of J.P. Morgan made a detailed presentation regarding the proposed merger with Wellsford. J.P. Morgan's presentation included a discussion of (i) the fairness from a financial point of view to EQR of the consideration to be paid by EQR in the proposed merger; (ii) a summary of the financial terms of the proposed merger; (iii) a valuation analysis; and (iv) a discussion of the impact of the proposed merger on EQR. Also included in J.P. Morgan's oral presentation of its fairness opinion were (i) an outline of J.P. Morgan's fairness opinion process; (ii) a pro forma merger analysis; (iii) a fully loaded share price analysis; (iv) a public trading multiples analysis; (v) a selected transactions analysis; (vi) a share trading history analysis; (vii) an historical exchange ratio analysis; (viii) a net asset value analysis; and (ix) a WRP Newco analysis. See "- Opinion of Financial Advisor -- EQR." Following such presentations, and after extensive discussion, the Board of Trustees of EQR concluded that the advantages of the Merger outweighed the potential risks and the EQR Trustees who voted on the Merger unanimously approved the Merger Agreement and the related agreements contemplated thereby, and authorized EQR management to enter into such agreements. J.P. Morgan rendered its oral opinion to the effect that, as of that date and subject to the assumptions made, procedures followed, matters considered and limits of its review, the consideration to be paid by EQR in connection with the Merger was fair, from a financial point of view, to EQR. J.P. Morgan's written opinion confirming its oral opinion was delivered on January 16, 1997. 70 On January 16, 1997, a special meeting of the Board of Trustees of Wellsford was held at which members of management, representatives of Merrill Lynch and legal counsel were present. At such meeting, the Wellsford Board of Trustees was updated on the status of discussions with EQR regarding the potential merger transaction between Wellsford and EQR. Mr. Lynford reviewed with the Board of Trustees (i) the background of the proposed merger and spin- off transaction, (ii) the current status of Wellsford's financial and business plans without the proposed merger, including the feasibility of improving the profitability of Wellsford's existing property portfolio and raising additional capital and acquiring new properties, (iii) pertinent due diligence findings with respect to EQR, with particular emphasis on the current operations and properties of EQR and (iv) the potential benefits as well as the risks of the proposed merger transaction as described below under "- Reasons for the Merger; Recommendation of the Wellsford Board of Trustees." Wellsford's legal counsel made a presentation to the Wellsford Board of Trustees in which it explained the material terms of the proposed merger and spin-off transaction and agreements related thereto, briefed the Board of Trustees on certain legal issues raised by the proposed merger transaction and advised the Board of Trustees of its fiduciary duties in connection with such transaction. Merrill Lynch presented its financial analysis of the merger transaction, which included: (i) an overview of the proposed transaction setting forth, among other things, a summary of the key transaction terms and a description of the Distribution, (ii) an analysis of the stock trading history of each of Wellsford Common and EQR Common, (iii) valuation analyses of Wellsford, EQR and WRP Newco, (iv) a comparison of each of Wellsford and EQR with selected publicly traded companies, (v) a comparison of the proposed financial terms of the Merger with the financial terms of other relevant mergers and acquisitions and (vi) a pro forma merger analysis. Merrill Lynch concluded its presentation by orally advising the Wellsford Board of Trustees that as of that date, based upon the facts and circumstances as they existed at that time, and subject to certain assumptions, factors and limitations, the proposed consideration to be received by the holders of Wellsford Common, pursuant to the Merger and Distribution, was fair to such shareholders from a financial point of view. Following such presentations, and after extensive discussion of the advantages and disadvantages of the proposed merger transaction as described under "- Reasons for the Merger; Recommendations of the Wellsford Board of Trustees," the Board of Trustees of Wellsford concluded that the advantages of the Merger and Distribution outweighed the potential risks, and unanimously approved the merger transaction, the spin-off, the Merger Agreement and all transactions contemplated thereby. EQR and Wellsford did not believe that the Merger or the Contribution and Distribution would have a material adverse effect on the results of operations, liquidity or capital resources of the Surviving Trust and believed that the advantages of such transactions outweighed the disadvantages. 71 The Merger Agreement was executed on January 16, 1997. Reasons for the Merger; Recommendation of the EQR Board of Trustees The EQR Board of Trustees believes that the Merger, including the consideration, is fair and in the best interests of EQR and its shareholders. Accordingly, the EQR Trustees who voted on the Merger unanimously approved the Merger and unanimously recommend approval of the Merger by the shareholders of EQR. In reaching this determination, the EQR Board of Trustees consulted with EQR management, as well as its financial advisors, J.P. Morgan, legal counsel and accountants, and considered a number of factors. The material factors that the EQR Board of Trustees considered in approving the Merger and unanimously recommending approval of the Merger are that: (i) The EQR Board of Trustees believes that the Merger would solidify EQR's leadership position in the multifamily property industry. The EQR Board of Trustees viewed this as favorable because the combined entity would own and operate 317 multifamily properties consisting of 90,873 apartment units; would have funds from operations on a pro forma basis for the nine months ended September 30, 1996 of approximately $155.4 million and would have a combined market capitalization, as of September 30, 1996, of approximately $5.0 billion with an initial Debt to Total Market Capitalization Ratio of approximately 31%. (ii) The EQR Board of Trustees believes that the Merger would increase operating efficiency through economies of scales, which the EQR Board of Trustees viewed as favorable as the combined entity would realize significant savings in overhead and expenses (such savings are estimated to be approximately $3.7 million per annum). (iii) The EQR Board of Trustees believes that the Merger would provide greater access to the public equity and debt markets. The Debt to Total Market Capitalization Ratio for EQR as of September 30, 1996 was approximately 31.5%, while the ratio on a pro forma basis of the Surviving Trust as of the same date would be approximately 31%. The EQR Board of Trustees viewed this favorably because of management's belief, based in part on discussions with advisors, investment banking firms and lenders, that it would provide EQR Common Shareholders with enhanced liquidity and make the Survivor Common a more attractive investment for institutional investors. (iv) The EQR Board of Trustees believes that the Surviving Trust would be a larger and financially stronger company, which would make it easier to combine with other public or private entities. The EQR Board of Trustees viewed this as favorable because it would provide another efficient and attractive means of growth. (v) The EQR Board of Trustees believes that the combination of the Wellsford properties (approximately 19,000 units) with those of EQR will expand the geographic focus of EQR's ownership and operation of properties and enhance EQR's operations in the Southwest, 72 Western and Pacific Northwest regions of the United States. The EQR Board of Trustees viewed this as favorable because it would limit the impact that adverse economic or real estate conditions in a particular region may have on EQR as a whole and provide EQR the opportunity for additional expansion in these regions. (vi) The Unaudited Pro Forma Combined Financial Statements for the nine months ended September 30, 1996 on a pro forma basis illustrated the effects of the Merger. On a pro forma basis funds from operations for the Surviving Trust are $155.4 million for the nine months ended September 30, 1996 instead of $113.3 million for EQR on a historical basis. The EQR Board of Trustees viewed this as favorable because it would most likely increase the Surviving Trust's funds from operations available for distribution to shareholders and holders of OP Units. Funds from operations available for distribution is not the same as cash available for distribution as it does not reflect cash required for capital expenditures and principal repayments on debt. (vii) The Merger could be effectuated through the issuance of new equity valued at $464 million (based upon a market price of $43.375 per share of EQR Common on January 16, 1997), rather than through the use of cash or a public offering of equity or debt securities, which the EQR Board of Trustees viewed as favorable. (viii) J.P. Morgan delivered an oral opinion on January 15, 1997 to the effect that, as of such date and based upon and subject to certain matters stated therein, the consideration to be paid by EQR in connection with the Merger was fair, from a financial point of view, to EQR. The EQR Board of Trustees viewed such opinion as favorable not only because of the conclusion reached by J.P. Morgan, but also because such conclusion was consistent with the opinion of EQR's management. (ix) The EQR Board of Trustees believes the terms of the Merger Agreement to be fair to EQR. (x) Under generally accepted accounting principles, the Merger will be accounted for as a purchase, and for federal income tax purposes the Merger will be a tax-free transaction, which the EQR Board of Trustees viewed as favorable because, with certain possible exceptions, no gain or loss will be recognized by EQR, Wellsford or a shareholder of Wellsford who receives shares of Survivor Common for shares of Wellsford Common exchanged therefor (except with respect to any cash received in lieu of a fractional interest in a share of EQR Common). The EQR Board of Trustees also considered certain potentially negative factors which could arise from the Merger. These included, among others, the significant costs involved in connection with consummating the Merger and the substantial management time and effort required to effectuate the Merger and integrate the businesses of EQR and Wellsford. The EQR Board of Trustees considered that the Merger would increase the debt of the Surviving Trust. 73 The Surviving Trust will assume all of Wellsford's outstanding debt of approximately $330 million. The EQR Board of Trustees recognized this increase could adversely affect the ability of the Surviving Trust to obtain debt financing for additional growth and would subject EQR to the risks of higher leverage. Overall, however, the EQR Board of Trustees concluded that the increase in debt would be within EQR's policies with respect to the incurrence of debt. In addition, the EQR Board of Trustees considered the possible adverse effects upon the market for EQR Common Shares and upon EQR's ability to raise capital and issue equity in both the public and private markets which might result if the Merger were not consummated. Finally, the EQR Board of Trustees considered the risk that the anticipated benefits of the Merger might not be fully realized. The EQR Board of Trustees did not believe that the negative factors were sufficient, either individually or collectively, to outweigh the advantages of the Merger. The EQR Board of Trustees viewed as adequate the conditions to the closing in the Merger Agreement, including the condition that no change in the financial condition, business or operations of Wellsford will have occurred that would have a material adverse effect, other than a change which affects EQR and Wellsford in a substantially similar manner. In view of the wide variety of factors considered in connection with its evaluation of the Merger, the EQR Board of Trustees did not find it practicable to, and did not, quantify or otherwise attempt to assign relative weight to the specific factors considered in reaching its determination. The EQR Board of Trustees view the indemnification provisions relating to Wellsford trustees and officers as a continuing responsibility and approved of the continuation of the indemnification of the Wellsford trustees and officers as part of the negotiated transaction. The EQR Board of Trustees believes that the proposed transaction is fair to and in the best interests of EQR and its shareholders. The EQR Trustees who voted on the Merger unanimously approved the Merger, and unanimously recommend that the shareholders of EQR vote FOR the Merger. In the event the Merger is not consummated for any reason, EQR will continue to pursue its business objectives. Reasons for the Merger; Recommendation of the Wellsford Board of Trustees At a special meeting of the Wellsford Board of Trustees held on January 16, 1997, members of Wellsford management, representatives of Merrill Lynch and legal counsel made presentations concerning the business and prospects of Wellsford and EQR. As part of its deliberations, the Wellsford Board of Trustees considered, among other factors, the age, condition and geographic diversification of EQR's assets, the depth and experience of its management and its credit rating and analyzed its capital structure, funds from operations and Debt to Total Market Capitalization Ratio, as well 74 as its future prospects and opportunities for growth as a combined company with Wellsford. The Wellsford Board of Trustees also reviewed the terms of the Merger Agreement and the Contribution and Distribution Agreement with Wellsford's management and Wellsford's financial and legal advisors. By unanimous vote, the Wellsford Board of Trustees determined that the Merger and the Distribution were fair to, and in the best interests of, Wellsford and its shareholders, approved and adopted the Merger Agreement, the Contribution and Distribution Agreement and the transactions contemplated thereby, and resolved to recommend that Wellsford's shareholders approve the Merger. Although Wellsford Common Shareholders are not being asked to approve the Distribution, approval of the Merger will, in effect, constitute approval of the Distribution. The Wellsford Board of Trustees believes that the Merger offers Wellsford's shareholders an opportunity to take advantage of the general trend in the real estate industry towards consolidation, by affording shareholders a significant participation in a much larger and more geographically diversified REIT with greater potential for long-term appreciation and improved access to capital markets. In making its determination with respect to the Merger and the Distribution, the Wellsford Board of Trustees also considered, among other things, that: (i) the Merger represents the alternative which has the greatest feasibility and offers the greatest potential to maximize shareholder value. In this regard, the Board considered the discussions management conducted with investment banking firms and other publicly traded REITs regarding possible strategic combinations, as well as EQR's size, financial resources, geographic diversification and credit rating and the expertise and experience of EQR's management; (ii) after management's discussions with other parties regarding possible strategic business combinations, the Merger was the best alternative reasonably available to Wellsford's shareholders. The Board believed that after management's discussions with investment banking firms and other publicly traded REITs, there were no other prospective purchasers that had both the financial ability to complete the transaction and would be willing to pay an aggregate consideration greater than that to be paid by EQR in the Merger. Other possible strategic business combinations, including potential acquisitions of other companies, were rejected for many reasons, including the lack of management depth and experience, age and condition of the applicable assets, lack of geographic diversification, insufficient credit rating, insufficient cost savings and size of the other company; (iii) the anticipated cost savings and operating efficiencies available to the Surviving Trust from the Merger, particularly from a reduction of general and administrative overhead expenses, the costs of capital, bulk purchasing, advertising and property management; 75 (iv) the terms of the Merger Agreement, which the Wellsford Board of Trustees viewed as favorable because it believed them to be fair to Wellsford and its shareholders and because the terms were reached through extensive arms-length negotiations. In this regard, the Wellsford Board of Trustees noted that the Exchange Ratio fairly reflected the relative contributions of both companies to the combined entity and represented an attractive opportunity for shareholders to continue their investment and maintain their receipt of quarterly dividends, but with significantly expanded geographic diversification; (v) the Surviving Trust will have significantly greater market capitalization which could increase the liquidity of Survivor Common after the Merger. In this regard, the Board noted that the market capitalization of the Surviving Trust is expected to be approximately $4 billion greater than the then current market capitalization of Wellsford and the Surviving Trust would have approximately 60,000,000 shares of Survivor Common outstanding after the Merger; (vi) the Distribution will enable shareholders to participate in an opportunity to maximize the value of the Contributed Assets (as defined herein) because EQR did not wish to acquire the Contributed Assets for a price that Wellsford considered to be adequate value for such assets; (vii) the structure of the Merger, particularly the fact that the Merger, as a "stock-for-stock" transaction, rather than a "cash-for-stock" transaction, will provide an opportunity for Wellsford's shareholders to participate in any future appreciation of the Surviving Trust; (viii) the tax-free nature of the Merger; and (ix) the opinion, analyses and presentations of Merrill Lynch, including the opinion that the proposed consideration to be received by Wellsford Common Shareholders pursuant to the Merger and the Distribution was fair to such shareholders from a financial point of view, which supported the conclusions reached by the Board after its own deliberations and analyses. The Wellsford Board of Trustees also considered certain potentially negative factors in its deliberations concerning the Merger, including, among others: (i) the risk that the anticipated benefits of the Merger might not be fully realized; (ii) the significant costs involved in connection with consummating the Merger; 76 (iii) the substantial management time and effort required to effectuate the Merger; (iv) the possibility that Wellsford may be required, if the Merger Agreement is terminated under certain circumstances, to pay EQR a Break-Up Fee of $14.0 million and to reimburse EQR Break-Up Expenses of up to $2.5 million; and (v) that the dividend rate payable with respect to the EQR Common is less than the dividend rate payable with respect to the Wellsford Common. In addition to the above factors, the Board of Trustees was mindful of and evaluated the actual and potential conflicts of interest. In view of the wide variety of factors considered by the Wellsford Board of Trustees, the Board of Trustees did not quantify or otherwise attempt to assign relative weights to the specific factors considered in making its determination. However, after due consideration of their fiduciary obligations, in the unanimous view of the Wellsford Board of Trustees, the potential conflicts of interest and potentially negative factors considered by it were not sufficient, either individually or collectively, to outweigh the positive factors considered by it in its deliberations relating to the Merger. Opinion of Financial Advisor - EQR At the meeting of the Board of Trustees of EQR on January 15, 1997, J.P. Morgan rendered its oral opinion to the Board of Trustees of EQR that, as of such date, the consideration to be paid by EQR in connection with the proposed Merger was fair from a financial point of view to EQR. J.P. Morgan has confirmed its January 15, 1997 oral opinion by delivering its written opinion to the Board of Trustees of EQR, dated January 16, 1997, that, as of such date, the consideration to be paid by EQR in connection with the proposed Merger was fair from a financial point of view to EQR. J.P. Morgan has not been requested to, and will not, update its opinion prior to the Closing. No limitations were imposed by EQR's Board of Trustees upon J.P. Morgan with respect to the investigations made or procedures followed by it in rendering its opinions. The full text of the written opinion of J.P. Morgan dated January 16, 1997, which sets forth the assumptions made, matters considered and limits on the review undertaken, is attached as Appendix C to this Joint Proxy Statement/Prospectus/Information Statement and is incorporated herein by reference. EQR Common Shareholders are urged to read the opinion in its entirety. J.P. Morgan's written opinion is addressed to the Board of Trustees of EQR, is directed only to the consideration to be paid in connection with the Merger and does not constitute a recommendation to any shareholder of EQR as to how such shareholder should vote at the EQR Special Meeting. The summary of the opinion of J.P. Morgan set forth in this Joint Proxy Statement/Prospectus/ Information Statement is qualified in its entirety by reference to the full text of such opinion. In the opinion of EQR, no events or significant changes in information have occurred that would alter the opinion of J.P. Morgan. However, if such an event or 77 change does occur, including, without limitation, an amendment to the Merger Agreement or Contribution and Distribution Agreement which materially affects the financial terms of either of such agreements, a revised fairness opinion will be requested. In arriving at its opinion, J.P. Morgan reviewed, among other things, the Merger Agreement; the audited financial statements of EQR and Wellsford for the fiscal year ended December 31, 1995, and the unaudited financial statements of EQR and Wellsford for the nine months ended September 30, 1996; current and historical market prices of the EQR Common and Wellsford Common; certain publicly available information concerning the business of Wellsford and of certain other companies engaged in businesses comparable to those of Wellsford, and the reported market prices for certain other companies' securities deemed comparable; publicly available terms of certain transactions involving companies comparable to Wellsford and the consideration received for such companies; the terms of other business combinations deemed relevant by J.P. Morgan; certain internal financial analyses and estimates of budgeted 1997 funds from operations and net operating income prepared by EQR and Wellsford and their respective managements; and certain agreements with respect to outstanding indebtedness or obligations of EQR and Wellsford. J.P. Morgan also held discussions with certain members of the management of EQR and Wellsford with respect to certain aspects of the Merger, and the past and current business operations of EQR and Wellsford, the financial condition and future prospects and operations of EQR and Wellsford, and certain other matters believed necessary or appropriate to J.P. Morgan's inquiry. In addition, J.P. Morgan reviewed such other financial studies and analyses and considered such other information as it deemed appropriate for the purposes of its opinion. J.P. Morgan relied upon and assumed, without independent verification, the accuracy and completeness of all information that was publicly available or that was furnished to it by EQR and Wellsford or otherwise reviewed by J.P. Morgan, and J.P. Morgan has not assumed any responsibility or liability therefor. J.P. Morgan has not conducted any valuation or appraisal of any assets or liabilities, nor have any valuations or appraisals been provided to J.P. Morgan. In relying on financial analyses and forecasts provided to J.P. Morgan, J.P. Morgan has assumed that they have been reasonably prepared based on assumptions reflecting the best currently available estimates and judgments by management as to the expected future results of operations and financial condition of EQR and Wellsford to which such analyses or forecasts relate. J.P. Morgan has also assumed that the Merger will have the tax consequences described in discussions with, and materials furnished to J.P. Morgan by, representatives of EQR, and that the other transactions contemplated by the Merger Agreement will be consummated as described in the Merger Agreement. The projections utilized by J.P. Morgan in connection with its opinion were derived by calculating the average of the 1997 projections for both EQR and Wellsford, as projected by the REIT equity analyst community, of (i) total rental revenues, (ii) net operating income, (iii) earnings before interest, taxes, depreciation and amortization ("EBITDA"), (iv) FFO and (v) FFO per share (as provided by First Call, an online data service available to subscribers 78 which compiles earnings estimates by research analysts). This resulted in projected 1997 total rental revenues, net operating income, EBITDA, FFO and FFO per share of approximately $554.1 million, $337.8 million, $340.4 million, $202.5 million and $3.43 per share, respectively, for EQR, and approximately $138.0 million, $78.8 million, $77.7 million, $38.5 million and $2.25 per share, respectively, for Wellsford. No representation or warranty was made by any party with respect to these projections. Financial projections are subject to contingencies beyond management's control and realization of the projections depends on numerous factors, including among other things, the cost of integrating the companies, the completion of pending developments, the actual cost in relation to such projects and decisions by management to modify business plans to address changing needs and a changing operating environment. All material events and circumstances cannot be predicted and unanticipated events and circumstances are likely to occur. Accordingly, there may be differences between the projected results of operations and the actual results of operations of the respective companies, and such differences could be material. In the event that the financial projections prove to be materially different, the conclusions reached in the opinion of J.P. Morgan could be materially affected. J.P. Morgan's opinions are based on economic, market and other conditions as in effect on, and the information made available to J.P. Morgan as of, the date of such opinions. Subsequent developments may affect the written opinion dated January 16, 1997, and J.P. Morgan does not have any obligation to update, revise, or reaffirm such opinion. J.P. Morgan expressed no opinion as to the price at which the EQR Common or Wellsford Common will trade at any future time. In accordance with customary investment banking practice, J.P. Morgan employed generally accepted valuation methods in reaching its opinion. The following is a summary of the material financial analyses utilized by J.P. Morgan in connection with providing its opinion. Pro Forma Merger Analysis. J.P. Morgan analyzed the effect of the Merger on, among other things, the estimated First Call funds from operations ("FFO") per share of EQR Common for the year ended December 31, 1997. In doing so, J.P. Morgan combined the average of various equity analyst estimated 1997 operating results for Wellsford and EQR and assumed certain savings in accounting and general and administrative expenses per estimates provided by the management of EQR. J.P. Morgan observed a total projected post-Merger incremental accretion of 4.4% to EQR's First Call 1997 FFO estimate of $3.43 per share. The analysis assumed the January 8, 1997 closing price of $42.50 per share for EQR Common in calculating the purchase price for Wellsford Common. J.P. Morgan also analyzed the effect of the Merger on EQR's 1997 pro forma equity market capitalization, total market capitalization, leverage ratios and dividend payout ratio. In this regard, J.P. Morgan noted that the pro forma equity market capitalization for EQR would be approximately $2.96 billion, assuming a share price of $42.50 (EQR's closing share price on 79 January 8, 1997) and 69,702,788 shares of EQR Common outstanding after completion of the Merger, and a total post-Merger pro forma market capitalization of approximately $5.27 billion. J.P. Morgan further noted that (i) EQR's Debt to Total Market Capitalization Ratio would increase slightly, upon completion of the Merger, from 32.2% prior to the Merger to 33.3% after the assumption of Wellsford's outstanding debt plus the incremental debt incurred from the payment of certain transaction costs, and (ii) the ratio of debt plus perpetual preferred stock to total market capitalization also increases slightly from 41.3% to 41.9% after accounting for the assumption and re-issuance of Wellsford Preferred by EQR. J.P. Morgan also noted that EQR's management intends to retain its current dividend of $2.50 per common share for the combined company. Fully-Loaded Share Price. J.P. Morgan calculated the fully-loaded share price being paid by EQR for Wellsford Common. The fully-loaded share price adjusts the implied share price of $26.56 (calculated as the January 8, 1997 closing price of $42.50 per share for EQR Common multiplied by the .625 exchange ratio) for certain additional amounts being paid by EQR, including payments to key executives of Wellsford in compensation, benefits, payments, accelerations, share options and share appreciation rights. These additional payments are more particularly described in the Merger Agreement. J.P. Morgan calculated that these additional amounts create a fully-loaded price of up to $28.05 per share of Wellsford Common. Based on the fully-loaded share price, J.P. Morgan calculated a range of FFO multiples from a high of 13.0x (excluding synergies and accounting) to a low of 9.6x (including synergies and accounting). Public Trading Multiples Analysis. Using publicly available information, J.P. Morgan compared selected financial and stock market data of Wellsford with similar data for selected publicly traded companies (each, a "Comparable Company" and, collectively, the "Comparable Companies") engaged in businesses which J.P. Morgan judged to be analogous to that of Wellsford's. The companies selected by J.P. Morgan were Security Capital Pacific Trust, United Dominion Realty Trust, Post Properties, Inc., Avalon Properties, Inc., Merry Land & Investment Company, Inc., Security Capital Atlantic, Inc., Gables Residential Trust, Camden Property Trust, Irvine Apartment Communities, Evans Withycombe Residential, Inc., Oasis Residential, Inc. and Smith Residential Realty. These companies were selected, among other reasons, because of their specialization in the multifamily REIT sector. For each Comparable Company, publicly available financial performance data through the twelve months ended September 30, 1996 was measured. J.P. Morgan calculated the multiples of current stock price, as of January 8, 1997, to analysts estimates for 1997 First Call FFO for each of the Comparable Companies to determine the 1997 FFO trading multiples. J.P. Morgan's calculations resulted in a range of 1997 FFO multiples from 10.1x to 13.9x (excluding the highest and lowest). These multiples were then applied to Wellsford's First Call 1997 FFO per share estimate (less $0.09 per share associated with the Sonterra Loan contributed to WRP 80 Newco), yielding a range of implied trading values for Wellsford's common stock of approximately $21.88 to $29.98 per share. J.P. Morgan also observed that the Comparable Companies had a range of debt to total market capitalization of 27.7% to 44.5%. Selected Transaction Analysis. Using publicly available information, J.P. Morgan examined selected transactions with respect to purchase price per share to calculate FFO transaction multiples. Specifically, J.P. Morgan reviewed the following six transactions (collectively, the "Transaction Comparables") that it deemed relevant: Camden Property Trust/Paragon Group (pending): (J.P. Morgan's estimate of the transaction multiple was based upon the announced exchange ratio multiplied by the January 8, 1997 closing price for Camden's common stock, divided by the 1997 First Call estimate of FFO for Paragon), United Dominion Realty Trust/South West Property Trust, Inc., BRE Properties/California REIT, Mid-America Apartment Communities/America First REIT, Inc., and Wellsford Residential Property Trust/Holly Residential Properties, Inc. J.P. Morgan observed a range of transaction multiples from 8.3x to 11.2x First Call FFO of the acquired companies. This range was then applied to Wellsford's First Call 1997 FFO per share, as adjusted for the Sonterra Loan, resulting in a range of equity values for Wellsford's common stock of between $17.91 and $24.17 per share. J.P. Morgan noted that this range was below both the implied and fully- loaded prices for Wellsford Common. J.P. Morgan concluded that the multifamily REIT Transaction Comparables were imperfect comparisons to the Merger and therefore did not provide a fully meaningful test of the exchange ratio or the purchase price per share for Wellsford Common. In arriving at this conclusion J.P. Morgan reviewed the FFO multiples for the Transaction Comparables universe and compared them to both the average First Call FFO trading multiple for the acquired multifamily REITs and to the average trading FFO multiple for the Comparable Companies, corresponding to the period from July 8, 1994 to January 8, 1997 during which the transactions took place. J.P. Morgan observed that the average FFO trading multiple for the acquired multifamily REITs was significantly below that of the Comparable Companies and that the four most comparable of the acquired multifamily REITs were purchased at a discount to the average FFO trading multiple for the Comparable Companies for the corresponding time period. Based on this analysis, J.P. Morgan discounted the relevance of the multifamily REIT Transaction Comparables as a measure of the multiple for Wellsford's purchase price. J.P. Morgan also noted that when certain other transactions from other REIT sectors were included in the transaction analysis, the range of FFO multiples became 8.2x to 13.4x, resulting in a range of $17.80 to $28.88 per share for Wellsford's common stock. These additional transactions were Highwoods Properties Inc./Crocker Realty, Simon Property Group, Inc./DeBartolo Realty Corporation, Horizon Outlet Centers, Inc./McArthur/Glen Realty Corporation, and Omega Healthcare Investors/Health Equity Properties, Inc. 81 Share Trading History Analysis. Based on publicly available information, J.P. Morgan reviewed the history of trading prices for Wellsford Common and EQR Common for the 52-week period ending January 8, 1997 and compared the 52-week high/low range of $25.00 to $20.75 per share for Wellsford Common to both the implied purchase price per share of $26.56 (calculated as the product of the January 8, 1997 closing price for EQR Common times the exchange ratio of .625) and the fully-loaded price per share of $28.05. J.P. Morgan noted that the implied price for Wellsford Common was at a premium to the 52-week high. Historical Exchange Ratio Analysis. J.P. Morgan reviewed the historical exchange ratio of the daily closing price per share of Wellsford Common to the daily closing price per share of EQR Common for the period from January 9, 1996 to January 8, 1997. To compensate in the value of Wellsford's share price for the loss of income resulting from the contribution of the Sonterra Loan to WRP Newco, J.P. Morgan calculated the First Call 1996 FFO multiple for each of Wellsford's daily closing prices beginning August 1, 1996 (the commencement date of the mortgage loan). Adjusting Wellsford's First Call 1996 FFO downwards by $0.09, J.P. Morgan multiplied the above FFO multiple times the adjusted First Call 1996 FFO to arrive at an adjusted Wellsford share price for each closing price from August 1, 1996 to January 8, 1997. This adjusted share price was then used in the calculation of the historical exchange ratios. The exchange ratios of the daily closing prices of one share of Wellsford Common, as adjusted for the Sonterra Loan, to one share of EQR Common on January 9, 1996 and on January 8, 1997, were 0.777 and 0.575, respectively. J.P. Morgan noted a one- year low to high range (adjusted for the Sonterra mortgage) of between 0.569 and 0.780; an average one-year unadjusted exchange ratio of 0.662 versus an adjusted ratio of 0.658; an average six-month unadjusted exchange ratio of 0.626 versus an adjusted ratio of 0.623; and an average one-month unadjusted exchange ratio of 0.583 versus an adjusted ratio of 0.579. In addition, such analysis implied a one-year historical share price range for Wellsford of $24.18 to $33.15, as calculated by multiplying EQR Common's January 8, 1997 closing price of $42.50 by the 52-week low and high values for the exchange ratios, respectively. Net Asset Value Analysis. Using the publicly available unaudited results for each company for the period ending September 30, 1996, J.P. Morgan calculated the Net Asset Value ("NAV") per share for both Wellsford Common and EQR Common. In so doing, J.P. Morgan applied a range of capitalization rates from 8.5% to 9.5% to projections by Wellsford and EQR for the stabilized 1997 net operating income ("NOI") of the properties, calculated as the average of the estimated 1997 NOI for each company as projected by the REIT analyst community, including projected acquisitions related NOI, in order to calculate a gross real estate value, to which was added the gross value of other assets, excluding the Wellsford assets to be contributed to WRP Newco, less each company's respective outstanding debt and liabilities, to arrive at an equity NAV. The equity NAV per share was then calculated by dividing the equity NAV by the number of common shares outstanding for each company. This analysis indicated an NAV exchange ratio range for the two companies of between 0.470 to 0.742, and an implied range 82 for the price of Wellsford Common of $19.96 to $31.54 per share, assuming a January 8, 1997 closing price of $42.50 per share for EQR Common. WRP Newco Analysis. As a part of its opinion, J.P. Morgan reviewed the terms of EQR's investments in and commitments to WRP Newco. These include the following items: an agreement by EQR to invest $3.5 million in WRP Newco Common at the time of the Merger in return for receiving an approximately 7.5% interest in WRP Newco; a commitment to purchase up to $25 million of preferred stock with an 8.0% dividend and 8.0% conversion premium; a 20.0% interest in the Palomino Park development (10.0% received through the purchase of Wellsford, and an additional 10.0% purchased for $1.5 million in cash); credit enhancement for $14.8 million in bonds outstanding on Palomino Park; and a two-part standby purchase obligation for Palomino Park Phases I and II. J.P. Morgan noted that EQR is to be compensated at competitive market based rates for its investments in WRP Newco. The summary set forth above does not purport to be a complete description of the analyses or data presented by J.P. Morgan. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. J.P. Morgan believes that the summary set forth above and their analyses must be considered as a whole and that selecting portions thereof, without considering all of its analyses, could create an incomplete view of the processes underlying its analyses and opinion. J.P. Morgan based its analyses on assumptions that it deemed reasonable, including assumptions concerning general business and economic conditions and industry- specific factors. The other principal assumptions upon which J.P. Morgan based its analyses are set forth above under the description of each such analysis. J.P. Morgan's analyses are not necessarily indicative of actual values or actual future results that might be achieved, which values may be higher or lower than those indicated. Moreover, J.P. Morgan's analyses are not and do not purport to be appraisals or otherwise reflective of the prices at which businesses actually could be bought or sold. As a part of its investment banking business, J.P. Morgan and its affiliates are continually engaged in the valuation of businesses and their securities in connection with Mergers and acquisitions, investments for passive and control purposes, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements, and valuations for estate, corporate and other purposes. J.P. Morgan was selected to deliver an opinion to EQR's Board of Trustees with respect to the Merger on the basis of such experience and its familiarity with EQR. For the delivery of its opinion, J.P. Morgan received a fee of $600,000 from EQR. In addition, EQR reimbursed J.P. Morgan for its reasonable expenses incurred in connection with its services, including the fees and disbursements of counsel, and agreed to indemnify J.P. Morgan against certain liabilities, including liabilities arising under the Federal securities laws. J.P. Morgan and its affiliates (including Morgan Guaranty Trust Company of New York) maintain banking and other business relationships with EQR and its affiliates pursuant to which 83 J.P. Morgan has received an aggregate of approximately $490,000 in fees over the past two years, and with Wellsford and its affiliates pursuant to which J.P. Morgan has received an aggregate of approximately $638,000 in fees over the past two years. In the ordinary course of their businesses, affiliates of J.P. Morgan may actively trade the debt and equity securities of EQR or Wellsford for their own accounts or for the accounts of customers and, accordingly, they may at any time hold long or short positions in such securities. Opinion of Financial Advisor - Wellsford Wellsford. At the meeting of the Board of Trustees of Wellsford on January 16, 1997, Merrill Lynch rendered its oral opinion to the Wellsford Board of Trustees, and subsequently on such date Merrill Lynch delivered its written opinion (the "Merrill Lynch Opinion"), to the effect that, as of such date and based upon the assumptions made, matters considered and limits of review, the proposed consideration to be received by Wellsford Common Shareholders pursuant to the Merger and the Distribution was fair to such shareholders from a financial point of view. Merrill Lynch has not been requested to, and will not, update its opinion prior to Closing. No limitations were imposed by Wellsford's Board of Trustees upon Merrill Lynch with respect to the investigations made or procedures followed by it in rendering its opinion. A copy of the Merrill Lynch Opinion which sets forth the assumptions made, matters considered and certain limitations on the scope of review undertaken by Merrill Lynch, is attached hereto as Appendix D and is incorporated by reference herein. The description of the written opinion set forth herein is qualified in its entirety by reference to the full text of the written opinion. Shareholders of Wellsford are urged to read such opinion in its entirety. In the opinion of Wellsford, no events or significant changes in information have occurred that would alter the opinion of Merrill Lynch. However, if such an event or change does occur, including, without limitation, an amendment to the Merger Agreement or Contribution and Distribution Agreement which materially affects the financial terms of either of such agreements, a revised fairness opinion will be requested. THE MERRILL LYNCH OPINION IS ADDRESSED TO THE WELLSFORD BOARD OF TRUSTEES AND ADDRESSES ONLY THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE PROPOSED CONSIDERATION TO BE RECEIVED BY WELLSFORD COMMON SHAREHOLDERS PURSUANT TO THE MERGER AND THE DISTRIBUTION AND DOES NOT CONSTITUTE, NOR SHOULD IT BE CONSTRUED AS, A RECOMMENDATION TO ANY WELLSFORD COMMON SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE WELLSFORD SPECIAL MEETING. THE PROPOSED CONSIDERATION TO BE RECEIVED BY WELLSFORD COMMON SHAREHOLDERS PURSUANT TO THE MERGER AND THE DISTRIBUTION WAS DETERMINED ON THE BASIS OF NEGOTIATIONS BETWEEN WELLSFORD AND EQR AND WAS APPROVED BY THE WELLSFORD BOARD OF TRUSTEES. 84 In connection with the preparation of the Merrill Lynch Opinion, Merrill Lynch, among other things: (i) reviewed Wellsford's Annual Report on Form 10-K and related financial information for the fiscal year ended December 31, 1995 and Wellsford's Reports on Form 10-Q and the related unaudited financial information for the quarterly periods ended March 31, 1996, June 30, 1996 and September 30, 1996; (ii) reviewed EQR's Annual Report on Form 10-K and related financial information for the fiscal year ended December 31, 1995 and EQR's Reports on Form 10-Q and the related unaudited financial information for the quarterly periods ended March 31, 1996, June 30, 1996 and September 30, 1996; (iii) reviewed certain information, including certain financial forecasts and assumptions, relating to the business, earnings, cash flow, assets and prospects of (A) Wellsford and WRP Newco and (B) EQR, furnished to it by Wellsford and EQR, respectively; (iv) reviewed estimates of prospective synergies resulting from the Merger prepared by the managements of Wellsford and EQR and discussed such estimates with the managements of both companies; (v) conducted discussions with members of senior management of Wellsford and EQR concerning the respective businesses and prospects of (A) Wellsford and WRP Newco and (B) EQR; (vi) reviewed the historical market prices and trading activity for Wellsford Common and EQR Common and compared them with that of certain companies which Merrill Lynch deemed to be reasonably similar to Wellsford and EQR, respectively; (vii) compared the results of operations of Wellsford and EQR with that of certain companies which Merrill Lynch deemed to be reasonably similar to Wellsford and EQR, respectively; (viii) compared the proposed financial terms of the Merger with the financial terms of certain other mergers and acquisitions which Merrill Lynch deemed to be relevant; (ix) considered the pro forma effect of the Merger on the combined entity's capitalization ratios and earnings, cash flow and book value per share; (x) reviewed the Merger Agreement; (xi) reviewed the financial terms of the Contribution and Distribution as set forth in the Merger Agreement and the forms of Contribution and Distribution Agreement and Stock Purchase Agreement attached as exhibits thereto; and (xii) reviewed such other financial studies and analyses and performed such other investigations and took into account such other matters as Merrill Lynch deemed necessary, including its assessment of general economic, market and monetary conditions. In preparing the Merrill Lynch Opinion, Merrill Lynch relied on the accuracy and completeness of all information supplied or otherwise made available to it by Wellsford and EQR, and did not independently verify such information or undertake an independent appraisal or evaluation of the assets or liabilities of Wellsford or EQR. With respect to the financial forecasts, assumptions and estimates of prospective synergies resulting from the Merger furnished by Wellsford and the financial forecasts, assumptions and estimates of prospective synergies resulting from the Merger furnished by EQR, Merrill Lynch assumed that they had been reasonably prepared and reflected the best currently available estimates and judgment of Wellsford's or EQR's management as to the expected future financial performance of Wellsford, WRP Newco or EQR, as the case may be. Merrill Lynch further assumed that the Merger will qualify as a tax-free reorganization to the holders of Wellsford Common (except to the extent, if any, of cash received in lieu of fractional shares). In addition, Merrill Lynch further assumed that the Distribution will be consummated without any material modification to the terms set 85 forth in the forms of Contribution and Distribution Agreement and Stock Purchase Agreement reviewed by it. As a matter of policy, Wellsford does not publicly disclose internal management forecasts, projections or estimates of the type furnished to Merrill Lynch in connection with its analysis of the Merger, and such forecasts, projections and estimates were not prepared with a view towards public disclosure. These forecasts, projections and estimates were based on numerous variables and assumptions which are inherently uncertain and which may not be within the control of management of Wellsford, including, without limitation, general economic, regulatory and competitive conditions. Accordingly, actual results could vary materially from those set forth in such forecasts, projections and estimates. In connection with rendering its opinion, Merrill Lynch was not authorized to, and did not, solicit indications of interest from third parties to purchase the outstanding Wellsford Common or otherwise enter into a business combination with Wellsford. Merrill Lynch's opinion as to the fairness from a financial point of view of the proposed consideration to be received by holders of Wellsford Common addresses the ownership position in the combined entity to be received by the holders of Wellsford Common pursuant to the Merger on the terms set forth in the Merger Agreement based upon the relative contributions of Wellsford and EQR to the combined entity and after giving effect to the Contribution and Distribution. Merrill Lynch expressed no opinion as to prices at which the Survivor Common or the WRP Newco Common will trade following the consummation of the Contribution and Distribution and the Merger or prices which could be obtained for the Survivor Common in a sale of the combined entity following the consummation of the Merger. Merrill Lynch did not consider, and its opinion does not address, the tax consequences of the Distribution to the holders of Wellsford Common. The Merrill Lynch Opinion does not address the relative merits of the Merger as compared with any other business plan or opportunity that might be presented to Wellsford, including alternative business combinations with third parties, or the effect of any other arrangement in which Wellsford might engage. At the meeting of the Wellsford Board of Trustees held on January 16, 1997, Merrill Lynch presented certain financial analyses accompanied by written materials in connection with the delivery of its fairness opinion. The following is a summary of the material financial and comparative analyses performed by Merrill Lynch in arriving at its opinion. Historical Trading Performance and Current Capitalization. Merrill Lynch reviewed certain trading information for each of Wellsford and EQR and, on the basis thereof, calculated their respective market values, market capitalizations and trading multiples based on stock prices as of January 14, 1997 of $24.63 for Wellsford and $42.88 for EQR. For this purpose, Merrill Lynch defined "total market capitalization" as market value of the relevant company's common equity (including operating partnership units), plus preferred stock at liquidation value plus total debt less cash. Merrill Lynch then calculated the market value of each of Wellsford and EQR as a multiple of projected FFO (based on mean First Call estimates) and Adjusted Funds From Operations ("AFFO") (based on estimates from Merrill Lynch Research). For Wellsford, the FFO multiples for 1996 and 1997 were 11.7x and 11.0x, respectively, and the AFFO multiples for 1996 and 1997 were 12.6x and 11.8x, respectively. For EQR, the FFO multiples for 1996 and 1997 were 13.8x and 12.5x, respectively, and the AFFO multiples for 1996 and 1997 were 16.0x and 14.4x, respectively. Merrill Lynch also reviewed the share price history for Wellsford for the period January 7, 1996 through January 10, 1997, and for EQR for the period January 7, 1996 through January 86 9, 1997 and noted certain events and public announcements made by the respective companies during such periods. Analysis of Selected Comparable Publicly Traded Companies. Using publicly available information and estimates of future financial results published by First Call and taken from Merrill Lynch Research, Merrill Lynch compared certain financial and operating information and ratios for both Wellsford and EQR with the corresponding financial and operating information for a group of publicly traded companies engaged primarily in the ownership, management, operation and acquisition of multifamily properties which Merrill Lynch deemed to be reasonably comparable to Wellsford and EQR. For the purpose of its analyses, the following companies were used as comparable companies to Wellsford: Evans Withycombe Residential, Inc., Amli Residential Properties Trust, Camden Property Trust, Oasis Residential, Inc. and Apartment Investment & Management Co. (collectively, the "Wellsford Comparable Companies"); and the following companies were used as comparable companies to EQR: Security Capital Pacific Trust, United Dominion Realty Trust, Inc., Wellsford, Merry Land & Investment Co., Inc., Security Capital Atlantic, Inc. and Apartment Investment & Management Co. (collectively, the "EQR Comparable Companies"). Merrill Lynch's calculations resulted in the following relevant ranges for the Wellsford Comparable Companies and for Wellsford as of January 14, 1997: a range of debt to total market capitalization of 32.3% to 43.1%, with a mean of 40.8% (with Wellsford at 37.2%); a range of dividend yields of 6.4% to 7.5%, with a mean of 7.1% (with Wellsford at 7.9%); a range of 1996 AFFO payout ratios of 87.6% to 102.6%, with a mean of 95.4% calculated on the basis of projected results for 1996 (with Wellsford at 99.0%); a range of market value as a multiple of projected 1996 FFO of 11.1x to 11.9x, with a mean of 11.5x (with Wellsford at 11.7x); a range of market value as a multiple of projected 1997 FFO of 10.1x to 11.3x, with a mean of 10.7x (with Wellsford at 11.0x); a range of market value as a multiple of projected 1996 AFFO of 12.6x to 13.9x, with a mean of 13.2x (with Wellsford at 12.6x); and a range of market value as a multiple of projected 1997 AFFO of 11.5x to 13.1x, with a mean of 12.2x (with Wellsford at 11.8x). Merrill Lynch's calculations resulted in the following relevant ranges for the EQR Comparable Companies and for EQR as of January 14, 1997: a range of dividend yields of 5.8% to 7.9%, with a mean of 6.5% (with EQR at 5.8%); a range of debt to total market capitalization of 11.5% to 42.9%, with a mean of 31.7% (with EQR at 27.9%); a range of 1996 AFFO payout ratios of 82.2% to 99.0%, with a mean of 90.2% calculated on the basis of projected results for 1996 (with EQR at 93.3%); a range of market value as a multiple of projected 1996 FFO of 10.9x to 15.5x, with a mean of 12.6x (with EQR at 13.8x); a range of market value as a multiple of projected 1997 FFO of 10.1x to 14.6x, with a mean of 11.8x (with EQR at 12.5x); a range of market value as a multiple of projected 1996 AFFO of 12.2x to 15.5x, with a mean of 13.7x (with EQR at 16.0x); and a range of market value as a multiple of projected 1997 AFFO of 11.8x to 14.0x, with a mean of 13.0x (with EQR at 14.4x). 87 None of the companies utilized in the above analysis for comparative purposes is, of course, identical to Wellsford or EQR. Accordingly, a complete analysis of the results of the foregoing calculations cannot be limited to a quantitative review of such results and involves complex considerations and judgments concerning differences in financial and operating characteristics of the Wellsford Comparable Companies and the EQR Comparable Companies, and other factors that could affect the public trading value of the Wellsford Comparable Companies and the EQR Comparable Companies, as well as that of Wellsford or EQR. In addition, the multiples of market value to estimated 1996 and projected 1997 FFO and AFFO for the Wellsford Comparable Companies and the EQR Comparable Companies are based on projections prepared by research analysts using only publicly available information. Accordingly, such estimates may or may not prove to be accurate. Comparable Transactions Analysis. Merrill Lynch also compared certain financial ratios of the Merger with those of selected other mergers and strategic transactions involving REITs which Merrill Lynch deemed to be reasonably comparable to the Merger. These transactions were Camden Property Trust's proposed merger with Paragon Group, Inc., Chateau Properties, Inc.'s merger with ROC Communities, Inc., United Dominion Realty, Inc.'s merger with South West Property Trust Inc., Highwoods Properties Inc.'s acquisition of Crocker Realty Trust, Inc., Simon Property Group, Inc.'s merger with DeBartolo Realty Corporation, Bradley Real Estate Inc.'s merger with Tucker Properties Corp., BRE Properties Inc.'s Merger with REIT of California, Horizon Outlet Center Inc.'s merger with McArthur Glen Realty Corp., Mid America Apartment Communities Inc.'s merger with America First REIT, Inc. and Wellsford's merger with Holly Residential Properties, Inc. Using publicly available information and estimates of financial results as published by First Call, Merrill Lynch calculated the premium of the implied offer value per share relative to the acquired company's stock price on the day before announcement of the respective transaction and the implied offer value per share for the acquired company, as of the day before the announcement of the respective transaction, as a multiple of the projected FFO per share for such company. This analysis yielded a range of premiums/(discounts) of (0.8%) to 38.0% with a mean of 12.2% and a range of transaction FFO multiples of 6.6x to 15.5x with a mean of 10.2x. Merrill Lynch observed that, based on the closing price of EQR Common on the NYSE of $42.88 per share as of January 14, 1997, the Exchange Ratio yielded an implied offer value in the Merger of $26.80 per share of Wellsford Common. Together with the per share valuation range for Newco Common of $2.43 to $2.82, the implied premium range of the aggregate consideration to be received in the Merger and the Distribution over the closing market price of Wellsford Common on January 14, 1997 was 18.7% to 20.3% and represented a range of implied offer values in the Merger and the Distribution for the Wellsford Common as a multiple of Wellsford's projected 1997 FFO of 12.2x to 12.4x. 88 Discounted Cash Flow Analysis. Merrill Lynch performed discounted cash flow analyses (i.e., an analysis of the present value of the projected levered cash flows for the periods and using the discount rates indicated) of Wellsford based upon projections provided by Wellsford's management of Wellsford's dividends, FFO and AFFO for the years 1997 through 2001, inclusive, using discount rates reflecting an equity cost of capital ranging from 15.0% to 17.0% and terminal value multiples of calendar year 2001 FFO ranging from 10.5x to 12.5x and terminal value multiples of calendar year 2001 AFFO ranging from 11.5x to 13.5x. Based upon Wellsford Management's projection of FFO per share of $2.39 in 1997 increasing gradually to $3.27 in 2001 (assuming a compound annual growth rate of 9.1%) and AFFO per share of $2.25 in 1997 increasing gradually to $3.10 in 2001 (assuming a compound annual growth rate of 9.2%). The range of present values per Wellsford share was $22.07 to $27.85 using the FFO and AFFO discounted dividend methods and $24.50 to $29.47 based upon the discounted AFFO method. Merrill Lynch also performed discounted cash flow analyses of EQR based upon projections and assumptions provided by EQR's management of EQR's dividends, FFO and AFFO for the years 1997 through 2001, inclusive, using discount rates reflecting an equity cost of capital ranging from 14.0% to 16.0% and terminal value multiples of calendar year 2001 FFO ranging from 12.5x to 14.5x and terminal value multiples of calendar year 2001 AFFO ranging from 14.0x to 16.0x. The range of present values per EQR share was $36.63 to $44.51 using the FFO and AFFO discounted dividend methods and $39.89 to $47.41 based upon the discounted AFFO method. Net Asset Valuation Analysis. Merrill Lynch performed a net asset valuation for Wellsford based on an asset-by-asset real estate valuation of Wellsford's properties, an estimation of the current value for Wellsford's other assets and liabilities, and an estimation of Wellsford's debt balances as of December 31, 1996. The real estate valuation utilized property specific projections prepared by Wellsford's management for the year 1997. For the operating portfolio of Wellsford, the valuation utilized the direct capitalization method on 1997 property net operating income after capital reserves and a range of capitalization rates of 8.50% to 9.25%. These calculations indicated a per share net asset valuation range for Wellsford of $25.58 to $28.27. Merrill Lynch also performed a net asset valuation for EQR based on an asset-by-asset real estate valuation of EQR's properties, an estimation of the current values for EQR's other assets and liabilities, and an estimation of EQR's debt balances as of December 31, 1996. The real estate valuation utilized property specific projections prepared by EQR's management for the year 1997. For the operating portfolio of EQR, the valuation utilized the direct capitalization method on 1997 property net operating income after capital reserves and a range of capitalization rates of 8.25% to 9.25%. These calculations indicated a per share net asset valuation range for EQR of $32.53 to $35.95. Merrill Lynch also performed a net asset valuation for WRP Newco based on an asset-by-asset valuation. Merrill Lynch arrived at a range of values by summing the following: (i) the implied value range for WRP Newco's interest in the Sonterra Assets, (ii) the implied value range for WRP Newco's interest in Palomino Park, net of associated liabilities, and (iii) cash 89 and cash equivalents less total debt. These calculations indicated a net asset valuation range for WRP Newco Common allocable to each share of Wellsford Common in the Distribution of $2.43 to $2.82, of which amount $1.45 was attributable to cash and cash equivalents. Relative Discounted Cash Flow Analysis. Merrill Lynch utilized the results of the discounted cash flow analyses of Wellsford and EQR described above after adjusting the projections relating to Wellsford to give effect to the Distribution (as so adjusted, the "Post-Distribution Wellsford") to calculate a range of implied exchange ratios based on a comparison of the relative ranges of value for EQR and Post-Distribution Wellsford. When the low Post-Distribution Wellsford discounted cash flow value was compared to the high EQR discounted cash flow value and the high Post-Distribution Wellsford discounted cash flow value was compared to the low EQR discounted cash flow value, the analysis yielded an implied exchange ratio range of 0.442 to 0.660. The Exchange Ratio under the Merger Agreement is set at .625, subject to adjustment as set forth in the Merger Agreement. Contribution Analysis. Merrill Lynch observed that Wellsford Common Shareholders would own 15.3% of the common shares of the combined entity outstanding after the Merger and Distribution (assuming an Exchange Ratio of .625), after giving effect to the issuance of the Merger consideration. Merrill Lynch reviewed certain projected operating and financial information, including, among other things, FFO and AFFO for Post-Distribution Wellsford, EQR and the pro forma combined entity without giving effect to potential transaction synergies. Merrill Lynch observed that in 1997, 1998 and 1999 Post-Distribution Wellsford would contribute (without giving effect to potential transaction synergies) 16.0%, 14.1% and 13.2% to the combined entity's FFO, respectively, and 16.6%, 14.6% and 13.6% to the combined entity's AFFO, respectively. Merrill Lynch also reviewed the relative contributions to the pro forma combined net asset valuation. The analysis indicated that Post-Distribution Wellsford would contribute 17.1% of the combined net asset value based upon the midpoints of the net asset value ranges. Pro Forma Combination Analysis. Merrill Lynch analyzed the pro forma effects resulting from the Merger, including the potential impact on EQR's projected stand alone FFO per share and the anticipated accretion (i.e., the incremental increase) to EQR's FFO per share resulting from the Merger. Merrill Lynch observed that, after giving effect to Wellsford management's estimates of potential transaction synergies, the Merger would be accretive to EQR's projected FFO per share in each of the years 1997 through 1999, inclusive. Merrill Lynch also observed that the indicated annual dividend per Wellsford share pro forma for the Merger would be $1.56 per Wellsford share, or a 19.5% implied reduction in Wellsford's current indicated dividend rate. Capitalization. In addition, Merrill Lynch compared EQR's book capitalization as of December 31, 1996 to (i) its book capitalization as of December 31, 1996 pro forma for the Merger and (ii) based on projections of Wellsford and EQR managements, EQR's book 90 capitalization as of December 31, 1997 pro forma for the Merger. The total debt to book equity ratio was 87.1%, 79.4% and 80.5% as of December 31, 1996, pro forma December 31, 1996 and pro forma December 31, 1997, respectively. The total debt to capitalization ratio was 46.6%, 44.2% and 44.6% as of such respective dates. EBITDA as a multiple of interest expense was 3.2x, 3.3x and 3.5x as of such respective dates, EBITDA as a multiple of fixed charges was 2.4x, 2.4x and 2.5x as of such respective dates, EBITDA less capital expenditures as a multiple of interest expense was 3.0x, 3.1x and 3.2x as of such respective dates and EBITDA less capital expenditures as a multiple of fixed charges was 2.2x, 2.3x and 2.3x as of such respective dates. Additionally, based on projections of Wellsford's management for WRP Newco, Merrill Lynch observed that the total debt to capitalization ratio of WRP Newco as of December 31, 1997 was 25.4%. The summary set forth above does not purport to be a complete description of the analyses performed by Merrill Lynch in arriving at its opinion. The preparation of a fairness opinion is a complex process and not necessarily susceptible to partial or summary description. Merrill Lynch believes that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered by it, without considering all factors and analyses, could create a misleading view of the processes underlying its analyses set forth in its opinion. In its analyses, Merrill Lynch made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond EQR's, Wellsford's and Merrill Lynch's control. Any estimates contained in Merrill Lynch's analyses are not necessarily indicative of actual values, which may be significantly more or less favorable than as set forth therein. Estimated values do not purport to be appraisals and do not necessarily reflect the prices at which businesses or companies may be sold in the future, and such estimates are inherently subject to uncertainty. The Wellsford Board of Trustees selected Merrill Lynch to render a fairness opinion because Merrill Lynch is an internationally recognized investment banking firm with substantial experience in transactions similar to the Merger and because it is familiar with Wellsford and its business. Merrill Lynch has from time to time rendered investment banking, financial advisory and other services to Wellsford and EQR for which it has received aggregate compensation in the amount of $6.7 million from EQR and $2.3 million from Wellsford, in each case since January 1, 1995. Merrill Lynch is continually engaged in the valuation of businesses and their securities in connection with Mergers and acquisitions, leveraged buyouts, negotiated underwritings, secondary distributions of listed and unlisted securities and private placements. Pursuant to a letter agreement dated January 14, 1997, Wellsford has agreed to pay Merrill Lynch fees as follows: (i) a cash fee of $500,000 payable upon the delivery of the Merrill Lynch Opinion, and (ii) an additional cash fee of $2 million (less the fees paid to Merrill Lynch pursuant to (i) above) to be paid contingent upon the Closing of the Merger. WRP Newco has agreed with Wellsford to be responsible for $250,000 of such fees. Wellsford also agreed to reimburse Merrill Lynch for its reasonable out-of-pocket expenses incurred in connection with its advisory work, including the reasonable fees and disbursements of its legal 91 counsel, subject to certain limitations, and to indemnify Merrill Lynch and certain related persons against certain liabilities arising out of or in conjunction with its rendering of services under its engagement, including certain liabilities under the federal securities laws. In the ordinary course of its business, Merrill Lynch may actively trade in the securities of Wellsford and EQR for its own account and the account of its customers and, accordingly, may at any time hold a long or short position in such securities. Effective Time of the Merger If the Merger is approved by the requisite vote of shareholders of Wellsford and shareholders of EQR, and the other conditions to the Merger are satisfied or waived, the Merger will become effective at the time the Department accepts the Articles for record or at a different time established in the Articles, not to exceed 30 days after the Articles are accepted for record by the Department. It is presently anticipated that such filing and acceptance will be made on or about May 30, 1997, and that the Effective Time of the Merger will occur on such date unless a different date is specified in the Articles, as discussed above, although there can be no assurance as to whether or when the Merger will occur. The Articles are attached hereto as Appendix B. See "--Representation and Warranties; Conditions to the Merger." Representations and Warranties; Conditions to the Merger The Merger Agreement contains representations and warranties by EQR and Wellsford regarding, among other things, their organization and good standing, capitalization, ownership and capitalization of their subsidiaries, qualification to do business, authority to enter into the Merger Agreement and related agreements, filings with the Commission, reliability of financial statements, compliance with applicable laws and regulations, taxation and qualification as a REIT, properties, development rights (with respect to Wellsford only), environmental matters, contracts, debt instruments, employee benefit plans, undisclosed liabilities and the absence of certain legal proceedings and other events, including material adverse changes in the parties' businesses, financial condition or results of operations. These representations and warranties will not survive the Effective Time. The respective obligations of EQR and Wellsford to effect the Merger are subject to the following conditions: (i) approval of the Merger Agreement, and the transactions contemplated therein, by the shareholders of Wellsford and EQR, (ii) approval by the NYSE of the listing of the shares of Survivor Common to be issued in the Merger, (iii) the Registration Statement shall not be the subject of any stop order or proceeding by the Commission seeking a stop order, (iv) no injunctions or restraints shall have been issued by any court of competent jurisdiction preventing the consummation of the Merger, (v) all state securities laws shall have been complied with, (vi) execution of the Contribution and Distribution Agreement, (vii) execution of the Common and Preferred Stock Purchase Agreement between ERP Operating Partnership and WRP Newco (the "Stock Purchase Agreement"), (viii) execution of the Palomino Credit 92 Enhancement Agreement between ERP Operating Partnership and WRP Newco, (ix) execution of the Sonterra Right of First Offer Agreement between WRP Newco and ERP Operating Partnership, (x) execution of the Palomino Agreement between WRP Newco and ERP Operating Partnership, (xi) execution of the Transaction and Termination Costs Agreement among EQR, Wellsford and WRP Newco, (xii) execution of the Consulting Agreements of Jeffrey H. Lynford and Edward Lowenthal and (xiii) the receipt of the opinion of Ballard Spahr Andrews & Ingersoll to the effect that the Merger Agreement and Articles are enforceable under Maryland law. The obligations of Wellsford and EQR to effect the Merger are subject to the following additional conditions: (i) all representations and warranties made by the parties shall be true and correct as of the Closing Date, which shall be deemed the case unless the breach of such representations and warranties, in the aggregate, could reasonably be expected to have a material adverse effect with respect to such parties, (ii) each party shall have performed its obligations under the Merger Agreement, (iii) as of the Closing Date, neither party, nor any of their subsidiaries, will have suffered a material adverse change in its business, financial condition or results of operations taken as a whole (a "Material Adverse Change"), (iv) each party shall have received an opinion of counsel from counsel to the other party stating that commencing with its taxable year ended December 31, 1993, its client was organized and has operated in conformity with the requirements for qualification as a REIT under the Code, (v) each party shall have received an opinion of counsel dated as of the closing date, to the effect that the Merger will qualify as a reorganization under the provisions of Section 368(a) of the Code, (vi) each party shall have received a "comfort letter" from the other party's accountants, (vii) each party shall have received an opinion from counsel to the other party addressing certain issues as set out in the Merger Agreement, and (viii) the receipt of all consents and waivers from third parties necessary in connection with the consummation of the transactions contemplated by the Merger Agreement. The obligation of EQR to effect the Merger is further subject to the following conditions: (i) unless Wellsford Holly Management, Inc. ("Wellsford Management Inc.") is dissolved before the Closing Date, the voting shares of Wellsford Management Inc. shall have been transferred to EQR's designees as provided for in the Merger Agreement, (ii) certain executives of Wellsford who have agreed to the conversion of their options to purchase Wellsford Common into options to purchase WRP Newco Common will have executed agreements releasing the Surviving Trust from any obligations of Wellsford to them under options to purchase Wellsford Common which are exchanged for or converted into options to purchase WRP Newco Common, (iii) the Articles of Incorporation of WPHC shall have been amended to modify its equity structure as provided in the Merger Agreement and (iv) Wellsford's ownership interest in WPHC immediately prior to the Distribution by Wellsford of WRP Newco Common shall consist solely of 80 voting shares of WPHC and 20 non-voting shares of WPHC. 93 Appraisal Rights Shareholders of Wellsford and shareholders of EQR are not entitled to dissenting shareholders' appraisal rights under Maryland law. Maryland law does not provide appraisal rights to shareholders of a real estate investment trust in connection with a merger if their shares are listed on a national securities exchange, such as the NYSE, on the record date for determining shareholders entitled to vote on such merger. All of the shares of EQR and Wellsford outstanding on the record date for determining the shareholders entitled to vote on the Merger were listed on the NYSE. Regulatory Matters EQR and Wellsford believe that the Merger may be consummated without notification being given or certain information being furnished to the Federal Trade Commission (the "FTC") or the Antitrust Division of the Department of Justice (the "Antitrust Division") pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act"), and that no waiting period requirements under the HSR Act are applicable to the Merger. However, at any time before or after the Effective Time, either the Antitrust Division or the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, or certain other persons could take action under the antitrust laws, including seeking to enjoin the Merger. EQR and Wellsford believe that consummation of the Merger would not violate any antitrust laws. However, there can be no assurance that a challenge to the Merger on antitrust grounds will not be made or, if a challenge is made, what the result will be. Termination Provisions The Merger Agreement provides that it may be terminated at any time prior to the filing of the Articles with the Department, whether before or after approval of the Merger by the shareholders of Wellsford and EQR, by mutual written consent, duly authorized by the Boards of Trustees of EQR and Wellsford. In addition, the Merger Agreement may be terminated by EQR or Wellsford (i) if the Merger has not been consummated by August 1, 1997 (provided the terminating party will not have breached in any material respect its obligations under the Merger Agreement in any manner that will have proximately contributed to the occurrence of such failure), (ii) upon a breach of any representation, warranty, covenant, obligation or agreement, on the part of the non-terminating party set forth in the Merger Agreement, such that certain conditions set forth in the Merger Agreement would be incapable of being satisfied by August 1, 1997, (iii) if the requisite vote of the shareholders of EQR or Wellsford will not have been obtained at the meeting of such shareholders, or (iv) if an order, decree, ruling or other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Merger Agreement will have become final and non-appealable. The Merger Agreement may be terminated by Wellsford, if prior to the Wellsford Special Meeting, the Wellsford Board of Trustees withdraws or modifies its approval or recommendation 94 of the Merger in connection with, or approves or recommends, a Superior Acquisition Proposal (as defined hereinafter). The Merger Agreement may be terminated by EQR if (i) prior to the Wellsford Special Meeting, the Wellsford Board of Trustees withdraws or modifies in any manner adverse to EQR its approval or recommendation of the Merger or the Merger Agreement in connection with, or approves or recommends, a Superior Acquisition Proposal, or (ii) Wellsford enters into a definitive agreement with respect to any Acquisition Proposal. The Merger Agreement defines an "Acquisition Proposal" as a merger, acquisition, tender offer, exchange offer, consolidation, sale of assets or similar transaction involving all or any significant portion of the assets or any equity securities of, Wellsford or any of its subsidiaries, other than the transactions contemplated by the Merger Agreement. The Merger Agreement defines a "Superior Acquisition Proposal" as a bona fide acquisition proposal by a third party which a majority of the members of the Wellsford Board of Trustees determines in good faith to be more favorable to Wellsford's shareholders from a financial point of view than the Merger and which the Board of Trustees of Wellsford determines is reasonably capable of being consummated. Termination Fee and Expenses The Merger Agreement provides for certain payments by Wellsford to EQR in connection with the termination of the Merger Agreement. These payments are (i) a Break-Up Fee of $14 million, plus (ii) Break-Up Expenses equal to the out-of- pocket expenses incurred in connection with the Merger Agreement and the transactions contemplated thereunder, up to a maximum of $2.5 million. If the Merger Agreement is terminated due to the Wellsford Board of Trustees having withdrawn or modified its approval or recommendation of the Merger or the Merger Agreement in connection with, or having approved or recommended a Superior Acquisition Proposal, or if Wellsford will have entered into a definitive agreement with respect to any Acquisition Proposal, Wellsford is obligated to pay EQR the Break-Up Fee. Additionally, if the Merger Agreement is terminated due to a breach of any representation, warranty, covenant, obligation or agreement by Wellsford or EQR, or failure by either Wellsford or EQR to obtain the required shareholder approval, then the breaching party, or the party which failed to obtain such shareholder approval, shall pay to the other party an amount equal to the Break-Up Expenses. If the Merger is not consummated, other than due to the termination of the Merger Agreement by (i) the mutual written consent of the respective Boards of Trustees of EQR and Wellsford, (ii) either party, upon the failure by EQR to obtain the required shareholder approval, or (iii) Wellsford, upon a breach of any representation, warranty, covenant, obligation or agreement on the part of EQR resulting in a "material adverse effect" to EQR, and either prior to the termination of the Merger Agreement or within 12 months thereafter, Wellsford or any of its subsidiaries enters into any written Acquisition Proposal which is subsequently consummated, Wellsford is required to pay the Break-Up Fee to EQR, as compensation and liquidated damages for the loss suffered by EQR as a result of the failure of the Merger to be consummated and to avoid the difficulty of determining damages under the circumstances. Neither party shall have any liability to the other after payment of the Break-Up Fee. 95 Except as described above, all costs and expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby (the "Transaction Costs") will be allocated between EQR and the Surviving Trust. If the portion of the Transaction Costs allocated to the Surviving Trust exceeds an amount specified in the Merger Agreement, WRP Newco will be obligated to reimburse the Surviving Trust for such excess amount. If WRP Newco becomes obligated to reimburse the Surviving Trust in the manner described above, the funds contributed to WRP Newco by Wellsford under the Contribution and Distribution Agreement will be decreased by an amount equal to the amount which WRP Newco is obligated to reimburse the Surviving Trust. No Solicitation of Other Transactions Wellsford has agreed that (i) it and its subsidiaries will not, and it will use its best efforts not to permit its officers, trustees, employees, agents or financial advisors to initiate, solicit or encourage, directly or indirectly, any inquiries or the making or implementation of any proposal or offer (including, without limitation, any proposal or offer to its shareholders) with respect to a merger, acquisition, tender offer, exchange offer, consolidation, sale of assets or similar transactions involving all or any significant portion of the assets or any equity securities of, it or any of its subsidiaries, other than the transactions contemplated by the Merger Agreement and (ii) it will notify EQR immediately if Wellsford receives any such inquiries or proposals, or any requests for such information, or if any negotiations or discussions are sought to be initiated or continued with it with respect to any of the foregoing. The Merger Agreement does not, however, prohibit a party from entering into discussion with respect to an unsolicited proposal if the Board of Trustees of that party determines that such action is required by its duties to its shareholders imposed by law. EQR has agreed that if it enters into negotiations with another entity having a class of equity securities registered under the Exchange Act regarding the acquisition of such entity (whether effected through a merger, consolidation, share exchange, tender offer or other form), then at least three business days prior to executing any definitive agreement with such entity with respect to such acquisition or making a tender offer for the shares or other ownership interests of such entity, EQR shall notify Wellsford of such transaction and consult with Wellsford with respect thereto, it being understood, however, that Wellsford shall have no approval rights with respect thereto. Conversion of Shares Each share of Wellsford Common outstanding immediately prior to the Effective Time will be converted into .625 of a share of Survivor Common. All such shares of Wellsford Common, when so converted, will cease to be outstanding and will automatically be cancelled and retired and each holder of a certificate representing any such shares will cease to have any rights with respect thereto, except the right to receive the shares of Survivor Common and any cash, without interest, in lieu of fractional shares to be issued or paid in consideration therefor 96 upon the surrender of such certificate in accordance with the Merger Agreement, as well as dividends and distributions declared with a record date after the Effective Time. Each share of Wellsford Preferred, consisting of Wellsford Series A and Wellsford's Series B Cumulative Redeemable Preferred Shares of Beneficial Interest ("Wellsford Series B"), outstanding immediately prior to the Effective Time will continue as a preferred share of the Surviving Trust with its same preferences and other terms except that each share of Wellsford Series A will be redesignated as one share of Series D Convertible Preferred Share of Beneficial Interest in the Surviving Trust ("Survivor Series D") and each share of Wellsford Series B will be redesignated as one share of Series E Cumulative Redeemable Preferred Share of Beneficial Interest in the Surviving Trust ("Survivor Series E"); provided, however, that the conversion ratio for Survivor Series D shall be adjusted in accordance with its terms. At the Effective Time, each certificate representing outstanding shares of Wellsford Series A and Wellsford Series B will cease to have any rights with respect to such shares, except the right to receive a certificate of the Surviving Trust representing an equal number of Survivor Series D or Survivor Series E, as the case may be. Each share of EQR Common outstanding immediately prior to the Effective Time will be converted into and continue as one share of Survivor Common. At the Effective Time, each certificate representing shares of EQR Common will thereafter represent an equal number of shares of Survivor Common. Each share of EQR Preferred, consisting of 9 3/8% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share (the "Series A Preferred Shares"), 9 1/8% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share (the "Series B Preferred Shares"), and 9 1/8% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share (the "Series C Preferred Shares"), outstanding immediately prior to the Effective Time will be converted into and continue with its same preferences as one share of the Surviving Trust's 9 3/8% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest ("Survivor Series A"), the Surviving Trust's 9 1/8% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest ("Survivor Series B"), and the Surviving Trust's 9 1/8% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest ("Survivor Series C"), respectively. At the Effective Time, each certificate evidencing outstanding shares of Series A Preferred Shares, Series B Preferred Shares or Series C Preferred Shares will thereafter evidence an equal number of shares of Survivor Series A, Survivor Series B or Survivor Series C, respectively. The issuance, terms and conditions of the Survivor Common and the Survivor Preferred (collectively, the "Survivor Shares") will be governed by the Surviving Trust's Declaration. For a detailed description of the provisions of the Surviving Trust's Declaration, see "Proposal Regarding Additional Declaration of Trust Provisions" and "Comparison of Rights of Shareholders." 97 Appointment of Exchange Agent In order to facilitate distribution of certificates representing shares of the Surviving Trust to Wellsford shareholders, the Surviving Trust will appoint Boston EquiServe LLP, an affiliate of First National Bank of Boston, to act as Exchange Agent in connection with the Merger. The Exchange Agent will enter into an agreement with EQR and Wellsford pursuant to which it will agree to act as agent for purposes of distributing the certificates representing shares of the Surviving Trust to Wellsford shareholders. Exchange of Certificates Wellsford shareholders should not tender their certificates representing Wellsford shares with their proxy. Promptly after the Effective Time, the Exchange Agent will mail to all Wellsford shareholders transmittal materials, including a letter of transmittal (the "Letter of Transmittal") for use in exchanging certificates evidencing Wellsford Shares for certificates evidencing Survivor Shares. As soon as practicable after the Letter of Transmittal is properly completed and returned, along with the certificates evidencing Wellsford Shares, to the Exchange Agent, the person specified in the Letter of Transmittal will receive certificates for the number of whole shares of Survivor Shares and, to the extent applicable, any cash in lieu of fractional shares of Survivor Common, to which such person is entitled as a result of the Merger. The Letter of Transmittal is expected to provide instructions for shareholders who have lost or misplaced their certificates and wish to tender their shares. Each Survivor Share for which Wellsford Shares are exchanged in the Merger will be deemed to have been issued at the Effective Time. Accordingly, Wellsford shareholders who receive Survivor Shares in the Merger will be entitled to receive any dividends or other distributions which may be payable to all holders of record of Survivor Shares with respect to any record date after the Effective Time. No holder of Wellsford Shares will be entitled to receive Survivor Shares or cash in lieu of fractional Survivor Common, and no dividends or other distributions will be paid with respect to any Survivor Shares, until the certificate or certificates formerly representing such holder's Wellsford Shares have been surrendered in accordance with the procedures described above. At the time such surrender has been accomplished, a certificate representing the appropriate number of Survivor Shares will be issued and accrued dividends and other distributions on such Survivor Shares will be paid without interest. Existing shareholders of EQR are not required to tender their certificates representing EQR Shares. Certificates for EQR Shares will represent the same number and type of Survivor Shares. Conduct of Business Pending the Merger Except as (i) contemplated by the Merger Agreement, (ii) necessary to accomplish the Distribution, (iii) as disclosed to EQR, or (iv) consented to in writing by EQR, Wellsford will, and will cause each of its subsidiaries to: (a) conduct its business only in the usual, regular and 98 ordinary course and in substantially the same manner as before the date of the Merger Agreement, (b) use reasonable efforts to preserve intact its business organizations and goodwill and keep available the services of its officers and employees, (c) confer on a regular basis with one or more representatives of EQR to report operational matters of materiality and, subject to certain qualifications, any proposals to engage in material transactions, (d) promptly notify EQR of any material emergency or other material change in the condition (financial or otherwise), business, properties, assets, liabilities, prospects or the normal course of its businesses or in the operation of its properties, or of any material governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated), (e) promptly deliver to EQR true and correct copies of any report, statement or schedule filed with the Commission subsequent to the date of the Merger Agreement, (f) maintain its books and records in accordance with generally accepted accounting principles ("GAAP") consistently applied and not change in any material manner any of its methods, principles or practices of accounting in effect at the "Financial Statement Date" (as defined in the Merger Agreement), except as may be required by the Commission, applicable law or GAAP, (g) duly and timely file all reports, tax returns and other documents required to be filed with Federal, state, local and other authorities, subject to extensions permitted by law, provided Wellsford notifies EQR that it is availing itself of such extensions and provided such extensions do not adversely affect Wellsford's status as a qualified REIT under the Code, (h) not make or rescind any express or deemed election relative to taxes (unless required by law or necessary to preserve Wellsford's status as a REIT or the status of any Wellsford subsidiaries as a partnership for Federal income tax purposes), (i) not acquire, enter into any option to acquire, or exercise an option or contract to acquire, additional real property, incur additional indebtedness except for working capital under its revolving line(s) of credit, encumber assets or commence construction of, or enter into any agreement or commitment to develop or construct, other real estate projects, except in the ordinary course of business, which shall include all activities necessary to proceed with the acquisition, ownership and construction of Phases I, II and III of Palomino Park in accordance with the agreements in existence on the date of the Merger Agreement and previously furnished to EQR, (j) not amend its Declaration of Trust, Bylaws, or the articles of incorporation, bylaws, partnership agreement, joint venture agreement or comparable charter or organization document of any subsidiary without EQR's prior written consent; provided that EQR will not unreasonably withhold or delay its consent to non-material amendments to organizational documents of such subsidiaries, (k) make no change in the number of shares of beneficial interest or capital stock, other than pursuant to (i) the exercise of options, rights or similar securities outstanding as of the date hereof and disclosed to EQR, (ii) the conversion ratio of Wellsford Series A pursuant to the terms of the Articles Supplementary for the Wellsford Series A, (iii) options to purchase Wellsford Common which are issued, and (iv) the Dividend Reinvestment and Share Purchase Plan of Wellsford, (l) grant no options or other right or commitment relating to its shares of beneficial interest or capital stock, membership interests or units of limited partnership interest or any security convertible into its shares of beneficial interest or capital stock, membership interests or units of limited partnership interest, or any security the value of which is measured by shares of beneficial interest, or any security subordinated to the claim of its general creditors, (m) not (i) authorize, declare, set aside or pay any dividend or make any other distribution or 99 payment with respect to any shares of its beneficial interest or capital stock, except as provided in the Merger Agreement and in connection with the use of shares of beneficial interest to pay the exercise price or tax withholding in connection with equity-based employee benefit plans, or (ii) directly or indirectly redeem, purchase or otherwise acquire any shares of beneficial interest, membership interests or units of limited partnership interest or any option, warrant or right to acquire, or security convertible into, shares of beneficial interest, membership interests, or units of limited partnership interest, (n) not sell, lease, mortgage, subject to lien or otherwise dispose of any material part of its assets, individually or in the aggregate, except in the ordinary course of business or as disclosed to EQR, (o) not make any loans, advances or capital contributions to, or investments in, any other person or entity, other than (i) loans, advances and capital contributions to Wellsford subsidiaries in existence on the date of the Merger Agreement (other than WRP Newco) and (ii) loans to WRP Newco and WRP Newco subsidiaries bearing interest at a rate per annum equal to the rate of interest payable under the Second Amended and Restated Revolving Credit Agreement dated June 30, 1995 between Wellsford and First National Bank of Boston; (p) not pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction, in the ordinary course of business consistent with past practice or in accordance with their terms, of liabilities reflected or reserved against in, or contemplated by, the most recent consolidated financial statements (or the notes thereto) furnished to EQR or incurred in the ordinary course of business consistent with past practice, (q) not enter into any commitment, contractual obligation, capital expenditure or transaction (each, a "Commitment") which may result in total payments or liability by or to it in excess of $1 million or aggregate Commitments in excess of $5 million, (r) not guarantee the indebtedness of another person or entity, enter into any "keep well" or other agreement to maintain any financial statement condition of another person or entity or enter into any arrangement having the economic effect of any of the foregoing, other than guarantees of indebtedness of WRP Newco and its subsidiaries provided, that on the Closing Date, the Surviving Trust is released from any obligations with respect to such guarantees, or the indebtedness so guaranteed is paid in full without payment by the Surviving Trust or its subsidiaries, (s) not enter into any Commitment with any officer, trustee, consultant or affiliate of Wellsford or any of the Wellsford's subsidiaries, except as contemplated by the Merger Agreement, (t) not increase any compensation or enter into or amend any employment agreement with any of its officers, directors or employees earning more than $50,000 per annum, other than waivers by employees of benefits under such agreements, (u) not adopt any new employee benefit plan or amend any existing plans or rights, except for changes which are required by law and changes which are not more favorable to participants than provisions presently in effect, and (v) not settle any shareholder derivative or class action claims arising out of or in connection with any of the transactions contemplated by the Merger Agreement, (w) not change the ownership of any of its subsidiaries except pursuant to the Contribution Agreement and (x) not accept a promissory note in payment of the exercise price payable under any option to purchase shares of Wellsford Common. Wellsford has agreed to cause WRP Newco and its subsidiaries to repay, on the Closing Date, all its loans made to any of them and to procure, on the Closing Date, the release of Wellsford and its subsidiaries from any guarantees of the obligations of WRP Newco and its subsidiaries other than the guarantees 100 contemplated under the Credit Enhancement Agreement and Palomino Agreement by Wellsford. In the event WRP Newco is unable to repay such loans to Wellsford on the Closing Date, EQR may, at its option, and in lieu of terminating the Merger Agreement, require WRP Newco to execute and deliver to the Surviving Trust a promissory note in the amount of such indebtedness, payable in 12 equal consecutive monthly installments together with interest thereon. For purposes of this section, the Merger Agreement provides that any contract, transaction or other event will be deemed to be material if it would result or is expected to result in a net impact on Wellsford's consolidated income statement in excess of $1 million, or on Wellsford's consolidated balance sheet in excess of $1 million. Prior to the Effective Time, WRP Newco and its subsidiaries will not be bound by the restrictions which would otherwise be applicable under (a), (b), (c), (d), (i), (j), (k), (l), (m)(ii), (n), (o), (p), (q), (r), (s), (t), (u), or (w) above; provided, however, that in no event may WRP Newco: (i) issue any of its shares to any person or entity other than Wellsford prior to the Distribution for less than fair value; (ii) take any action or fail to take any action which would reasonably be expected to result in the termination of or a challenge to Wellsford's status as a REIT within the meaning of Section 856 of the Code, or result in a Material Adverse Effect to Wellsford; (iii) enter into any contract which creates or imposes any obligation on, or otherwise purports to bind, Wellsford or any of the other Wellsford subsidiaries; (iv) take any action or omit to take any action which causes a default under any loan agreement to which Wellsford is a party; (v) amend its Articles of Incorporation or By-laws in any manner which is inconsistent with the provisions of the WRP Newco Stock Purchase Agreement. Prior to the Effective Time, except as (i) contemplated by the Merger Agreement, or (ii) consented to in writing by Wellsford, EQR will, and will cause each of its subsidiaries to: (a) use its reasonable efforts to preserve intact its business organizations and goodwill and keep available the services of its officers and employees, (b) confer on a regular basis with one or more representatives of Wellsford to report operational matters of materiality which could have a EQR Material Adverse Effect (as defined in the Merger Agreement), (c) promptly notify Wellsford of any material emergency or other material change in the condition (financial or otherwise), business, properties, assets, liabilities, prospects or the normal course of its businesses or in the operation of its properties, or of any material governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated), (d) promptly deliver to Wellsford true and correct copies of any report, statement or schedule filed with the Commission subsequent to the date of the Merger Agreement, (e) maintain its books and records in accordance with GAAP consistently applied, and (f) duly and timely file all reports, tax returns and other documents required to be filed with Federal, state, local and other authorities. In addition, during the period beginning the day after the fifth (5th) trading day prior to the date of this Joint Proxy Statement/Prospectus/ Information Statement and ending on (but including) the Closing Date, EQR will not (a) issue any EQR Common or other securities 101 convertible into EQR Common in any single transaction or series of transactions having an aggregate issuance price in excess of $250 million, or (b) announce any merger with or acquisition of all or substantially all the assets of another entity which has net assets in excess of $250 million. Waiver and Amendment The Merger Agreement provides that, at any time prior to the Effective Time, either party may, to the extent legally allowed and set forth in a written instrument signed on behalf of such party, (i) extend the time for the performance of any of the obligations or other acts of the other party, (ii) waive any inaccuracies in the representations and warranties contained in the Merger Agreement or in any document delivered pursuant thereto and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained in the Merger Agreement. The Merger Agreement provides that it may be amended by the parties by action taken by the Boards of Trustees of EQR and Wellsford, at any time before or after approval of the Merger Agreement by the shareholders of EQR or Wellsford and prior to the filing of the Articles of Merger with the Department. After any such approval by the shareholders of EQR or Wellsford, no amendment may be made which by law requires the further approval of shareholders or partners without obtaining such further approval. Stock Exchange Listing The Surviving Trust will apply to list the Survivor Shares issuable in connection with the Merger on the NYSE. Approval of the listing of such shares on the NYSE, subject to official notice of issuance, is a condition to the respective obligations of the parties to consummate the Merger. Anticipated Accounting Treatment The Merger will be treated as a purchase in accordance with Accounting Principles Board Opinion No. 16. Purchase accounting for a merger is the same as the accounting treatment used for the acquisition of any group of assets. The fair market value of the consideration given by the Surviving Trust in the Merger will be used as the valuation basis of the combination. The assets acquired and liabilities assumed of Wellsford will be recorded at their relative fair market values as of the Effective Date. The financial statements of the Surviving Trust will reflect the combined operations of EQR and Wellsford from the date of the Merger. Shares Available for Resale The issuance of Survivor Common upon consummation of the Merger will be registered under the Securities Act. Such shares may be traded freely and without restriction by those 102 shareholders not deemed to be "affiliates" of Wellsford as that term is defined in the rules and regulations promulgated pursuant to the Securities Act. "Affiliates" are generally defined as persons who control, are controlled by or are under common control with an issuer. This Joint Proxy Statement/Prospectus /Information Statement does not cover any resales of Survivor Common received by affiliates of Wellsford. Contribution of Assets of Wellsford to ERP Operating Partnership Immediately after the Effective Time, the assets of Wellsford at the Effective Time, subject to the liabilities of Wellsford, will be contributed by the Surviving Trust to ERP Operating Partnership, in exchange for general partner units of ERP Operating Partnership equal in number to the number of shares of Survivor Common issued to the Wellsford Common Shareholders and preferred units of ERP Operating Partnership equal in number to the number of outstanding shares of Wellsford Preferred. In connection with the contribution of assets to ERP Operating Partnership by the Surviving Trust, all of Wellsford's senior unsecured indebtedness will become the obligation of ERP Operating Partnership. ERP Operating Partnership will assume the Surviving Trust's full and complete obligations with respect to Wellsford's senior unsecured debt which will become an unconditional obligation of ERP Operating Partnership. ERP Operating Partnership will execute and deliver a legally binding assumption agreement in connection with the assumption of such Wellsford unsecured debt. Federal Income Tax Consequences The following is a general summary of the material United States Federal income tax consequences of the Merger to EQR, Wellsford and their respective shareholders. The following summary is based upon current provisions of the Code, existing, temporary and final regulations thereunder and current administrative rulings and court decisions, all of which are subject to change (possibly on a retroactive basis). No attempt has been made to comment on all United States Federal income tax consequences of the Distribution and the Merger that may be relevant to particular holders of Wellsford Shares and EQR Shares, including holders that are subject to special tax rules such as dealers in securities, mutual funds, insurance companies, tax-exempt entities, holders who do not hold their Wellsford Shares or EQR Shares as capital assets and holders that, for United States Federal income tax purposes, are non-resident alien individuals, foreign corporations, foreign partnerships or foreign estates or trusts. The tax discussion set forth below is included for general information only. It is not intended to be, nor should it be construed to be, legal or tax advice to any particular holder of Wellsford Shares or EQR Shares. Because of the particular tax attributes of holders of Wellsford Shares or EQR Shares, the Merger may have differing tax implications for such holders. Accordingly, holders of Wellsford Shares or EQR Shares are urged to consult with their own legal and tax advisers regarding the United States federal income 103 tax consequences of the Merger and any other consequences to them of the Merger under state, local and foreign tax laws. Tax Consequences of Merger. Rudnick & Wolfe, counsel to EQR in connection with the Merger, has rendered an opinion to EQR that on the basis of the facts, representations and assumptions set forth in such opinion: (i) the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code, and EQR and Wellsford will each be a party to such reorganization within the meaning of Section 368(b) of the code; (ii) no gain or loss will be recognized by EQR as a result of the Merger; (iii) no gain or loss will be recognized by the shareholders of EQR upon the exchange of their EQR Common solely for Survivor Common pursuant to the Merger; (iv) no gain or loss will be recognized by the shareholders of EQR upon the exchange of their EQR Preferred solely for Survivor Preferred pursuant to the Merger; (v) the tax basis of the Survivor Common received or deemed to be received by any holder of EQR Common in exchange for EQR Common pursuant to the Merger will be the same as the tax basis of such EQR Common exchanged therefor; (vi) the tax basis of the Survivor Preferred received or deemed to be received by any holder of EQR Preferred in exchange for EQR Preferred pursuant to the Merger will be the same as the tax basis of such EQR Preferred exchanged therefor; (vii) the holding period for Survivor Common and Survivor Preferred received in exchange for EQR Common and EQR Preferred, respectively, pursuant to the Merger will include the period that such EQR Common and EQR Preferred were held by the holder, provided that such EQR Common and EQR Preferred were held as capital assets by such holder at the Effective Time; (viii) subsequent to the Merger, the proposed method of operation described in this Joint Proxy Statement/Prospectus/Information Statement and as represented by EQR should enable the Surviving Trust to satisfy the requirements under the Code to qualify as a REIT for federal income tax purposes; and (ix) ERP Operating Partnership will be classified as a partnership for federal income tax purposes. 104 Robinson Silverman Pearce Aronsohn & Berman LLP, counsel to Wellsford in connection with the Merger, has rendered an opinion to Wellsford that on the basis of the facts, representations and assumptions set forth in such opinion: (i) the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code, and EQR and Wellsford will each be a party to such reorganization within the meaning of Section 368(b) of the Code; (ii) no gain or loss for federal income tax purposes will be recognized by Wellsford as a result of the Merger; (iii) no gain or loss will be recognized by the shareholders of Wellsford upon the exchange of their Wellsford Common solely for Survivor Common pursuant to the Merger; (iv) no gain or loss will be recognized by the shareholders of Wellsford upon the exchange of their Wellsford Preferred solely for Survivor Preferred pursuant to the Merger; (v) the tax basis of the Survivor Common received or deemed to be received by any holder of Wellsford Common in exchange for Wellsford Common pursuant to the Merger will be the same as the tax basis of such Wellsford Common exchanged therefor; (vi) the tax basis of the Survivor Preferred received or deemed to be received by any holder of Wellsford Preferred in exchange for Wellsford Preferred pursuant to the Merger will be the same as the tax basis of such Wellsford Preferred exchanged therefor; (vii) the holding period for Survivor Common and Survivor Preferred received in exchange for Wellsford Common and Wellsford Preferred, respectively, pursuant to the Merger will include the period that such shares of Wellsford Common and Wellsford Preferred, respectively, were held by the holder, provided that such Wellsford Common and Wellsford Preferred were held as capital assets by such holder at the Effective Time; and (viii) a shareholder of Wellsford Common who receives cash in lieu of a fractional share of Wellsford Common pursuant to the Merger will recognize gain or loss equal to the difference, if any, between such shareholder's basis in the fractional share and the amount of cash received. Shareholders of EQR and Wellsford should be aware that such opinions of counsel are not binding on the United States IRS, and no assurance is or will be given that the IRS would not adopt a contrary position or that the IRS position would not be sustained by a court. 105 Qualification of Surviving Trust as a REIT. General. Wellsford elected REIT status commencing with its taxable year ending December 31, 1992. In the opinion of Robinson Silverman Pearce Aronsohn & Berman LLP, which has acted as counsel to Wellsford, Wellsford was organized and has operated in conformity with the requirements for qualification and taxation as a REIT under the Code for its taxable years ended December 31, 1992 through December 31, 1996. Rudnick & Wolfe has opined that, (i) EQR was organized and has operated in conformity with the requirements for qualification and taxation as a REIT under the Code for its taxable years ended December 31, 1993 through December 31, 1996, and (ii) subsequent to the Merger, the Surviving Trust's proposed method of operation described in this Joint ProxyStatement/Prospectus/ Information Statement and as represented by EQR should enable it to meet the requirements for qualification and taxation as a REIT. It must be emphasized that this opinion is based on various assumptions relating to the organization and operation of the Surviving Trust, ERP Operating Partnership, the Management Partnerships, Equity Residential Properties Management Corp., Equity Residential Properties Management Corp. II, Equity Residential Properties Management Corp. III and Wellsford Management Corp. (collectively, the "Management Corps."), the limited partnerships and limited liability companies (the "Financing Partnerships") that own the beneficial interest of certain properties encumbered by mortgage financing, and various qualified REIT subsidiaries wholly owned by the Surviving Trust (each a "QRS Corporation") (collectively, the Management Partnerships, the Management Corps., the Financing partnerships and the QRS Corporations may be referred to as the "Subsidiary Entities"), and is conditioned upon certain representations made by EQR and ERP Operating Partnership as to certain relevant factual matters, including matters related to the organization, expected operation, and assets of the Surviving Trust, ERP Operating Partnership and the Subsidiary Entities. The Surviving Trust's qualification and taxation as a REIT depend upon the Surviving Trust's ability to meet on a continuing basis, through actual annual operating and other results, the various requirements under the Code and described in the Prospectus with regard to, among other things, the sources of its gross income, the composition of its assets, the level of its dividends to shareholders, and the diversity of its share ownership. Neither Rudnick & Wolfe nor Robinson Silverman Pearce Aronsohn & Berman LLP will review the Surviving Trust's compliance with these requirements on a continuing basis. No assurance can be given that the actual results of the operations of the Surviving Trust, ERP Operating Partnership, and the Subsidiary Entities, the sources of their income, the nature of their assets, the level of the Surviving Trust's dividends to shareholders and the diversity of its share ownership for any given taxable year will satisfy the requirements under the Code for qualification and taxation as a REIT. In any year in which the Surviving Trust qualifies as a REIT, generally it will not be subject to Federal income tax on that portion of its REIT taxable income or capital gain which is distributed to shareholders. This treatment substantially eliminates the "double taxation" (at both the corporate and shareholder levels) that generally results from the use of corporate investment vehicles. The Surviving Trust may, however, be subject to tax at normal corporate rates upon any taxable income or capital gain not distributed. 106 If the Surviving Trust should fail to satisfy either the 75% or the 95% gross income test (as discussed below), and nonetheless maintains its qualification as a REIT because certain other requirements are met, it will be subject to a 100% tax on the greater of the amount by which it fails the 75% or the 95% test, multiplied by a fraction intended to reflect its profitability. The Surviving Trust will also be subject to a 100% tax on net income derived from any "prohibited transaction," as described below. In addition, if the Surviving Trust should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior years, the Surviving Trust would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. The Surviving Trust may also be subject to the corporate "alternative minimum tax," as well as tax in certain situations and on certain transactions not presently contemplated. The Surviving Trust will use the calendar year both for Federal income tax purposes and for financial reporting purposes. In order to qualify as a REIT, the Surviving Trust must meet, among others, the following requirements: Share Ownership Test. Shares of beneficial interest of the Surviving Trust must be held by a minimum of 100 persons for at least 335 days of a taxable year that is 12 months, or during a proportionate part of a taxable year of less than 12 months. In addition, no more than 50% in value of the shares of beneficial interest of the Surviving Trust may be owned, directly or indirectly and by applying certain constructive ownership rules, by five or fewer individuals during the last half of each taxable year. EQR and Wellsford believe that they have each satisfied both of these tests, and EQR believes the Surviving Trust will continue to do so. In order to help comply with the second of these tests, the Surviving Trust has placed certain restrictions on the transfer of the Survivor Common and Survivor Preferred that are intended to prevent further concentration of share ownership. Asset Tests. At the close of each quarter of the Surviving Trust's taxable year, the Surviving Trust must satisfy two tests relating to the nature of its assets. First, at least 75% of the value of the Surviving Trust's total assets must be represented by any combination of interests in real property, interests in mortgages on real property, shares in other REITs, cash, cash items and certain government securities. Second, although the remaining 25% of the Surviving Trust's assets generally may be invested without restriction, securities in this class may not exceed either (i) 5% of the value of the Surviving Trust's total assets as to any one issuer, or (ii) 10% of the outstanding voting securities of any one issuer. Where the Surviving Trust invests in a partnership, it will be deemed to own a proportionate share of the partnership's assets. The Surviving Trust's investment in the properties of Wellsford through its interest in ERP Operating Partnership will constitute qualified assets for purposes of the 75% asset test. 107 ERP Operating Partnership will own none of the voting stock of the Management Corps. except for Wellsford Management Inc., in which ERP Operating Partnership will own 10% of the voting stock. ERP Operating Partnership will own 100% of the non-voting stock of each of the Management Corps. ERP Operating Partnership will also own 100% of the Class A Common Stock of WRP Newco and 100% of the Series A 8% Convertible Redeemable Preferred Stock of WRP Newco. By virtue of its partnership interest in ERP Operating Partnership, the Surviving Trust will be deemed to own its pro rata share of the assets of ERP Operating Partnership, including the stock of the Management Corps. and WRP Newco as described above. ERP Operating Partnership has not and does not intend to own more than 10% of the voting securities of the Management Corps. or WRP Newco. In addition, based upon its analysis of the estimated value of the stock of the Management Corps. and WRP Newco owned by ERP Operating Partnership relative to the estimated value of the other assets owned by ERP Operating Partnership, EQR believes that its pro rata share of the stock of WRP Newco and each Management Corp. held by ERP Operating Partnership will not exceed 5% of the total value of the Surviving Trust's assets. No independent appraisals, however, have been obtained to support this conclusion. This 5% limitation must be satisfied not only on the date that the Surviving Trust first acquires stock of WRP Newco or a Management Corp., but also at the end of each quarter in which the Surviving Trust increases its interest in WRP Newco or any of the Management Corps. (including as a result of increasing its interest in ERP Operating Partnership as the holders of OP Units exercise their exchange rights). Although the Surviving Trust plans to take steps to ensure that it satisfies the 5% value test for any quarter with respect to which retesting is to occur, there can be no assurance that such steps will always be successful or will not require a reduction in ERP Operating Partnership's overall interest in the Management Corps. The Surviving Trust's indirect interests as a general partner in the Financing Partnerships are held through the QRS Corporations, each of which is organized and operated as a "qualified REIT subsidiary" within the meaning of the Code. Qualified REIT subsidiaries are not treated as separate entities from their parent REIT. Instead, all assets, liabilities and items of income, deduction and credit of each QRS Corporation will be treated as assets, liabilities and items of the Surviving Trust. Each QRS Corporation therefore will not be subject to Federal corporate income taxation, although it may be subject to state or local taxation. In addition, the Surviving Trust's ownership of the voting stock of each QRS Corporation will not violate the general restriction against ownership of more than 10% of the voting securities of any issuer. Gross Income Tests. There are three separate percentage tests relating to the sources of the Surviving Trust's gross income which must be satisfied for each taxable year. For purposes of these tests, where the Surviving Trust invests in a partnership, the Surviving Trust will be treated as receiving its share of the income and loss of the partnership, and the gross income of the partnership will retain the same character in the hands of the Surviving Trust as it has in the hands of the partnership. 108 1. The 75% Test. At least 75% of the Surviving Trust's gross income for each taxable year must be "qualifying income." Qualifying income generally includes (i) rents from real property (except as modified below); (ii) interest on obligations collateralized by mortgages on, or interests in, real property; (iii) gains from the sale or other disposition of interests in real property and real estate mortgages, other than gain from property held primarily for sale to customers in the ordinary course of the Surviving Trust's trade or business ("dealer property"); (iv) distributions on shares in other REITs, as well as gain from the sale of such shares; (v) abatements and refunds of real property taxes; (vi) income from the operation, and gain from the sale, of property acquired at or in lieu of a foreclosure of a mortgage collateralized by such property ("foreclosure property"); (vii) commitment fees received for agreeing to make loans collateralized by mortgages on real property or to purchase or lease real property; and (viii) certain qualified temporary investment income attributable to the investment of new capital received by the Surviving Trust in exchange for its shares (including the Securities offered hereby) during the one-year period following the receipt of such new capital. Rents received from a tenant will not, however, qualify as rents from real property in satisfying the 75% test (or the 95% gross income test described below) if the Surviving Trust, or an owner of 10% or more of the Surviving Trust, directly or constructively owns 10% or more of such tenant. In addition, if rent attributable to personal property leased in connection with a lease of real property is greater than 15% of the total rent received under the lease, then the portion of rent attributable to such personal property will not qualify as rents from real property. Moreover, an amount received or accrued will not qualify as rents from real property (or as interest income) for purposes of the 75% and 95% gross income tests if it is based in whole or in part on the income or profits of any person. Finally, for rents received to qualify as rents from real property, the Surviving Trust generally must not operate or manage the property or furnish or render services to tenants, other than through an "independent contractor" from whom the Surviving Trust derives no revenue. The "independent contractor" requirement, however, does not apply to the extent that the services provided by the Surviving Trust are "usually or customarily rendered" in connection with the rental of space for occupancy only, and are not otherwise considered "rendered to the occupant." The Surviving Trust, through the Management Partnerships, will provide certain services with respect to the properties of Wellsford and any newly acquired multifamily residential properties. The Surviving Trust believes that the services provided by the Management Partnerships are usually or customarily rendered in connection with the rental of space for occupancy only, and therefore that the provision of such services has not caused, and will not in the future cause the rents received with respect to the Properties to fail to qualify as rents from real property for purposes of the 75% and 95% gross income tests. 2. The 95% Test. At least 95% of the Surviving Trust's gross income for the taxable year must be derived from the above-described qualifying income, or from dividends, interest or gains from the sale or disposition of stock or other securities that are not dealer property. 109 Dividends (including the Surviving Trust's share of dividends paid by the Management Corps.) and interest on any obligations not collateralized by an interest in real property and any payments made on behalf of the Surviving Trust by a financial institution pursuant to a rate protection agreement will be included as qualifying income for purposes of the 95% gross income test, but not for purposes of the 75% test. For purposes of determining whether the Surviving Trust complies with the 75% and 95% income tests, qualifying income does not include income from prohibited transactions. A "prohibited transaction" is a sale of dealer property, excluding certain dealer property held by the Surviving Trust for at least four years and excluding foreclosure property. The Surviving Trust's investment in the Properties, through ERP Operating Partnership, in major part will give rise to rental income qualifying under the 75% and 95% gross income tests. Gains on sales of the Properties or of the Surviving Trust's interest in ERP Operating Partnership will generally qualify under the 75% and 95% gross income tests. EQR believes that the income on its other investments, including its indirect investment in WRP Newco and the Management Corps., will not cause the Surviving Trust to fail the 75% or 95% gross income test for any year, and the Surviving Trust anticipates that this will continue to be the case. Even if the Surviving Trust fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may still qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. These relief provisions will generally be available if: (i) the Surviving Trust's failure to comply was due to reasonable cause and not to willful neglect; (ii) the Surviving Trust reports the nature and amount of each item of its income included in the tests on a schedule attached to its tax return; and (iii) any incorrect information on this schedule is not due to fraud with intent to evade tax. If these relief provisions apply, the Surviving Trust, however, will still be subject to a 100% tax based upon the greater of the amount by which it fails either the 75% or 95% gross income test for that year, less certain adjustments. 3. The 30% Test. The Surviving Trust must derive less than 30% of its gross income for each taxable year from the sale or other disposition of (i) real property held for less than four years (other than foreclosure property and involuntary conversions), (ii) stock or securities held for less than one year, and (iii) property in a prohibited transaction. EQR does not anticipate that it will have any substantial difficulty in complying with this test. Annual Distribution Requirements. The Surviving Trust, in order to qualify as a REIT, is required to make dividend distributions (other than capital gain dividends) to its shareholders each year in an amount at least equal to (A) the sum of (i) 95% of the Surviving Trust's REIT taxable income (computed without regard to the dividends paid deduction and the Surviving Trust's net capital gain) and (ii) 95% of the net income (after tax), if any, from foreclosure property, minus (B) the sum of certain items of non-cash income. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before 110 the Surviving Trust timely files its tax return for such year and if paid on or before the first regular dividend payment after such declaration. To the extent that the Surviving Trust does not distribute all of its net capital gain or distributes at least 95%, but less than 100%, of its REIT taxable income, as adjusted, it will be subject to tax on the undistributed amount at regular capital gains or ordinary corporate tax rates, as the case may be. The Surviving Trust has made and intends to continue to make timely distributions sufficient to satisfy the annual distribution requirements. In this regard, the partnership agreement of ERP Operating Partnership authorizes the Surviving Trust, as general partner, to take such steps as may be necessary to cause ERP Operating Partnership to distribute to its partners an amount sufficient to permit the Surviving Trust to meet these distribution requirements. It is possible that the Surviving Trust may not have sufficient cash or other liquid assets to meet the 95% dividend requirement, due to the payment of principal on debt or to timing differences between the actual receipt of income and actual payment of expenses on the one hand, and the inclusion of such income and deduction of such expenses in computing the Surviving Trust's REIT taxable income on the other hand. To avoid any problem with the 95% distribution requirement, the Surviving Trust will closely monitor the relationship between its REIT taxable income and cash flow and, if necessary, will borrow funds (or cause ERP Operating Partnership or other affiliates to borrow funds) in order to satisfy the distribution requirement. Failure to Qualify. If the Surviving Trust fails to qualify for taxation as a REIT in any taxable year and the relief provisions do not apply, the Surviving Trust will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to shareholders in any year in which the Surviving Trust fails to qualify will not be required and, if made, will not be deductible by the Surviving Trust. In such event, to the extent of current and accumulated earnings and profits, all distributions to shareholders will be taxable as ordinary income, and, subject to certain limitations in the Code, corporate distributees may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, the Surviving Trust also will be ineligible for qualification as a REIT for the four taxable years following the year during which qualification was lost. Tax Aspects of the Surviving Trust's Investments in Partnerships. General. The Surviving Trust will hold direct or indirect interests in ERP Operating Partnership, WRP Newco, the Management Partnerships and certain Financing Partnerships (each individually a "Partnership" and, collectively, the "Partnerships"). The Surviving Trust believes that each of the Partnerships qualifies as a partnership (as opposed to an association taxable as a corporation) for Federal income tax purposes. If any of the Partnerships were to be treated as an association, it would be taxable as a corporation and therefore subject to an entity-level tax on its income. In such a situation, the character of the Surviving Trust's assets and items of gross income would change, which would preclude the Surviving Trust from 111 satisfying the asset tests and possibly the income tests (see "Certain Federal Income Tax Consequences--Taxation of the Surviving Trust--Asset Tests" and "-- Gross Income Tests"), and in turn would prevent the Surviving Trust from qualifying as a REIT. Tax Termination of ERP Operating Partnership. Pursuant to Section 708(b)(1)(B) of the Code, if within a twelve-month period, there is a sale or exchange of 50 percent or more of the total interest in a partnership's capital and profits, the partnership terminates for federal income tax purposes. Treasury Regulations under Code Section 708(b)(1)(B) (the "Section 708 Regulations") provide that if a partnership is deemed terminated by a sale or exchange of an interest, the following is deemed to occur: (a) the partnership distributes all of its assets subject to all of its liabilities to the purchaser and the other remaining partners in proportion to their respective interests in the partnership assets; and, (b) immediately thereafter, the purchaser and the other remaining partners contribute the assets, subject to the liabilities encumbering such assets, to a new partnership. Under the Section 708 Regulations, the deemed termination of a partnership will result in the closing of the partnership's taxable year and recognition of gain under Code Section 731 if the amount of money deemed distributed to the partner (including any money deemed distributed upon a shift in the liabilities of the partnership under Code Section 752) exceeds such partner's adjusted basis in his partnership interest. Any built-in gain or loss attributable to the assets re-contributed to the partnership must be allocated among the partners of the new partnership under Code Section 704(c). See "Tax Aspects of Surviving Trusts Investment in Partnerships -- Tax Allocations With Respect to the Properties." In addition, the deemed termination requires the partnership to depreciate its assets as if they were newly acquired by the partnership at the time of termination. As a result, such assets must be depreciated over each asset's depreciable life beginning as of the date of the deemed termination. In connection with the Merger, more than 50 percent of the total interest in ERP Operating Partnership's capital and profits will be exchanged. Therefore, the Merger will result in the termination of ERP Operating Partnership under Code Section 708(b)(1)(B). Accordingly, under the Section 708 Regulations, all of the assets of ERP Operating Partnership will be deemed to be distributed to the partners of ERP Operating Partnership (including the Surviving Trust) and re-contributed by such partners to a newly formed partnership. Such deemed distribution and re-contribution is not expected to cause gain recognition to the Surviving Trust under Code Section 731(a) because the amount of cash deemed distributed to the Surviving Trust as a result of the deemed liquidation (including any deemed distribution occurring under Code Section 752 as a result of a shifting of liabilities among the partners of the ERP Operating Partnership) is not expected to exceed the Surviving Trusts's adjusted basis in the ERP Operating Partnership. Moreover, because the taxable years of both the ERP Operating Partnership and the Surviving Trust end on the same date, the closing of the ERP Operating Partnership's taxable year should have no adverse tax consequences to the Surviving Trust. However, the termination of the ERP Operating Partnership will cause the assets of the ERP Operating Partnership to be depreciated as if they were newly acquired by the ERP Operating Partnership, possibly resulting in lower annual depreciation deductions to the Surviving Trust for federal income tax purposes. In addition, the deemed re-contribution of the assets to the ERP Operating Partnership could 112 result in a reallocation of the built-in gain attributable to the properties owned by the ERP Operating Partnership. See "Tax Aspects of Surviving Trusts Investment in Partnerships -- Tax Allocations With Respect to the Properties." Proposed Treasury Regulations recently promulgated by the Treasury Department (the "Proposed 708 Regulations") would alter the tax consequences of a termination under Code Section 708(b)(1)(B). Under the Proposed Section 708 Regulations, if a partnership is terminated by a sale or exchange of an interest, the following would be deemed to occur: (a) the partnership transfers all of its assets and liabilities to a new partnership in exchange for an interest in the new partnership; and (b) immediately thereafter, the terminated partnership distributes all of the interests in the new partnership to the purchasing partner and the other remaining partners in liquidation of the terminated partnership. The effect of the Proposed Regulations would be to (i) eliminate any possibility of gain recognition to the partners of the ERP Operating Partnership under Code Section 731, and (ii) eliminate any potential reallocation of ERP Operating Partnership's basis and any Section 704(c) built- in gain with respect to the properties currently held by the ERP Operating Partnership. However, under the Proposed 708 Regulations, the ERP Operating Partnership would still be required to depreciate its properties as newly acquired assets, possibly resulting in lower depreciation deductions to the Surviving Trust for federal income tax purposes. The Proposed Section 708 Regulation will apply to the deemed termination of ERP Operating Partnership if the Proposed Section 708 Regulations shall have been published as final regulations in the Federal Register as of the effective date of the Merger. Tax Allocations with Respect to the Properties. Pursuant to Section 704(c) of the Code, income, gain, loss and deduction attributable to appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership (such as certain of the Properties contributed to ERP Operating Partnership in connection with both the initial public offering of EQR and the Merger) (the "Contributed Properties") must be allocated in a manner such that the contributing partner is charged with, or benefits from, respectively, the unrealized gain or unrealized loss associated with the property at the time of the contribution. The amount of such unrealized gain or unrealized loss is generally equal to the difference between the fair market value and the adjusted tax basis of contributed property at the time of contribution (a "Book-Tax Difference"). Such allocations are solely for Federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners. ERP Operating Partnership Agreement (as well as the Financing Partnerships agreements) require such allocations to be made in a manner consistent with Section 704(c). As a result, certain limited partners of ERP Operating Partnership will be allocated lower amounts of depreciation deductions for tax purposes and increased taxable income and gain on sale by the Partnerships of the contributed assets (including certain of the Contributed Properties). These allocations will tend to eliminate the Book-Tax Difference over the lives of the Partnerships. However, the special allocation rules of Section 704(c) as applied by the Surviving Trust will not always entirely rectify the Book-Tax Difference on an annual basis or with respect to a specific taxable transaction such as a sale. Thus, the carryover basis of the contributed assets 113 in the hands of the Partnerships will cause the Surviving Trust to be allocated lower depreciation and other deductions, and possibly greater amounts of taxable income in the event of a sale of such contributed assets in excess of the economic or book income allocated to it as a result of such sale. This may cause the Surviving Trust to recognize taxable income in excess of cash proceeds, which might adversely affect the Surviving Trust's ability to comply with the REIT distribution requirements. See "Qualification of the Surviving Trust as a REIT--Annual Distribution Requirements." Sale of the Properties. The Surviving Trust's share of any gain realized by ERP Operating Partnership on the sale of any dealer property generally will be treated as income from a prohibited transaction that is subject to a 100% penalty tax. See "Qualification of the Surviving Trust as a REIT--Gross Income Tests--The 95% Test." Under existing law, whether property is dealer property is a question of fact that depends on all the facts and circumstances with respect to the particular transaction. The Partnerships have held and intend to continue to hold the Properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing, owning and operating the Properties and other multifamily residential properties and to make such occasional sales of the Properties as are consistent with the Surviving Trust's investment objectives. Based upon such investment objectives, the Surviving Trust believes that in general the Properties should not be considered dealer property and that the amount of income from prohibited transactions, if any, will not be material. Taxation of Taxable Domestic Shareholders. General. As long as the Surviving Trust qualifies as a REIT, distributions made to the Surviving Trust's taxable domestic shareholders, with respect to their shares out of current or accumulated earnings and profits (and not designated as capital gain dividends) will be taken into account by them as ordinary income and will not be eligible for the dividends received deduction for shareholders that are corporations. For purposes of determining whether distributions on the Securities are out of current or accumulated earnings and profits, the earnings and profits of the Surviving Trust will be allocated first to the Survivor Preferred Shares and second to the Survivor Common Shares. There can be no assurance, however, that the Surviving Trust will have sufficient earnings and profits to cover distributions on the Survivor Preferred Shares. Dividends that are designated as capital gain dividends will be taxed as long-term capital gains (to the extent that they do not exceed the Surviving Trust's actual net capital gain for the taxable year) without regard to the period for which the shareholder has held its Securities. However, corporate shareholders may be required to treat up to 20% of certain capital gain dividends as ordinary income. For a discussion on the manner in which that portion of any dividends designated by the Surviving Trust as capital gains dividends will be allocated among the holders of Survivor Preferred Shares and Survivor Common Shares, see "Description of Shares of Beneficial Interest-- Survivor Preferred Shares--Distributions." To the extent that the Surviving Trust makes distributions in excess of current and accumulated earnings and profits, 114 these distributions are treated first as a tax-free return of capital to the shareholder, reducing the tax basis of a shareholder's Securities by the amount of such distribution (but not below zero), with distributions in excess of the shareholder's tax basis taxable as capital gains (if the Securities are held as a capital asset). In addition, any dividend declared by the Surviving Trust in October, November or December of any year and payable to a shareholder of record on a specific date in any such month will be treated as both paid by the Surviving Trust and received by the shareholder on December 31 of such year, provided that the dividend is actually paid by the Surviving Trust during January of the following calendar year. Shareholders may not include in their individual income tax returns any net operating losses or capital losses of the Surviving Trust. In general, any loss upon a sale or exchange of securities by a shareholder who has held such securities for six months or less (after applying certain holding period rules) will be treated as a long-term capital loss, to the extent of distributions from the Surviving Trust received by such shareholder are required to be treated by such shareholder as long-term capital gains. Taxation of Tax-Exempt Shareholders. Most tax-exempt employees' pension trusts are not subject to Federal income tax except to the extent of their receipt of "unrelated business taxable income" as defined in Section 512(a) of the Code ("UBTI"). Distributions by the Surviving Trust to a shareholder that is a tax-exempt entity should not constitute UBTI, provided that the tax-exempt entity has not financed the acquisition of its securities with "acquisition indebtedness" within the meaning of the Code and the securities are not otherwise used in an unrelated trade or business of the tax-exempt entity. In addition, for taxable years beginning on or after January 1, 1994, certain pension trusts that own more than 10% of a "pension-held REIT" must report a portion of the distribution that they receive from such a REIT as UBTI. The Surviving Trust has not been and does not expect to be treated as a pension-held REIT for purposes of this rule. Taxation of Foreign Shareholders. The following is a discussion of certain anticipated U.S. Federal income tax consequences of the ownership and disposition of securities applicable to Non-U.S. Holders of such securities. A "Non-U.S. Holder" is any person other than (i) a citizen or resident of the United States, (ii) a corporation or partnership created or organized in the United States or under the laws of the United States or of any state thereof, or (iii) an estate or trust whose income is includible in gross income for U.S. Federal income tax purposes regardless of its source. The discussion is based on current law and is for general information only. 115 Distributions From the Surviving Trust. 1. Ordinary Dividends. The portion of dividends received by Non-U.S. Holders payable out of the Surviving Trust's earnings and profits which are not attributable to capital gains of the Surviving Trust or of ERP Operating Partnership and which are not effectively connected with a U.S. trade or business of the Non-U.S. Holder will be subject to U.S. withholding tax at the rate of 30% (unless reduced by an applicable treaty). In general, Non-U.S. Holders will not be considered engaged in a U.S. trade or business solely as a result of their ownership of securities. In cases where the dividend income from a Non-U.S. Holder's investment in securities is (or is treated as) effectively connected with the Non-U.S. Holder's conduct of a U.S. trade or business, the Non-U.S. Holder generally will be subject to U.S. tax at graduated rates, in the same manner as U.S. shareholders are taxed with respect to such dividends (and may also be subject to the 30% branch profits tax in the case of a Non-U.S. Holder that is a foreign corporation). 2. Non-Dividend Distributions. Distributions by the Surviving Trust which are not dividends out of the earnings and profits of the Surviving Trust will not be subject to U.S. income or withholding tax. If it cannot be determined at the time a distribution is made whether or not such distribution will be in excess of the Surviving Trust's current and accumulated earnings and profits, the entire distribution will be subject to withholding at the rate applicable to dividends. However, the Non-U.S. Holder may seek a refund of such amounts from the Service if it is subsequently determined that such distribution was, in fact, in excess of current and accumulated earnings and profits of the Surviving Trust. 3. Capital Gain Dividends. Under the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"), a distribution made by the Surviving Trust to a Non- U.S. Holder, to the extent attributable to gains from dispositions of United States Real Property Interests ("USRPIs") such as the Properties beneficially owned by the Surviving Trust will be considered effectively connected with a U.S. trade or business of the Non-U.S. Holder and subject to U.S. income tax at the rate applicable to U.S. individuals or corporations, without regard to whether such distribution is designated as a capital gain dividend. In addition, the Surviving Trust will be required to withhold tax equal to 35% of the amount of dividends to the extent such dividends constitute gains from any USRPI. Distributions subject to FIRPTA may also be subject to a 30% branch profits tax in the hands of a foreign corporate shareholder that is not entitled to treaty exemption. Dispositions of Securities. Unless securities constitute a USRPI, a sale of securities by a Non-U.S. Holder generally will not be subject to U.S. taxation under FIRPTA. The securities will not constitute a USRPI if the Surviving Trust is a "domestically controlled REIT." A domestically controlled REIT is a REIT in which, at all times during a specified testing period, less than 50% in value of its securities is held directly or indirectly by Non-U.S. Holders. The Surviving Trust believes that it has been and anticipates that it will continue to be a domestically 116 controlled REIT, and therefore that the sale of securities will not be subject to taxation under FIRPTA. Because the securities will be publicly traded, however, no assurance can be given the Surviving Trust will continue to be a domestically controlled REIT. If the Surviving Trust does not constitute a domestically controlled REIT, a Non-U.S. Holder's sale of securities generally will still not be subject to tax under FIRPTA as a sale of a USRPI provided that (i) the securities are "regularly traded" (as defined by applicable Treasury regulations) on an established securities market and (ii) the selling Non-U.S. Holder held 5% or less of the Surviving Trust's outstanding securities at all times during a specified testing period. If gain on the sale of securities were subject to taxation under FIRPTA, the Non-U.S. Holder would be subject to the same treatment as a U.S. shareholder with respect to such gain (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals) and the purchaser of securities could be required to withhold 10% of the purchase price and remit such amount to the Service. Capital gains not subject to FIRPTA will nonetheless be taxable in the United States to a Non-U.S. Holder in two cases: (i) if the Non-U.S. Holder's investment in securities is effectively connected with a U.S. trade or business conducted by such Non-U.S. Holder, the Non-U.S. Holder will be subject to the same treatment as a U.S. shareholder with respect to such gain, or (ii) if the Non-U.S. Holder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a "tax home" in the United States, the nonresident alien individual will be subject to a 30% tax on the individual's capital gain. Other Tax Considerations. WRP Newco and the Management Corps. A portion of the cash to be used by ERP Operating Partnership to fund distributions to its partners, including the Surviving Trust, is expected to come from WRP Newco and the Management Corps. through payments of dividends on the stock of WRP Newco and the Management Corps. held by ERP Operating Partnership. The Management Corps. will pay Federal and state income tax at the full applicable corporate rates on their taxable income. The Management Corps. will attempt to minimize the amount of such taxes, but there can be no assurance whether or the extent to which measures taken to minimize taxes will be successful. To the extent that WRP Newco and/or the Management Corps. are required to pay Federal, state or local taxes, the cash available to WRP Newco for distribution by the Surviving Trust, among its shareholders will be reduced accordingly. State and Local Taxes. The Surviving Trust and its shareholders may be subject to state or local taxation in various jurisdictions, including those in which it or they transact business or reside. The state and local tax treatment of the Surviving Trust and its shareholders may not conform to the Federal income tax consequences discussed above. Consequently, prospective shareholders should consult their own tax advisors regarding the effect of state and local tax laws on an investment in the shares of beneficial interest of the Surviving Trust. 117 INTERESTS OF CERTAIN PERSONS IN THE MERGER AND DISTRIBUTION In considering whether to approve the Merger, shareholders should be aware that certain members of the management of Wellsford and the Wellsford Board of Trustees have certain interests that arise in connection with the Merger and the Distribution that are in addition to the interests of shareholders of Wellsford generally. These interests arise under existing agreements with, and previously approved annual compensation awards from, Wellsford and proposed agreements with WRP Newco and the Surviving Trust. Benefits of Key Executives Each key executive of Wellsford, consisting of Messrs. Lynford, Lowenthal, Kelley, MacKenzie, Hughes and Strong, has an existing employment agreement with Wellsford that entitles him to certain benefits as described below. In addition, in prior years each of the executives has earned and received additional compensation in the form of share loans, grants of restricted shares and share options. Members of the Board of Trustees of Wellsford have also been granted share options over the years. Set forth below is a discussion of the treatment of the various benefits and other compensation to be paid in connection with the Merger to the key executives and the Trustees by reason of these pre-existing agreements. A. Severance Payments. Certain executive officers (but not Messrs. Lynford and Lowenthal) will be entitled to receive severance payments under their employment agreements as follows: $1,149,000 for Mr. Kelley, $764,070 for Mr. MacKenzie, $692,440 for Mr. Hughes, and $585,000 for Mr. Strong. B. Share Loans. Under the existing agreements, Wellsford's key executives previously purchased Wellsford Common over the years at their then fair market value, the purchase price of which was borrowed from Wellsford and evidenced by a ten-year promissory note. Under the agreements, 5% of the principal balance of the promissory notes is forgiven each year provided the executive remains in the employ of Wellsford and the remaining 50% is due at the end of the ten year term of the promissory note. Upon a change of control, such as the Merger, the then remaining principal balance of the loans will be forgiven for Messrs. Lynford, Lowenthal, Kelley, MacKenzie, Hughes, and Strong in the amounts of approximately $1.5 million, $1.5 million, $281,000, $1.1 million, $1.1 million and $369,000, respectively. C. Change In Control Share Grants. In accordance with the terms of the existing agreements between Wellsford and Messrs. Lynford, Lowenthal and Kelley, immediately prior to the Merger and Distribution, Messrs. Lynford, Lowenthal and Kelley will each be issued 22,346 shares of Wellsford Common, which shares will participate in the Distribution and Merger on the same basis as all other shares of Wellsford Common. 118 D. Restricted Share Grants. Restricted share grants have previously been made to Messrs. Lynford, Lowenthal, MacKenzie and Hughes, portions of which have vested and portions of which remain subject to forfeiture. All restricted shares, whether vested or not, will participate in the Distribution and Merger on the same basis as all other shares of Wellsford Common. Messrs. Lynford and Lowenthal each hold restricted share grants for 11,375 shares of Wellsford Common that will continue to remain subject to forfeiture restrictions. The shares of Survivor Common and the shares of WRP Newco Common to be received by Messrs. Lynford and Lowenthal on account of the 11,375 restricted shares of Wellsford Common held by each of them will be forfeited (as to 50% on January 1, 1998 and 50% on January 1, 1999) unless the Surviving Trust achieves on a consolidated basis a minimum 5% increase in funds from operations per share for the twelve-month period ending on the December 31 immediately preceding the applicable vesting date over FFO per share for the preceding twelve-month period. The portions of the restricted share grants issued to Messrs. MacKenzie and Hughes that remain subject to forfeiture will become fully vested at the Effective Time. Accordingly, 2,843 shares of Wellsford Common will vest upon the Merger for each of Messrs. MacKenzie and Hughes, which shares will participate in the Distribution and the Merger. E. Tax Payments. Pursuant to the existing employment agreements with the key executives of Wellsford, in connection with the Merger the Surviving Trust will pay on behalf of Messrs. Lynford, Lowenthal, Kelley, MacKenzie, Hughes and Strong approximately $2.6 million, $2.4 million, $420,000, $1.0 million, $1.1 million and $500,000, respectively, on account of the Federal, state and local income and excise tax liabilities to the Internal Revenue Service and the various state and local tax authorities. These payments are based on an estimated value of Wellsford Common at the Effective Time of $27.50 per share and will be adjusted based upon the actual value of Wellsford Common at the Effective Time. F. Wellsford Options. ------------------ Over the years, the key executives of Wellsford have been granted share options in connection with services previously rendered by them. The treatment of both the vested options and the nonvested options are described below. (a) Vested Options. -------------- All vested options (both incentive share options and nonqualified options) held by Messrs. Lynford, Lowenthal, Kelley, Hughes and Strong were exercised prior to the Merger by tendering existing shares of Wellsford Common in payment of the exercise price. The tendered shares of Wellsford Common were valued at $27.50 per share for purposes of payment of the exercise price regardless of their actual value on the date of exercise, and will be accounted for as a cost of the Merger. Pursuant to existing agreements, each executive officer that exercised a vested option was granted a new option to purchase additional shares of Wellsford Common at $27.50 per share (a "Reload Option"). These Reload Options issued to Messrs. Lynford, 119 Lowenthal, Kelley, Hughes and Strong will be assumed by WRP Newco and amended, thereby becoming options to purchase WRP Newco Common, as more fully described in (c) below. (b) Nonvested Options. ----------------- The nonvested portion of each Wellsford option held by Messrs. Lynford, Lowenthal, Hughes and Strong will be assumed by WRP Newco and amended thereby becoming an option to purchase WRP Newco Common, as more fully described in (c) below. (c) Assumed Options. --------------- For each of Messrs. Lynford, Lowenthal, Kelley, Hughes and Strong, WRP Newco will assume and amend their Wellsford nonvested options (other than Mr. Kelley) and Reload Options so that they become options to purchase WRP Newco Common. With respect to Wellsford nonvested nonqualified options and Reload Options, the number of WRP Newco nonqualified options will be calculated by dividing the value of such Wellsford options by the value of the option to purchase one share of WRP Newco Common. Reload Options will be valued using an exercise price of $27.50 per share. The exercise price of each WRP Newco nonqualified option will be the Issuance Price (as defined under "Certain Agreements between WRP Newco and ERP Operating Partnership -- Common Stock and Preferred Stock Purchase Agreement") and the term of each such WRP Newco option will be for an initial term of six years with a four year extension if the optionee is employed by WRP Newco at the end of four years. These options will become exercisable as follows: 25% after two years, an additional 25% after three years, an additional 25% after four years and the remaining 25% after five years from the date of the Merger. All options will be valued using a mathematical option pricing formula that incorporates certain assumptions, including an estimated value of the underlying shares, share option exercise prices, the duration of the share options and the volatility of the underlying shares (the "Option Pricing Formula"). Based on the foregoing, the total number of shares of WRP Newco Common subject to options with respect to Wellsford nonvested options (other than Mr. Kelley) and Reload Options assumed by WRP Newco will be approximately as follows: 427,534, 427,534, 162,049, 78,410 and 24,159, for Messrs. Lynford, Lowenthal, Kelley, Hughes and Strong, respectively. These amounts will be adjusted based upon the actual value of Wellsford Common (and the actual value of the Wellsford options assumed by WRP Newco) at the Effective Time. The nonvested incentive share options held by Messrs. Lynford, Lowenthal, Hughes and Strong will also be assumed by WRP Newco and amended to become WRP Newco incentive stock options. These amended options will continue to be nonvested incentive stock options just as they were before the Merger and will maintain the same vesting schedule as the Wellsford incentive share options assumed. These WRP Newco nonvested incentive stock options will reflect the inherent value of, and have a term equal to the remaining term of, the Wellsford incentive share options assumed, as required by Treasury Regulation Section 1.425-1(a). Based on the foregoing, the total number of shares of WRP Newco Common subject to options with 120 respect to Wellsford nonvested incentive share options assumed by WRP Newco will be approximately as follows: 25,171, 25,171, 24,195, and 16,467 for Messrs. Lynford, Lowenthal, Hughes and Strong, respectively. G. Options Held By Trustees. Outstanding options of Wellsford held by persons whose benefits are not described above will vest at the Effective Time and each such optionee will have the right to continue their option subject to adjustment for the Exchange Rate or the right to relinquish all option rights in exchange for a cash payment of $27.50 per share for each option relinquished less the exercise price per share. All existing options to purchase Wellsford Common granted to the non-employee Trustees of Wellsford (other than Mr. Du Bois) will be assumed by WRP Newco and amended thereby becoming options to purchase WRP Newco Common. The number of options to purchase WRP Newco Common will be calculated by dividing the value of each Trustee's existing options to purchase Wellsford Common by the value of the option to purchase one share of WRP Newco Common. The options to purchase WRP Newco Common will be exercisable immediately, and will have an initial term of six years (regardless of whether or not the optionee remains a director of WRP Newco) with a four-year extension if the optionee is a trustee or director of WRP Newco at the end of four years. The exercise price of the options to purchase WRP Newco Common shall be the Issuance Price. All options will be valued using the Option Pricing Formula. Options to purchase 15,000 shares of Wellsford Common have been previously granted to each of Messrs. Germain, Hoenemeyer and Sixt, respectively. These options will be assumed by WRP Newco and amended to become options to purchase approximately 38,515, 38,515 and 38,515 shares of WRP Newco Common, respectively, at the Effective Time, assuming a fair market value of Wellsford Common of $29.75 per share at the Effective Time. Options to purchase 15,000 shares of Wellsford Common previously held by Mr. Du Bois have been exercised by paying the exercise price. Agreements with the Surviving Trust and ERP Operating Partnership Consulting Agreements. Messrs. Lynford and Lowenthal will each execute a consulting agreement with ERP Operating Partnership. The consulting agreements will each be for a term of five years from the Effective Time. Pursuant to the consulting agreements each of Messrs. Lynford and Lowenthal will serve as a senior management consultant to ERP Operating Partnership and, in all events, will receive compensation at the rate of $200,000 per year plus reimbursement for reasonable out-of-pocket expenses. Appointment to Board of Trustees of Surviving Trust. At or shortly after the Effective Time, each of Messrs. Lynford and Lowenthal will be appointed to the Board of Trustees of the Surviving Trust for a term ending at the annual meeting of the Surviving Trust in the year 1997. EQR has agreed to cause Messrs. Lynford and Lowenthal to be nominated for election as trustees at the 1997 annual meeting of the Surviving Trust for a term ending at the annual meeting of the Surviving Trust in the year 2000. 121 Indemnification. The Surviving Trust will indemnify each trustee and officer of Wellsford to the same extent after the Effective Time as such individuals were indemnified by Wellsford prior to the Effective Time. Severance and Retention Benefits. As of the Effective Time, the Surviving Trust will adopt a severance and retention program (the "Retention Program") for specified employees of Wellsford who are not officers. The aggregate obligations of the Surviving Trust under the Retention Program will not exceed $544,575. Pursuant to the Retention Program, any employee who stays for 6 months after the Effective Time or is terminated without cause by the Surviving Trust will be entitled to a bonus in a specified amount. The Retention Program will not require the Surviving Trust to continue the employment of any employee of Wellsford after the Effective Time. Senior Officer. Mr. MacKenzie will be a Senior Vice President of the Surviving Trust at an initial salary of $175,000 per annum. Under his proposed employment arrangement, on the Effective Date, Mr. MacKenzie intends to exchange all rights under all of his existing Wellsford options for an option to purchase 52,903 shares of Survivor Common . These options will be fully vested on the date of issuance and will have an exercise price equal to the fair market value of Survivor Common on the date of issuance. In addition, on the Effective Date Mr. MacKenzie will receive an option to purchase 35,000 shares of Survivor Common. These options will vest over a period of three years and will have an exercise price equal to the fair market value of Survivor Common on the date of the grant. Mr. MacKenzie will also receive on the Effective Date an option to purchase an additional number of shares of Survivor Common which will be calculated by multiplying (i) the difference in value, if any, between a share of EQR Common on the date of his initial agreement to work for EQR (February 7, 1997) and a share of Survivor Common on the date of the grant by (ii) 87,903, and then dividing the resulting number by eight. These additional options will vest over three years and will have an exercise price equal to the fair market value of Survivor Common on the date of the grant. Agreements with WRP Newco Employment Agreements. WRP Newco will enter into employment agreements as of the Effective Time with Messrs. Lynford and Lowenthal, which will expire on December 31, 2002 and will provide for cash compensation to be paid to each of them of $275,000 per annum. WRP Newco will also enter into employment agreements as of the Effective Time with Messrs. Hughes and Strong, which will expire two years after the Effective Time, and will provide for annual cash compensation to be paid to each of them of $175,000 and $125,000, respectively. Each of Messrs. Lynford, Lowenthal, Hughes and Strong are also entitled to incentive compensation as determined by the Compensation Committee. In addition, Mr. Hughes is entitled to incentive compensation equal to at least 50% of his annual base salary. See "Management of WRP Newco -- Employment Agreements." 122 Split Dollar Life Insurance. The existing split dollar life insurance arrangements between Wellsford and Messrs. Lynford and Lowenthal will be assumed by WRP Newco. Consultant. Upon completion of the Merger, William Cockrum, a consultant to Wellsford, will receive a consulting fee of $500,000, payable $250,000 in cash and $250,000 by the issuance of shares of WRP Newco Common. New Options. In addition to the stock options in WRP Newco Common referred to in "-- Benefits to Key Executives," immediately following the Distribution and Merger, WRP Newco intends to grant new stock options to purchase shares of WRP Newco Common to WRP Newco's non-employee directors and certain executive officers. WRP Newco intends to grant options to purchase 42,750 shares of WRP Newco Common to each of Messrs. Du Bois, Germain, Hoenemeyer and Sixt, options to purchase 21,375 shares of WRP Newco Common to Mr. Crocker, and options to purchase 85,500 shares of WRP Newco Common to each of Messrs. Lynford, Lowenthal, Hughes and Strong. 123 SURVIVING TRUST SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA The following tables set forth the selected unaudited pro forma combined financial data for the Surviving Trust as a combined entity, giving effect to the Merger as if it had occurred on the dates indicated herein, after giving effect to the pro forma adjustments described in the notes to the unaudited pro forma financial statements included elsewhere in the Joint Proxy Statement/Prospectus/Information Statement. The selected unaudited pro forma combined operating data are presented as if the Merger had been consummated at the beginning of the period presented. The selected unaudited pro forma combined balance sheet data is presented as if the Merger had occurred on December 31, 1996. The Merger has been accounted for under the purchase method of accounting in accordance with the Accounting Principles Board Opinion No. 16. In the opinion of management, all significant adjustments necessary to reflect the effects of the Merger have been made. The selected pro forma financial information should be read in conjunction with, and is qualified in its entirety by, the respective historical audited financial statements and notes thereto of EQR and Wellsford incorporated by reference into this Joint Proxy Statement/Prospectus/Information Statement and the unaudited pro forma financial statements and notes thereto included elsewhere in the Joint Proxy Statement/Prospectus/Information Statement. The selected unaudited pro forma operating and balance sheet data are presented for comparative purposes only and are not necessarily indicative of what the actual combined results of EQR and Wellsford would have been for the period and dates presented. Nor does such data purport to represent the results of future periods. 124 SURVIVING TRUST ---------------
OPERATING DATA: Pro Forma Year Ended December 31, 1996 ----------------- REVENUES: (Amount in thousands except Rental income $578,820 Fee and asset management 6,749 Interest income-investment in mortgage notes 12,819 Interest and other income 11,061 -------- Total revenues 609,449 -------- EXPENSES: Property and maintenance 167,526 Real estate taxes and insurance 54,010 Property management 21,506 Fee and asset management 3,837 Depreciation 124,211 Interest: Expense incurred 103,538 Amortization of deferred financing costs 4,242 General and administrative 10,353 -------- Total Expenses 489,223 -------- Income before gain on disposition of properties and (loss) on joint venture communities 120,226 Gain on disposition of properties 22,336 (Loss) on joint venture communities (58) -------- Income before extraordinary item and allocation to Minority Interests 142,504 Extraordinary Item: Write-off of unamortized cost on refinanced debt (3,512) -------- Income before allocation to Minority Interests 138,992 Income allocated to Minority Interests (15,706) -------- Net income 123,286 Preferred distributions 41,563 -------- Net income available for Common Shares $ 81,723 ======== Net income per weighted average Common Share outstanding $1.53 ======== Weighted average Common Shares outstanding 53,317 ========
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Pro Forma December 31, 1996 ----------------- BALANCE SHEET DATA: (at end of period) Real estate, after accumulated depreciation $3,708,310 Total assets $3,968,482 Total debt $1,576,869 Minority Interests $ 190,793 Shareholders' Equity $2,048,133
126 EQUITY RESIDENTIAL PROPERTIES TRUST SELECTED HISTORICAL AND COMBINED FINANCIAL DATA The following tables set forth selected historical and combined financial data for EQR. The selected historical combined financial data for each of the years ended December 31, 1992, 1993, 1994 , 1995 and 1996 are derived from the audited financial statements of EQR as reported in its Annual Reports on Form 10-K . The selected historical financial data should be read in conjunction with, and is qualified in its entirety by, the historical and combined financial statements and notes thereto of EQR incorporated by reference into this Joint Proxy Statement/Prospectus/Information Statement. 127 EQUITY RESIDENTIAL PROPERTIES TRUST CONSOLIDATED AND COMBINED HISTORICAL FINANCIAL INFORMATION (Amounts in thousands except per share data)
Year Ended December 31, -------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- OPERATING DATA: REVENUES Rental income $454,412 $373,919 $220,727 $104,388 $ 86,597 Fee and asset management 6,749 7,030 4,739 4,651 4,215 Interest income-investment in mortgage notes 12,819 4,862 -- -- -- Interest and other income 4,405 4,573 5,568 3,031 2,161 -------- -------- -------- -------- ------- Total revenues 478,385 390,384 231,034 112,070 92,973 -------- -------- -------- -------- ------- EXPENSES Property and maintenance 127,172 112,186 66,534 35,324 30,680 Real estate taxes and insurance 44,128 37,002 23,028 11,403 10,274 Property management 17,512 15,213 10,249 4,938 2,912 Property management - non-recurring -- -- 879 -- -- Fee and asset management 3,837 3,887 2,056 2,242 2,403 Depreciation 93,253 72,410 37,273 15,384 13,442 Interest: Expense incurred 81,351 78,375 37,044 26,042 31,926 Amortization of deferred financing costs 4,242 3,444 1,930 3,322 2,702 Refinancing costs -- -- -- 3,284 -- General and administrative 9,857 8,129 6,053 1,994 1,915 -------- -------- --------- -------- ------- Total expenses 381,352 330,646 185,046 103,933 96,254 -------- -------- --------- -------- -------
128
Year Ended December 31, --------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- -------- --------- Income (loss) before gain on disposition of properties, extraordinary items and allocation to Minority Interests 97,033 59,738 45,988 8,137 (3,281) Gain on disposition of properties 22,402 21,617 -- -- -- ---------- ---------- ---------- -------- --------- Income (loss) before extraordinary items and allocation to Minority Interests 119,435 81,355 45,988 8,137 (3,281) Extraordinary Items: Write-off of unamortized costs on refinanced debt (3,512) -- -- -- -- Gain on early extinguishment of debt -- 2,000 -- -- -- Gain on discharge of indebtedness -- -- -- 1,792 18,203 ---------- ---------- ---------- -------- --------- Income (loss) before allocation to Minority Interests 115,923 83,355 45,988 9,929 14,922 Income allocated to Minority Interests (14,299) (15,636) (11,570) (3,834) -- ---------- ---------- ---------- -------- --------- Net income (loss) 101,624 67,719 34,418 6,095 14,922 Preferred distributions (29,015) (10,109) -- -- -- ---------- ---------- ---------- -------- --------- Net income (loss) available for Common Shares $ 72,609 $ 57,610 $ 34,418 $ 6,095 $ 14,922 ========== ========== ========== ======== ========= Net income per weighted average Common Share outstanding $ 1.70 $ 1.68 $ 1.34 $ .42 -- Weighted average Common Shares outstanding 42,586 34,358 25,621 14,601 -- BALANCE SHEET DATA (at end of period): Real estate, after accumulated depreciation $2,983,510 $2,186,636 $1,963,476 $634,577 $ 358,212 Real estate, after accumulated depreciation $2,681,998 $1,969,453 $1,770,735 $478,210 $ 218,825 Total assets $2,986,127 $2,141,260 $1,847,685 $535,914 $ 238,878 Total debt $1,254,274 $1,002,219 $ 994,746 $278,642 $ 343,282 Minority Interests 150,637 $ 168,963 $ 177,438 $ 83,159 $ -- Shareholders' Equity (Net Deficit) $1,458,830 $ 884,517 $ 609,936 $146,485 $(122,094)
129 WELLSFORD RESIDENTIAL PROPERTY TRUST SELECTED HISTORICAL FINANCIAL DATA The following tables set forth selected historical financial data for Wellsford. The selected historical financial data for each of the years ended December 31, 1992, 1993, 1994, 1995 and 1996 are derived from the audited financial statements of Wellsford as reported in its Annual Reports on Form 10-K. The selected historical financial data should be read in conjunction with, and is qualified in its entirety by, the historical financial statements and notes thereto of Wellsford incorporated by reference into this Joint Proxy Statement/Prospectus/Information Statement. Certain reclassifications have been made to Wellsford's historical financial data to conform to EQR's presentation. 130 WELLSFORD RESIDENTIAL PROPERTY TRUST SELECTED HISTORICAL FINANCIAL DATA
Year Ended December 31, Historical (000s except per share data) -------------------------------------------------------- 1996 1995 1994 1993 1992 -------------------------------------------------------- Revenues $ 131,821 $ 131,232 $ 82,794 $ 42,007 $ 26,229 Expenses (109,035) (113,712) (73,299) (34,816) (26,991) Gain (loss) on sale of investment communities (66) (819) -- 882 -- Loss on joint venture (58) (279) -- -- -- communities --------- --------- -------- -------- -------- Income (loss) before extraordinary item $ 22,662 $ 16,422 $ 9,495 $ 8,073 $ (762) ========= ========= ======== ======== ======== Net income (loss) $ 22,662 $ 10,869 $ 9,495 $ 8,073 $ (762) Preferred dividends (12,548) (8,973) (7,000) (972) -- --------- --------- -------- -------- -------- Net income (loss) available for common shareholders $ 10,114 $ 1,896 $ 2,495 $ 7,101 $ (762) ========= ========= ======== ======== ======== Net income (loss) per common share $0.59 $ 0.11 $ 0.25 $0.91 $(0.34) ========= ========= ======== ======== ======== Weighted average number of common shares outstanding 17,057 16,938 10,070 7,813 2,273 ========= ========= ======== ======== ========
131 WELLSFORD RESIDENTIAL PROPERTY TRUST SELECTED HISTORICAL FINANCIAL DATA
Year Ended December 31, ----------------------- Historical (000s except share data) ================================================== 1996 1995 1994 1993 1992 -------------------------------------------------- Real Estate assets before accumulated depreciation $795,580 $736,399 $747,519 $301,389 $156,568 Real estate assets after accumulated depreciation 711,614 677,908 712,742 282,224 143,787 Total Assets 756,289 729,638 745,754 322,400 165,963 Mortgages Payable 82,731 77,137 208,858 24,203 17,155 Convertible note payable -- -- -- 46,070 55,358 Unsecured credit facility 18,075 -- 140,000 -- -- Senior unsecured notes 248,496 223,307 -- -- -- Shareholders' equity 376,686 398,359 371,655 239,775 89,986 Cash dividends declared per Series A preferred share $ 1.75 $ 1.75 $ 1.75 $ 0.24 $ -- ======== ======== ======== ======== ======== Cash dividends declared per Series B preferred share $ 2.41 $ 0.86 $ -- $ -- $ -- ======== ======== ======== ======== ======== Cash dividends declared per common share $ 1.94 $ 1.92 $ 1.80 $ 1.68 $ 0.16 ======== ======== ======== ======== ========
132 SURVIVING TRUST BASIS OF PRESENTATION TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF DECEMBER 31, 1996 The Unaudited Pro Forma Combined Balance Sheet gives effect to the proposed Merger of Equity Residential Properties Trust ("EQR") and Wellsford Residential Property Trust ("Wellsford") as if the Merger had occurred on December 31, 1996. The Unaudited Pro Forma Combined Balance Sheet gives effect to the Merger under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16. In the opinion of management, all significant adjustments necessary to reflect the effects of the Merger have been made. The Unaudited Pro Forma Combined Balance Sheet is presented for comparative purposes only and is not necessarily indicative of what the actual combined financial position of EQR and Wellsford would have been at December 31, 1996, nor does it purport to represent the future combined financial position of EQR and Wellsford. This Unaudited Pro Forma Combined Balance Sheet should be read in conjunction with, and is qualified in its entirety by, the respective historical financial statements and notes thereto of EQR and Wellsford incorporated by reference into the Joint Proxy Statement/Prospectus/Information Statement. 133 SURVIVING TRUST UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro Forma Surviving Trust EQR WRP Merger Pro Forma Historical Historical (A) Adjustments (B) Combined ASSETS Rental property, net $2,681,998 $689,403 $336,909 (C) $3,708,310 Real Estate held for disposition -- -- -- -- Construction in progress -- 22,211 (21,306) (D) 905 Investment in mortgage notes, net 86,596 17,800 (17,800) (E) 86,596 Cash and cash equivalents 147,271 10,811 (67,112) (F) 90,970 Rents receivables 1,450 -- -- 1,450 Deposits-restricted 20,637 7,667 (5,520) (G) 22,784 Escrows deposits-mortgage 15,434 -- -- 15,434 Deferred financing costs, net 14,555 5,401 (5,401) (H) 14,555 Other assets 18,186 2,996 6,296 (I) 27,478 ---------- -------- -------- ---------- Total assets $2,986,127 $756,289 $226,066 $3,968,482 ========== ======== ======== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage notes payable $ 755,434 $ 82,731 $ (8,632) (J) $ 829,533 Line of credit -- 18,075 (18,075) (K) -- Notes, net 498,840 248,496 -- 747,336 Accounts payable and accrued expenses 33,117 15,617 -- 48,734 Accrued interest payable 12,737 -- -- 12,737 Due to affiliates 628 -- -- 628 Rents received in advance and other liabilities 15,838 -- -- 15,838 Security deposits 14,128 3,250 -- 17,378 Distributions payable 45,938 11,434 -- 57,372 ---------- -------- -------- ---------- Total liabilities 1,376,660 379,603 (26,707) 1,729,556 ---------- -------- -------- ---------- Commitments and contingencies (L) Minority Interests 150,637 -- 40,156 (M) 190,793 (M) ---------- -------- -------- ---------- Shareholders' equity: Common shares 512 171 (64) (N) 619 Preferred shares 393,000 63 (63) (O) 393,000 Series D Convertible Preferred Shares -- -- 99,995 (O) 99,995 Series E Preferred Shares -- -- 57,500 (O) 57,500 Employee notes (5,255) (6,553) 6,553 (P) (5,255) Paid in capital 1,146,989 461,290 (29,589) (Q) 1,578,690 Distributions in excess of accumulated earnings (76,416) (78,285) 78,285 (R) (76,416) ---------- -------- -------- ---------- Total Shareholders' Equity 1,458,830 376,686 212,617 2,048,133 ---------- -------- -------- ---------- Total liabilities and shareholders' equity $2,986,127 $756,289 $226,066 $3,968,482 ========== ======== ======== ==========
134 SURVIVING TRUST BASIS OF PRESENTATION TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 The Unaudited Pro Forma Combined Statement of Operations for the year ended December 31, 1996 is presented as if the Merger had occurred on January 1, 1996. The Unaudited Pro Forma Combined Statement of Operations gives effect to the Merger under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, and the combined entity qualifying as a REIT, distributing at least 95% of its taxable income, and therefore, incurring no federal income tax liability for the year. In the opinion of management, all significant adjustments necessary to reflect the effects of these transactions have been made. The Unaudited Pro Forma Combined Statement of Operations is presented for comparative purposes only and is not necessarily indicative of what the actual combined results of EQR and Wellsford would have been for the year ended December 31, 1996, nor does it purport to be indicative of the results of operations in future periods. The Unaudited Pro Forma Combined Statement of Operations should be read in conjunction with, and are qualified in their entirety by, the respective historical financial statements and notes thereto of EQR and Wellsford incorporated by reference into this Joint Proxy Statement/Prospectus/Information Statement. 135 SURVIVING TRUST UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
Surviving Trust EQR Wellsford Merger Pro Forma Historical Historical (S) Adjustments Combined REVENUES Rental Income $454,412 $124,408 $ (757)(T) $578,820 Fee and asset management 6,749 - 6,749 Interest income-investment in mortgage notes 12,819 757 12,819 Interest and other income 4,405 6,656 11,061 -------- -------- -------- -------- Total revenues 478,385 131,821 (757) 609,449 -------- -------- -------- -------- EXPENSES Property and maintenance 127,172 40,354 167,526 Real estate taxes and insurance 44,128 9,882 54,010 Property management 17,512 4,770 (776)(U) 21,506 Fee and asset management 3,837 - 3,837 Depreciation 93,253 25,179 5,779 (V) 124,211 Interest: Expense incurred 81,351 23,599 (1,412)(W) 103,538 Amortization of deferred financing costs 4,242 1,386 (1,386)(X) 4,242 General and administrative 9,857 3,865 (3,369)(Y) 10,353 -------- -------- -------- -------- Total expenses 381,352 109,035 (1,164) 489,223 -------- -------- -------- -------- Income before gain on disposition of properties, (loss) on joint venture communities, extraordinary items and allocation to Minority Interests 97,033 22,786 407 120,226 Gain (loss) on disposition of properties 22,402 (66) - 22,336 (Loss) on joint venture communities - (58) - (58) -------- -------- -------- -------- Income before extraordinary items 119,435 22,662 407 142,504 Extraordinary item: Write-off of unamortized costs on refinanced debt (3,512) - - (3,512) -------- -------- -------- -------- Income before allocation to Minority Interests 115,923 22,662 407 138,992 (Income) allocated to Minority Interests (14,299) - (1,407)(Z) (15,706) -------- -------- -------- -------- Net income 101,624 22,662 (1,000) 123,286 Preferred distributions (29,015) (12,548) (41,563) -------- -------- -------- -------- Net income available to common shares $ 72,609 $ 10,114 $ (1,000) $ 81,723 ======== ======== ======== ======== Net income per weighted average Common Shares outstanding $ 1.70 $ 0.59 $ 0.16 $ 1.53 ======== ======== ======== ======== Weighted average Common Shares Outstanding 42,586 17,057 (6,326)(AA) 53,317 ======== ======== ======== ========
136 SURVIVING TRUST NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA) (A) Certain reclassifications have been made to Wellsford's historical balance sheet to conform to EQR's balance sheet presentation. (B) Represents adjustments to record the Merger in accordance with the purchase method of accounting, based upon the assumed purchase price of $1,032,226 assuming a market value of $44.00 per share of EQR's common shares, as follows:
Issuance of 10,731 common shares of beneficial interest of EQR, based on the .625 exchange rate, in exchange for 17,169 common shares of Wellsford, which includes 67 common shares of Wellsford issued immediately prior to the merger $ 472,164 Issuance of EQR Series D Preferred Shares of Beneficial Interest 99,995 Issuance of EQR Series E Preferred Shares of Beneficial Interest 57,500 Assumption of Wellsford's liabilities, net of spin-off to WRP NewCo of $6,786 372,817 Adjustment to increase the assumed Wellsford debt to its fair value (see Note J) 6,123 Merger costs (see calculation below) 23,627 ---------- $1,032,226 ========== The value of the issuance of the EQR Series D Preferred Shares of Beneficial Interest and the EQR Series E Preferred Shares of Beneficial Interest is based upon Wellsford's outstanding shares of 3,999.8 Series A Convertible Preferred Shares with a liquidation preference at $25 per share and Wellsford's outstanding shares of 2,300 Series B Preferred Shares with a liquidation preference at $25 per share, respectively. The following is a calculation of the estimated fees and other expenses related to the Merger: Employee termination costs $ 10,063 Buyout of stock options 4,227 Advisory fees 2,350 Legal and accounting fees 2,225 Consulting contracts 2,000 Other, including printing, filing, transfer and spin-off costs 2,762 ---------- TOTAL $ 23,627 ========== (C) Represents the estimated increase in Wellsford's rental property, net based upon EQR's purchase price and the adjustment to eliminate the basis of Wellsford's net assets acquired: Purchase Price (see Note B) $1,032,226 Less: Historical basis of Wellsford's net assets acquired Rental property, net 689,403 Construction in progress, net of spin-off to WRP NewCo of $21,306 905 Restricted deposits, net of spin-off to WRP NewCo of $5,520 2,147 Other assets, net of spin-off to WRP NewCo of $134 2,862 ---------- Step-up to record fair value of Wellsford rental property $ 336,909 ========== (D) Decrease reflects the spin-off of costs related to the Palomino Park project to WRP NewCo. (E) Decrease results from the spin-off of the Sonterra mortgage notes receivable to WRP NewCo.
137 SURVIVING TRUST NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(F) Decrease to Cash and Cash Equivalents reflects the following: Spin-off of WRP NewCo, including an investment of $2,930 for EQR's 20% interest in the Palomino Park project (see Note I) $21,710 The expected payment for Merger (see Note B) and registration costs (see Note Q) 23,827 Repayment of Wellsford's line of credit 18,075 EQR's purchase of WRP NewCo common stock 3,500 ------- $67,112 ======= (G) Decrease results from the spin-off of restricted cash to WRP NewCo for the Palomino Park project. (H) Decrease due to elimination of Wellsford deferred loan costs in connection with the Merger. (I) Increase to Other Assets reflects the following: EQR purchase of WRP NewCo common stock $ 3,500 EQR's 20% investment in the Palomino Park project 2,930 Spin-off to WRP NewCo of interest receivable related to the Sonterra mortgage notes receivable. (134) ------- $ 6,296 ======= (J) Decrease to Mortgage Notes Payable reflects the following: Spin-off of bonds on the Palomino Park project to WRP NewCo $14,755 Premium required to adjust Wellsford's debt to its estimated fair value (6,123) ------- $ 8,632 =======
(K) Reflects the repayment of Wellsford's line of credit from EQR's cash balances. It is assumed that additional Wellsford borrowings of $7,969 that would be incurred in connection with the spin-off of WRP NewCo are repaid from EQR's cash balances. (L) ERP Operating Partnership has committed to acquire up to 1,000 shares of WRP NewCo Series A 8% Convertible Redeemable Preferred Stock; has provided stand-by obligations with respect to a $36,800 agreement with respect to the construction financing of Phase I of Palomino Park and $30,000 pursuant to an agreement expected to be entered into with respect to the construction financing for Phase II of Palomino Park; and a $14,800 credit enhancement with respect to bonds issued to finance certain public improvements at Palomino Park. (M) The pro forma allocation to the Minority Interests is based upon the percentage owned by such Minority Interests as follows:
Total Shareholders' Equity and Minority Interests $2,238,926 Less: Preferred Shares, Series D Convertible and Series E Preferred shares (550,495) ---------- 1,688,431 Minority Interests percentage ownership in ERP Operating Partnership (see Note Q) 11.3% ---------- Pro Forma Combined Minority Interests ownership in ERP Operating Partnerships 190,793 EQR historical Minority Interests ownership in ERP Operating Partnership 150,637 ---------- Adjustment to Minority Interests ownership in ERP Operating Partnership $ 40,156 ==========
138 SURVIVING TRUST NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA) (N) Decrease results from elimination of Wellsford common shares at $.01 par value ($171) net of the issuance of EQR common shares at $.01 par value $107 (see Note C). O) Elimination of $63 of Wellsford Preferred Shares and the issuance of $99,995 of EQR Series D Convertible Preferred Shares and of $57,500 of EQR Series E Preferred Shares (see Note C). P) Reflects the elimination of restricted stock and the forgiveness of all of Wellsford's employee notes as a result of the Merger. Q) Decrease to paid in capital to reflect the following:
Issuance of 10,731 EQR common shares at $44.00 per share $ 472,164 Par value of common shares issued (107) Registration costs incurred in connection with the Merger (200) Wellsford's historical shareholders' equity (461,290) Adjustment to Minority Interests ownership in ERP Operating Partnership (see Note M) (40,156) ----------- $ (29,589) ===========
The 11.3% Minority Interests ownership in EQR, is calculated as follows:
Shares Units ------ ----- Wellsford's historical Shares outstanding 17,169 -- =========== ========= EQR's Shares/Units to be issued based on the .625 Merger exchange ratio 10,731 10,731 EQR's historical Shares/Units outstanding 51,155 59,013 ----------- --------- EQR's proforma Shares/Units outstanding 61,886 69,744 =========== ========= EQR ownership percentage of ERP Operating Partnership 88.7% =========== Minority Interests ownership percentage of ERP Operating Partnership 11.3% ===========
R) Reflects the elimination of Wellsford's distribution in excess of accumulated earnings to paid in capital, as a result of the Merger. 139 SURVIVING TRUST NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (S) Certain reclassifications have been made to Wellsford's Historical Statement of Operations to conform to EQR's Statement of Operations presentation. (T) Decrease results from the loss of interest income related to the spin-off of the $17,800 Sonterra mortgage notes receivable to WRP NewCo. (U) Decrease results from operating efficiencies expected to occur as a result of the Merger. (V) Represents the net increase in depreciation of real estate owned as a result of recording the Wellsford real estate assets at fair value versus historical cost. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets which have a useful life of approximately 30 years.
The calculation of the fair value of depreciable real estate assets at December 31, 1996 is as follows: Historical basis of Wellsford's rental property $ 689,403 Plus: Step up to Wellsford's rental property, net (see Note C) 336,909 ------------------ Pro forma basis of Wellsford's rental property at fair value 1,026,312 Less: Fair value allocated to land (102,631) ------------------ Pro forma basis of Wellsford's depreciable rental property at fair value $ 923,681 ================== Calculation of depreciation of rental property for the year ended December 31, 1996 is as follows: Depreciation expense based upon an estimated useful life of approximately $ 30,789 30 years Less: historic Wellsford depreciation of rental property (25,010) ------------------ Pro forma adjustment $ 5,779 ================== (W) Decrease results from the amortization of the premium required to record Wellsford's debt at it's estimated fair value. (X) Decrease results from the elimination of amortization of Wellsford's deferred financing costs, which costs would be eliminated in connection with the Merger. (Y) Decrease results from identified historic costs of certain items which are anticipated to be eliminated or reduced as a result of the Merger as follows: Duplication of public company expenses $ 626 Net reduction in salary, benefits and occupancy 1,732 Other 1,011 ------------------- Total $ 3,369 ===================
(Z) A portion of income was allocated to Minority Interests representing interests in ERP Operating Partnership not owned by EQR. The pro forma allocation to Minority Interests (represented by OP Units) is based upon the percentage estimated to be owned by such Minority Interests as a result of the pro forma transactions. (AA) Decrease of Weighted Average Common Shares Outstanding based on the conversion of Wellsford common shares to EQR common shares at a conversion ratio of .625 Wellsford shares per EQR share and a par value of $.01. 140 POLICIES OF THE SURVIVING TRUST WITH RESPECT TO CERTAIN ACTIVITIES The following section sets forth the policies expected to be implemented by the Surviving Trust upon the effectiveness of the Merger with respect to certain matters. These policies may be amended or revised from time to time at the discretion of the Board of Trustees of the Surviving Trust without a vote of the shareholders of the Surviving Trust. Business Objectives and Operating Strategies The Surviving Trust will seek to maximize both current income and long-term growth in income. The Surviving Trust will focus on acquiring multifamily properties that have strong cash flow potential with the intent to hold such properties for long-term investment and capital appreciation. The Surviving Trust's primary business objectives are to increase distributions on a per share of Survivor Common basis, to increase the value of its properties and to increase shareholders' value. The Surviving Trust's strategies for accomplishing these objectives will be: . maintaining and increasing property occupancy while increasing rental rates; . controlling expenses, providing regular preventive maintenance, making periodic renovations and enhancing amenities; . maintaining a Debt to Total Market Capitalization Ratio of less than 50%; and . pursuing acquisitions that: (i) are available at prices below estimated replacement costs; (ii) have potential for rental rate and/or occupancy increases; (iii) have attractive locations in their respective markets; and (iv) provide anticipated total returns that will increase the Surviving Trust's distributions per share of Survivor Common and the Surviving Trust's overall market value. The Surviving Trust will be committed to tenant satisfaction by striving to anticipate industry trends and implementing strategies and policies consistent with providing quality tenant services. In addition, the Surviving Trust will continuously survey rental rates of competing properties and conduct satisfaction surveys of residents to determine the factors they consider most important in choosing a particular apartment unit. 141 Acquisition Strategies The Surviving Trust anticipates that future property acquisitions will be located in the continental United States. Management will use market information to evaluate acquisition opportunities. The Surviving Trust's market data base will allow it to review the primary economic indicators of the markets where the Surviving Trust currently manages properties and where it expects to expand its operations. Acquisitions may be financed from various sources of capital, which may include undistributed funds from operations, issuance of additional equity securities, sales of properties and collateralized and uncollateralized borrowings. In addition, the Surviving Trust may acquire additional multifamily properties in transactions that include the issuance of OP Units as consideration for the acquired properties. Such transactions may, in certain circumstances, partially defer the sellers' tax consequences. When evaluating potential acquisitions, the Surviving Trust will consider: (i) the geographic area and type of community; (ii) the location, construction quality, condition and design of the property; (iii) the current and projected cash flow of the property and the ability to increase cash flow; (iv) the potential for capital appreciation of the property, (v) the terms of resident leases, including the potential for rent increases; (vi) the potential for economic growth and the tax and regulatory environment of the community in which the property is located; (vii) the occupancy and demand by residents for properties of a similar type in the vicinity (the overall market and submarket); (viii) the prospects for liquidity through sale, financing or refinancing of the property; and (ix) competition from existing multifamily properties and the potential for the construction of new multifamily properties in the area. The Surviving Trust expects to purchase multifamily properties with physical and market characteristics similar to the properties. Disposition Strategies Management will use market information to evaluate dispositions. The Surviving Trust intends to dispose of its properties in cities or markets where the level of new construction is increasing or the economy is expected to decline substantially. The Surviving Trust will also dispose of properties in markets where it does not intend to establish long-term concentrations. The Surviving Trust will reinvest the proceeds received from property dispositions to fund property acquisitions. In addition, when feasible the Surviving Trust will structure these transactions as tax deferred exchanges. Investment Policies Investments in Real Estate or Interests in Real Estate. The Surviving Trust's investment objectives will be to increase cash flow and the value of the properties, and to acquire established income-producing multifamily properties with cash flow growth potential. Additionally, where prudent and possible, the Surviving Trust will seek to upgrade its existing properties and any newly acquired multifamily properties. The Surviving Trust's business is 142 focused on multifamily properties, although such properties may include retail and recreational facilities. The Surviving Trust's policy will be to acquire assets primarily for current income generation and long-term value appreciation; however, where appropriate, the Surviving Trust will sell certain of its properties. The Surviving Trust expects to pursue its investment objectives through the direct and indirect ownership of properties and the ownership of interests in other entities. The Surviving Trust will focus on properties in those markets where the Surviving Trust currently has operations and in new markets targeted by management. Future investments, including the activities described below, will not be limited to any geographic area or to a specified percentage of the Surviving Trust's assets. The Surviving Trust also may participate with other entities in property ownership through joint ventures or other types of co- ownership. Equity investments may be subject to existing mortgage financing and other indebtedness or such financing or indebtedness may be incurred in connection with acquiring investments. Any such financing or indebtedness will have priority over the Surviving Trust's equity interest in such property. Investments in Real Estate Mortgages. While the Surviving Trust will emphasize equity real estate investments in multifamily properties, it may, in its discretion, invest in mortgages and other interests related to multifamily properties. The Surviving Trust does not intend to invest to a significant extent in mortgages or deeds of trust, but may acquire mortgages as a strategy for acquiring a property, subject to the investment restrictions applicable to REITs. The mortgages in which the Surviving Trust may invest may be either first mortgages or junior mortgages, and may or may not be insured by a governmental agency. The Surviving Trust may also invest in mortgage-related securities. Furthermore, the Surviving Trust may seek to issue securities representing interest in such mortgage-related securities as a method of raising additional funds. Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers. Subject to the gross income and asset tests for REIT qualification, the Surviving Trust also may invest in securities of entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities. The Surviving Trust may acquire all or substantially all of the securities or assets of other REITs or similar entities where such investments would be consistent with the Surviving Trust's investment policies. In any event, the Surviving Trust does not intend that its investments in securities will require it to register as an "investment company" under the Investment Surviving Trust Act of 1940, and the Surviving Trust would intend to divest securities before any such registration would be required. Financing Policies The Surviving Trust intends to maintain a Debt to Total Market Capitalization Ratio of 50% or less. The Surviving Trust, however, may from time to time re-evaluate this policy and 143 decrease or increase such ratio in light of then current economic conditions, relative costs to the Surviving Trust of debt and equity capital, market values of the properties, growth and acquisition opportunities and other factors. There will be no limit on the Surviving Trust's Debt to Total Market Capitalization Ratio imposed by the Surviving Trust's Declaration of Trust or Bylaws. To the extent that the Board of Trustees of the Surviving Trust determines to obtain additional capital, the Surviving Trust may issue debt or equity securities, or cause ERP Operating Partnership to issue additional OP Units, or retain earnings (subject to provisions in the Code requiring distributions of income to maintain REIT status), or a combination of these methods. As long as ERP Operating Partnership is in existence, the proceeds of all equity capital raised by the Surviving Trust will be contributed to ERP Operating Partnership in exchange for additional interests in ERP Operating Partnership, which will dilute the ownership interest of holders of OP Units. It is the Surviving Trust's policy that it shall not incur indebtedness other than short-term trade, employee compensation, dividends payable or similar indebtedness that will be paid in the ordinary course of business, and that indebtedness shall instead be incurred by the ERP Operating Partnership to the extent necessary to fund the business activities conducted by the ERP Operating Partnership. The Surviving Trust owns several properties that are subject to restrictive covenants or deed restrictions relating to current or previous tax-exempt bond financings and owns the bonds collateralized by several additional properties. The Surviving Trust has retained an independent outside consultant to monitor compliance with the restrictive covenants and deed restrictions that affect these properties. The bond compliance requirements may have the effect of limiting the Surviving Trust's income from these properties if the Surviving Trust is required to lower its rental rates to attract low or moderate income tenants, or eligible/qualified tenants. To the extent that the Board of Trustees determines to obtain debt financing the Surviving Trust intends to do so generally through mortgages on its properties and through lines of credit; however, the Surviving Trust may also issue additional debt securities in the future. Such indebtedness may be recourse, non-recourse or cross-collateralized and may contain cross-default provisions. The Surviving Trust will not have a policy limiting the number or amount of mortgages that may be placed on any particular property, but mortgage financing instruments usually limit additional indebtedness on such properties. In the future, the Surviving Trust may seek to extend, expand, reduce or renew its lines of credit, or obtain new credit facilities or lines of credit, subject to its general policy on debt capitalization, for the purpose of making acquisitions or capital improvements or providing working capital to the Surviving Trust or meeting the taxable income distribution requirements for REITs under the Code if the Surviving Trust has taxable income without receipt of cash sufficient to enable the Surviving Trust to meet such distribution requirements. Lending Policies Although it is not presently contemplated, the Surviving Trust may consider offering purchase money financing in connection with the sale of multifamily properties where the 144 provision of such financing will increase the value received by the Surviving Trust for the property sold. Policies with Respect to Other Activities Although it is not presently contemplated, the Surviving Trust may make investments other than as previously described. All investments will be related to the multifamily residential business. The Surviving Trust will have authority to offer Survivor Common or other equity or debt securities in exchange for property or other REITS and to repurchase or otherwise reacquire Survivor Common or any other securities and may engage in such activities in the future. Similarly, the Surviving Trust may offer additional OP Units or other equity interests in ERP Operating Partnership that are exchangeable into Survivor Common in exchange for property. The Surviving Trust may also make loans to joint ventures in which it may participate in the future. The Surviving Trust will not engage in trading, underwriting or the agency distribution or sale of securities of other issuers. At all times, the Surviving Trust intends to make investments in such a manner as to be consistent with the requirements of the Code to qualify as a REIT unless, because of circumstances or changes in the Code (or the regulations promulgated thereunder), the Board of Trustees determines that it is no longer in the best interests of the Surviving Trust to continue to have the Surviving Trust qualify as a REIT. The Surviving Trust's policies with respect to such activities may be reviewed and modified from time to time by the Surviving Trust's trustees without notice to or the vote of the shareholders. MANAGEMENT AND OPERATION OF THE SURVIVING TRUST AFTER THE MERGER Trustees and Executive Officers The following table sets forth as of the consummation of the Merger the names, positions and ages of the executive officers and trustees of the Surviving Trust.
Name Position Age - ---------------------- -------------------------------------------------- --- Samuel Zell Chairman of the Board of Trustees (term expires 55 in 1999) Douglas Crocker II President, Chief Executive Officer and Trustee 56 (term expires in 1998) David J. Neithercut Executive Vice President and Chief Financial 41 Officer Gregory H. Smith Executive Vice President-Asset Management 46 Gerald A. Spector Executive Vice President, Chief Operating Officer 50 and Trustee (term expires in 1998)
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Name Position Age ---- -------- --- Bruce C. Strohm Executive Vice President, General Counsel and 42 Secretary Frederick C. Tuomi Executive Vice President-Property Management 42 Alan W. George Executive Vice President-Acquisitions 39 Michael J. McHugh Senior Vice President, Chief Accounting Officer 41 and Treasurer John W. Alexander Trustee (term expires in 1999) 50 Henry H. Goldberg Trustee (term expires in 1999) 58 Errol R. Halperin Trustee (term expires in 1999) 56 James D. Harper, Jr. Trustee (term expires in 1998) 63 Sheli Z. Rosenberg Trustee (term expires in 1998) 55 Barry S. Sternlicht Trustee (term expires in 1997) 36 B. Joseph White Trustee (term expires in 1997) 49 Jeffrey H. Lynford Trustee (term expires in 1997)* 49 Edward Lowenthal Trustee (term expires in 1997)* 52
*After the Effective Time, each of Messrs. Lynford and Lowenthal will be appointed to the Board of Trustees of the Surviving Trust for a term ending at the annual meeting of the Surviving Trust in the year 1997. EQR has agreed to cause Messrs. Lynford and Lowenthal to be nominated for election as trustees at the Surviving Trust's 1997 annual meeting for a term ending at the annual meeting of the Surviving Trust in the year 2000. The following is a biographical summary as of March 1, 1997 of the experience of the executive officers and trustees of the Surviving Trust. Samuel Zell has been Chairman of the Board of EQR since March 1993. Mr. Zell is chairman of the board of directors of Equity Group Investments, Inc., an owner, manager and financier of real estate and corporations ("EGI"), American Classic Voyages Co., an owner and operator of cruise lines ("American Classic"), and Anixter International Inc., a provider of integrated network and cabling systems ("Anixter"). Mr. Zell is chairman of the board and chief executive officer of both Capsure Holdings Corp., a holding company whose principal subsidiaries are specialty property and casualty insurers ("Capsure"), and Manufactured Home Communities, Inc., a REIT specializing in the ownership and management of manufactured home communities ("MHC"). He is co-chairman of the board of directors of Revco D.S., Inc., 146 a drugstore chain ("Revco"), and is a director of Quality Food Centers, Inc., an owner and operator of supermarkets, Sealy Corporation, a bedding manufacturer ("Sealy"), Ramco Energy PLC, an independent oil company based in the United Kingdom, and TeleTech Holdings, Inc., a provider of telephone and computer based customer care solutions. Douglas Crocker II has been President, Chief Executive Officer and a Trustee of EQR since March 1993. Mr. Crocker is a director of Horizon Group, Inc., an owner, developer and operator of outlet retail properties. Mr. Crocker has been president and chief executive officer of First Capital Financial Corporation, a sponsor of public limited real estate partnerships ("First Capital"), since December 1992 and a director since January 1993. He has been an executive vice president of Equity Financial and Management Company ("EF&M"), a subsidiary of EGI, providing strategic direction and services for EGI's real estate and corporate activities since November 1992. From September 1992 until November 1992, Mr. Crocker was a managing director of investment banking with Prudential Securities, an investment banking firm. He was a director and president of Republic Savings Bank, a national chartered savings and loan association ("Republic"), from December 1988 to June 1992, at which time the Resolution Trust Corporation took control of Republic. David J. Neithercut has been Executive Vice President and Chief Financial Officer of EQR since February 1995. Mr. Neithercut had been Vice President-- Financing of EQR from September 1993 until February 1995. Mr. Neithercut was a senior vice president--finance of EGI from January 1995 until February 1995. He was a vice president--finance of Equity Assets Management, Inc., a subsidiary of EGI providing real estate ownership services ("EAM"), from October 1990 until December 1994. Gregory H. Smith has been Executive Vice President--Asset Management of EQR since December 1994. Mr. Smith was a senior vice president of Strategic Realty Advisors, Inc., a real estate and advisory company, from January 1994 until December 1994. Mr. Smith had been employed at VMS Realty Partners, a sponsor of public and private real estate limited partnerships, from June 1989 until December 1993, most recently serving as first vice president. Gerald A. Spector has been a Trustee and Executive Vice President of EQR since March 1993 and Chief Operating Officer of EQR since February 1995. Mr. Spector was the Treasurer of EQR from March 1993 through February 1995. Mr. Spector had been an officer of EF&M since January 1973, most recently serving as vice president from November 1994 through January 1996. Mr. Spector was executive vice president and chief operating officer of EF&M from September 1990 through November 1994. Mr. Spector had been an officer of EGI since January 1998, most recently serving as vice president from November 1994 through January 1996. Mr. Spector was executive vice president and chief operating officer of EGI from January 1991 through January 1994. Bruce C. Strohm has been Executive Vice President and General Counsel of EQR since March 1995 and Secretary since November 1995. Mr. Strohm was an Assistant Secretary since 147 March 1995 and Vice President of EQR since its formation. Mr. Strohm was a vice president of Rosenberg & Liebentritt, P.C., a law firm ("R&L"), most recently serving as a member of the firm's management committee. Frederick C. Tuomi has been Executive Vice President--Property Management of EQR since January 1994. Mr. Tuomi had been president of RAM Partners, Inc., a subsidiary of Post Properties, Inc., a REIT, from March 1991 to January 1994. Mr. Tuomi was president of Pilot Property Company, a property management company, from July 1988 until March 1991. Alan W. George has been Executive Vice President - Acquisitions of EQR since February 1997, Senior Vice President-Acquisitions of EQR from December 1995 until February 1997 and Vice President-Acquisitions and asset manager of EQR from December 1993 to December 1995. Mr. George was vice president-asset management of EAM from June 1992 until August 1993. He was vice president-asset management for American Real Estate Group, a real estate investment company, from 1990 to 1992. Michael J. McHugh has been Senior Vice President of EQR since November 1994 and Chief Accounting Officer and Treasurer of EQR since February 1995. From May 1990 until January 1995, Mr. McHugh was senior vice president and chief financial officer of First Capital. John W. Alexander has been a Trustee of EQR since May 1993. Mr. Alexander has been the president of Mallard Creek Capital Partners, Inc., primarily an investment company with interests in real estate and development entities, since February 1994. He is a partner of Meringoff Equities, a real estate investment and development company, and is a director of Jacor Communications, Inc., an owner and operator of radio stations ("Jacor"). Henry H. Goldberg has been a Trustee of EQR since January 1995. Mr. Goldberg is chairman of the board, chief executive officer and founder of Artery Properties, Inc. Founded in 1959, Artery Properties, Inc. is a diversified real estate company. Mr. Goldberg was the direct or indirect general partner (or an executive thereof) of seven partnerships owning residential apartment communities and one commercial office building, each of which filed petitions under the Federal bankruptcy laws during 1992 and 1993. Each of the partnerships is now out of bankruptcy through a reorganization plan agreed to by the project lender. Errol R. Halperin became a Trustee of EQR in May 1993. Mr. Halperin has been an attorney at Rudnick & Wolfe, a law firm, since 1979, serving as a senior partner and a member of such firm's policy committee since 1981, specializing in Federal income tax counseling and real estate and corporate transactions. James D. Harper, Jr. became a Trustee of EQR in May 1993. Since 1982, Mr. Harper has been president of JDH Realty Co., a real estate development and investment company. Since 1988, he has been a co-managing partner in AH Development, S.E. and AH HA 148 Investments, S.E., special limited partnerships formed to develop over 400 acres of land in Puerto Rico. Sheli Z. Rosenberg has been a Trustee of EQR since March 1993. She is a principal of the law firm of R&L. Ms. Rosenberg is chief executive officer, president and a director of EGI. Ms. Rosenberg has been a director of Jacor since 1994 and has been the chairman of its board of directors since February 1996. Ms. Rosenberg is a director of Capsure, Falcon Building Products, Inc., a manufacturer and supplier of building products ("Falcon"), American Classic, MHC, Anixter, Sealy, and Revco. Barry S. Sternlicht became a Trustee of EQR in May 1993. Mr. Sternlicht has been chief executive officer and president of Starwood Capital Group, L.P. since 1993 and president of Starwood Capital Partners, L.P., a privately owned real estate investment firm, since its formation in 1991. Mr. Sternlicht is chairman of the board and chief executive officer of Starwood Lodging Trust, a REIT specializing in the ownership of hotels, and co-chairman of the board of Westin Hotels & Resorts Company, an owner and operator of hotels. Mr. Sternlicht is a director of Angeles Participating Mortgage Trust, a mortgage REIT, U.S. Franchise Systems, a hotel franchise company, and Starwood Lodging Corporation, which manages hotels owned by Starwood Lodging Trust. B. Joseph White became a Trustee of EQR since May 1993. Mr. White has been a professor at the University of Michigan Business School since 1987 and has served as Dean since 1991. Mr. White is a director of Falcon, Union Pump Company, a manufacturer of pumps, and Kelly Services, Inc., an employment agency. For biographical descriptions of Jeffrey H. Lynford and Edward Lowenthal see "Management of WRP Newco-Directors and Executive Officers." Committees of the Board of Trustees There will be three standing committees of the Board of Trustees of the Surviving Trust: the Executive Committee, the Compensation Committee and the Audit Committee, which are described further below. Executive Committee: The Executive Committee will be comprised of Messrs. Alexander, Crocker and Zell. The Executive Committee will have the authority within certain parameters to acquire, dispose of and finance investments for the Surviving Trust and execute contracts and agreements, including those related to the borrowing of money by the Surviving Trust, and generally exercise all other powers of the Board, except as prohibited by law. 149 Compensation Committee: The Compensation Committee will be comprised of Messrs. Halperin and Harper and Ms. Rosenberg. Mr. Harper will be the chairman. The Compensation Committee will review and make recommendations concerning proposals by management with respect to compensation, bonuses, employment agreements and other benefits and policies respecting such matters for the executive officers of the Surviving Trust. Audit Committee: The Audit Committee will be comprised of Messrs. White, Alexander, Halperin, Sternlicht and Goldberg. Mr. White will be the chairman. The Audit Committee will make recommendations concerning the engagement of independent public accountants, review the plans and results of the audit engagement with the independent public accountants, approve professional services provided by the independent public accountants, review the independence of the independent public accountants, consider the range of audit and non-audit fees and review the adequacy of the Surviving Trust's internal accounting controls. Compensation of Trustees Trustees who are not employees of the Surviving Trust receive an annual fee of $20,000 for serving as trustees. In addition, trustees who serve on the Audit Committee, the Executive Committee or the Compensation Committee will receive an additional $1,000 per annum for each committee on which they serve. Committee chairs receive an additional $500 per annum. The Surviving Trust will also reimburse the trustees of each committee for travel expenses incurred in connection with their activities on behalf of the Surviving Trust. Each trustee will also be granted options to purchase 5,000 shares of Survivor Common at the fair market value of such shares at the close of business on the date of the first trustees' meeting following each annual meeting of shareholders. Consulting Agreements Messrs. Lynford and Lowenthal will each execute a consulting agreement with ERP Operating Partnership. The consulting agreements will each be for a term of five years from the Effective Time. Pursuant to the consulting agreements, each of Messrs. Lynford and Lowenthal will serve as a senior management consultant to ERP Operating Partnership and, in all events, will receive compensation at the rate of $200,000 per year plus reimbursement for reasonable out-of-pocket expenses. COMPARISON OF RIGHTS OF SHAREHOLDERS At the Effective Time, the shareholders of Wellsford and EQR will become shareholders of the Surviving Trust. The rights of Wellsford's shareholders are presently governed by Title 8 of the Corporations and Associations Article of the Annotated Code of Maryland ("Title 8"), the Wellsford Declaration, and the Wellsford Bylaws. The rights of EQR's shareholders are presently governed by Title 8, the EQR Declaration and EQR Bylaws. The rights of the 150 shareholders of the Surviving Trust will be governed by Title 8, the Surviving Trust's Declaration and the Surviving Trust's Bylaws. Upon approval of the Merger by the Wellsford Common Shareholders and at the Effective Time, the Wellsford Declaration will be amended and restated to substantially conform the Wellsford Declaration to the terms of the EQR Declaration (except for the Additional Provisions that require approval by a two-thirds vote of the Wellsford Common Shareholders, which are being voted upon separately). The Wellsford Declaration, as amended and restated (including, if so approved, the Additional Provisions) will serve as the Surviving Trust's Declaration. The following discussion summarizes certain significant differences between the rights of shareholders of EQR, Wellsford and the Surviving Trust as a result of certain of these amendments. This summary does not purport to be complete and is subject to and qualified in its entirety by reference to the EQR Declaration and Bylaws, the Wellsford Declaration and Bylaws and the Surviving Trust's Declaration and Bylaws. In addition, upon the separate approval by an affirmative vote of the holders of not less than two-thirds of the outstanding shares of Wellsford Common, the Declaration of the Surviving Trust will be modified to include the Additional Provisions. See "Proposal Regarding Additional Declaration of Trust Provisions." This summary does not take into account the modifications contemplated by the Additional Provisions, which are discussed in "Proposal Regarding Additional Declaration of Trust Provisions." Rights of the shareholders of EQR and Wellsford which are and will remain the same after the Merger are not discussed. Authorized and Issued Shares The Wellsford Declaration authorizes the issuance of 100,000,000 shares of beneficial interest, which consists of shares of Wellsford Common and such other types or classes as the Wellsford Board of Trustees may create and authorize from time to time and designate as representing a beneficial interest in Wellsford. The designation and number of outstanding shares of beneficial interest of Wellsford as of April 21, 1997, was as follows: (i) 17,261,897 of Wellsford Common; (ii) 3,999,800 shares of Wellsford Series A; and (iii) 2,300,000 shares of Wellsford Series B. The EQR Declaration authorizes the issuance of 110,000,000 shares of beneficial interest, of which 100,000,000 are EQR Common and 10,000,000 are Preferred Shares which may be issued from time to time, in one or more series. The designation and number of outstanding shares of beneficial interest in EQR as of April 1, 1997, was as follows: (i) 53,713,158 of EQR Common; (ii) 6,120,000 shares of EQR Series A; (iii) 500,000 shares of EQR Series B represented by 5,000,000 depository shares; (iv) 460,000 shares of EQR Series C represented by 4,600,000 depository shares; and (v) no excess shares of beneficial interest. The Declaration of the Surviving Trust will authorize the issuance of 300,000,000 shares of beneficial interest, of which 200,000,000 will be shares of Survivor Common and 100,000,000 will be preferred shares of beneficial interest of the Surviving Trust, of which (a) 6,900,000 shares have been designated as 9-3/8% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, (b) 575,000 shares have been designated as 9-1/8% Series B Cumulative Redeemable Shares of Beneficial Interest, (c) 460,000 shares have been designated as 9-1/8% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, (d) 4,600,000 shares have been designated as Series D Cumulative Convertible Preferred Shares of Beneficial Interest and (e) 2,300,000 shares have been designated as Series E Cumulative Redeemable Preferred Shares of Beneficial Interest. Shares of beneficial interest may be 151 issued from time to time, as authorized by the Board of Trustees of the Surviving Trust. As of the Effective Date, the designation and number of the outstanding shares of beneficial interest in the Surviving Trust, based upon the shares outstanding as of April 1, 1997, will be as follows: (i) 64,483,878 of Survivor Common; (ii) 6,120,000 of Survivor Series A; (iii) 500,000 of Survivor Series B represented by 5,000,000 depository shares; (iv) 460,000 of Survivor Series C represented by 4,600,000 depository shares; (v) 3,999,800 of Survivor Series D; and (vi) 2,300,000 of Survivor Series E. Amendment to Declaration and Bylaws As permitted by Title 8, the Wellsford Declaration provides that the Wellsford Board of Trustees may, by a two-thirds vote, amend the Wellsford Declaration from time to time in order to enable Wellsford to qualify and remain qualified as a REIT under the Code and Title 8. Except as set forth in the preceding sentence and in the Articles Supplementary that set forth the rights and preferences of the holders of Wellsford Preferred, the Wellsford Declaration may be amended only by the affirmative vote of the holders of not less than a majority of the shares of beneficial interest then outstanding and entitled to vote thereon, and in certain cases may be amended only by the affirmative vote of the holders of not less than two-thirds of such shares. Amendments to the provisions of the Wellsford Declaration relating to the removal of trustees, the restrictions on ownership of its shares of beneficial interest, the reorganization of Wellsford and mergers, consolidations and sales of all or substantially all of Wellsford's property must be approved by the affirmative vote of holders of not less than two-thirds of the shares of beneficial interest then outstanding and entitled to vote on the matter. As permitted by Title 8, the EQR Declaration provides that the EQR Board of Trustees may, by a two-thirds vote, amend the EQR Declaration from time to time in order to enable EQR to qualify and remain qualified as REIT under the Code and under Title 8. Except as set forth in the previous sentence and in the terms of preferred shares of beneficial interest, the EQR Declaration may be amended only by the affirmative vote of the holders of not less than two-thirds of the shares of beneficial interest then outstanding and entitled to vote thereon. The Declaration of the Surviving Trust will provide for its amendment in the same manner as the Wellsford Declaration. The amendment provisions of the Declaration of the Surviving Trust will also be affected by the Additional Provisions, if approved. See "Proposal Regarding Additional Declaration of Trust Provisions." Special Meetings The Wellsford Bylaws provide that the chairman, the president or one-third of the trustees of Wellsford may call a special meeting of Wellsford's shareholders. A special meeting shall also be called by the secretary of Wellsford upon the written request of holders of shares entitled to cast not less than a majority of all the votes entitled to be cast at such meeting. 152 The EQR Bylaws provide that the chairman, the president or one-third of the trustees of EQR may call a special meeting of EQR's shareholders. A special meeting shall be called by the secretary of EQR upon the written request of EQR Shareholders entitled to cast not less than 25% of all the votes entitled to be cast at such meeting. The Bylaws of the Surviving Trust will provide for special meetings in the same manner as the EQR Bylaws. Boards of Trustees The Wellsford Declaration states that the trustees of Wellsford shall be divided into three classes as nearly equal in number as possible, with the term of each class of trustees expiring at the annual meeting of shareholders in the third year following the year of their election. This classified Board of Trustees could have the effect of making the removal of incumbents more time consuming and difficult, which could delay, defer or prevent a third party from making a timely offer or otherwise attempting to obtain control, even though such an attempt might be beneficial to the company and its shareholders. Thus, the classified board could increase the likelihood that incumbents will retain their positions. The Wellsford Declaration provides that a trustee may be removed, with or without cause, by the affirmative vote of the holders of not less than two- thirds of the shares of beneficial interest then outstanding and entitled to vote in the election of trustees. Amendments to this section of the Wellsford Declaration must be approved by the holders of not less than two-thirds of the shares of beneficial interest outstanding and entitled to vote on the matter. The EQR Declaration contains substantially similar provisions regarding the classification of trustees as the Wellsford Declaration; however, the EQR Declaration provides that a trustee may be removed only with cause, by the vote of the holders of not less than two-thirds of the shares of beneficial interest then outstanding and entitled to vote in the election of trustees. The EQR Declaration defines cause as (i) material theft, fraud or embezzlement or active and deliberate dishonesty by a trustee, (ii) habitual neglect of duty by a trustee having a material and adverse significance to the trust, or (iii) the conviction of a trustee for a felony or of any crime involving moral turpitude. The Declaration of the Surviving Trust will contain provisions paralleling those of the Wellsford Declaration relating to the classification and removal of trustees. The method of removing trustees under the Declaration of the Surviving Trust will also be affected by the Additional Provisions, if approved. See "Proposal Regarding Additional Declaration of Trust Provisions." 153 Mergers, Consolidations, and Sale of Substantially all Assets Declaration Provisions. Under the Wellsford Declaration, any merger or consolidation involving Wellsford or any sale or other disposition of all or substantially all of Wellsford's property must be approved by its trustees and submitted to its shareholders for approval, such approval to be obtained by the affirmative vote of (i) holders of not less than two-thirds of all the shares of beneficial interest then outstanding and entitled to vote thereon, if Wellsford is not the surviving entity in any merger or consolidation or in the event of a proposed sale or disposition of all or substantially all of Wellsford's property, or (ii) holders of not less than a majority of all the shares of beneficial interest then outstanding and entitled to vote thereon, in all other cases. Amending this section of the Wellsford Declaration requires the affirmative vote of the holders of two-thirds of the shares of beneficial interest outstanding and entitled to vote on the matter. The EQR Declaration does not address the vote required for a merger or consolidation involving EQR or EQR's property. Under Title 8, a merger must be approved by the affirmative vote of two-thirds of all the shareholders entitled to vote on the matter unless otherwise provided in the declaration of trust. The Declaration of the Surviving Trust will contain provisions paralleling those of the Wellsford Declaration relating to shareholder approval of mergers, consolidations and sales of assets. The Declaration of the Surviving Trust will provide that the Surviving Trust may sell or otherwise dispose of all or substantially all of its property only upon the affirmative vote of the holders of not less than two-thirds of all the shares then outstanding and entitled to vote on the matter. These shareholder approval requirements for mergers, consolidations and sales of assets under the Declaration of the Surviving Trust will also be affected by the Additional Provisions, if approved. See "Proposal Regarding Additional Declaration of Trust Provisions." Statutory Restrictions. Under the MGCL, certain "business combinations" (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland REIT and (i) any person who beneficially owns 10% or more of the voting power of the REIT's shares or an affiliate of the REIT who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting shares of beneficial interest of the REIT (an "Interested Shareholder) or (ii) an affiliate of an Interested Shareholder are prohibited for five years after the most recent date on which the Interested Shareholder becomes an Interested Shareholder. Thereafter, any such business combination must be recommended by the Board of Trustees of such REIT and approved by the affirmative vote of at least (a) 80% of the votes entitled to be cast by holders of outstanding shares of the REIT and (b) two-thirds of the votes entitled to be cast by holders of voting shares of the REIT other than shares held by the Interested Shareholder with whom (or with whose affiliate) the business combination is to be effected, unless, among other conditions, the REIT's common shareholders 154 receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form previously paid by the Interested Shareholder for its shares. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by the board of trustees of the REIT prior to the time that the Interested Shareholder becomes an Interested Shareholder. The Surviving Trust will exempt any business combination involving Mr. Zell, the Zell Holders, EPMC and their respective affiliates and associates, present or future, or any other person acting in concert or as a group with any of the foregoing persons and, consequently, the five-year prohibition and the super-majority vote requirements will not apply to a business combination between any of them and the Surviving Trust. In addition to the restrictions on certain business combinations, the MGCL also provides that "control shares" of a Maryland REIT acquired in a "control share acquisition" have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquiror, by officers or by directors who are employees of the REIT. "Control Shares" are voting shares which, if aggregated with all other such shares previously acquired by the acquiror, or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing trustees within one of the following ranges of voting power: (i) one-fifth or more but less than one-third, (ii) one-third or more but less than a majority, or (iii) a majority or more of all voting power. A "control share acquisition" means the acquisition of control shares, subject to certain exceptions. Despite these restrictions on Control Share acquisitions, the MGCL provides that a REIT may effectively exempt itself from such restrictions by a provision contained in its Declaration or Bylaws. The Wellsford Bylaws and EQR Bylaws both contain provisions stating that the restrictions regarding Control Shares will not apply to any acquisition of its shares by any person, and the Bylaws of the Surviving Trust will contain a similar provision. Restrictions on the Ownership, Transfer or Issuance of Shares The Wellsford Declaration, subject to certain exceptions, provides that no holder (other than (i) Edward Lowenthal and Jeffrey H. Lynford, and (ii) any other person approved by the trustees) may own more than 9.8% (the "WRP Ownership Limit") of the lesser of the number or value (in either case as determined in good faith by the trustees) of the total outstanding shares of beneficial interest. The Wellsford Declaration provides that the trustees may waive the WRP Ownership Limit if evidence satisfactory to the trustees and to Wellsford's tax counsel is presented that such ownership will not then or in the future jeopardize Wellsford's status as a REIT. As a condition of such waiver, the intended transferee must give written notice to Wellsford of the proposed transfer and must furnish such opinions of counsel, affidavits, undertakings, agreements and information as may be required by the trustees no later than the 15th day prior to any transfer which, if consummated, would result in the intended transferee owning shares in excess of the WRP Ownership Limit. The foregoing restrictions on transferability and ownership will not apply if the Wellsford Board of Trustees determines that 155 it is no longer in the best interests of Wellsford to attempt to qualify, or to continue to qualify, as a REIT. Any transfer of shares of beneficial interest that would (i) create a direct or indirect ownership of shares of beneficial interest in excess of the WRP Ownership Limit, (ii) result in the shares of beneficial interest being owned by fewer than 100 persons, or (iii) result in Wellsford being "closely held" within the meaning of Section 856(h) of the Code, will be null and void, and the intended transferee will acquire no rights to such shares of beneficial interest. The Wellsford Declaration provides that Wellsford, by notice to the holder thereof, may purchase any or all shares of beneficial interest of Wellsford (the "Excess Shares") that are proposed to be transferred pursuant to a transfer which, if consummated, would result in the intended transferee owning shares of beneficial ownership in excess of the WRP Ownership Limit or would otherwise jeopardize Wellsford's REIT status. The purchase price of any Excess Shares will be equal to the fair market value of such excess Shares as reflected in the closing sales price for the shares of beneficial interest, if then listed on a national securities exchange. From and after the date fixed for purchase by the trustees, the holder of such shares of beneficial interest to be purchased by Wellsford will cease to be entitled to dividends, distributions, voting rights and other benefits with respect to such shares except the right to payment of the purchase price for the shares. Any dividend or distribution paid to a proposed transferee on Excess Shares prior to the discovery by Wellsford that such shares of beneficial interest have been transferred in violation of the provisions of the Wellsford Declaration shall be repaid to Wellsford upon demand. If the foregoing transfer restrictions are determined to be void or invalid by virtue of any legal decision, statute, rule or regulation, then the intended transferee of any Excess Shares may be deemed, at Wellsford's option, to have acted as an agent on behalf of Wellsford in acquiring such Excess Shares and to hold such Excess Shares on behalf of Wellsford. The Wellsford Declaration requires that all persons who own, directly or indirectly, more than 5% in number or value of the total outstanding shares of beneficial interest of Wellsford must give a written notice to Wellsford containing the information specified in the Wellsford Declaration by January 31 of each year. In addition, each shareholder irrespective of such shareholder's ownership shall upon demand be required to disclose to Wellsford in writing such information with respect to the direct, indirect and constructive ownership of beneficial interests as the trustees deem necessary to comply with the provisions of the Code applicable to a REIT, to comply with the requirements of any taxing authority or governmental agency or to determine any such compliance. The EQR Declaration, subject to certain exceptions, provides that no holder may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 5% (the "EQR Ownership Limit") of the lesser of the number of shares or value of the issued and outstanding shares of beneficial interest of EQR. The EQR Board of Trustees, upon receipt of a ruling from the Service, an opinion of counsel or other evidence satisfactory to the EQR Board of Trustees and upon such other conditions as the EQR Board of Trustees may direct, may also exempt a proposed transferee from the EQR Ownership Limit. As a condition of such exemption, the intended transferee must give written notice to EQR of the proposed transfer no 156 later than the fifteenth day prior to any transfer which, if consummated, would result in the intended transferee owning shares in excess of the EQR Ownership Limit. Any transfer of EQR Common or EQR Preferred that would (i) create a direct or indirect ownership of shares of beneficial interest in excess of the EQR Ownership Limit, (ii) result in the shares of beneficial interest being owned by fewer than 100 persons, or (iii) result in EQR being "closely held" within the meaning of Section 856(h) of the Code, will be void ab initio, and the intended transferee will acquire no rights to the shares of beneficial interest. The foregoing restrictions on transferability and ownership will not apply if the EQR Board of Trustees determines that it is no longer in the best interests of EQR to attempt to qualify, or to continue to qualify, as a REIT. EQR's Declaration exempts from the Ownership Limit certain persons and entities who would exceed the Ownership Limit as a result of the exchange of the OP Units for EQR Common, which OP Units were received by them at the time of the formation of EQR. These persons may also acquire additional EQR Shares through EQR's Second Amended and Restated 1993 Share Option and Share Award Plan (the "Option and Award Plan"), but in no event will such persons be entitled to acquire additional shares of beneficial interest such that the five largest beneficial owners of EQR's shares of beneficial interest hold more than 50% in number or value of the total outstanding EQR Shares. Any EQR Shares the transfer of which would result in a person owning shares of beneficial interest in excess of the Ownership Limit or cause EQR to become "closely held" under Section 856(h) of the Code that is not otherwise permitted as provided above will constitute excess shares ("Excess Shares"), which will be transferred by operation of law to EQR as trustee for the exclusive benefit of the person or persons to whom the Excess Shares are ultimately transferred, until such time as the intended transferee retransfers the Excess Shares. While these Excess Shares are held in trust, they will not be entitled to vote or to share in any distributions (except upon liquidation). Subject to the Ownership Limit, the Excess Shares may be retransferred by the intended transferee to any person (if the Excess Shares would not be Excess Shares in the hands of such person) at a price not to exceed the price paid by the intended transferee or, if the intended transferee did not give value for such Excess Shares (e.g., a transfer by gift or devise), the fair market value (as described below) at the time of the purported transfer that resulted in the Excess Shares, at which point the Excess Shares will automatically be exchanged for the shares of beneficial interest to which the Excess Shares are attributable. In addition, such Excess Shares held in trust are subject to purchase by EQR at a purchase price equal to the lesser of the price paid for the Excess Shares in the transaction that created such Excess Shares (or, in the case of a devise or gift, the fair market value at the time of such devise or gift) and the fair market value of the EQR Preferred or EQR Common to which such Excess Shares relate on the date EQR exercises its right to purchase. Fair market value will be the last sales price of such shares of beneficial interest reported on the NYSE on the trading day immediately preceding the relevant date, or if not then traded on the NYSE, the last reported sales price of such shares of beneficial interest on the trading day immediately preceding the relevant date as reported on any exchange or quotation system over which such 157 shares of beneficial interest may be traded, or if not then traded over any exchange or quotation system, then the fair market value of such shares of beneficial interest on the relevant date as determined in good faith by the EQR Board of Trustees. EQR's right to purchase shall be for a period of 90 days after the later of the date of the purported transfer which resulted in the Excess Shares and the date the EQR Board of Trustees determines in good faith that such a transfer has occurred. From and after the intended transfer to the intended transferee of the Excess Shares, the intended transferee will cease to be entitled to distributions (except upon liquidation), voting rights and other benefits with respect to such shares except the right to payment of the purchase price for the shares or the retransfer of shares as provided above. Any distribution paid to a proposed transferee on Excess Shares prior to the discovery by EQR that such shares of beneficial interest have been transferred in violation of the provisions of EQR's Declaration will be repaid to EQR upon demand. If the foregoing transfer restrictions are determined to be void or invalid by virtue of any legal decision, statute, rule or regulation, then the intended transferee of any Excess Shares may be deemed, at the option of EQR, to have acted as an agent on behalf of EQR in acquiring such Excess Shares and to hold such Excess Shares on behalf of EQR. All certificates representing shares of beneficial interest of EQR shall bear a legend referring to the restrictions described above. All persons who own, directly or by virtue of the attribution provisions of the Code, more than 5% (or such other percentage between 1/2 of 1% and 5% as provided in the rules and regulations promulgated under the Code) of the lesser of the number or value of the outstanding shares of beneficial interest of EQR must give a written notice to EQR by January 31 of each year. In addition, each shareholder will upon demand be required to disclose to EQR in writing such information with respect to the direct, indirect and constructive ownership of EQR Shares as the EQR Board of Trustees deems reasonably necessary to comply with the provisions of the Code applicable to a REIT, to comply with the requirements of any taxing authority or governmental agency or to determine any such compliance. The Declaration of the Surviving Trust will contain restrictions on the ownership, transfer and issuance of Survivor Shares generally similar to those restrictions contained in the EQR Declaration. The provisions relating to restrictions on the ownership, transfer or issuance of shares contained in the Surviving Trust will also be affected by the Additional Provisions, if approved. See "Proposal Regarding Additional Declaration of Trust Provisions." PROPOSAL REGARDING ADDITIONAL DECLARATION OF TRUST PROVISIONS The Wellsford Common Shareholders are being asked to separately approve the Additional Provisions to the Surviving Trust Declaration (defined herein) to further conform the Surviving Trust Declaration to the terms of the EQR Declaration and to update the Surviving Trust Declaration to reflect the current approaches in the REIT industry regarding share ownership restrictions necessary to maintain REIT status. The Wellsford Declaration, as amended and restated to 158 include or exclude the Additional Provisions depending on the requisite approval of the Wellsford Common Shareholders ("Surviving Trust Declaration"), will constitute the declaration of the Surviving Trust. As described in the following summary of the Additional Provisions, the Board of Trustees of each of Wellsford and EQR believe that the Additional Provisions would be in the best interests of the shareholders of the Surviving Trust. The Wellsford Common Shareholders are therefore being asked to separately approve modifications to certain sections, including Sections 2.3, 6.6, 9.1, 9.2 and 9.3 of, and the addition of Article VII to, the Surviving Trust Declaration. The following is a summary of the Additional Provisions as to which the approval of the Wellsford Common Shareholders is being requested. Removal of Trustees. Section 2.3 of the Wellsford Declaration currently provides for the removal of trustees, with or without cause, by the affirmative vote of the holders of not less than two-thirds of the shares of Wellsford Common then outstanding and entitled to vote on the election of trustees. Upon approval of the Additional Provisions, the Surviving Trust Declaration will provide for the removal of trustees only with cause by the same vote previously required. "Cause" will be defined as (a) material theft, fraud or embezzlement or active and deliberate dishonesty by a trustee; (b) habitual neglect of duty by a trustee having a material and adverse significance to the Surviving Trust; or (c) the conviction of a trustee for a felony or for any crime involving mortal turpitude. The Board of Trustees of each of Wellsford and EQR believe that the increased stability of management that would result from this amendment is in the best interest of the shareholders of the Surviving Trust. Restrictions on Transfer and Ownership of Shares. In order to maintain its status as a REIT under the Code and Title 8, Section 6.6 of the Wellsford Declaration currently imposes a number of restrictions on the transfer and ownership of Wellsford Shares. See "Comparison of Rights of Shareholders - Restrictions on the Ownership, Transfer or Issuance of Shares." Since the adoption of the Wellsford Declaration in 1992, the comparable section of the declarations of other REITs has evolved into a more detailed provision relating to the applicable ownership limits and compliance with the Code. Upon approval of the Additional Provisions, these provisions will be modified to reflect the effects of the Merger and the Surviving Trust's relationship with ERP Operating Partnership. Among the specific amendments to be made will be the inclusion of provisions exempting the exchange of OP Units into Survivor Shares from the definition of "transfer." In addition, certain persons and entities who would otherwise exceed the ownership limits placed on Survivor Shares will be exempted from such ownership restrictions in order to avoid their forced divestment of such shares or OP Units. Upon approval of the Additional Provisions, any transfer of shares resulting in a person owning shares in excess of the ownership limits placed on the Survivor Shares shall be automatically transferred to a charitable trust for the benefit of a charitable beneficiary. For the reasons stated above, the Board of Trustees of each of Wellsford and EQR believe that the Additional Provisions affecting 159 the ownership and transfer of Survivor Shares are in the best interest of the shareholders of the Surviving Trust. Amendment to Declaration. Section 9.1 of the Wellsford Declaration currently provides for its amendment by the affirmative vote of the holders of not less than a majority of the Wellsford Shares outstanding and entitled to vote thereon, except that amendments related to the removal of trustees, the restrictions on the ownership of Wellsford Shares, the reorganization of Wellsford and the merger, consolidation or sale of all or substantially of Wellsford's property must be approved by the affirmative vote of the holders of two-thirds of the Wellsford's Shares then outstanding and entitled to vote on the matter. In addition, the Wellsford Board of Trustees may, by a two-thirds vote, amend the Wellsford Declaration in order to enable Wellsford to qualify and remain qualified as a REIT under the Code and Title 8. Upon approval of the Additional Provisions, Section 9.2 of the Surviving Trust Declaration will provide that it may be amended by the Board of Trustees of the Surviving Trust, by a two-thirds vote, to enable the Surviving Trust to qualify as a REIT. The Surviving Trust Declaration as modified will also provide for amendment of all its provisions by the affirmative vote of the holders of not less than two-thirds of the Survivor Shares then outstanding and entitled to vote thereon. The Board of Trustees of each of Wellsford and EQR believe that this consistent requirement of approval by not less than two-thirds of the Survivor Shares to amend all provisions of the Surviving Trust Declaration is in the best interest of the shareholders of the Surviving Trust. Mergers, Consolidation, or Sale of Trust Property. Section 9.2 of the Wellsford Declaration currently states that, upon the affirmative vote of the holders of not less than two-thirds of the Wellsford Shares then outstanding and entitled to vote thereon, the trustees of Wellsford may reorganize Wellsford by creating a separate entity into which Wellsford will merge or sell its assets. In addition, Section 9.3 of the Wellsford Declaration currently provides that if Wellsford is not the surviving entity in a merger or consolidation, or in the event of a sale of all or substantially all of Wellsford's property, that transaction must be approved by two-thirds of the Wellsford Shares then outstanding and entitled to vote thereon. In all other cases, such a merger or consolidation need only be approved by a majority of the Wellsford Shares then outstanding and entitled to vote thereon. Upon approval of the Additional Provisions, any merger, consolidation, or sale of all or substantially all of the Surviving Trust's property will be required to be approved by the holders of a majority of the Survivor Shares then outstanding and entitled to vote thereon. The Board of Trustees of each of Wellsford and EQR believe that this threshold of shareholder approval, which would facilitate the merger, consolidation or sale of all or substantially all of the Surviving Trust's property, would be in the best interest of the shareholders of the Surviving Trust. 160 THE CONTRIBUTION AND DISTRIBUTION The following describes certain aspects of the Contribution and the Distribution. To the extent that they relate to the Contribution and Distribution Agreement, the following descriptions do not purport to be complete and are qualified in their entirety by reference to the Contribution and Distribution Agreement, which is filed as an exhibit to the registration statement of which this Joint Proxy Statement/Prospectus/Information Statement is a part. Background of and Reasons for the Distribution EQR is in the business of acquiring, owning and operating multifamily properties. It does not currently engage in any development activities and generally does not hold debt instruments for investment. In the course of discussions with respect to the Merger it became clear that EQR did not wish to acquire all of Wellsford's interest in its development project near Denver, Colorado, known as Palomino Park or its interests in the Sonterra Assets. If EQR were to acquire such assets, Wellsford would not be able to receive what it considered to be adequate value for such assets. Wellsford's management believes that it can maximize the value of those assets for its shareholders by not conveying them in the Merger or pursuant to an asset sale to a third party and by retaining such assets and their long-term value for Wellsford Common Shareholders by contributing them to WRP Newco and distributing all of the shares of WRP Newco owned by Wellsford to the Wellsford Common Shareholders pro rata. It has also been agreed that to provide initial working capital for WRP Newco, Wellsford would contribute approximately $18 million in cash to WRP Newco. Pursuant to the Merger, EQR will acquire the remaining assets of Wellsford, subject to certain liabilities. See "- Contribution and Distribution Agreement." Although the Contribution and Distribution will not be effected unless the Merger is approved and all conditions thereto have been satisfied or waived, Wellsford Common Shareholders are not being asked to approve the Contribution and Distribution, which are not subject to shareholder approval under Maryland law because they do not constitute a sale of all or substantially all of the assets of Wellsford. Manner of Effecting the Contribution and Distribution The Contribution was approved and the Distribution was declared by the Board of Trustees of Wellsford on January 16, 1997, the date on which it also approved the Merger. The Contribution will be made immediately prior to the Distribution, and both the Contribution and the Distribution will occur on the same date as the Effective Date (the "Distribution Date") and immediately prior to the Merger. The Distribution will be made to Wellsford Common Shareholders of record as of the close of business on the Distribution Date. On or prior to the Distribution Date, a share certificate evidencing all the shares of WRP Newco Common owned by Wellsford will be delivered to the United States Trust Company of New York, as Distribution Agent. Commencing on the Distribution Date, the Distribution Agent will begin mailing to 161 Wellsford Common Shareholders as of the close of business on the Distribution Date one share of WRP Newco Common for every four shares of Wellsford Common held on the Distribution Date. See "Description of Capital Stock of WRP Newco -- Common Stock." Wellsford Common Shareholders who would be entitled to receive fractional shares of WRP Newco Common will receive cash in the Distribution in lieu of such fractional shares. To accomplish this, the Distribution Agent will determine the number of whole and fractional shares of WRP Newco Common to which each Wellsford Common Shareholder as of the Distribution Date is entitled. Next, the Distribution Agent will aggregate these fractional share interests and sell them on the open market at then-prevailing prices. The Distribution Agent will distribute to each Wellsford Common Shareholder its ratable share of such proceeds after deducting appropriate amounts for federal income tax withholding purposes and any applicable transfer taxes. No holder of Wellsford Common Shareholder will be required to pay any cash or other consideration for the shares of WRP Newco Common to be received in the Distribution or to surrender or exchange shares of Wellsford Common or to take any other action in order to receive WRP Newco Common. Listing and Trading of WRP Newco Common WRP Newco has applied for listing of the WRP Newco Common on the ASE. Initially, WRP Newco will have approximately 629 stockholders of record and the outstanding shares of WRP Newco Common will be held on behalf of approximately 13,500 beneficial owners, based on the number of record holders and beneficial owners of Wellsford Common as of April 18, 1997. There is currently no trading market for the WRP Newco Common. Prices at which WRP Newco Common may trade after the Distribution cannot be predicted. Until the WRP Newco Common is fully distributed and an orderly market develops, the prices at which trading in such stock occurs may fluctuate significantly. The prices at which WRP Newco Common trades will be determined by the marketplace and may be influenced by many factors, including, among others, the depth and liquidity of the market for WRP Newco Common, investor perception of WRP Newco and its businesses, WRP Newco's dividend policy, interest rates and general economic and market conditions. Shares of WRP Newco Common distributed to Wellsford Common Shareholders in the Distribution will be freely transferable, except for shares received by persons who may be deemed to be "affiliates" of WRP Newco under the Securities Act. Persons who may be deemed to be affiliates of WRP Newco after the Distribution generally include individuals or entities that control, are controlled by, or are under common control with, WRP Newco, and may include certain officers and directors of WRP Newco as well as certain principal stockholders of WRP Newco, if any. Persons who are affiliates of WRP Newco will be permitted to sell their shares 162 of WRP Newco Common only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act. Conditions; Termination The Contribution and Distribution are subject to certain conditions as set forth in the Contribution and Distribution Agreement including, but not limited to, each condition to the closing of the Merger set forth in the Merger Agreement shall have been satisfied or waived. The Contribution and Distribution may be abandoned at any time prior to their occurrence by and in the sole discretion of the Board of Trustees of Wellsford without the approval of WRP Newco or the Wellsford Common Shareholders. Contribution and Distribution Agreement Wellsford and WRP Newco have entered into a Contribution and Distribution Agreement providing for, among other things, the principal corporate transactions required to effect the contribution by Wellsford of certain of its assets to WRP Newco. Wellsford will transfer, without representation or warranty, all of its right, title and interest in and to the following assets, among others (the "Contributed Assets"): (a) the Sonterra Assets. See "WRP Newco's Initial Assets"; (b) 80% of the outstanding shares of Wellsford Park Highlands Corp. ("WPHC"), which represents an approximate 80% interest in Palomino Park, together with certain additional ownership and financing agreements relating to Palomino Park. See "WRP Newco's Initial Assets"; (c) cash in the amount of approximately $18 million, subject to adjustment as described in the Merger Agreement and the Transaction and Termination Costs Agreement attached as an exhibit thereto; (d) the lease of the premises currently occupied by Wellsford in New York City, together with the furniture, fixtures, equipment and personalty located at such premises; and (e) the name "Wellsford." Simultaneously with the Contribution, WRP Newco will assume, among others, the following liabilities: (i) All liabilities of Wellsford with respect to the Contributed Assets; 163 (ii) the obligations to executive officers and trustees of Wellsford arising under certain Wellsford share option certificates, which will be satisfied by (A) amending the option certificates, as described in "Interests of Certain Persons in the Merger and Distribution -- Benefits of Key Executives -- Wellsford Options" (as amended, the "Amended WRP Newco Options") and (B) issuing shares of WRP Newco Common pursuant to the Amended WRP Newco Options; and (iii) any other obligation of Wellsford under any agreement relating to the Sonterra Assets, the bonds relating to Palomino Park, or Palomino Park except the obligations of ERP Operating Partnership under the Credit Enhancement Agreement and the Palomino Agreement, each between ERP Operating Partnership and WRP Newco. Mutual Indemnities. Pursuant to the Contribution and Distribution Agreement, Wellsford and WRP Newco will each be responsible for all claims and liabilities relating to its own business (whether or not such claims and liabilities arise from activities occurring prior to the Distribution) and will each indemnify the other against such claims and liabilities, subject to certain limited exceptions relating to the Credit Enhancement Agreement, Palomino Agreement and Transaction and Termination Costs Agreement. Tax Consequences of the Distribution The following discussion concerns the material United States Federal income tax consequences of the receipt of shares of WRP Newco Common by Wellsford Common Shareholders in the Distribution. The discussion is based on current law, which is subject to change retroactively or prospectively, and is for general information only. Robinson Silverman Pearce Aronsohn & Berman LLP has reviewed the discussion set forth herein under the caption "Tax Consequences of the Distribution" and believes that such discussion, as it pertains to matters of law, is correct in all material respects. The discussion does not address all aspects of Federal income taxation and does not address any aspects of state, local or non-U.S. tax laws, except as set forth below. The discussion does not consider any specific facts or circumstances that may apply to a particular Wellsford shareholder. Accordingly, Wellsford Common Shareholders are urged to consult their tax advisors regarding the United States Federal, state, local and non-U.S. income and other tax consequences of the Distribution and of holding and disposing of shares of WRP Newco Common. General. To the extent the fair market value of the shares of WRP Newco Common distributed in the Distribution to Wellsford Common Shareholders exceeds Wellsford's tax basis in such shares, gain will be recognized by Wellsford. Assuming Wellsford qualifies as a REIT and has a dividends paid deduction for distributions to its shareholders at least equal to its REIT taxable income (as computed before taking into account the dividends paid deduction), no REIT level tax will be incurred on account of the Distribution. 164 The distribution of WRP Newco Common will, however, be taxable to Wellsford Common Shareholders to the same extent as any other distribution made by Wellsford to its shareholders. Thus, so long as Wellsford qualifies for taxation as a REIT, distributions with respect to its shares, including the Distribution, made out of current earnings and profits (computed as of the close of its taxable year without taking into account any distributions made during such year) or accumulated earnings and profits allocable thereto (and not designated as capital gain dividends) will be includible by the shareholders as ordinary income for Federal income tax purposes. For this purpose, the current and accumulated earnings and profits of Wellsford will be allocated first to distributions with respect to shares of Wellsford Preferred and then to distributions with respect to Common Shares. None of these distributions will be eligible for the dividends received deduction for corporate shareholders. Distributions that are designated as capital gain dividends will be taxed as long-term capital gains (to the extent they do not exceed Wellsford's actual net capital gain for the taxable year) without regard to the period for which the shareholder has held his share. Corporate shareholders, however, may be required to treat up to 20% of certain capital gain dividends as ordinary income. Distributions in excess of current or accumulated earnings and profits will not be taxable to a shareholder to the extent that they do not exceed the adjusted basis of the shareholder's shares. Shareholders will be required to reduce the tax basis of their shares by the amount of such distributions until such basis has been reduced to zero, after which such distributions will be taxable as capital gain (ordinary income in the case of a shareholder who holds his shares as a dealer). The tax basis as so reduced will be used in computing the capital gain or loss, if any, realized upon sale of the shares of Wellsford Common (or shares of Survivor Common received in exchange therefor in the Merger). Any loss upon a sale or exchange of shares of Wellsford Common (or shares of Survivor Common received in exchange therefor in the Merger) by a shareholder who held such shares of Wellsford Common (or shares of Survivor Common received in exchange therefor in the Merger) for six months or less (after applying certain holding period rules) will generally be treated as a long-term capital loss to the extent such shareholder previously received capital gain distributions with respect to such shares of Wellsford Common (or shares of Survivor Common received in exchange therefor in the Merger). The current earnings and profits of the Surviving Trust will include all pre-Merger earnings and profits of Wellsford, all pre-Merger undistributed earnings and profits of EQR and all post-Merger earnings and profits of the Surviving Trust. The total earnings and profits at the close of the Surviving Trust's taxable year will be allocated among pre-Merger Wellsford distributions, including the Distribution, and all post-Merger distributions of the Surviving Trust. Management estimates that approximately 50% of the value of the shares of WRP Newco Common received in the Distribution will be taxable as ordinary income. Because this estimate is based, in part, on future events, there can be no assurance as to the portion of the value of the Distribution that will be taxable as ordinary income. The remainder of the value of the shares of WRP Newco Common received in the Distribution will either constitute a return of capital (reducing basis in the shares of Wellsford Common that converted in the Merger into Survivor 165 Common) or capital gain. A Wellsford shareholder's tax basis in the WRP Newco Common received in the Distribution will equal their fair market value on the date of Distribution. The holding period of the WRP Newco Common received in the Distribution will begin on the day following the date of the Distribution. Upon the sale or exchange of WRP Newco Common to or with a person other than WRP Newco, a holder will recognize capital gain or loss equal to the difference between the amount realized on such sale or exchange and the holder's adjusted tax basis in such shares. Any capital gain or loss recognized will generally be treated as long-term capital gain or loss if the holder held such shares for more than one year. Backup Withholding and Information Reporting. A noncorporate holder of WRP Newco Common who is not otherwise exempt from backup withholding may be subject to backup withholding at the rate of 31% with respect to distributions paid on, or the proceeds of a sale, exchange or redemption of, the WRP Newco Common. Generally, backup withholding applies only when the taxpayer (i) fails to furnish or certify his correct taxpayer identification number to the payor in the manner requested, (ii) is notified by the United States Internal Revenue Service ("IRS") that he has failed to report payments of interest or dividends properly, or (iii) under certain circumstances, fails to certify that he has not been notified by the IRS that he is subject to backup withholding for failure to report interest or dividend payments. Any amounts withheld under the backup withholding rules from a payment to a holder will be allowed as a credit against the holder's Federal income tax liability or as a refund, provided that the required information is furnished to the IRS. Holders of WRP Newco Common should consult their own tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining any applicable exemption. State, Local and Foreign Taxation. WRP Newco and its shareholders may be subject to state, local or foreign taxation in various state, local or foreign jurisdictions, including those in which it or they transact business or reside. Such state, local or foreign taxation may differ from the Federal income tax treatment described above. Consequently, prospective holders of WRP Newco Common should consult their own tax advisors regarding the effect of state, local and foreign tax laws on the ownership of WRP Newco Common. 166 WELLSFORD REAL PROPERTIES, INC. General WRP Newco was organized to create and realize value by identifying and making opportunistic real estate investments through the direct acquisition, rehabilitation, development, financing and management of real properties and/or participation in these activities through the purchase of debt or equity securities of entities engaged in such real estate businesses. Management will concentrate its efforts on defining and building focused operating businesses with recurring sources of income. WRP Newco intends to maximize shareholder value over time through growth in cash flow and net asset value per share. WRP Newco believes that while liquidity has returned to many real estate markets and that the supply and demand of many real estate asset classes are in relative equilibrium, there are specific opportunities which are expected to continue to exist because of market inefficiencies and impediments to investment, such as transactional complexity, time-consuming regulatory approvals, the prospect of no or limited immediate cash flow and a lack of available property information and market information analysis. In this regard, WRP Newco will initially focus its investments on three distinct aspects of the real estate business which management believes currently offer such opportunities. They are (i) acquiring underperforming office and other commercial properties below replacement cost, renovating and/or repositioning them, and owning, operating and/or reselling such properties, (ii) investing in real estate-related debt instruments with the potential for high-yields or returns more characteristic of equity ownership and (iii) engaging in selective property development when justified by expected returns. As opportunities emerge, WRP Newco may in the future expand its real estate-related businesses and activities. WRP Newco currently does not intend to qualify as a REIT under the Code. Consequently, WRP Newco will have the flexibility to respond quickly to opportunities without the structural limitations inherent in REITs and to operate, when deemed advantageous by management, on a more highly leveraged basis than most REITs. By not qualifying as a REIT under the Code (which would require WRP Newco to distribute each year at least 95% of its net taxable income, excluding capital gains), WRP Newco will have the ability and currently intends to retain for reinvestment its cash flow generated from operations and to sell properties without the substantial income tax penalties which may be imposed on REITs in such transactions. In addition, WRP Newco will differ from opportunity funds that are typically structured as private partnerships. In that regard, the business of WRP Newco will be conducted without the payment of acquisition, disposition or advisory fees to general partners which should result in additional cash flow being available for reinvestment as well as mitigate the potential for conflicts of interest. In addition, unlike investors in opportunity funds, WRP Newco's shareholders are expected to have enhanced liquidity through their ability to sell or margin their stock. WRP Newco also hopes to attract a broader range of investors because there will be no stipulated investment minimum. However, unlike REITs and opportunity funds, WRP Newco will be subject to corporate level taxation. WRP Newco's management will include Jeffrey H. Lynford, Chairman, and Edward Lowenthal, President and Chief Executive Officer, who were co-founders of, and served in the same capacities at, Wellsford supported by a management team with experience in real estate acquisitions, development, asset management and financing. WRP Newco believes that the over 50 years of combined experience of management in real estate, capital markets and public company operations, their knowledge, credibility, and business relationships, and their demonstrated track record of recognizing and profiting from emerging real estate trends should help WRP Newco accomplish its business objectives. Since the Wellsford IPO in November 1992, Messrs. Lynford and Lowenthal, through Wellsford, acquired 69 multifamily properties containing 16,332 units. From calendar year 1992 through calendar year 1996, Wellsford's revenues increased from $26 million to $131.8 million, representing a compounded annual growth rate of approximately 49%, and WRP Newco EBITDA increased from $13.8 million to $72.8 million, representing a compounded annual growth rate of approximately 52%. In analyzing potential investments and market trends and inefficiencies, management has reviewed, and will continue to review, current economic and market information. WRP Newco is a Maryland corporation which was incorporated in January 1997. WRP Newco's executive offices are located at 610 Fifth Avenue, New York, New York 10020 and its telephone number is (212) 333-2300. Business Strategy In furtherance of its business strategy, WRP Newco will initially focus on investments in three distinct aspects of the real estate business. As opportunities emerge and in response to changes in market, real estate and general economic conditions, WRP Newco may in the future expand, retract from or discontinue its real estate related business and activities. Commercial Properties. WRP Newco will seek to acquire office and other commercial properties below replacement cost and operate and/or resell such properties after renovation, redevelopment and/or repositioning. WRP Newco believes that appropriate well-located commercial properties which are currently underperforming can be acquired on advantageous terms and repositioned with the expectation of achieving enhanced returns which are greater than returns which could be achieved by acquiring a stabilized property. WRP Newco also believes that there are opportunities available to acquire properties that are not attractive to REITs and institutional investors because the properties have no or limited cash flow as a result of required rehabilitation and their not being substantially leased. WRP Newco's acquisitions to date demonstrate that WRP Newco is able to take advantage of existing opportunities in this area. WRP Newco has hired Richard R. Previdi, a former partner at Trammell Crow Co. with significant leasing and redevelopment experience in major metropolitan areas from Washington, D.C. to New York, to seek out such opportunities. Initially, WRP Newco will seek to apply its business strategy to suburban office properties. In this regard, WRP Newco has acquired five suburban office properties, consisting of six buildings, all of which are located in Northern New Jersey. As opportunities arise, WRP Newco may seek to acquire other types of commercial properties, including industrial properties. See "Business and Properties". High Yield Debt Investments. WRP Newco will make loans that constitute, or will invest in real estate-related senior, junior or otherwise subordinated debt instruments, which may be unsecured or secured by liens on real estate or the economic benefits thereof. WRP Newco will focus on investments of this type which have the potential for high yields or returns more characteristic of equity ownership. These investments may contain options to acquire, or be convertible into the right to acquire, all or a portion of the underlying real estate, or contain the right to participate in the cash flow and economic return which may be derived from the real estate. These investments may include debt that is acquired at a discount, mezzanine financing, commercial mortgage-backed securities, 167 secured and unsecured lines of credit, distressed loans, and loans previously made by foreign and other financial institutions. In some cases WRP Newco may only acquire a participating interest in the debt instrument. WRP Newco believes that there are opportunities to acquire real estate debt, especially in the low or below investment grade tranches, at significant returns as a result of inefficiencies in pricing. WRP Newco will initially focus on opportunities arising in the following areas, among others. First, where traditional CMBS buyers cannot or will not invest, such as the purchase of subordinated real estate debt secured not by a mortgage but by other indicia of ownership of an asset. Second, where WRP Newco believes that the market has mispriced an outstanding tranche of debt because of insufficient asset specific information. WRP Newco's investment in the Sonterra Loan and its expected investment in the 277 Park Loan in April 1997 demonstrate its ability to take advantage of opportunities in this area. See "Business and Properties". Property Development. WRP Newco will engage in selective development activities as opportunities arise and when justified by expected returns. WRP Newco believes that by pursuing selective development activities it can achieve returns which are greater than returns which could be achieved by acquiring a stabilized property. Initially, WRP Newco will continue the development of Palomino Park, its five-phase residential community begun by Wellsford, taking advantage of the fixed-price purchase options for the land underlying such residential community obtained by Wellsford two years ago. This development may be retained for investment and operated by WRP Newco, sold, or converted to condominium ownership. WRP Newco may also acquire land for speculation, future development or subdivision. Certain development activities may be conducted in joint ventures with local developers who may bear the substantial portion of the economic risks associated with the construction, development and initial rent-up of properties. As part of its strategy, WRP Newco may seek to obtain bond financing from local governmental authorities which generally bear interest at rates substantially below rates with respect to conventional financing. See "Business and Properties". WRP Newco may in the future make equity investments in entities owned by third parties and which engage in real estate-related businesses and activities or businesses that service the real estate business. Some of the entities in which WRP Newco may invest may be start-up companies or companies in need of additional capital. WRP Newco may also in the future invest in retail, residential, hotel and other types of properties and may also manage and lease properties owned by it or in which it has an equity or debt investment. In analyzing potential investments and market trends and inefficiencies, management has reviewed, and will continue to review, current economic and market information. Much of this information has been, and will continue to be, provided by REIS Reports, Inc., a nationally recognized real estate market database firm. Initial Capital and Financing Upon completion of the Distribution and consummation of the Merger and certain of the other transactions described in this Joint Proxy Statement/Prospectus/Information Statement, WRP Newco expects to have available the following sources of capital, financing and credit support: . $3.5 million of proceeds from the sale to ERP Operating Partnership of shares of the WRP Newco Class A Common at a price equal to the Issuance Price. 168 . $25 million pursuant to the ERP Preferred Commitment to acquire up to 1,000,000 shares of the WRP Newco Series A Preferred at the request of WRP Newco and subject to certain limited conditions. Each share of WRP Newco Series A Preferred is convertible into shares of WRP Newco Common Stock at a premium equal to 8% of the Issuance Price. The ERP Preferred Commitment will be pledged as security for the WRP Newco Line of Credit. . $50 million under a two-year WRP Newco Line of Credit as to which Bank of Boston and Morgan Guaranty have issued a commitment. The WRP Newco Line of Credit will bear interest at an annual rate equal to LIBOR plus 175 basis points and will be extendible for an additional one-year period. . $36.8 million, pursuant to an agreement with respect to the construction financing for Phase I of Palomino Park, and approximately $30 million, pursuant to an agreement expected to be entered into with respect to the construction financing for Phase II of Palomino Park, in each case guaranteed by a third-party developer and supported by the credit of ERP Operating Partnership pursuant to its stand-by obligations. . Approximately $14.8 million of credit enhancement from ERP Operating Partnership with respect to the bonds issued to finance certain public facilities at Palomino Park. See "Description of Capital Stock of WRP Newco" and "Certain Agreements Between WRP Newco and ERP Operating Partnership". In addition to the foregoing, WRP Newco will receive from Wellsford at the time of the Contribution approximately $18 million of cash (subject to adjustment as provided in the Merger Agreement), substantially all of which will be applied to the repayment of loans made by Wellsford to WRP Newco to acquire certain office properties and make its expected investment in the 277 Park Loan. WRP Newco's other sources of capital to finance its acquisition, investment, development and other activities, may include retained earnings, funds derived from the issuance of debt and equity securities, sales of investments and bank borrowings. See "Policies with Respect to Certain Activities of WRP Newco". WRP Newco Line of Credit WRP Newco has received a commitment for a revolving line of credit in the amount of up to $50 million from Bank of Boston and Morgan Guaranty as to which each has agreed to lend up to $25 million. The WRP Newco Line of Credit will be secured inter alia by WRP Newco's interest in the Sonterra Loan, the 277 Park Loan and the ERP Preferred Commitment. Under the WRP Newco Line of Credit, WRP Newco will pay interest only, monthly, at an annual rate equal to, at WRP Newco's option, either (i) LIBOR plus 175 basis points or (ii) the base rate of Bank of Boston. The WRP Newco Line of Credit will be for a term of two years and be extendible by WRP Newco with the consent of Bank of Boston and Morgan Guaranty for one additional year. It will include customary covenants, including, among others, (i) maintaining a ratio of liabilities to assets of not in excess of .60 to 1.0, (ii) maintaining a debt service coverage ratio of not less than 1.3 to 1.0, until the earlier 169 to occur of (A) 12 months from consummation of the line of credit, (B) WRP Newco raises at least $50 million of equity, or (C) certain lease up tests are met with respect to certain of WRP Newco's properties, at which time the required ratio will be not less that 1.5 to 1, (iii) a prohibition on the payment of dividends during the first year of the WRP Newco Line of Credit and (iv) a prohibition of ground-up development (other than Palomino Park). Management The management of WRP Newco will be led by substantially all of the current senior management of Wellsford, including Jeffrey H. Lynford, Chairman, and Edward Lowenthal, President and Chief Executive Officer, of WRP Newco, who held the same offices at Wellsford. Joining them are Gregory F. Hughes and David Strong, who are Chief Financial Officer and Vice President-Development, respectively, of Wellsford, and Richard R. Previdi, who was previously a managing director of Emmes & Company, a real estate investment company and a managing director of Trammell Crow N.E., Inc. and Chief Executive Officer of that company's Northern Virginia Commercial Division. At the time of the Wellsford IPO in November 1992, Wellsford was the only REIT dedicated exclusively to the ownership of multifamily properties. Wellsford has sought to maximize long term profitability for its shareholders by acquiring, developing, and operating multifamily properties in target markets, applying sophisticated management and operating techniques, and maintaining a conservative capital structure. Wellsford Acquisitions Messrs. Lynford and Lowenthal formed Wellsford Group, Inc. ("WGI") with an initial capitalization of $1 million provided primarily by William E. Simon, Raymond Chambers and Frank Walsh, former principals of Wesray, a private leveraged buy-out firm, and by principals of Eastdil Realty, Inc., a private real estate investment banking firm. During the period from 1986 through November 1992, WGI and its affiliates acquired 19 multifamily properties consisting of 5,255 units. After WGI and its affiliates transferred their properties to Wellsford in 1992, Wellsford commenced an aggressive acquisition strategy by purchasing 69 properties containing 16,332 multifamily units which increased the historical cost of its total assets from $147 million at the time of the Wellsford IPO, to $756 million at December 31, 1996. These acquisitions included 14 properties containing 5,100 units in Oklahoma purchased for $133 million in May 1994, and the $250 million acquisition by merger in December 1994 of Holly Residential Properties, Inc., a real estate investment trust publicly traded on the New York Stock Exchange which developed, owned and operated 34 properties containing over 5,000 multifamily units in the Seattle/Tacoma area. Wellsford Management and Development of Properties During 1995 and 1996 Wellsford focused its efforts on its core portfolio and the development of new properties. Property management, which had previously been contracted to third parties, was substantially internalized. Wellsford currently provides direct management for 84% of its properties. In addition, Wellsford developed three new properties consisting of 548 multifamily units during this period, helping to reduce the average age of its portfolio. Wellsford also commenced development of Palomino Park, a 182-acre master planned class A multifamily residential community in Highlands 170 Ranch, a suburb of Denver, Colorado. See "WRP Newco's Business and Properties-- Palomino Park". Wellsford Equity and Debt Financings Wellsford funded its acquisition and development activities with various sources of capital including public and private debt and equity. In November 1992, Wellsford raised $100 million in the Wellsford IPO. Wellsford was one of the first REITs to obtain a corporate credit rating, when it received an implied senior rating of BBB - from S&P and Duff & Phelps in September 1993. This rating facilitated the issuance by Wellsford in November 1993 of $100 million of convertible preferred shares. In January 1995 Wellsford became one of the first REITs to access the unsecured debt markets with a $100 million issuance. In August 1995 Wellsford's senior credit rating was upgraded to BBB by S&P and Duff & Phelps, which helped facilitate the issuance of $125 million of unsecured notes and $57.5 million of perpetual preferred shares. Wellsford's commitment to a conservative corporate capital structure, including a 35% debt to total market capitalization ratio, resulted in the investment grade rating and a gradual reduction of its costs of capital, as reflected by the borrowing costs on its line of credit. At the time of the Wellsford IPO, Wellsford's line of credit was secured and bore an annual interest rate of LIBOR plus 3.75%. Wellsford's line of credit in the amount of $150 million is now unsecured with an annual interest rate of LIBOR plus 1.50%. Most recently, Wellsford issued 3- year medium term notes at an annual interest rate of LIBOR plus .32%. Wellsford Return to Shareholders As a result of the above accomplishments, Wellsford has raised its dividend 15% since the Wellsford IPO. Assuming the consummation of the Merger investors who bought their shares of Wellsford Common in the Wellsford IPO would have received an average annual return of approximately 22.8% on their initial investment, based upon the April 1, 1997 closing market price of a common share of beneficial interest of EQR on the New York Stock Exchange, and assuming (i) all distributions received on such shares of Wellsford Common were immediately reinvested in Wellsford Common and (ii) a value for each share of WRP Newco Common Stock distributed in the Distribution equal to the book value (which is currently estimated to be $10.43 per share). There can be no assurance that WRP Newco's future performance or average rate of return achieved by its investors will be similar to Wellsford's past accomplishments or the average rate of return achieved by its shareholders. WRP Newco's business strategy differs substantially from that of Wellsford's, which operated as a REIT and invested only in multifamily properties. WRP NEWCO PRO FORMA CAPITALIZATION The following table sets forth the pro forma capitalization of WRP Newco as of December 31, 1996 on an historical basis and as adjusted to give effect to the Merger and Distribution, the sale of shares of WRP Newco Class A Common to ERP Partnership for an aggregate purchase price of $3.5 million and the application of the net proceeds therefrom, and the funding of a portion of WRP Newco's $50 million credit facility with Bank of Boston and Morgan Guaranty for the purchase of five commercial office properties and the origination of a loan. The information set forth in the table should be read in conjunction with the WRP Newco financial statements and notes thereto, the WRP Newco pro forma financial information and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" of WRP Newco included elsewhere in this Joint Proxy Statement/Prospectus/ Information Statement. 171
December 31, 1996 Actual As Adjusted ------ ----------- (In thousands) DEBT: Tax exempt mortgage note payable............ $14,755 $ 14,755 Credit facility............................. 45,000 ------- -------- Total debt.................................. $14,755 $ 59,755 ------- -------- STOCKHOLDERS' EQUITY: Common Stock, $.01 par value per share; 200,000,000 shares authorized - 4,899,965 shares issued and outstanding, as adjusted.. -- 49 Capital in excess of par value................. 51,060 ------- -------- Total stockholders' equity............. 30,005 51,109 ------- -------- Total capitalization................... $44,760 $110,864 ======= ========
WRP NEWCO DIVIDEND POLICY WRP Newco does not currently contemplate paying dividends on WRP Newco Common. Earnings from the investments of WRP Newco are currently expected to be used by WRP Newco to finance future acquisitions and investments. The Board of Directors of WRP Newco may determine in its discretion to pay dividends on WRP Newco Common in the future, and any such determination will be dependent upon WRP Newco's results of operations, financial condition, contractual restrictions and other factors deemed relevant at that time by the WRP Newco Board of Directors. 172 WRP NEWCO'S BUSINESS AND PROPERTIES WRP Newco's initial assets will consist primarily of five office properties consisting of six buildings; the 277 Park Loan; the Sonterra Loan and the Sonterra Option; and an approximately 80% interest in Phases I and II of, and in options to acquire and develop Phases III, IV and V of, Palomino Park. Set forth below is a brief description of these assets and WRP Newco's plans with respect thereto. In the opinion of WRP Newco's management, all of the properties described below are adequately covered by insurance. Wellsford Commercial Properties WRP Newco recently completed the acquisition of four commercial properties and expects to acquire a fifth commercial property in April 1997 pursuant to an existing contract. All the properties are located in suburban areas of Northern New Jersey. These properties contain in the aggregate six office buildings with approximately 940,400 gross square feet (or approximately 913,000 net rentable square feet) located on approximately 260 acres. The aggregate purchase price for these properties is approximately $47.6 million or approximately $50 per gross square foot of building area. None of the properties is encumbered by mortgage liens. It is currently anticipated that WRP Newco will invest approximately $13.7 million (approximately $15 per gross square foot of building) for renovation and repositioning of the properties, and will pay approximately $18.5 million (approximately $20 per gross square foot of building) for tenant improvements and leasing costs, for a total cost to WRP Newco of approximately $80 million. These acquisitions represent opportunities which WRP Newco believes are impractical for REITs because they provide little or no immediate cash return. Point View Office Complex WRP Newco acquired the Point View office complex ("Point View") located in Wayne, N.J. in February 1997. Point View, formerly the international headquarters for American Cyanamid Company, consists of (i) a main campus consisting primarily of two office buildings (the "Main Campus"); and (ii) two smaller office buildings, located at 1700 and 1800 Valley Road. All the buildings are currently vacant. It is expected that renovations to each of these buildings will be completed by the end of 1997. The Main Campus The Main Campus consists of two parcels: (i) one parcel of approximately 194 acres on which two buildings consisting of an aggregate of approximately 560,000 gross square feet (approximately 530,000 net rentable square feet) are situated and (ii) an approximately 10 acre site directly across from the entrance to the two buildings which is zoned for approximately 7 - 8 single family houses and has no existing structures. The 194-acre parcel is zoned for the development of an additional 1 million square feet of office or research space. The larger of the two buildings on the Main Campus (the "Serpentine Building") was constructed in 1962, is of class B+ quality, four stories high and 173 contains approximately 400,000 gross square feet. The Serpentine Building contains a fully functional cafeteria area seating 800, separate executive officer tower, separate executive dining area and overlooks a large reservoir and the heliport for the complex. The smaller building (the "West Building") was constructed in 1976, is of class A quality, six stories high and contains approximately 160,000 gross square feet. The West Building is connected to the Serpentine Building by an underground passageway and has a (primarily) moveable wall interior partitioning system, a fitness center and an auditorium. There are 1,720 parking spaces currently serving both buildings. On a pro forma basis, the Main Campus had a federal tax basis equal to its purchase price of $15.8 million at December 31, 1996, and will be depreciated straight-line over a 40-year estimated life. The current annual real estate taxes on the Main Campus are $1.2 million, subject to pending negotiations with the municipality of Wayne to reduce such taxes. WRP Newco currently contemplates a number of renovations to the Serpentine Building and the West Building to, among other things, refurbish the exterior, add new elevators, and renovate the lobby and other common areas. Other renovations will (i) enable the buildings to comply with current life safety and ADA requirements and become more energy efficient; and (ii) eliminate potentially hazardous materials (such as spray-on asbestos fireproofing in the Serpentine Building's structure). Removal of the spray-on asbestos fire proofing will cost approximately $3.5 million, and the estimated total cost of all planned renovations will be approximately $9.1 million. WRP Newco will finance the renovations from its working capital and its WRP Newco Line of Credit. The purchase price for the Main Campus was $15.8 million, or $28.00 per gross square foot of building area, and together with the cost of planned renovations, is expected to be $44.00 per gross square foot. 1700 Valley Road The 1700 Valley Road building consists of 70,600 gross square feet (approximately 67,000 net rentable square feet), is of class B+ quality, is two stories high and is situated on a wooded nine acre site. The building was constructed in two stages, during 1972 and 1979, and the interior was completely refurbished in 1993. The building contains a full service dining area and 294 parking spaces. WRP Newco contemplates renovation of the building's facade, upgrading of the HVAC system and various cosmetic improvements. The estimated cost of planned renovations is $200,000, and WRP Newco will finance such renovations from its working capital and its WRP Newco Line of Credit. The property is zoned for the development of an additional 50,000 square feet of office space. The purchase price for 1700 Valley Road was $1.0 million, or $14.00 per gross square foot of building area, and together with the cost of planned renovations, is expected to be $17.00 per gross square foot. 1800 Valley Road The 1800 Valley Road building consists of 54,800 gross square feet (approximately 53,000 net rentable square feet), is of class B+ quality, is two stories high and is situated on a wooded 14 acre site. The building was constructed in 1980, contains a full service dining area and has 260 parking spaces. WRP Newco contemplates replacing the roof and upgrading the HVAC system, and other 174 renovations to comply with existing life safety and ADA codes. The estimated cost of planned renovations is $800,000, and WRP Newco will finance such renovations from its working capital and its WRP Newco Line of Credit. WRP Newco currently contemplates marketing this building primarily for sale. The purchase price for 1800 Valley Road was $2.0 million, or $36.00 per gross square foot of building area, and together with the cost of planned renovations, is expected to be $51.00 per gross square foot. Greenbrook Corporate Center WRP Newco acquired The Greenbrook Corporate Center ("Greenbrook") in Fairfield, N.J. in April 1997. Greenbrook consists of (i) a class A suburban three-story office building with approximately 190,000 gross square feet situated on approximately 20 acres and (ii) a contiguous undeveloped approximately seven acre parcel zoned for development of an additional 50,000 square feet of office and light industrial use. The entrance to the building is a 35-foot atrium lobby and the second and third floors have terraces overlooking a park and country club which border the rear of the site. WRP Newco intends to spend approximately $500,000 to renovate the building, and WRP Newco will finance such renovations from its working capital and its WRP Newco Line of Credit. The renovations are expected to be completed by October, 1997. Greenbrook, as WRP Newco's only occupied commercial property, accounted for 50% of WRP Newco's pro forma revenues during the year ended December 31, 1996. The occupancy rate for Greenbrook as of April 1, 1997 was approximately 85.7%, and the average annual gross rent per square foot as of such date was approximately $20. The current asking gross rental rate per square foot is approximately $23. On a pro forma basis, Greenbrook had a federal tax basis equal to its purchase price of $23.7 million at December 31, 1996, and will be depreciated straight-line over a 40-year estimated life. The current annual real estate taxes on Greenbrook are approximately $428,000. Greenbrook's two largest tenants are Information Resources, Inc. ("IRI"), a market research firm, and S.B. Thomas Division of CPC International, whose principal business is producing baked foods. IRI occupies 64,676 rentable square feet, with an annual rent of approximately $1.3 million (or approximately $20 per rentable square foot), under a lease that expires December 2003. The annual rent to be paid by IRI increases over the term of the lease to approximately $1.5 million (or approximately $23.5 per rentable square foot) by its expiration in December 2003. S.B. Thomas occupies 49,384 rentable square feet with an annual rent of approximately $.9 million (or $19 per rentable square foot), under a lease that expires in 2005. S.B. Thomas has the right to renew for two successive periods of five years each, at 95% of the fair market value rent as of October 1st of the last lease year prior to commencement of each renewal term. Greenbrook has nine additional tenants, with aggregate annual rents of approximately $1.2 million. The purchase price for this property was $23.7 million payable in cash, or $125.00 per gross square foot of building area, and together with the cost of planned renovations, is expected to be $127.00 per gross square foot. 175 Chatham, New Jersey In January 1997, WRP Newco acquired a class A three-story suburban office building consisting of approximately 65,000 gross square feet (approximately 63,300 net rentable square feet) located on approximately five acres in Chatham, New Jersey. WRP Newco currently intends to spend approximately $3.1 million to make various renovations to upgrade the building's status including, among other things, to add a first class lobby and improve other common areas, renovate the facade and replace the HVAC system and provide landscaping. WRP Newco will finance such renovations from its working capital and the WRP Newco Line of Credit, and the renovations are expected to be completed by the end of the third quarter of 1997. WRP Newco is currently marketing the building for rental. WRP Newco has entered into a lease with Quadrant HealthCom Inc., a publisher of medical specialty magazines, for approximately 22,000 gross square feet in the building which is approximately 33% of the gross leasable area of the building. The lease is for a term of ten years (terminable after seven years upon payment of six months' rent) at $26.00 per gross square foot for years 1-5 and at approximately $28.00 per gross square foot for years 6-10. The purchase price for the property was $5.1 million, or $78.00 per gross square foot of building area, and together with the cost of planned renovations, is expected to be $126.00 per gross square foot. Wellsford High Yield Investment Portfolio 277 Park Loan WRP Newco and Bank of Boston are expected to enter into an $80 million loan transaction (the "277 Park Loan") in April 1997 with entities which own substantially all of the equity interests (the "Equity Interests") in the entity which owns a 52-story, approximately 1.75 million square foot gross leasable area, class A office building located in New York City in mid-town Manhattan at 277 Park Avenue (the "277 Park Property"). WRP Newco and Bank of Boston will lend $20 million and $60 million, respectively, pursuant to the 277 Park Loan. The 277 Park Loan will be secured primarily by a pledge of the Equity Interests owned by the borrowers. There will also be a limited guarantee from the individual who indirectly owns all the Equity Interests. The 277 Park Loan will be subordinated to a 10-year $345 million first mortgage loan (the "REMIC Loan") on the 277 Park Property, the proceeds for which will be obtained by the sale of investment grade rated commercial mortgage pass-through certificates in a real estate mortgage investment conduit. The notes representing the REMIC Loan will bear interest at different rates which are expected to equate to a weighted average interest rate of approximately 7 3/4% per annum. The 277 Park Loan will bear interest at the rate of approximately 12% per annum for the first nine years of its term and at a floating annual rate during the tenth year equal to LIBOR plus 5.15% or Bank of Boston base rate plus 5.15%, as elected by the borrowers. Interest on the 277 Park Loan will be payable monthly to the extent of available cash after payment of interest on the REMIC Loan and the funding of various reserve accounts under the REMIC Loan and provided there is no event of default under the REMIC Loan. To the extent funds are not available to pay interest at a rate in excess of 10% per annum, such excess interest will accrue and be added to the principal amount of the 277 Park Loan. The principal amount of the 277 Park Loan and all accrued interest will be payable on May 1, 2007 which 176 is also the due date of the REMIC Loan. The 277 Park Loan will be prepayable only in full and then only after the fifth year of the loan and must be repaid if the REMIC Loan is repaid or the 277 Park Property is sold. Any prepayment during the sixth through ninth years of the loan must be accompanied by a yield maintenance payment. The 277 Park Property is currently 100% leased to 33 tenants, including Donaldson, Lufkin & Jenrette, Inc. which has leased approximately 47% of the gross leasable area pursuant to a lease expiring in 2016. The 277 Park Property was appraised for $555 million as of July 1, 1996 by an independent nationally recognized appraiser. The appraisal was not prepared on behalf of WRP Newco. An appraisal is an opinion of value made by experts, subject to the assumptions and limiting conditions contained therein (including assumptions relating to the discounted cash flow analysis contained therein). Sonterra Assets Sonterra Loan WRP Newco will hold a $17.8 million mortgage loan made to the owner of Sonterra, a 344-unit class A multifamily apartment complex located in Tucson, Arizona, construction of which was completed in June, 1996. The Sonterra Loan was originated in July, 1996 and the principal amount thereof is due on July 1, 1999. Until the maturity date, the borrower is to pay interest only, monthly, at the rate of 9% percent per annum. The loan is non-recourse and repayment of the loan is secured by a first mortgage on Sonterra and by a personal guaranty of an individual affiliated with the owner. Under certain circumstances, prepayment of the loan is subject to a prepayment premium equal to 5% percent of the principal amount of the loan. Sonterra Option Agreement WRP Newco will also own an option to acquire Sonterra free and clear of all mortgages and other material liens for approximately $20.5 million through December 31, 1997 and for approximately $21 million if the sale is consummated during 1998. ERP Operating Partnership will have a right of first offer to acquire the Sonterra Option and a right to acquire the option if WRP Newco does not exercise it. If WRP Newco acquires Sonterra, then WRP Newco and ERP Operating Partnership will enter into a "Right of First/Last Offer Agreement" in substantially the same form as the Right of First/Last Offer Agreement entered into pursuant to the Agreement Regarding Palomino Park. See "Certain Agreements Between WRP Newco and ERP Operating Partnership -- Agreement Regarding Palomino Park". Wellsford Property Development Palomino Park Palomino Park is a master planned five-phase multifamily development project comprising approximately 182 acres, of which 65 acres have been developed, in suburban South East Denver, Colorado, about 14 miles from Denver's central business district. It is situated within Highlands Ranch, a 22,000 acre master planned community. Palomino Park is intended to be developed as an integrated project comprising an 1,880-unit, class A multifamily apartment community constructed 177 around a centrally located 24 acre park which will feature tennis courts, athletic fields, a putting green and an amphitheater. There is also a 29,000 square foot recreation center which has been completed and which includes a full-size gymnasium, fitness center, indoor golf range, racquet ball courts, and a baby-sitting facility and has an adjacent swimming pool. Palomino Park will also have a perimeter wall with a guard at the entry gate. Wellsford Park Highlands Corp. ("WPHC"), a wholly-owned subsidiary of Wellsford, acquired fixed-price options in 1995 to purchase the land underlying each of the phases (hereinafter referred to collectively as "Phases" or individually as a "Phase" or specifically as "Phase I," "Phase II," "Phase III," "Phase IV" or "Phase V") of Palomino Park. The land underlying Phases I and II has been acquired, and WRP Newco intends to acquire the land underlying Phase III, which is subject to an option which expires in May, 1997. The land underlying Phases IV and V is subject to options which expire in May, 1998 and May, 1999, respectively. There can be no assurance that Phase III, Phase IV or Phase V will be commenced or if commenced, that it will be completed. See "WRP Newco Risk Factors - Risks of Acquisition, Development, Construction and Renovation Activities". The purchase price for land acquired with respect to any Phase is $73,500 per acre, subject to an increase of the purchase price by 6% per annum from and after November 30, 1994. The land options should reduce WRP Newco's exposure to market cycles in Denver while enabling WRP Newco to develop a signature residential community in one of the fastest growing counties in the country. Upon completion of any or all of the Phases, WRP Newco will either operate and rent apartment units or convert all or a portion of them to condominium ownership which a REIT also could not do because of the adverse tax consequences thereof. The development of Palomino Park calls for construction of the 1,880 units over a period of five years at a total estimated cost of $194 million. WRP Newco currently has invested $21.3 million in the development of Palomino Park. Phase I, referred to as Blue Ridge, will consist of 456 units of which 192 are constructed, 175 are leased and 143 are occupied. Rents range from $760 per month for a one bedroom, one bathroom to $1,375 per month for a three bedroom, two bathroom unit. Garages are available and washer and dryer hook-ups exist in all the apartments. Completion of construction of this Phase is expected in late 1997. The total estimated cost of Blue Ridge is approximately $42.5 million. Phase II, referred to as Red Canyon, is expected to consist of 304 units. The total estimated cost of Red Canyon is approximately $33.6 million. Site preparation for construction of Phase II has recently begun and construction of Phase II is expected to be completed in late 1998. Blue Ridge is owned by Park at Highlands LLC ("Phase I LLC"), a limited liability company, the members of which are WPHC (99%) and Al Feld ("Feld") (1%). Red Canyon is owned by Red Canyon at Palomino Park LLC ("Phase II LLC"), a limited liability company, the members of which are WPHC (99%) and Feld (1%). Al Feld is a Denver-based developer specializing in the construction of luxury residential properties. He has constructed over 3,000 units since 1984. Various development, construction and property management and guarantee fees, as well as certain other fees designed to provide cost savings incentives in connection with property construction and stabilization, are paid to Feld and his affiliates. These amounts are included in the cost estimates 178 for Phase I and Phase II described above. Feld has unconditionally guaranteed completion of Phase I within 30 months and Phase II within 24 months, in each case after closing of the construction loan, and has agreed to a one-year guarantee of such Phases against construction defects. In addition, in the case of both Blue Ridge and Red Canyon, Feld has agreed, subject to certain conditions, to fund deficits in development and operating costs. To secure his obligations to make deficit payments and perform all of his other obligations under the operating agreements, Feld has pledged his interests in Phase I LLC and Phase II LLC to WPHC. The operating agreements provide that neither member may transfer, pledge or assign its interest in the Phase I LLC or Phase II LLC without the consent of the other member, except that (i) WPHC may transfer a portion of its interest provided it retains at least a 21% interest in Phase I LLC or Phase II LLC, as the case may be, and (ii) WPHC has an option to acquire Feld's 1% interest for fair market value at any time after completion of the Phase, and Feld has an option to compel WPHC to buy his 1% interest for fair market value upon completion of the Phase. The construction loan on Blue Ridge is for approximately $36.8 million, matures on December 31, 1998, and bears interest at the prime rate, except that the Phase I LLC may elect to cause a portion of the previously advanced principal to bear interest at LIBOR plus 175 basis points. Feld has guaranteed repayment of this loan. Phase II LLC expects to obtain a construction loan for approximately $30 million to finance construction of Red Canyon. Wellsford has agreed with the Phase I construction lender (the "Tri-Party Agreement") to purchase the loan when due, assuming completion of construction, if it is not paid off by the Phase I LLC or by Feld pursuant to his guaranty, for the lesser of the loan balance or the final agreed upon budget. Concurrently with the Merger, ERP Operating Partnership has agreed to substitute itself for Wellsford under the Tri-Party Agreement, with the consent of the Phase I construction lender. ERP Operating Partnership has agreed to provide substantially similar credit support for the Phase II construction loan as it has agreed to provide for the Phase I construction loan. See "Certain Agreements Between WRP Newco and ERP Operating Partnership -- Agreement Regarding Palomino Park". Palomino Park Public Improvements Corporation ("PPPIC"), a Colorado non- profit corporation, has issued $14.8 million of tax exempt bonds due on December 1, 2035 (the "Bonds") to finance the development of the park and certain parts of the infrastructure within Palomino Park, which have a total cost of approximately $18.3 million. The Bonds bear interest at a floating rate, which is currently approximately 4% per annum, but may be converted to a term rate or a fixed rate. Subject to certain restrictions, revenue assessment liens are imposed against the Phases to secure the obligation of the Phase owners to repay the portion of the Bonds' debt service attributed by PPPIC to their respective Phases. If it is determined to proceed with Phases III, IV and/or V, the ownership and transaction structure of each such Phase is expected to be similar to that of Phases I and II, although neither Wellsford nor Feld has any obligation to continue the relationship for future Phases. 179 Cash Approximately $18 million of cash will be contributed by Wellsford to WRP Newco, a substantial portion of which will be applied to repay indebtedness incurred to acquire WRP Newco's commercial properties. Legal Proceedings Neither WRP Newco nor the Properties are presently subject to any material litigation nor, to WRP Newco's knowledge, is any material litigation threatened against WRP Newco or the Properties, other than routine litigation arising in the ordinary course of business and which is expected to be covered by liability insurance. CERTAIN AGREEMENTS BETWEEN WRP NEWCO AND ERP OPERATING PARTNERSHIP The following describes certain aspects of the agreements to be entered into by WRP Newco and ERP Operating Partnership on the Effective Date. The following descriptions do not purport to be complete and are qualified in their entirety by reference to the full text of the agreements, which are filed as exhibits to the registration statement on Form 10 filed by WRP Newco. Common Stock and Preferred Stock Purchase Agreement Following the Distribution and upon consummation of the Merger, WRP Newco will enter into the Stock Purchase Agreement with ERP Operating Partnership, providing for the sale of WRP Newco Class A Common and WRP Newco Series A Preferred to ERP Operating Partnership on the terms described below. WRP Newco Class A Common Stock. Pursuant to the terms of the Stock Purchase Agreement, ERP Operating Partnership will purchase from WRP Newco upon the Closing Date shares of WRP Newco Class A Common for an aggregate purchase price of $3.5 million at a price per share equal to the Issuance Price. The "Issuance Price" is defined in the Stock Purchase Agreement as (a) the average gross purchase price of WRP Newco Common Stock sold to institutional purchasers on or prior to the Closing Date or subject to written commitments to purchase WRP Newco Common Stock from institutional purchasers received on or prior to the Closing Date (collectively "Institutional Sales") or (b) if there are no Institutional Sales, the net book value per share of WRP Newco Common Stock on the Closing Date. For a description of the WRP Newco Class A Common, see "Description of Capital Stock of WRP Newco -- Class A Common Stock". 180 WRP Newco Series A Preferred Stock. Pursuant to the terms of the Stock Purchase Agreement, ERP Operating Partnership will agree to purchase from WRP Newco up to 1,000,000 shares of WRP Newco Series A Preferred at $25.00 per share as requested by WRP Newco over the three-year period (the "Commitment Period") commencing on the Closing Date. Purchases of Class A Preferred are to be in minimum aggregate amounts of $1 million and in multiples of $500,000 in excess thereof. The obligations of ERP Operating Partnership to acquire WRP Newco Series A Preferred are subject to, among other matters, certain representations and warranties being true and correct in all material respects and there being no event of default existing under the Stock Purchase Agreement. For a description of the WRP Newco Series A Preferred, see "Description of Capital Stock of WRP Newco -- Series A 8% Convertible Redeemable Preferred Stock". WRP Newco Board Member Elected by ERP Operating Partnership. On the Closing Date, ERP Operating Partnership, as the holder of WRP Newco Class A Common, is entitled to elect Douglas Crocker II, President of EQR, to the WRP Newco Board of Directors. In the event Mr. Crocker (or other person subsequently elected by ERP Operating Partnership to the WRP Newco Board of Directors) is unable or unwilling to serve as a director or is no longer employed by ERP Operating Partnership, ERP Operating Partnership and WRP Newco will agree to the election of another member of senior management of ERP Operating Partnership to the WRP Newco Board of Directors (Crocker or such other individual elected by WRP Newco Class A Common shareholders, called the "Purchaser Director"). Voting of WRP Newco Class A Common and WRP Newco Series A Preferred. For ten years after the Closing Date, WRP Newco has the right to direct the voting of all shares of WRP Newco Series A Preferred, WRP Newco Class A Common and WRP Newco Common owned by ERP Operating Partnership or any of its affiliates, except as to the election of the Purchaser Director or any matter relating to the rights, preferences and privileges of the WRP Newco Series A Preferred or the WRP Newco Class A Common. Sale of Stock. For ten years after the Closing Date, ERP Operating Partnership shall first offer, in writing (a "Notice of Proposed Sale"), to sell any shares of WRP Newco Common, WRP Newco Class A Common, WRP Newco Series A Preferred or warrants to purchase WRP Newco Common owned by it to WRP Newco prior to selling such shares to any other entity. If WRP Newco has not agreed to purchase such shares within 20 days of receipt of such notice, ERP Operating Partnership shall have the right to sell such shares to any other entity for a period of 90 days provided any sale is made on terms and conditions no more favorable to such entity than specified in the Notice of Proposed Sale. 181 Events of Default. An event of default occurs under the Stock Purchase Agreement upon the occurrence of any of the following events, among others: (i) a judgment for the payment of money in an aggregate amount in excess of $250,000 is rendered against WRP Newco and such judgement remains undischarged for 30 days; (ii) a change in control of WRP Newco (as defined in the Stock Purchase Agreement); (iii) WRP Newco fails to pay the dividend on the WRP Newco Series A Preferred on three separate instances; or (iv) a change resulting in or that could reasonably be expected to result in a material adverse effect on WRP Newco. Remedies. Upon the occurrence of an event of default, all obligations of ERP Operating Partnership to purchase shares of WRP Newco Series A Preferred automatically terminate unless WRP Newco delivers a notice to ERP Operating Partnership requesting the purchase by ERP Operating Partnership of WRP Newco Series A Preferred, and the proceeds of such sale would cure such event of default. In addition, in the event of the bankruptcy of WRP Newco or if WRP Newco fails to pay the dividend on the WRP Newco Series A Preferred on three separate instances, ERP Operating Partnership has the right to cause WRP Newco to purchase the WRP Newco Series A Preferred then held by ERP Operating Partnership. Registration Rights Agreement Upon issuance of the WRP Newco Class A Common, WRP Newco and ERP Operating Partnership will enter into a Registration Rights Agreement providing for registration rights at WRP Newco's expense with respect to shares of WRP Newco Class A Common, WRP Newco Series A Preferred and WRP Newco Common. Demand Registration. After the Effective Date, upon request (a "Demand Notice") of ERP Operating Partnership, WRP Newco has agreed to file a registration statement providing for the resale by ERP Operating Partnership of Registrable Securities and will use its best efforts to cause any such registration statement to be declared effective by the Commission. "Registrable Securities" means any of: (i) WRP Newco Series A Preferred issuable or issued; (ii) WRP Newco Common issuable or issued upon conversion of shares of WRP Newco Series A Preferred or WRP Newco Class A Common, or (iii) WRP Newco Common issuable or issued upon the exercise of warrants issued pursuant to the Articles Supplementary. WRP Newco is entitled to postpone for a reasonable period of time (but not in excess of 60 days) the filing of any registration statement, if the Board of Directors of WRP Newco determines that such registration and offering would materially interfere with any proposed material transaction involving WRP Newco. ERP Operating Partnership has the right to deliver one Demand Notice during any calendar year, but not more than four Demand Notices during the period ending five years from the Effective Date. 182 Incidental Registration. If WRP Newco proposes to register any WRP Newco Common for public sale pursuant to an underwritten offering it will give prompt written notice (a "Registration Notice") to ERP Operating Partnership and upon request from ERP Operating Partnership, WRP Newco will include Registrable Securities in the registration statement. WRP Newco will not be required to effect any registration if WRP Newco is advised by a nationally recognized independent investment banking firm selected by WRP Newco to act as lead underwriter, that a registration at that time of additional securities would materially and adversely affect the offering. ERP Operating Partnership has the right to deliver one Registration Notice during any calendar year, but not more than four Registration Notices during the period ending five years from the Effective Date. Limit in Aggregate Amount. WRP Newco need not register Registrable Securities pursuant to a Demand Notice or Registration Notice unless the Registrable Securities being registered have an aggregate fair market value of (i) $5,000,000 during the period ending three years from the Effective Date ("Initial Period"), or (ii) $7,500,000 at any time after the Initial Period. Lockup. In the event WRP Newco proposes to effect the distribution of its securities through an underwritten public offering, beginning seven days prior to the pricing of such offering and ending thirty days after such pricing, ERP Operating Partnership, in the event it beneficially owns in excess of 100,000 shares, will cease any sale or other disposition of any of the Registrable Securities, if requested by WRP Newco; provided, however, that ERP Operating Partnership will not be subject to more than one lockup period during any 12 month period. Agreement Regarding Palomino Park General. Upon consummation of the Merger, WRP Newco and ERP Operating Partnership will become the shareholders in WPHC. Pursuant to the Contribution and Distribution Agreement, Wellsford will contribute to WRP Newco 80% of its shares of WPHC, consisting of voting Class A Shares (the "Class A Shares"). The remaining 20% of Wellsford's shares in WPHC, consisting of non-voting Class B Shares (the "Class B Shares"), will be retained by Wellsford and, following the Merger, will be owned by ERP Operating Partnership. WPHC, together with Feld, are the two members of the limited liability companies -- Park at Highlands LLC and Red Canyon at Palomino Park LLC -- which own Phase I and Phase II, respectively. WRP Newco and ERP Operating Partnership will enter into an agreement (the "Palomino Agreement") regarding their rights and obligations as shareholders of WPHC and certain aspects of the development of Palomino Park, including Phases I (Blue Ridge) and II (Red Canyon). Certain of the terms are summarized below. 183 Capital Contributions. WPHC is obligated to make capital contributions to the Phase I LLC and Phase II LLC for certain acquisition costs, and to fund the deficit between construction costs and construction loan proceeds, respectively. These subsequent capital contribution obligations ("Phase Contributions") are limited to the deficits as projected in the budgets originally adopted for each Phase. Wellsford has guaranteed the Phase Contributions, which guarantees, following the Merger and with the consent of Feld, will be assumed by WRP Newco. ERP Operating Partnership has no obligation to contribute capital to WPHC. Issuance of Additional WPHC Shares to WRP Newco; Anti-Dilution Provisions. If additional shares of WPHC are issued to WRP Newco or to one of its subsidiaries, ERP Operating Partnership will have the right to purchase a sufficient number of such shares to retain a 20% interest in WPHC. Any Class A Shares acquired by ERP Operating Partnership will be converted into Class B Shares. Offers to Purchase Class A Shares or Class B Shares; Rights of First Refusal; WRP Newco's Drag Along Right. ERP Operating Partnership may transfer all, but not part, of its Class B Shares, except in a Tag Along transaction (described below). WRP Newco may transfer all or part of its Class A Shares after the expiration of the lock-up period (i.e., the period during which ERP Operating Partnership is liable to the construction lender under a Tri-Party Agreement, as described below). If WRP Newco receives an offer to purchase all of the Class A Shares, WRP Newco has the right ("Drag Along Right") to compel ERP Operating Partnership to sell all of its Class B Shares as part of that transaction to enable WRP Newco to effectuate a total sale of WPHC to a third party. If ERP Operating Partnership or WRP Newco shall receive an offer from a bona fide third party to purchase all (or in the case of WRP Newco any part) of their shares in WPHC, then the selling shareholder shall be obligated to offer to sell its shares to the other shareholder (i.e. the non-selling shareholder) who shall have a preemptive right ("Right of First Refusal") to purchase the offered shares on the same terms. ERP Operating Partnership may exercise its Right of First Refusal as to the Class A Shares, notwithstanding that WRP Newco may have exercised its Drag Along Right. In such event and for such purpose, WRP Newco's Class A Shares shall be valued as if all of the shares of WPHC had been sold, and not only the Class A Shares alone. ERP Operating Partnership's Tag Along Right. ERP Operating Partnership has a right ("Tag Along Right") to compel WRP Newco to include ERP Operating Partnership's Class B Shares in a sale of the Class A Shares, in such amount as will 184 preserve the 80%-20% ratio between the Class A Shares held by WRP Newco and Class B Shares held by ERP Operating Partnership. The Put/Call Feature of One-Half of the Class B Shares. One-half of ERP Operating Partnership's Class B Shares (the "Put/Call Shares") are subject to a Put/Call agreement in favor of either ERP Operating Partnership (the Put feature) or WRP Newco (the Call feature) at the Put/Call Price. Pursuant to its Put right, ERP Operating Partnership may compel WRP Newco to purchase from ERP Operating Partnership the Put/Call Shares at any time after the fifth year for the Put/Call Price. Pursuant to its Call right, WRP Newco may compel ERP Operating Partnership to sell to WRP Newco the Put/Call Shares at any time for the Put/Call Price. The Put/Call Price equals $1.9 million (adjusted, in the case of the Call, for inflation after the fifth year), less any amounts previously received by ERP Operating Partnership from sale and refinancing proceeds. Consistent with the foregoing, one-half of the Class B Shares in any sale transaction effected by means of either the Drag Along Right or the Tag Along Right is deemed Put/Call Stock and entitled to receive the greater of the purchase price in such transaction or a pro-rated portion of the Put/Call Price. Future Acquisitions of the Remaining Overall Property. Any future Phase acquired by WPHC will be acquired in a Colorado limited liability company substantially similar to the Phase II LLC. ERP Operating Partnership's Right of First Offer if WPHC Elects to Assign its Interest in the Land Contract. If WRP Newco, through WPHC, decides not to acquire a future Phase and instead to assign the land contract to a third party for such future Phase, then ERP Operating Partnership, subject to the similar interests of Feld, has a preemptive right of first offer with respect to such proposed assignment. ERP Operating Partnership's Right of First/Last Offer for Sale of Blue Ridge and Red Canyon. With the exception of sales pursuant to a condominium or townhome plan, ERP Operating Partnership is accorded certain rights of first and last offer with respect to a sale of either WPHC's interest in the Phase I LLC or the Phase II LLC, or the sale of fee title to Phase I or Phase II by either of said entities. 185 WRP Newco and WHPC Loss of Control. WRP Newco has agreed not to lose its controlling interest in WPHC nor to permit WPHC to lose its controlling interest in Phase I LLC, Phase II LLC or any future entity formed with respect to another phase of Palomino Park without first releasing ERP Operating Partnership from its obligations with respect to the Credit Enhancement Agreement and ERP Guaranty (as defined below). Tri-Party Agreements and Standby Agreements. Phase I Tri-Party Agreement. With respect to the development of Phase I, NationsBank, N.A. ("NationsBank") has provided a construction loan of approximately $36.7 million. Wellsford, PPPIC and NationsBank have entered into an agreement ("Phase I Tri-Party Agreement") under which Wellsford has agreed, assuming completion of construction, if the loan is not paid when due, to pay NationsBank the lesser of the loan balance or the final agreed upon budget. Upon consummation of the Merger, ERP Operating Partnership will, with the consent of NationsBank, assume Wellsford's obligations under the Phase I Tri-Party Agreement. Phase II Tri-Party Agreement. With respect to the development of Phase II, a construction loan has not yet been obtained. ERP Operating Partnership has agreed to provide substantially similar credit support for the Phase II construction loan ("Phase II Tri-Party Agreement") as it has agreed to provide pursuant to the Phase I Tri-Party Agreement. ERP Operating Partnership will receive a fee of (i) 1% of the committed construction loan amount for each of the first two years and (ii) 1-1/2% of such amount for the third year. The parties anticipate a construction loan of approximately $30 million. The Standby Agreements. If ERP Operating Partnership does, in fact, pay off the construction loan pursuant to its obligations under the Phase I Tri-Party Agreement or Phase II Tri-Party Agreement, ERP Operating Partnership shall be entitled to acquire fee title to the corresponding Phase for $100. Events of Default. Upon an event of default (as described below), ERP Operating Partnership may exercise all remedies available to it and shall have no obligation to enter into the Phase II Tri-Party Agreement; provided, however, ERP Operating Partnership may not disaffirm its obligations under the Phase I Tri-Party Agreement or, if entered into prior to the event of default, the Phase II Tri-Party Agreement. An event of default includes, among other things, a material misrepresentation by WRP Newco, failure to make payments after a material default by WRP Newco under the Palomino Agreement or any document entered into pursuant to the Palomino Agreement, an undischarged judgment against WRP Newco in excess of $250,000 and a change in control of WRP Newco. Credit Enhancement Agreement At the time of the Contribution and Distribution, with the consent of Dresdner Bank, AG, NY Branch ("Dresdner"), WRP Newco will assume Wellsford's obligations under a certain agreement (the "Bank Reimbursement Agreement") entered into between PPPIC, Wellsford and Dresdner pursuant to which (i) Dresdner has issued its letter of credit ("Dresdner Letter of Credit") to insure the repayment of the Bonds and (ii) Wellsford has undertaken to reimburse Dresdner if the Dresdner Letter of Credit is drawn upon. 186 ERP Operating Partnership has agreed to enter into a Credit Enhancement Agreement with WRP Newco (the "Credit Enhancement Agreement") under which, assuming the satisfaction of certain conditions, ERP Operating Partnership will make its own credit available to Dresdner in the form of a guaranty to Dresdner of WRP Newco's obligations under the Bank Reimbursement Agreement for a period of eight years from the consummation of the Merger (the "ERP Guaranty"). The ERP Guaranty will be revised and made available with respect to any similar letter of credit or credit facility issued in lieu or replacement of the Dresdner Letter of Credit. WRP Newco has agreed to pay ERP Operating Partnership for the ERP Guaranty an annual credit enhancement fee, payable quarterly, equal to .5% of the face amount of the Dresdner Letter of Credit (or the face amount of any alternate credit arrangement). Following an event of default by WRP Newco, ERP Operating Partnership will have the right, among other remedies, to select an alternate interest rate on the Bonds and to direct the actions of PPPIC under the Credit Enhancement Agreement. In addition, pursuant to the Credit Enhancement Agreement there are certain restrictions on the ability to convert the rate mode of the Bonds. WRP Newco has agreed to reimburse ERP Operating Partnership for any amounts it pays under the ERP Guaranty or any revision thereof, together with interest on such amount. POLICIES WITH RESPECT TO CERTAIN ACTIVITIES OF WRP NEWCO The following is a discussion of WRP Newco's investment policies, financing policies and policies with respect to certain other activities. WRP Newco's policies with respect to these activities have been determined by the directors of WRP Newco and may be amended or revised from time to time at the discretion of the directors without a vote of the stockholders of WRP Newco. Investment Policies WRP Newco intends to invest in real estate directly or indirectly through entities that engage in real estate-related activities. These investments may be in the form of debt or equity. Debt investments may include the purchasing of mortgage loans, other financial instruments collateralized by real estate or real estate interests, or participations therein, real property tax liens or tax-exempt bonds collateralized by real estate or tax-increment finance districts. These debt instruments may be senior, junior or otherwise subordinated to the interests of others. Further, WRP Newco may provide credit enhancement or guarantees of the obligations of others involved in real estate-related activities. WRP Newco may also invest in participating or convertible mortgages if WRP Newco concludes that it may benefit from the cash flow and/or any appreciation in the value of the property. Such mortgages may be similar to equity participations. WRP Newco may also make mortgage loans or participate in such loans and contemporaneously or otherwise obtain related property purchase options. Equity investments may include development projects directly or through joint ventures, as well as the purchase of general or limited partnership interests in limited partnerships, shares in publicly-traded or privately-held corporations or interests in other entities that own real estate, make real estate-related loans or invest in real estate-related debt instruments or provide services or products to the real estate industry. WRP Newco intends to engage in active real estate businesses, 187 which may include land subdivisions, condominium conversions, property sales, and other businesses considered ineligible or impractical investments for REITs. WRP Newco may also hold real estate or interests therein for investment. WRP Newco may purchase substantially leased, mostly unleased or vacant properties of any type or geographic location. WRP Newco intends to renovate and re-lease the mostly unleased or vacant properties. The activities described above often do not generate immediate cash flow, and cash flow generated may be non-recurring. These investments may be subject to existing debt financing and any such financing will have a priority over the equity interests of WRP Newco. WRP Newco may offer to exchange its securities for properties and securities of other entities. Further, it may, from time to time, repurchase its shares. WRP Newco will seek investments generally with a duration of one to five years. Financing Policies WRP Newco will seek to finance its investments through both public and private secured and unsecured debt financings, as well as public and private placements of its equity securities. The equity securities will include both common and preferred equity issuances. WRP Newco does not have a policy limiting the number or amount of mortgages that may be placed on any particular property, but mortgage financing instruments usually limit additional indebtedness on such properties. There are currently no restrictions on the amount of debt that WRP Newco may incur. Also, WRP Newco does not plan to distribute dividends for the foreseeable future, which will permit it to accumulate for reinvestment cash flow from investments, disposition of investments and other business activities. WRP Newco has obtained a written commitment from Bank of Boston and Morgan Guaranty for a $50 million two-year line of credit. This facility is subject to certain financial and other covenants. In the future, WRP Newco may seek to extend, expand, reduce or renew such facility, or obtain an additional or a replacement facility. See "Wellsford Real Properties, Inc. - Initial Capital and Financing". Policies with Respect to Other Activities WRP Newco does not intend to qualify as a REIT, but it may, from time to time, invest in REITs, sell properties or entities to REITs for cash and/or securities. Further, it may spin-off to its common stockholders, shares of its subsidiaries or shares of other entities it has acquired through the sale of its properties, investments or otherwise. These spin-offs may be taxable or non- taxable, depending upon the facts and circumstances. WRP Newco's policies with respect to its activities may be reviewed and modified from time to time by WRP Newco's directors without notice to or vote of its stockholders. 188 MANAGEMENT OF WRP NEWCO Directors and Executive Officers The executive officers and directors of WRP Newco, their ages and their positions are as follows:
Name Age Position Held ---- --- ------------- Jeffrey H. Lynford........... 49 Chairman of the Board, Secretary and Director** Edward Lowenthal............. 52 President, Chief Executive Officer and Director* Gregory F. Hughes............ 33 Chief Financial Officer David Strong................. 38 Vice President for Development Rodney F. Du Bois............ 60 Director* Mark S. Germain.............. 46 Director** Frank J. Hoenemeyer.......... 77 Director*** Frank J. Sixt................ 45 Director*** Douglas J. Crocker, II(1).... 56 Proposed Director** - --------------------
* Term expires 1998 ** Term expires 1999 *** Term expires 2000 (1) Mr. Crocker will become a director upon consummation of the Distribution and Merger and the purchase by ERP Operating Partnership of WRP Newco Class A Common. Mr. Crocker will remain a director for a minimum of two years, and thereafter so long as certain conditions are met. See "Description of Capital Stock of WRP Newco -- Class A Common Stock". Jeffrey H. Lynford has been the Chairman of the Board, Secretary and Director of WRP Newco since its formation in January 1997 and has been the Chairman of the Board and Secretary of Wellsford since its formation in July 1992 and was the Chief Financial Officer of Wellsford from July 1992 until December 1994. Mr. Lynford was the Chairman of the Board of WGI since its formation in 1986. Mr. Lynford currently serves as a trustee emeritus of the National Trust for Historic Preservation and as a director of four mutual funds: Cohen & Steers Total Return Realty Fund, Inc., Cohen & Steers Realty Shares, Inc., Cohen & Steers Realty Income Fund, Inc. and Cohen & Steers Special Equity Fund, Inc. He is also a member of the New York bar. Prior to founding WGI, Mr. Lynford gained real estate and investment banking experience as a partner of Bear Stearns & Co. and a managing director of A.G. Becker Paribas, Inc. 189 Edward Lowenthal has been the President, Chief Executive Officer and Director of WRP Newco since its formation in January 1997 and has been the President and Chief Executive Officer and a trustee of Wellsford since its formation in July 1992 and was President of WGI since its formation in 1986. Mr. Lowenthal currently serves as a director of United American Energy Corporation, a developer, owner and operator of hydroelectric and other alternative energy facilities, a director of Corporate Renaissance Group, Inc., a mutual fund, a director of Omega Healthcare, Inc., a REIT, a director of Great Lakes REIT, Inc., a REIT that owns and operates office buildings, and a trustee of Corporate Realty Income Trust, a REIT. He is also a member of the executive committee and The Board of Governors of the NAREIT. Prior to founding WGI, Mr. Lowenthal gained real estate and investment banking experience as a partner of Bear Stearns & Co., a managing director of A.G. Becker Paribas, Inc., and a partner in the law firm of Robinson Silverman Pearce Aronsohn & Berman. Gregory F. Hughes has been the Chief Financial Officer of WRP Newco since its formation in January 1997 and has been a Vice President - Chief Financial Officer of Wellsford since December 1994. From March 1993 until December 1994 he was a Vice President and Chief Accounting Officer of Wellsford. During 1992, Mr. Hughes was a controller with Jones Lang Wootton Realty Advisors, a firm that provides real estate asset management and investment consultation services. From 1985 to 1991, Mr. Hughes was a manager with Kenneth Leventhal & Company, a public accounting firm specializing in real estate and financial services. Mr. Hughes is a certified public accountant. David M. Strong has been a Vice President for Development of WRP Newco since its formation in January 1997 and has been a Vice President of Wellsford since July 1995. From July 1994 until July 1995 he was Acquisitions and Development Associate of Wellsford. From 1991 to 1994, Mr. Strong was President and owner of LPI Management, Inc., a commercial real estate company providing management and consulting services. From 1984 to 1991, he was a senior executive with the London Pacific Investment Group, a real estate development, investment and management firm active in Southern California and Western Canada. From 1979 to 1984, Mr. Strong was a manager with Arthur Young, a public accounting firm. Mr. Strong is a member of the Canadian Institute of Chartered Accountants. Rodney F. Du Bois will become a director of WRP Newco upon consummation of the Distribution and has been a trustee of Wellsford since November 1992. Mr. Du Bois also has been President and co-owner of Goshawk Corporation, which provides finance and general corporate services, since 1982. Mr. Du Bois was a founder of Mountain Cable Company, a cable TV multiple system operator, and its Chairman from 1985 until the company's sale in 1988. Previously Mr. Du Bois served as Executive Vice President and a director of C. Brewer and Co., Chairman of Alexander and Baldwin Agribusiness, Inc., a managing director of Warburg, Paribas, Becker, Inc. and a Professor of Real Estate at the Amos Tuck School of Business Administration at Dartmouth College. Mark S. Germain will become a director of WRP Newco upon consummation of the Distribution and has been a trustee of Wellsford since November 1992. Currently he is employed by Olmstead Group L.L.C., which is a consultant to biotechnology and other high technology companies. Mr. Germain also serves as a board member of several privately held biotechnology companies. Previously, from 1990 to 1994, Mr. Germain was employed by D. Blech & Company, Incorporated, a merchant bank. From 1986 to 1989, he was President and Chief Operating Officer of 190 The Vista Organization, Ltd., and from 1989 to 1990, its President and Chief Executive Officer. Mr. Germain was a partner in a New York law firm prior to 1986. Frank J. Hoenemeyer will become a director of WRP Newco upon consummation of the Distribution and has been a trustee of Wellsford since November 1992. Mr. Hoenemeyer also currently serves as a director of American International Group, Inc., Mitsui Trust Bank (U.S.A.), W.P. Carey Advisors, Inc. and Carey Fiduciary Advisors, Inc. (subsidiaries of W.P. Carey & Co., Inc.) and ARIAD Pharmaceuticals, Inc. and as Vice Chairman of the Investment Committee of W.P. Carey & Co., Inc. From 1947 to 1984, he was employed by The Prudential Insurance Company of America where he served as Vice Chairman and Chief Investment Officer prior to his retirement. Frank J. Sixt will become a director of WRP Newco upon consummation of the Distribution and has been a trustee of Wellsford since November 1992. Mr. Sixt also currently serves as an executive director of Cheung Kong (Holdings) Limited, Cheung Kong Infrastructure Holdings Limited and Hutchinson Whampoa Limited Group of Companies. He also serves as a director of Husky Oil Limited, Concord Property and Financial Company Limited and World Financial Properties Limited. He is also a director of and Chairman of the Executive Committee of the Board of Directors of Gordon Capital Corporation. Previously, from 1987 to 1990, Mr. Sixt was a partner in the law firm of Stikeman Elliot. For a biographical description of Douglas J. Crocker II, see "Management and Operation of the Surviving Trust After the Merger - Trustees and Executive Officers." Key Employee Richard R. Previdi has been active in seeking to acquire commercial properties on behalf of WRP Newco and its predecessor since September, 1996. From May 1994 until June 1996, he was a managing director of Emmes & Company, a real estate investment company. From April 1990 until May 1994, Mr. Previdi was a managing director of Trammell Crow N.E., Inc., and Chief Executive Officer of that company's Northern Virginia Commercial Division. Previously, from October 1985 until April 1990, he was first a marketing principal, and later a partner, of Trammell Crow Company. From October 1982 until October 1985, Mr. Previdi was a manager with Arthur Young and Company, a public accounting firm. Compensation of Directors WRP Newco will pay to each of its directors who are not employees of WRP Newco (i) an annual fee of $16,000, payable quarterly in shares of WRP Newco Common, and (ii) a fee of $2,250 payable in cash for each regular quarterly Board of Directors meeting at which such director is present in person or by telephone. Messrs. Du Bois, Germain, Hoenemeyer and Sixt will also each receive options to purchase 42,750 shares of WRP Newco Common and Mr. Crocker will receive options to purchase 21,375 shares of WRP Newco Common, all under WRP Newco's 1997 Management Incentive Plan and each will be eligible along with other present and future directors to receive additional share options. Directors who are employees of WRP Newco will not be paid any directors' fees. In addition, WRP Newco will reimburse the directors for travel expenses incurred in connection with their activities on behalf of WRP Newco. 191 WRP Newco also intends to grant options to purchase 85,500 shares of WRP Newco Common under the 1997 Management Investment Plan to each of Messrs. Lynford, Lowenthal, Hughes and Strong. Board Committees The Board of Directors of WRP Newco will establish, following consummation of the Distribution, an Audit Committee, a Compensation Committee and an Executive Committee. The Board will not have a nominating committee or a committee performing the functions of a nominating committee; the entire Board will perform the usual functions of such committee. Executive Committee. The Executive Committee will consist of Messrs. Lynford, Lowenthal and Hoenemeyer. The Executive Committee has the authority to acquire, dispose of and finance investments for WRP Newco and execute contracts and agreements, including those related to the borrowing of money by WRP Newco, and generally to exercise all other powers of the directors except for those which require action by all directors or the independent directors under the Articles of Incorporation or Bylaws of WRP Newco or under applicable law. Compensation Committee. The Compensation Committee will consist of Messrs. Du Bois, Germain, Hoenemeyer and Sixt, none of whom are employees of WRP Newco. The Compensation Committee will review WRP Newco's compensation and employee benefit plans, programs and policies, approve employment agreements and monitor the performance and compensation of the Executive Officers and other employees. Audit Committee. The Audit Committee will consist of Messrs. Du Bois, Germain, Hoenemeyer and Sixt and will make recommendations concerning the engagement of independent public accountants, review with the independent public accountants the plans and results of the audit engagement, approve the professional services provided by the independent public accountants, review the independence of the independent public accountants, consider the range of audit and non-audit fees, review the adequacy of WRP Newco's internal accounting controls and review related party transactions. Executive Compensation WRP Newco was organized as a Maryland corporation in January, 1997. Its executive officers will not be entitled to receive any separate salary or other cash compensation from WRP Newco for any period prior to the Distribution. Prior to the Distribution, WRP Newco's executive officers will only receive compensation from Wellsford for services rendered by them to Wellsford. The following table sets forth certain information with respect to the Chief Executive Officer and each of the other executive officers of WRP Newco (collectively, the "Executive Officers") whose cash compensation from WRP Newco is expected to exceed $100,000 on an annualized basis during the fiscal year ending December 31, 1997, and all executive officers as a group. 192
Cash Name of Individual or Number in Group Capacities in Which Serve Compensation - ------------------------------------- ------------------------- ------------ Jeffrey H. Lynford..................... Chairman of the Board and $275,000 Secretary Edward Lowenthal....................... President and Chief Executive $275,000 Officer Gregory F. Hughes...................... Chief Financial Officer $175,000 David M. Strong........................ Vice President for Development $125,000 All executive officers as a group (consisting of the four persons named above)........................... $850,000
For information regarding options to purchase shares of WRP Newco Common to be granted to executive officers and directors, see "-- Compensation of Directors". Employment Agreements WRP Newco will enter into employment agreements with Messrs. Lynford and Lowenthal (the "Senior Executives"), pursuant to which Mr. Lynford will serve as the Chairman of the Board of WRP Newco and Mr. Lowenthal will serve as its President and Chief Executive Officer. WRP Newco will also enter into employment agreements with Messrs. Hughes and Strong. The employment agreements with Messrs. Lynford and Lowenthal will expire on December 31, 2002, and the employment agreements with Messrs. Hughes and Strong will expire two years from the Effective Time. Each of the employment agreements is automatically extended for additional one-year periods unless either the Executive Officer or WRP Newco gives prior notice not to extend the employment agreement, as specified in the agreement. Pursuant to the employment agreements, each of the Executive Officers is also entitled to incentive compensation to be determined by the Compensation Committee. Mr. Hughes is entitled to incentive compensation equal to at least 50% of his annual base salary. In the event that either of the Senior Executives dies during the term of his employment agreement, or if WRP Newco elects to terminate his employment agreement as a result of the Senior Executive's total disability, WRP Newco is required to pay additional compensation for the longer of 36 months after such termination or for the remaining term of his agreement at the rate of his then annual base salary. Following a "change in control of the Company" (as defined in the agreements), if a Senior Executive's employment agreement is terminated (a) by WRP Newco, other than for "proper cause" (as defined in the agreements) or death or disability or (b) by the Senior Executive, then in either case the Senior Executive shall be entitled to receive a lump sum cash payment generally equal to the sum of (i) the amount of compensation that he would have been entitled to had the agreement not been so terminated and (ii) 299% of his average annual compensation of every type and form includible in gross income received during the three year period preceding the calendar year in which employment is terminated. The Senior Executives are also entitled to reimbursement of income taxes on certain 193 non-cash taxable income resulting from a change in control of WRP Newco, including taxable income resulting from accelerated loan forgiveness or vesting of restricted shares or options. In addition, each Senior Executive is entitled to receive an additional sum to cover certain resulting income and excise tax liabilities that may be incurred on all of the foregoing. The employment agreements with the Senior Executives will indemnify and hold harmless the Senior Executives for any income and excise tax liabilities that arise from any benefits described in this Joint Proxy Statement/Prospectus/Information Statement and are not otherwise provided for in the payments to be made to them by the Surviving Trust on the date of the Merger. Compensation Committee Interlocks and Insider Participation The Compensation Committee will consist of five independent directors of WRP Newco: Rodney F. Du Bois, Mark S. Germain, Frank J. Hoenemeyer and Frank J. Sixt, none of whom is, or has been, an officer or employee of WRP Newco. 194 PRINCIPAL STOCKHOLDERS OF WRP NEWCO The following table sets forth information regarding the beneficial ownership of WRP Newco Common by each person anticipated by WRP Newco to be the beneficial owner of more than 5% of WRP Newco Common, by each director or proposed director of WRP Newco, by certain executive officers of WRP Newco and by all directors, proposed directors and executive officers of WRP Newco as a group after giving effect to the Distribution, the Merger and certain other transactions described herein (excluding the Additional Share Offering). Each person named in the table has sole voting and investment power with respect to all WRP Newco Common shown as beneficially owned by such person. 195
Amount and Nature of Name and Address of Beneficial Owner (1) Beneficial Ownership Percent of Class - ---------------------------------------- -------------------- ---------------- Jeffrey H. Lynford(2).......................... 622,529 11.50% Edward Lowenthal(2)............................ 626,605 11.58% Gregory F. Hughes(3)........................... 202,074 3.99% David Strong(4)................................ 130,487 2.61% Rodney F. Du Bois(5) 32 Rip Road Hanover, New Hampshire 03755................ 44,500 * Mark S. Germain(6) Olmsted Road Scarsdale, New York 10583................... 110,858 2.24% Frank J. Hoenemeyer(5) 7 Harwood Drive Madison, New Jersey 07940................... 43,683 * Frank J. Sixt(6) c/o Cheung Kung (Holdings), Ltd. Ching Building, 18-22 Floors 29 Queen's Road Central Hong Kong.................................... 81,265 1.64% Douglas J. Crocker II(7) c/o Equity Residential Properties Trust Two North Riverside Plaza Chicago, Illinois 60606..................... 21,375 * ERP Operating Limited Partnership Two North Riverside Plaza Chicago, Illinois 60606...................... 334,062(8) 7.22% All directors, proposed directors and executive officers as a group (9 persons).. 1,883,376 28.82% - --------------------
* Less than 1.0% (1) Unless otherwise indicated, the address of each person is c/o Wellsford Real Properties, Inc., 610 Fifth Avenue, New York, New York 10020. (2) Includes 538,205 shares of WRP Newco Common issuable upon the exercise of options, all of which will be either issued or amended as of the Effective Time, and none of which will be exercisable as of the Effective Time. Options to purchase 452,705 of these shares represent replacement options for Wellsford share options having exercise prices ranging from $18.94 to $26.375. (3) Includes 188,105 shares of WRP Newco Common issuable upon the exercise of options, all of which will either be issued or amended as of the Effective Time, and none of which will be exercisable as of the 196 Effective Time. Options to purchase 102,605 of these shares represent replacement options for Wellsford share options having exercise prices ranging from $18.94 to $29.375. (4) Includes 126,126 shares of WRP Newco Common issuable upon the exercise of options, all of which will either be issued or amended as of the Effective Time, and none of which will be exercisable as of the Effective Time. Options to purchase 40,626 of these shares represent replacement options for Wellsford share options having exercise prices ranging from $18.94 to $22.50. (5) Includes 42,750 shares of WRP Newco Common issuable upon the exercise of options, all of which will either be issued or amended as of the Effective Time and will then be immediately exercisable. (6) Includes 81,265 shares of WRP Newco Common issuable upon the exercise of options, all of which will either be issued or amended as of the Effective Time and will then be immediately exercisable. (7) Includes 21,375 shares of WRP Newco Common issuable upon exercise of options, all of which will be issued as of the Effective Time and will then be immediately exercisable. Excludes 334,062 shares of WRP Newco Common (estimated) to be issued to ERP Operating Partnership pursuant to the Stock Purchase Agreement. Mr. Crocker is President and Chief Executive Officer of EQR, the general partner of ERP Operating Partnership, and disclaims beneficial ownership of such shares. (8) Estimated number of shares of WRP Newco Common to be issued to ERP Operating Partnership pursuant to the Stock Purchase Agreement. WRP NEWCO'S CERTAIN TRANSACTIONS The contracts to purchase Chatham, the Point View office complex and Greenbrook were transferred to WRP Newco by an entity ("Wellsford Commercial") of which Messrs. Lynford and Lowenthal, the wife of Mark Germain who will be a director of WRP Newco, and three unaffiliated parties are owners, for shares of WRP Newco Common having an aggregate value of approximately $2.25 million and WRP Newco's agreement to repay a $1.0 million advance used for the down payment on the Point View office complex. The number of shares of WRP Newco Common issued to Wellsford Commercial was approximately 225,000, based upon the Issuance Price. Upon liquidation of Wellsford Commercial, Mr. Lynford, Mr. Lowenthal and the wife of Mark Germain will each receive approximately 16.4%, 16.4% and 13.8%, respectively, of the shares of WRP Newco Common to be issued to Wellsford Commercial, and the other three unaffiliated owners will receive the remainder of the shares. The aggregate purchase price for these commercial properties paid by WRP Newco is approximately $47.6 million, including the approximately $2.25 million referred to above. The above transfers to WRP Newco, along with the Contribution and the purchase of stock by ERP Operating Partnership under the Stock Purchase Agreement, are being made as part of a single plan intended to qualify as a tax-free transaction. 197 MANAGEMENT'S DISCUSSION AND ANALYSIS OF WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR) Overview The following discussion should be read in conjunction with the Wellsford Real Properties Inc. (Predecessor) (the "Company") financial statements contained herein. Results of Operations The Company's operations during the year ended December 31, 1996 consisted of owning a mortgage note receivable, upon which the Company earned $757,000 of interest income, and developing two multifamily communities located in a suburb of Denver, Colorado with a total of 760 units under development. Liquidity and Capital Resources The Company expects to meet its short-term liquidity requirements generally through its working capital and cash flow provided by operations. The Company considers its ability to generate cash to be adequate and expects it to continue to be adequate to meet operating requirements both in the short and long terms. The Company expects to meet its long-term liquidity requirements such as refinancing mortgages, financing acquisitions and development, and financing capital improvements and debt and equity investments in real estate companies by long-term borrowings, through the issuance of debt and the offering of additional debt and equity securities. The Company has received a commitment from the Bank of Boston and Morgan Guaranty that they will provide a $50 million credit facility, subject to customary conditions, which would be available to fund acquisitions, debt and equity investments, development, capital expenditures, repayment of indebtedness and related expenditures. The Company expects to obtain this credit facility concurrently with the closing of the Merger and Distribution. The commitment received is subject to customary conditions and documentation. In December 1995, the Company marketed and sold $14.8 million of tax-exempt bonds to fund construction at Palomino Park. The bonds have a variable rate of interest and a term of 40 years. At December 31, 1996, $5.5 million of the bond proceeds were being held in escrow pending their use for the funding of development. In July 1996, the Company originated the Sonterra Loan. The Sonterra Loan bears interest at 9% per annum and matures in July 1999. The Company also has the exclusive option to purchase the community for $20.5 million through December 1997 and for $21 million during 1998. 198 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Trustees of Wellsford Residential Property Trust and Subsidiaries We have audited the accompanying combined balance sheets of the Predecessor to Wellsford Real Properties, Inc. (the "Company") as of December 31, 1996 and 1995, and the related combined statements of income and equity for the year ended December 31, 1996, and cash flows for the year ended December 31, 1996 and for the period from March 22, 1995 (the date the assets were acquired and liabilities incurred) to December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described in Note 1, no operating revenues or expenses were incurred in the period from March 22, 1995 through December 31, 1995. Accordingly, the statement of income for the period ended December 31, 1995 has been omitted. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Company at December 31, 1996 and 1995, and the combined results of its operations for the year ended December 31, 1996 and its cash flows for the year ended December 31, 1996 and for the period from March 22, 1995 to December 31, 1995, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP ---------------------- New York, New York February 28, 1997 199 Wellsford Real Properties, Inc. (Predecessor) Combined Balance Sheets (In thousands)
December 31, December 31, 1996 1995 ---- ---- ASSETS Construction in process $21,306 $7,955 Restricted cash 5,520 10,414 Mortgage note and interest receivable 17,934 0 -------------------------------- Total Assets $44,760 $18,369 =============================== LIABILITIES AND EQUITY Tax exempt mortgage note payable $14,755 $14,755 -------------------------------- Total Liabilities 14,755 14,755 -------------------------------- Commitments and contingencies -- -- Equity 30,005 3,614 -------------------------------- Total Equity 30,005 3,614 -------------------------------- Total Liabilities and Equity $44,760 $18,369 ================================
See accompanying notes. 200 Wellsford Real Properties, Inc. (Predecessor) Combined Statement of Income and Equity (In thousands) Year Ended December 31, 1996 ---- Interest income $757 ----------- Net income 757 ----------- Equity, January 1, 1996 3,614 Contributions 25,634 ----------- Equity, December 31, 1996 $30,005 =========== See accompanying notes. 201 Wellsford Real Properties, Inc. (Predecessor) Combined Statements of Cash Flows (In thousands)
Year Period From Ended March 22 to December 31, December 31, 1996 1995 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $757 $0 Adjustments to reconcile net income to net cash provided by operating activities: Decrease (increase) in assets: Debt service reserve 4,894 4,341 Interest receivable (134) 0 -------------------------------- Net cash provided by operating activities 5,517 4,341 -------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in real estate assets (13,351) (7,955) Investment in mortgage note receivable (17,800) 0 -------------------------------- Net cash (used) in investing activities (31,151) (7,955) -------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from tax exempt mortgage note payable 0 14,755 Funding of restricted cash accounts 0 (14,755) Equity contributions 25,634 3,614 -------------------------------- Net cash provided by financing activities 25,634 3,614 -------------------------------- Net increase (decrease) in cash and cash equivalents 0 0 Cash and cash equivalents, beginning of period 0 0 -------------------------------- Cash and cash equivalents, end of period $0 $0 ================================ Cash paid during the period for interest $663 $335
See accompanying notes. 202 WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR) NOTES TO COMBINED FINANCIAL STATEMENTS (1) Organization and Basis of Presentation Wellsford Real Properties, Inc. ("WRP Newco"), a C corporation formed on January 8, 1997, is a wholly owned subsidiary of Wellsford Residential Property Trust ("Wellsford"). On January 16, 1997 Wellsford announced its intention to merge with Equity Residential Properties Trust ("EQR"). Immediately prior to the Merger, Wellsford intends to contribute certain of its assets to WRP Newco and have WRP Newco assume certain liabilities of Wellsford. Immediately after the contribution of assets to WRP Newco and immediately prior to the Merger, Wellsford intends to distribute to its common shareholders all the outstanding shares of WRP Newco owned by Wellsford. The common shareholders of Wellsford will receive one common share of WRP Newco for each four common shares of Wellsford owned. The accompanying combined financial statements of the predecessor to WRP Newco (the "Company") include the assets and liabilities to be contributed and assumed by WRP Newco from the time the assets and liabilities were acquired or incurred, respectively, by Wellsford or the majority owned or controlled subsidiary of Wellsford. Such financial statements have been prepared using the historical basis of the assets and liabilities and historical results of operations related to the Company's assets. For the purpose of the Company, the assets were acquired and liabilities incurred beginning on March 22, 1995. During the period from March 22, 1995 through December 31, 1996 the Company was principally involved in the initial phase of construction development activities with no operating revenues or expenses incurred. Accordingly, the income statement for the period ended December 31, 1995 has been omitted. The Company has earned interest income on the Sonterra Mortgage (see Note 4) during the year ended December 31, 1996. (2) Summary of Significant Accounting Policies Principles of Combination. All significant intercompany transactions between Wellsford and the majority owned or controlled subsidiaries relating to the assets and liabilities that are to be contributed or assumed by WRP Newco have been eliminated in combination. Income Recognition. Residential communities are leased under operating leases with terms generally one year or less; rental revenue is recognized monthly as it is earned. 203 Commercial properties are leased under operating leases; rental revenue is recognized on a straight-line basis over the terms of the leases. Cash and Cash Equivalents. The Company considers all demand and money market accounts and short term investments in government funds with an original maturity of three months or less to be cash and cash equivalents. Real Estate and Depreciation. Costs directly related to the acquisition and improvement of real estate are capitalized, including interest expense incurred during and related to construction and including all improvements identified during the underwriting of a property acquisition. Depreciation is computed over the expected useful lives of depreciable property on a straight line basis, principally 40 years for buildings and improvements and 5 to 12 years for furnishings and equipment. The Company has adopted Statement of Financial Accounting Standard ("SFAS") 121 "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed of" which requires that long-lived assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and that long-lived assets to be disposed of be measured at the lower of carrying amount or net realizable value. The adoption of SFAS 121 has not had an impact on the Company's combined financial position or results of operations. Mortgage Note Receivable Impairment. The Company considers a note impaired if, based on current information and events, it is probable that all amounts due under the note agreement are not collectable. Impairment is measured based upon the fair value of the underlying collateral. No impairment has been recorded through December 31, 1996. Financing Costs. Financing and refinancing costs are capitalized and amortized over the term of the related loan under the interest method. Credit facility fees are capitalized and amortized over the term of the commitment on a straight-line basis. Estimates. 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. 204 (3) Restricted Cash Restricted cash primarily consists of the remaining proceeds from the Palomino Park tax-exempt mortgage note (Note 5) which are restricted in their use to construction costs and capitalized interest related to the Palomino Park development project (Note 4). (4) Multifamily Communities and Mortgage Note Receivable The Company holds a $17.8 million mortgage on a 344 unit, newly constructed community in Tucson, Arizona known as Sonterra at Williams Centre (the "Sonterra Mortgage"). The Sonterra Mortgage was originated in July 1996, bears interest at 9% per annum and matures in July 1999. The Company also has the exclusive option to purchase the community for $20.5 million through December 1997 and $21 million during 1998. Interest receivable of $0.1 million is included in the December 31, 1996 balance. The fair market value of the Company's mortgage note receivable, estimated by using a discounted cash flow analysis, approximates the carrying amount. In connection with the Sonterra Mortgage, a $0.2 million origination fee was paid to Wellsford by the borrower. The Company currently has two multifamily projects under development in a suburb of Denver, Colorado, totaling 760 apartment units (collectively, the "Development Communities"). The Development Communities are the first of five communities at Palomino Park, a 1,880 unit master-planned, security controlled apartment/townhome community. The Company has the option to develop phases three through five, but is not obligated to do so. The 181.8 acre master site surrounds an amenity-filled, 24 acre park and an approximately 29,000 square foot recreational center to be shared by all phases. The Development Communities are being constructed pursuant to fixed-price contracts, with a local developer, and are estimated to cost approximately $76.1 million in total, including certain development and incentive fees payable to the developer. The Company is committed to purchase 100% of the Development Communities upon completion and the achievement of certain occupancy levels. At December 31, 1996 the Company had invested $21 million related to the land for the Development Communities, the recreation center and general infrastructure work. A portion of such infrastructure will become the property of certain local governmental entities at the date of completion and retirement of the tax-exempt mortgage note payable described in Note 5. In addition, approximately $21.8 million was outstanding at December 31, 1996 on a construction loan to the developer, which the Company would repay upon purchase assuming completion and achievement of certain occupancy levels. During the periods ended December 31, 1996, and December 31, 1995, respectively, the Company capitalized $0.7 million and $0.3 million of interest to the Development Communities. The Company expects to fund the construction of its Development Communities from its working capital and with proceeds from a credit facility and a $14.8 million tax-exempt mortgage note (Note 5). 205 Subsequent to December 31, 1996, the Company entered into contracts on five commercial office properties for $47.6 million in aggregate, and has closed on four of the properties. The purchase prices for these commercial properties include approximately $2.25 million in value of shares of WRP Newco Common to be issued to an entity in consideration for the assignment of the purchase contracts entered into by such entity. Upon liquidation of such entity, each of the Chairman of the Board and President of Wellsford, Messrs. Lynford and Lowenthal, will receive approximately 16.4% of such shares, and the wife of Mark Germain, a trustee of Wellsford, will receive approximately 13.8% of such shares. Each are owners of such entity. Greenbrook Corporate Center ($23.7 million) is a Class A, three-story office building with a 35 foot atrium, located in Fairfield, NJ, and comprising approximately 190,000 rentable square feet. It is situated on a 20 acre developed site with 7 acres of additional, contiguous undeveloped land. Point View ($15.8 million) consists of 194 acres containing two office buildings, totaling approximately 560,000 square feet, an adjacent 10- acre undeveloped site, and a central utility plant located in Wayne, NJ. The site is currently undergoing a major renovation. The purchase of this building was closed in February 1997. 1700 Valley Road ($1.0 million) is a Class B+, two-story vacant office building located in Wayne, NJ and comprising approximately 70,600 square feet. It is situated on a nine acre site. The purchase price of this building was closed in February 1997. 1800 Valley Road ($2.0 million) is a Class B+, two-story vacant office building located in Wayne, NJ and comprising approximately 54,800 square feet. It is situated on a 14 acre site. The purchase of this building was closed in February 1997. The Chatham Building ($5.1 million) is a three-story office building located in Chatham, NJ and comprising approximately 65,000 square feet. The site is currently undergoing a major renovation. The purchase of this building was closed in January 1997. (5) Tax Exempt Mortgage Notes Payable At December 31, 1996 and 1995, the Company had $14.8 million of tax exempt mortgage notes payable outstanding. The Company's tax exempt mortgage note payable is secured by certain infrastructure at the Company's Palomino Park development and bears interest-only payments at a variable rate (which approximates the Standard & Poor's / J.J. Kenney index for short-term high grade tax-exempt bonds, currently 3.65%) until it matures in December 2035. 206 The tax-exempt mortgage note payable is security for tax-exempt bonds which are backed by a letter of credit from a AAA rated financial institution. Wellsford has guaranteed the reimbursement of the financial institution in the event that the letter of credit is drawn upon. It is anticipated that as a result of the Merger, this guaranty will be replaced by the guarantees of WRP Newco and EQR. These bonds require the Company to obtain the approval of both the trustee, as defined in the bond documents, and the above mentioned financial institution for transactions such as those anticipated in connection with the Merger and Distribution. The Company expects to receive such approvals. The fair market value of the variable rate tax exempt mortgage note is considered to be the carrying amount. (6) Commitments and Contingencies WRP Newco will enter into employment agreements with certain of its officers. Such agreements will be for terms which expire between 1999 and 2002, and will provide for aggregate annual base salaries of $0.8 million, $0.8 million and $0.6 million in 1997, 1998 and 1999 through 2002, respectively. The Company is obligated under an operating lease covering its corporate headquarters for $0.2 million in 1997, $0.2 million in 1998, and $0.2 million in 1999, plus certain operating expense escalations. As a commercial real estate owner, the Company is subject to potential environmental costs. The Company's Point View site contains asbestos containing materials ("ACMs"); upon acquisition of the property, the Company intends to proceed with the removal of all ACMs in such property which is anticipated to cost $3.5 million. At this point in time, management of the Company is not aware of any environmental concerns that would have a material adverse effect on the Company's financial position or future results of operations except as just described. In 1997 WRP Newco will adopt a defined contribution savings plan pursuant to Section 401 of the Internal Revenue Code. Under such a plan there are no prior service costs. All employees will be eligible to participate in the plan after one year of service. Employer contributions will be made based on a discretionary amount determined by WRP Newco's management. Employer contributions, if any, will be based upon the amount contributed by an employee. The Company will lend $20 million of an $80 million subordinated mezzanine loan to entities which own the equity interests (the "Equity Interests") in the owner of a 52-story approximately 1.74 million sq.ft. Class A office building located at 277 Park Avenue, New York City (the "277 Park Loan"). The loan will be secured primarily by the pledge of the Equity Interests. The 277 Park Loan will be due in April 2007 and will bear interest at the rate of approximately 11.75% per annum. 207 WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR) PRO FORMA COMBINED INCOME STATEMENT For the Year Ended December 31, 1996 (In Thousands Except Per Share Data) (Unaudited) During the period from January 1, 1996 to March 31, 1997, Wellsford Real Properties, Inc. (Predecessor) (the "Company") acquired a mortgage note receivable, committed to originate a mortgage receivable, purchased four commercial office properties, and contracted to purchase one additional commercial office property. One of the commercial office properties, the Greenbrook Corporate Center, is currently occupied. This unaudited Pro Forma Combined Income Statement is presented as if the Company's transactions, each as referred to above, and the Merger and Distribution had been consummated on January 1, 1996, as if the mortgage receivable upon which the Company has committed to originate had been originated on January 1, 1996, and as if the commercial office properties under contract were actually purchased as of January 1, 1996. All of the pro forma adjustments shown are solely attributed to the transactions described. In the opinion of the Company's management, all adjustments necessary to reflect the effects of these transactions have been made. This unaudited Pro Forma Combined Income Statement is presented for comparative purposes only, and is not necessarily indicative of what the actual results of operations of the Company would have been for the period presented; nor does it purport to represent the results for future periods. This unaudited Pro Forma Combined Income Statement should be read in conjunction with, and is qualified in its entirety by, the respective historical financial statements and notes thereto of Wellsford and the Company, incorporated by reference into, and included in, this Joint Proxy Statement/Prospectus/Information Statement, respectively. 208 Wellsford Real Properties, Inc. (Predecessor) Pro Forma Combined Income Statement Year Ended December 31, 1996 (In thousands) (Unaudited)
Pro Forma Historical Adjustments Pro Forma ---------- ----------- --------- REVENUE Rental income $3,632 (A) $3,632 Other income 250 (A) 250 Interest income $757 3,195 (B) 3,952 ------------------------ -------------------- Total Revenue 757 7,077 7,834 ------------------------ -------------------- EXPENSES Property operating and maintenance 852 (A) 852 Real estate taxes 428 (A) 428 Interest 1,550 (C) 1,550 General and administrative 1,750 (D) 1,750 Depreciation 510 (E) 510 Property management 181 (A) 181 ------------------------ -------------------- Total Expenses 0 5,271 5,271 ------------------------ -------------------- Income before income taxes $757 $1,806 2,563 ======================== Provision for income taxes 1,047 (F) -------------------- Net income $1,516 ==================== Net income per common share $0.31 (G) ==================== Weighted average common shares outstanding 4,900 (G) ====================
209 Wellsford Real Properties, Inc. (Predecessor) Notes to Unaudited Pro Forma Combined Income Statement December 31, 1996 (A) Represents historical operating revenues and expenses of Greenbrook Corporate Center, which was acquired in January 1997, for the year ended December 31, 1996. The Company's other four commercial properties are currently vacant. (B) Represents interest income from the Sonterra Loan for the period from January 1, 1996 to the date of origination (July 10, 1996), plus interest on the 277 Park Loan for one year ($20 million at approximately 11.75%). (C) Represents interest expense on the $20 million credit facility draw used to fund the 277 Park Loan, at 7.75%. (D) Represents the estimated general and administrative costs of WRP Newco for one year. (E) Represents depreciation on Greenbrook Corporate Center for the year ended December 31, 1996 utilizing a 40 year estimated useful life. (F) Represents provision for federal and state income taxes at rates of 35% and 9%, respectively. (G) Represents the aggregate of the shares of WRP Newco Common issued in connection with the Distribution (one share for every four shares of Wellsford Common), the 225,000 shares to be issued in connection with the acquisition of the commercial properties, and 350,000 shares (estimated) of WRP Newco Class A Common to be purchased by ERP Operating Partnership for $3.5 million. 210 WELLSFORD REAL PROPERTIES, INC. (PREDECESSOR) PRO FORMA COMBINED BALANCE SHEET December 31, 1996 (In Thousands) (Unaudited) This unaudited Pro Forma Combined Balance Sheet is presented as if the Merger, Contribution and Distribution and the proposed credit facility agreement with Bank of Boston and Morgan Guaranty had been consummated on December 31, 1996, the mortgage receivable to be originated had been originated on December 31, 1996 and the commercial office properties purchased by, or under contract with, Wellsford Real Properties, Inc. (Predecessor) (the "Company") had been purchased on December 31, 1996, utilizing proceeds from the Merger and Contribution and a draw from the credit facility. All of the assets and liabilities of the Company which are being transferred to the Company in connection with the Merger, Contribution and Distribution are recorded at their respective historical costs. This unaudited Pro Forma Combined Balance Sheet is presented for comparative purposes only, and is not necessarily indicative of what the actual financial position of the Company would have been at December 31, 1996; nor does it purport to represent the future financial position of the Company. This unaudited Pro Forma Combined Balance Sheet should be read in conjunction with, and is qualified in its entirety by, the respective historical financial statements and notes thereto of Wellsford and the Company, incorporated by reference into, and included in, this Joint Proxy Statement/Prospectus/ Information Statement, respectively. 211 Wellsford Real Properties, Inc. (Predecessor) Pro Forma Combined Balance Sheet 12/31/96 (In thousands) (Unaudited)
Pro Forma Historical Adjustments Pro Forma ---------- ----------- --------- ASSETS Real estate assets, at cost: Land $0 $6,720 $6,720 Buildings and improvements 38,080 38,080 ------------------------ ------------------- 0 44,800 44,800 Construction in process 21,306 21,306 ------------------------ ------------------- 21,306 44,800 66,106 Property held for sale 2,800 2,800 ------------------------ ------------------- 21,306 47,600 (A) 68,906 Cash and cash equivalents 832 (B) 832 Restricted cash 5,520 5,520 Mortgage notes and interest receivable 17,934 20,000 (C) 37,934 ------------------------ ------------------- Total Assets $44,760 $68,432 $113,192 ======================== ================== LIABILITIES AND EQUITY Liabilities: Tax exempt mortgage note payable $14,755 $14,755 Credit facility $45,000 (D) 45,000 ------------------------ ------------------- Total Liabilities 14,755 45,000 59,755 ------------------------ ------------------- Commitments and contingencies -- -- -- Minority Interest 2,328 (E) 2,328 Equity: Equity 30,005 (30,005) 0 Common stock, $.01 par value per share, 4,899,965 shares issued and outstanding as adjusted 49 49 Paid in capital in excess of par value 51,060 51,060 ------------------------ ------------------- Total Equity 30,005 21,104 (F) 51,109 ------------------------ ------------------- Total Liabilities and Equity $44,760 $68,432 $113,192 ======================== ===================
212 Wellsford Real Properties, Inc. (Predecessor) Notes to Unaudited Pro Forma Combined Balance Sheet December 31, 1996 (A) Reflects the acquisition of five commercial office properties, previously acquired or currently under contract for $47.6 million summarized as follows:
Purchase Purchase Price & Square Purchase Price Per Planned Planned Impr. Actual/Scheduled Name Location Footage Price Sq. Ft. Improvements Per Sq. Ft. Closing Date Point View Wayne, NJ 560,000 $15.8 million $ 28 $ 9.1 million $ 44 February 1997 Chatham Building Chatham, NJ 65,000 5.1 million 78 3.1 million 126 January 1997 Greenbrook Corp. Ctr Fairfield, NJ 190,000 23.7 million 125 0.5 million 127 April 1997 1700 Valley Road Wayne, NJ 70,600 1.0 million 14 0.2 million 17 February 1997 1800 Valley Road Wayne, NJ 54,800 2.0 million 36 0.8 million 51 February 1997 940,400 47.6 million $13.7 million
Greenbrook Corporate Center is currently in operation. The Company's other four commercial properties are currently vacant. The purchase price of $47.6 million is being funded with $20.4 million of cash-on-hand, $25.0 million of proceeds from the credit facility, and the balance from the issuance of approximately 225,000 shares of WRP Newco Common, each of which is described below. (B) Reflects the net cash effect of the following transactions (in thousands): .Cash contribution to WRP Newco at Contribution $ 17,732 .ERP Operating Partnership's purchase of WRP Newco Common 3,500 .Acquisition of properties (20,400) ------- $ 832 ======== (C) Represents the 277 Park Loan, a $20 million portion of an $80 million subordinated mezzanine loan bearing interest at approximately 11.75% per annum. (D) Represents draws on the credit facility to fund acquisitions and the 277 Park Loan. (E) Represents ERP Operating Partnership's 20% minority interest in Palomino Park, which has been combined in the Company's Pro Forma Combined Balance Sheet. (F) Represents the aggregate of the shares of WRP Newco Common issued in connection with the Distribution (one share for every four shares of Wellsford Common), the approximately 225,000 shares to be issued in connection with the acquisition of the commercial properties, and the 350,000 shares (estimated) of WRP Newco Class A Common to be purchased by ERP Operating Partnership for $3.5 million. 213 DESCRIPTION OF CAPITAL STOCK OF WRP NEWCO The following summary of the terms of WRP Newco's stock does not purport to be complete and is subject to and qualified in its entirety by reference to Maryland law, WRP Newco's Charter and Bylaws, copies of which are exhibits to the registration statement on Form 10 filed by WRP Newco. See "Additional Information." General The Charter of WRP Newco (the "Newco Charter") authorizes up to 200,000,000 shares of Common Stock, par value $.01 per share. The Board of Directors may reclassify any unissued shares of stock in one or more classes or series of stock. Upon completion of the Distribution and the other transactions to be entered into upon consummation of the Merger, there will be 4,899,965 shares of WRP Newco Common issued and outstanding (excluding the Additional Share Offering) and 350,000 shares (estimated) of WRP Newco Class A Common issued and outstanding. The Board of Directors has also authorized the issuance of up to 2,000,000 shares of WRP Newco Series A Preferred of which 1,000,000 shares are subject to issuance pursuant to the Stock Purchase Agreement and 1,000,000 shares are subject to issuance pursuant to WRP Newco's right to pay dividends on the WRP Newco Series A Preferred by the issuance of additional shares of WRP Newco Series A Preferred. In addition, up to 1,750,000 shares of WRP Newco Common have been reserved for issuance under WRP Newco's 1997 Management Incentive Plan, subject to approval of the Wellsford Common Shareholders. See "Approval of WRP Newco's 1997 Management Incentive Plan." WRP Newco also intends to issue up to approximately 10,000,000 shares of WRP Newco Common, excluding any over-allotment option, if any, in connection with WRP Newco's Additional Share Offering upon which the shareholders of Wellsford are being asked to vote. See "Approval of WRP Newco Additional Share Offering." At present, there is no established trading market for the WRP Newco Common. WRP Newco has applied for listing of the WRP Newco Common on the ASE under the symbol "WRP." The United States Trust Company of New York will act as transfer agent and registrar of the WRP Newco Common. Under Maryland law, stockholders generally are not liable for the corporation's debts and obligations. WRP Newco intends to furnish to its stockholders an annual report containing audited consolidated financial statements and an opinion thereon expressed by an independent public accounting firm. 214 Common Stock All shares of WRP Newco Common to be issued in connection with the Distribution and the other transactions to be entered into upon consummation of the Merger have been duly authorized, and will be fully paid, validly issued and nonassessable. Subject to the preferential rights of any other class or series of stock, holders of shares of WRP Newco Common are entitled to receive dividends on such stock if, as and when authorized and declared by the Board of Directors of WRP Newco out of assets legally available therefor and to share ratably in the assets of WRP Newco legally available for distribution to its stockholders in the event of its liquidation, dissolution or winding up after payment of or adequate provision for all known debts and liabilities of WRP Newco and payment of liquidation preferences to holders of preferred stock. Each outstanding share of WRP Newco Common entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors, and, except as provided with respect to any other class or series of stock, the holders of such shares will possess exclusive voting power. There is no cumulative voting in the election of directors, which means that, except with respect to the director elected by the holders of the WRP Newco Class A Common, the holders of a majority of the outstanding shares of WRP Newco Common can elect all of the directors then standing for election and the holders of the remaining shares will not be able to elect any directors. See "-- Class A Common Stock." Holders of shares of WRP Newco Common have no preference, conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any securities of WRP Newco. Except for the rights of WRP Newco Class A Common described below, shares of WRP Newco Common will have equal dividend, liquidation and other rights. Under the MGCL, a Maryland corporation generally may not dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business unless approved by the affirmative vote of stockholders holding at least two-thirds of the shares entitled to vote on the matter unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is set forth in the corporation's charter. The Newco Charter provides for approval of consolidations, share exchanges, mergers in which WRP Newco is the successor, and amendments to the charter (except amendments to the provisions relating to the classification and removal of directors or any amendment reducing supermajority voting requirements) by the affirmative vote of holders of shares entitled to cast a majority of the votes entitled to be cast on the matter. Preferred Stock The Newco Charter authorizes the Board of Directors to issue preferred stock in one or more series. Thus, the Board of Directors could authorize the issuance of shares of preferred 215 stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control of WRP Newco that might involve a premium price for holders of WRP Newco Common or otherwise be in their best interest. Classification or Reclassification of Common Stock or Preferred Stock The Newco Charter authorizes the Board of Directors to classify or reclassify any unissued stock by setting or changing the numbers, designations, preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications or terms or conditions of redemption of any of such shares. Power to Issue Additional Shares of Common Stock and Preferred Stock WRP Newco believes that the power of the Board of Directors to issue additional authorized but unissued shares of WRP Newco Common and to reclassify any unissued shares of WRP Newco Common and thereafter to cause WRP Newco to issue such reclassified shares of stock will provide WRP Newco with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs which might arise. The additional classes or series, as well as the WRP Newco Common, will be available for issuance without further action by WRP Newco's stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which WRP Newco's securities may be listed or traded. Although the Board of Directors has no intention at the present time of doing so, it could authorize WRP Newco to issue a class or series that could, depending on the terms of such class or series, delay, defer or prevent a transaction or a change of control of WRP Newco that might involve a premium price for holders of common stock or otherwise be in their best interest. Class A Common Stock Rights Generally. Each share of WRP Newco Class A Common entitles its holder to all the rights of a share of WRP Newco Common in addition to the rights described below. Holders of WRP Newco Class A Common will not have any preemptive rights to acquire other securities of WRP Newco. Voting Rights. Holders of WRP Newco Class A Common, as a class, may elect one director to the WRP Newco Board of Directors (the "Class A Director") until the longer of two years from the Closing Date or so long as (i) ERP Operating Partnership is obligated to purchase preferred stock in WRP Newco pursuant to the Stock Purchase Agreement; (ii) ERP Operating Partnership has obligations pursuant to the Agreement Regarding Palomino Park or pursuant to the Credit 216 Enhancement Agreement; or (iii) the aggregate liquidation value of the shares of WRP Newco Series A Preferred owned by ERP Operating Partnership is greater than $10 million. The WRP Newco Class A Director may be removed without cause, only by the affirmative vote of a majority of the WRP Newco Class A Common electing such director. For ten years after the Effective Time, WRP Newco has the right to direct the voting of all shares of WRP Newco Class A Common owned by ERP Operating Partnership or any of its affiliates, except as to the election of the Class A Director or any matter relating to the rights, preferences and privileges of the WRP Newco Class A Common. Optional and Automatic Conversion. Holders of WRP Newco Class A Common have the right, exercisable at any time and from time to time, to convert all or any of such WRP Newco Class A Common into WRP Newco Common at a conversion rate of one share of WRP Newco Common for each share of WRP Newco Class A Common so converted, subject to adjustment. Any outstanding shares of WRP Newco Class A Common will automatically convert, at the conversion rate, into shares of WRP Newco Common upon the sale, transfer, pledge or other disposition ("Transfer") of such shares of WRP Newco Class A Common to any entity other than an affiliate of EQR or ERP Operating Partnership. Adjustment of Conversion Rate. The conversion rate in effect at any time for the WRP Newco Class A Common is subject to adjustment from time to time as follows: In case WRP Newco (a) reclassifies the outstanding WRP Newco Common into shares of some other class or series of shares, (b) subdivides the outstanding WRP Newco Common into a greater number of shares of WRP Newco Common or (c) combines the outstanding WRP Newco Common into a smaller number of shares of WRP Newco Common, the conversion rate immediately prior to such action shall be adjusted so that the holder of any shares of WRP Newco Class A Common thereafter surrendered for conversion shall be entitled to receive the number of shares of WRP Newco Common which he would have owned immediately following such action had such WRP Newco Class A Common been converted immediately prior thereto. Purchase of Shares of Voting Stock in Excess of REIT Ownership Limit. If, an event which is undertaken or caused by WRP Newco occurs resulting in ERP Operating Partnership, EQR or any of their affiliates owning shares of WRP Newco Class A Common in excess of the REIT ownership limits (initially 9.9% of the value of the voting stock of WRP Newco), then WRP Newco will purchase such shares of WRP Newco Class A Common in excess of the REIT ownership limit at the market price thereof. 217 Series A 8% Convertible Redeemable Preferred Stock General. The Board of Directors of WRP Newco has established a series of preferred stock designated Series A 8% Convertible Redeemable Preferred Stock, par value $25.00 per share. The maximum number of authorized shares of WRP Newco Series A Preferred is 2,000,000. Seniority. With respect to the right to receive dividends and to participate in distributions or payments in the event of any liquidation, dissolution or winding up of WRP Newco, the WRP Newco Series A Preferred will rank on a parity with any other preferred stock of WRP Newco, and will rank senior to the WRP Newco Common and any other class or series of shares of stock of WRP Newco ranking, as to dividends and upon liquidation, junior to the WRP Newco Series A Preferred (collectively the "Junior Shares"). Notwithstanding the foregoing, WRP Newco may make distributions or pay dividends in WRP Newco Common or in any other shares of WRP Newco ranking junior to the WRP Newco Series A Preferred as to distribution rights and liquidation preference at any time. Dividends. The holders of WRP Newco Series A Preferred are entitled to receive, when and as declared by the WRP Newco Board of Directors out of any funds legally available therefor, dividends at the rate of $2.00 per share per year, payable in cash, except as provided below, in equal amounts quarterly on the fifteenth (or, if not a business day, the next succeeding business day) of January, April, July and October each year (each such day being called a "Quarterly Dividend Date" and each period ending on a Quarterly Dividend Date being called a "Dividend Period"). The amount of any dividend payable for the initial Dividend Period and for any Dividend Period, shorter than a full Dividend Period shall be prorated. Notwithstanding the foregoing, for any 12 Dividend Periods, WRP Newco has the right to pay the dividend in additional shares of WRP Newco Series A Preferred determined by dividing the total amount of the dividend to be paid in shares by $25.00. In the event WRP Newco fails to pay any dividend on the WRP Newco Series A Preferred on any Quarterly Dividend Date, WRP Newco shall not pay any dividends on any other class of stock of WRP Newco other than (i) pro rata with other securities of WRP Newco ranking pari passu with the WRP Newco Series A Preferred or (ii) with Junior Shares, until such dividend on the WRP Newco Series A Preferred has been paid. 218 Distributions Upon Liquidation, Dissolution or Winding Up. Upon the voluntary or involuntary dissolution, liquidation or winding up of WRP Newco, the holders of the WRP Newco Series A Preferred will be entitled to receive and to be paid out of the assets of WRP Newco available for distribution to its shareholders, before any payment or distribution is made on any Junior Shares, the amount of $25.00 per share of WRP Newco Series A Preferred ("Liquidation Value"), plus any accrued and unpaid dividends thereon. If, upon any dissolution, liquidation, or winding up of WRP Newco, the amounts payable with respect to the preference value of the WRP Newco Series A Preferred and any other shares of stock of WRP Newco ranking as to any such distribution on a parity with the WRP Newco Series A Preferred are not paid in full, the holders of the WRP Newco Series A Preferred and of such other shares will share ratably in such distribution of assets of WRP Newco in proportion to the full respective preference amounts to which they are entitled. Redemption. Optional Redemption. On and after the fifth anniversary of the Closing Date, WRP Newco may, at its option, redeem at any time all or any part of the outstanding WRP Newco Series A Preferred at a price per share (the "Redemption Price") equal to $25.00 per share of WRP Newco Series A Preferred, together with all accrued and unpaid dividends to and including the date fixed for redemption (the "Redemption Date"); provided, however, that no partial redemption of the WRP Newco Series A Preferred may be effected if after giving effect thereto the aggregate Liquidation Value of the WRP Newco Series A Preferred outstanding is less than $10,000,000. The Redemption Price and all accrued and unpaid dividends will be paid in cash; provided, however, that if (a) a holder of WRP Newco Series A Preferred desires to convert any of its WRP Newco Series A Preferred called for redemption but such conversion would cause any direct or indirect holder which is classified as a REIT under Section 856 of the Code, to own, directly or indirectly, more than 9.9% of the outstanding voting stock of WRP Newco or would otherwise cause any direct or indirect holder of such outstanding voting stock to lose its status as a REIT under the Code, and (b) such holder has so notified WRP Newco in writing prior to the Redemption Date, stating the number of shares of WRP Newco Series A Preferred which have been called for redemption which such holder is unable to convert for such reason (such shares being referred to as the "Unconvertible Shares"), then WRP Newco shall pay, in cash, the Redemption Price plus all accrued and unpaid dividends for each Unconvertible Share and shall issue to such holder a warrant to purchase the number of shares of WRP Newco Common equal to (i) the fair market value of a share of WRP Newco Common on the Redemption Date (calculated pursuant to the terms of the Articles Supplementary) over the Redemption Price, multiplied by (ii) the number of shares of WRP Newco Common into which the Unconvertible Shares redeemed from such holder were convertible immediately prior to such redemption, and divided by (iii) the fair market value of a share of WRP Newco Common on the Redemption Date. Such warrant shall be exercisable without cost to the holder thereof at any time and from time to time for a period of 10 years from the date of issuance of such 219 warrant. The warrant shall be on such terms and conditions as are customarily contained in like warrants, including provisions to protect the holder of the warrant from dilution. WRP Newco shall have the right, at any time, to redeem such warrant at a price equal to the fair market value of such warrant on the date of any such redemption. Required Redemption. Upon the (A) (i) non-payment by WRP Newco of any dividend on the Quarterly Dividend Date applicable to such dividend for three Dividend Periods which need not be consecutive or (ii) failure by WRP Newco to comply with any term or obligations under the Articles Supplementary (the occurrences in (i) and (ii) each called an "Event of Default") or (B) on and after the fifteenth anniversary of the Closing Date, whichever comes first, the holder of any shares of WRP Newco Series A Preferred may, at its option, cause WRP Newco to redeem at any time all of the WRP Newco Series A Preferred held by such holder at $25.00 per share, payable in cash, together with all accrued and unpaid dividends to and including the Redemption Date. Notwithstanding the provisions of the previous sentence, provided an Event of Default has not occurred, WRP Newco has the right to extend the date during which a required redemption is not permitted for three separate additional five year periods if the dividend rate on the WRP Newco Series A Preferred is changed to the then market rate of comparable preferred stock (the "Market Rate") on the first day of each such additional five year period; provided, however, in no event shall the dividend be reduced to less than $2.00 per share of WRP Newco Series A Preferred. The Market Rate shall be determined by mutual agreement of the holders of WRP Newco Series A Preferred Stock and WRP Newco or, if they cannot agree, by an investment banking firm under the procedure set forth in the Articles Supplementary. Voting Rights. The holders of WRP Newco Series A Preferred are not entitled to vote on any matter except as provided below; provided, however, the holders of WRP Newco Series A Preferred are not to have any voting rights to the extent such rights will cause any holder of WRP Newco Series A Preferred to own more than 9.9% of the outstanding voting stock of WRP Newco or otherwise cause any holder of WRP Newco Series A Preferred that is classified as a REIT under Section 856 of the Code to lose its status as a REIT under the Code. So long as any shares of WRP Newco Series A Preferred remain outstanding, WRP Newco will not, without the affirmative vote of the holders of at least two- thirds of the shares of WRP Newco Series A Preferred outstanding at the time, (i) authorize, create or issue, or increase the authorized or issued amount of, any class or series of shares of capital stock ranking prior to the WRP Newco Series A Preferred with respect to the payment of dividends or the distribution of assets upon liquidation, dissolution or winding up or reclassify any authorized shares of stock of WRP Newco into such shares, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such shares; or (ii) amend, alter or repeal the provisions of the WRP Newco Charter or the Articles Supplementary classifying the WRP Newco Series A Preferred, whether by merger, consolidation or otherwise (an "Event"), so as to materially and adversely affect any right, preference, privilege or voting 220 power of the WRP Newco Series A Preferred or the holders thereof; provided, however, with respect to the occurrence of any of the Events set forth in (ii) above, so long as the shares of WRP Newco Series A Preferred remain outstanding with the terms thereof materially unchanged, taking into account that upon the occurrence of an Event, WRP Newco may not be the surviving entity, the occurrence of any such Event will not be deemed to materially and adversely affect such rights, preferences, privileges or voting power of holders of WRP Newco Series A Preferred and provided further that (x) any increase in the amount of the authorized or issued shares of preferred stock of WRP Newco or the creation or issuance of any other preferred stock of WRP Newco, or (y) any increase in the amount of authorized or issued shares of WRP Newco Series A Preferred or any other preferred stock of WRP Newco, in each case ranking on a parity with or junior to the WRP Newco Series A Preferred with respect to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. Rights of Conversion. Holders of WRP Newco Series A Preferred shall have the right, exercisable at any time and from time to time, except in the case of WRP Newco Series A Preferred called for redemption, to convert all or any of such WRP Newco Series A Preferred into WRP Newco Common at a conversion price per share of WRP Newco Common equal to (a) (i) the net book value per share of WRP Newco Common on the Closing Date or (ii) in the event any sales of WRP Newco Common to any institutional purchasers have taken place on or prior to the Closing Date or are subject to a commitment to purchase from an institutional purchaser made on or prior to the Closing Date, the average per share sale price of WRP Newco Common sold to institutional purchasers on or prior to the Closing Date and subject to written commitments to purchase from institutional purchasers received on or prior to the Closing Date, multiplied by (b) 1.08 (the "Conversion Price"). In the case of WRP Newco Series A Preferred called for redemption, conversion rights will expire at the close of business on the last business day preceding the Redemption Date. Adjustments of Conversion Rate. The conversion rate in effect at any time for the WRP Newco Series A Preferred is subject to adjustment from time to time to protect against certain dilutive events. In case WRP Newco (1) pays or makes a distribution in shares of WRP Newco Common to holders of the WRP Newco Common, (2) reclassifies the outstanding WRP Newco Common into shares of some other class or series of shares, (3) subdivides the outstanding WRP Newco Common into a greater number of shares of WRP Newco Common or (4) combines the outstanding WRP Newco Common into a smaller number of shares of WRP Newco Common, the conversion rate immediately prior to such action shall be adjusted so that the holder of any shares of WRP Newco Series A Preferred thereafter surrendered for conversion will be entitled 221 to receive the number of shares of WRP Newco Common which he would have owned immediately following such action had such WRP Newco Series A Preferred been converted immediately prior to such event. In case WRP Newco issues rights, options or warrants to all holders of the WRP Newco Common entitling them to subscribe for or purchase WRP Newco Common (or securities convertible into WRP Newco Common) at a price per share less than the current market price (as determined pursuant to the Articles Supplementary) of the WRP Newco Common on such record date, the number of shares of WRP Newco Common into which each share of WRP Newco Series A Preferred is convertible will be adjusted so that the same shall be equal to the number determined by multiplying the number of shares of WRP Newco Common into which such share of WRP Newco Series A Preferred was convertible immediately prior to such record date by a fraction of which the numerator shall be the number of shares of WRP Newco Common outstanding on such record date plus the number of additional shares of WRP Newco Common offered (or into which the convertible securities so offered are convertible), and of which the denominator shall be the number of shares of WRP Newco Common outstanding on such record date, plus the number of shares of WRP Newco Common which the aggregate offering price of the additional shares of WRP Newco Common offered (or into which the convertible securities so offered are convertible) would purchase at such current market price. In case WRP Newco distributes to all holders of WRP Newco Common any class of shares of capital stock other than WRP Newco Common, evidences of indebtedness or assets of WRP Newco (other than cash distributions out of current or retained earnings), or distributes to all holders of WRP Newco Common rights or warrants to subscribe for securities other than those referred to in the immediately preceding paragraph, then in each case the number of shares of WRP Newco Common into which each share of WRP Newco Series A Preferred will be convertible will be adjusted so that the same shall equal the number determined by multiplying the number of shares of WRP Newco Common into which such share of WRP Newco Series A Preferred was convertible immediately prior to the date of such distribution by a fraction of which the numerator shall be the current market price of the WRP Newco Common on the record date mentioned below, and of which the denominator shall be such current market price of the WRP Newco Common, less the then fair market value (as determined by the Board of Directors) of the portion of the securities or assets so distributed or of such subscription rights or warrants applicable to one share of WRP Newco Common. Notwithstanding the foregoing, in the event that WRP Newco distributes rights or warrants (other than those referred to in the immediately preceding paragraph) ("Rights") pro rata to holders of the WRP Newco Common, WRP Newco may, in lieu of making any adjustment pursuant to this paragraph make proper provision so that each holder of a share of WRP Newco Series A Preferred who converts such share after the record date for such distribution and prior to the expiration or redemption of the Rights shall be entitled to receive upon such conversion, in addition to the WRP Newco Common issuable upon such conversion (the "Conversion Shares"), a number of Rights to be determined as follows: (1) if such conversion occurs on or prior to the date for the distribution to the holders of Rights of separate certificates evidencing such Rights (the "Distribution Date"), 222 the same number of Rights to which a holder of a number of shares of WRP Newco Common equal to the number of Conversion Shares is entitled at the time of such conversion in accordance with the terms and provisions of and applicable to the Rights; and (2) if such conversion occurs after the Distribution Date, the same number of Rights to which a holder of the number of shares of WRP Newco Common into which a share of WRP Newco Series A Preferred so converted was convertible immediately prior to the Distribution Date would have been entitled on the Distribution Date in accordance with the terms and provisions of and applicable to the Rights. Options. So long as any WRP Newco Series A Preferred is outstanding, WRP Newco may not issue any options to purchase shares of WRP Newco ("Employee Stock Options") to officers, directors or employees of or consultants to, WRP Newco, whether pursuant to employee stock option or purchase plans of WRP Newco or employment or consulting agreements or otherwise for an exercise price which is less than the fair market value of such shares on the date of grant. In the event the number of shares of WRP Newco Common subject to Employee Stock Options (excluding any Employee Stock Options granted in exchange for Wellsford share options existing at the Effective Time) at any time exceeds, in the aggregate, 10% of the WRP Newco Common outstanding at such time, all Employee Stock Options outstanding at such time in excess of such 10%, shall be deemed for certain anti-dilution purposes to have an exercise price per share equal to 20% of the average fair market value of a share of WRP Newco Common on the date of grant of those shares subject to Employee Stock Options most recently granted in excess of such 10%. CERTAIN PROVISIONS OF MARYLAND LAW AND OF WRP NEWCO'S CHARTER AND BYLAWS The following is a summary of certain provisions of Maryland law and WRP Newco's Charter and Bylaws and is qualified in its entirety by reference to the Newco Charter and Bylaws, copies of which are attached as exhibits to the registration statement on Form 10 filed by WRP Newco. See "Additional Information." Classification of the Board of Directors The Bylaws provide that the number of directors of WRP Newco may be established by the Board of Directors but may not be fewer than the minimum number required by Maryland law, which is three, nor more than 15. Any vacancy will be filled, at any regular meeting or at any special meeting called for that purpose, by a majority of the remaining directors. A vacancy resulting from an increase in the number of directors must be filled by a majority of the entire Board of Directors. 223 Pursuant to the Newco Charter, the Board of Directors is divided into three classes of directors. The initial terms of the first, second and third classes will expire at the annual meetings of stockholders to be held in 1998, 1999 and 2000, respectively. Beginning in 1998, directors of each class will be chosen for three-year terms upon the expiration of their current terms and each year one class of directors will be elected by the stockholders. The members of each such class will hold office until their successors are duly elected and qualified. WRP Newco believes that classification of the Board of Directors will help to assure the continuity and stability of WRP Newco's business strategies and policies as determined by the Board of Directors. Holders of shares of WRP Newco Common have no right to cumulative voting in the election of directors. Consequently, at each annual meeting of stockholders, the holders of a majority of the shares of WRP Newco Common are able to elect all of the successors of the class of directors whose terms expire at that meeting. Classification of the Board of Directors could have the effect of making the removal of incumbent directors more time-consuming and difficult, which could discourage a third party from making a tender offer or otherwise attempting to obtain control of WRP Newco, even though such an attempt might be beneficial to WRP Newco and its stockholders. At least two annual meetings of stockholders, instead of one, will generally be required to effect a change in a majority of the Board of Directors. Thus, the classified board provision could increase the likelihood that incumbent directors will retain their positions. Removal of Directors The Newco Charter provides that, except as provided in the next sentence, a director may be removed only for cause and by the affirmative vote of at least two-thirds of the votes entitled to be cast for the election of directors (i.e., the votes attributable to all outstanding shares of WRP Newco Common). The Class A Director may be removed, without cause, only by the affirmative vote of at least a majority of the WRP Newco Class A Common electing such Class A Director. Business Combinations Under the MGCL, certain "business combinations" (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and (i) any person who beneficially owns 10% or more of the voting power of the corporation's shares or (ii) an Interested Stockholder or (iii) an affiliate of an Interested Stockholder are prohibited for five years after the most recent date on which the Interested Stockholder becomes an Interested Stockholder. Thereafter, any such business combination must be recommended by the board of directors of such corporation and approved by the affirmative vote of at least (a) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation and (b) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the Interested Stockholder with whom (or with whose affiliate) the business combination is to be effected, unless, among other conditions, the corporation's common stockholders receive a minimum price 224 (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form previously paid by the Interested Stockholder for its shares. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by the board of directors of the corporation prior to the time that the Interested Stockholder becomes an Interested Stockholder. The directors of WRP Newco have exempted from the Maryland statute any business combinations with Jeffrey H. Lynford or Edward Lowenthal or any of their affiliates or any other person acting in concert or as a group with any of such persons. Amendment to the Charter and Bylaws The Newco Charter may be amended only by the affirmative vote of a majority of all of the votes entitled to be cast on the matter, except that any amendment to the sections of the charter that address the number, classification or removal of directors, or any amendment providing that the stockholders may approve an action by a lesser percentage of votes than that required by law will be valid only if approved by the affirmative vote of two-thirds of all of the votes entitled to be cast on the matter. The Board of Directors of WRP Newco has the exclusive power to adopt, alter or repeal any provision of the Bylaws and to make new Bylaws. Merger, Consolidation, Sale of Assets A sale of all or substantially all of the assets of WRP Newco or a merger in which WRP Newco is not the successor must be approved by the affirmative vote of two-thirds of all of the votes entitled to be cast on the matter. A consolidation or share exchange or a merger in which WRP Newco is the successor need be approved only by the affirmative vote of holders of shares entitled to cast a majority of all votes entitled to be cast on the matter. Dissolution of WRP Newco The dissolution of WRP Newco must be approved by the affirmative vote of the holders of not less than two-thirds of all the votes entitled to be cast on the matter. Advance Notice of Director Nominations and New Business The Bylaws of WRP Newco provide that (a) with respect to an annual meeting of stockholders, nominations of persons for election to the Board of Directors and the proposal of business to be considered by stockholders may be made only (i) pursuant to WRP Newco's notice of the meeting, (ii) by or at the direction of the Board of Directors or (iii) by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in the Bylaws and (b) with respect to special meetings of stockholders, only the business specified in WRP Newco's notice of meeting may be brought before the meeting of stockholders and nominations of persons for election to the Board of Directors may be made only (i) pursuant to WRP Newco's notice of the meeting, (ii) by or at the direction of the Board 225 of Directors, or (iii) provided that the Board of Directors has determined that directors shall be elected at such meeting, by a stockholder who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in the Bylaws. Meetings of Stockholders WRP Newco's Bylaws provide that annual meetings of stockholders shall be held on a date and at the time set by the Board of Directors during the month of May each year (commencing in May 1998). Special meetings of the stockholders may be called by (i) the Chairman of the Board of WRP Newco, (ii) the President of WRP Newco, (iii) the Chief Executive Officer of WRP Newco or (iv) the Board of Directors. As permitted by the MGCL, the Bylaws provide that special meetings must be called by the Secretary of WRP Newco upon the written request of the holders of shares entitled also to cast not less than a majority of all of the votes entitled to be cast at the meeting. WRP Newco's Bylaws provide that any stockholder of record wishing to nominate a director or have a stockholder proposal considered at an annual meeting (except for stockholder proposals included in WRP Newco proxy materials pursuant to Rule 14a-8 under the securities Exchange Act of 1934, as amended) must provide written notice and certain supporting documentation to WRP Newco relating to the nomination or proposal not later than 60 days nor earlier than 90 days prior to the anniversary date of the prior year's annual meeting or special meeting in lieu thereof (the "Anniversary Date"). In the event that the annual meeting is advanced by more than 30 calendar days before or delayed more than 60 days from the Anniversary Date, stockholders generally must provide written notice no earlier than 90 days prior to such annual meeting nor later than the later of 60 days prior to such annual meeting or 10 days following the date on which notice of the meeting is mailed to stockholders. The purpose of requiring stockholders to give WRP Newco advance notice of nominations and other business is to afford the Board of Directors a meaningful opportunity to consider the qualifications of the proposed nominees or the advisability of the other proposed business and, to the extent deemed necessary or desirable by the Board of Directors, to inform stockholders and make recommendations about the qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although WRP Newco's Bylaws do not give the Board of Directors any power to disapprove stockholder nominations for the election of directors or proposals for action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal, without regard to whether consideration of the nominees or proposals might be harmful or beneficial to WRP Newco and its stockholders. 226 Limitation of Liability and Indemnification The MGCL permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. The Newco Charter contains such a provision which eliminates such liability to the maximum extent permitted by Maryland law. The Newco Charter authorizes WRP Newco, to the maximum extent permitted by Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any present or former director or officer or (b) any individual who, while a director of WRP Newco, and at the request of WRP Newco, serves or has served another corporation, partnership, joint venture, trust, employee benefit plan, limited liability company or any other enterprise as a director, officer, partner, trustee, manager or member of such corporation, partnership, joint venture, trust, employee benefit plan, limited liability company or other enterprise. The Bylaws of WRP Newco obligate it, to the maximum extent permitted by Maryland law, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any present or former director or officer who is made a party to the proceeding by reason of his service in that capacity or (b) any individual who, while a director of WRP Newco and at the request of WRP Newco, serves or has served another corporation, partnership, joint venture, trust, employee benefit plan, limited liability company or any other enterprise as a director, officer, partner, trustee, manager or member of such corporation, partnership, joint venture, trust, employee benefit plan, limited liability company or other enterprise and who is made a party to the proceeding by reason of his service in that capacity. The Newco Charter and Bylaws also permit WRP Newco to indemnify and advance expenses to any person who served a predecessor of WRP Newco in any of the capacities described above and to any employee or agent of WRP Newco or a predecessor of WRP Newco. The MGCL requires a corporation (unless its charter provides otherwise, which the Newco Charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he is made a party by reason of his service in that capacity. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of 227 the corporation. In addition, the MGCL requires WRP Newco, as a condition to advancing expenses, to obtain (a) a written affirmation by the director or officer of his good faith belief that he has met the standard of conduct necessary for indemnification by WRP Newco as authorized by the Bylaws and (b) a written statement by or on his behalf to repay the amount paid or reimbursed by WRP Newco if it shall ultimately be determined that the standard of conduct was not met. PROPOSAL TO APPROVE WRP NEWCO ADDITIONAL SHARE OFFERING The Board of Trustees of Wellsford and the Board of Directors of WRP Newco have approved the issuance by WRP Newco of up to 12,000,000 shares of WRP Newco Common (the "Additional Shares"), subject to further approval by the Wellsford Common Shareholders solely to satisfy the requirements of the ASE. Such approval would not constitute approval of any other related transactions by Wellsford, WRP Newco or any of their affiliates. The purchase price for the Additional Shares will be determined by the Board of Directors of WRP Newco based upon prevailing market conditions. WRP Newco anticipates that the offering of the Additional Shares will be made to a limited number of investors in a private placement or in a registered offering to be filed with the Commission under the Securities Act. The Board of Trustees of Wellsford and the Board of Directors of WRP Newco believe that the WRP Newco Additional Share Offering will provide more capital available for investment, enhance WRP Newco's capital structure and increase the liquidity of WRP Newco Common. However, the equity of existing stockholders would be diluted if the purchase price for the Additional Shares is less than the book value of WRP Newco Common on the date of the Distribution. In addition, if all of the Additional Shares are issued and no other shares have been issued after the Distribution and prior to the WRP Newco Additional Share Offering, the owners of the Additional Shares will own approximately 70% of the then outstanding shares of WRP Newco Common. The nature and concentration of ownership of such Additional Shares could result in a change of control of the Company. The proceeds of this offering, after payment of underwriters' commissions and other offering expenses, will be used to repay loans of up to $50 million to be made to WRP Newco, and interest thereon, and for investments, other business activities and working capital. The loans are expected to be made under the WRP Newco Line of Credit. As of the date hereof, WRP Newco does not have any agreements, understandings or commitments to make any specific investments with such proceeds. In the normal course of business, however, WRP Newco is continually evaluating a number of potential investments and entering into non- binding letters of intent. In accordance with the Newco Charter, WRP Newco may make additional investments without the consent of its stockholders. 228 WRP Newco anticipates that purchasers of Additional Shares will be able to sell such shares in the public market immediately or shortly after purchase. The existence of the Additional Shares in the public market could adversely affect the market price for shares of WRP Newco Common. The Additional Shares will have the same terms as all other shares of WRP Newco Common with respect to dividends, voting, ownership and any other right(s) and limitation(s) pertaining to shares of WRP Newco Common generally. However, as would be the case with respect to any issuance of equity voting securities, the Additional Shares, if issued, will dilute the relative voting power of the issued and outstanding shares of WRP Newco Common. - -------------------------------------------------------------------------------- The Board of Trustees of Wellsford and the Board of Directors of WRP Newco recommend that you vote FOR the proposal to approve the WRP Newco Additional Share Offering. - -------------------------------------------------------------------------------- PROPOSAL TO APPROVE WRP NEWCO'S 1997 MANAGEMENT INCENTIVE PLAN General. The Board of Directors of WRP Newco has approved, subject to the approval of the shareholders, the 1997 Management Incentive Plan (the "Management Incentive Plan"). The purpose of the Management Incentive Plan is to align the interests of WRP Newco's directors, executive officers and employees with those of the stockholders and to enable WRP Newco to attract, compensate and retain directors, executive officers and employees and provide them with appropriate incentives and rewards for their performance. The existence of the Management Incentive Plan should enable the Company to compete more effectively for the services of such individuals. The officers, directors and employees of WRP Newco who receive awards under the Management Incentive Plan may receive a greater economic benefit to the extent the fair market value of WRP Newco Common increases. However, the equity of existing stockholders would be diluted if shares of WRP Newco Common were issued pursuant to the Management Incentive Plan at prices less than their then current fair market value. In addition, the issuance of a substantial number of shares of WRP Newco Common under the Management Incentive Plan or their sale in the public market might adversely affect prevailing market prices for such shares. Awards to directors, executive officers and other employees under the Management Incentive Plan may take the form of share options ("Options"), including corresponding share appreciation rights ("SARs") and reload options, restricted share awards and share purchase awards. The maximum number of shares of WRP Newco Common that may be the subject of awards under the Management Incentive Plan is 1,750,000 shares. 229 Share Authorization. Shares of WRP Newco Common covered by any unexercised portions of terminated Options, shares of WRP Newco Common forfeited by participants and shares of WRP Newco Common subject to any awards that are otherwise surrendered by a participant without receiving any payment or other benefit with respect thereto may again be subject to new awards under the Management Incentive Plan. In the event the purchase price of an Option is paid in whole or in part through the delivery of shares of WRP Newco Common, the number of shares of WRP Newco Common issuable in connection with the exercise of the Option shall not again be available for the grant of awards under the Management Incentive Plan. Shares of WRP Newco Common subject to Options, or portions thereof, with respect to which SARs are exercised, are not again available for the grant of awards under the Management Incentive Plan. The shares of WRP Newco Common to be issued or delivered under the Management Incentive Plan are authorized and unissued shares, or issued shares of WRP Newco Common that have been reacquired by WRP Newco. Management Incentive Plan Administration. The Management Incentive Plan will be administered by a committee of two or more non-employee directors (the "Committee"), which will initially consist of Messrs. Du Bois and Germain. The Committee will determine the directors, executive officers and other employees who will be eligible for and granted awards, determine the amount and type of awards, establish rules and guidelines relating to the Management Incentive Plan, establish, modify and terminate the terms and conditions of awards and take such other action as may be necessary for the proper administration of the Management Incentive Plan. All employees and non-employee directors are currently eligible to participate in the Management Incentive Plan. Options. "Incentive Options" meeting the requirements of Section 422 of the Code, and "Nonqualified Options" that do not meet such requirements are both available for grant under the Management Incentive Plan. The term of each Option will be determined by the Committee, but no Incentive Option will be exercisable more than ten years after the date of grant. Options may also be subject to restrictions on exercise, such as exercise in periodic installments, as determined by the Committee. The exercise price for Incentive Options must be at least equal to 100% of the fair market value of the shares of WRP Newco Common on the date of grant and the exercise price for Nonqualified Options will be determined by the Committee at the time of grant. The exercise price can be paid in cash, or if approved by the Committee, by tendering shares (actually or constructively) of WRP Newco Common owned by a participant. Incentive Options are not transferable except by will or the laws of descent and distribution and may be exercised only by the participant (or his guardian or legal representative) during his or her lifetime, except as provided below. Nonqualified Options may be transferable to family members and entities for the benefit of the participant or his family members. If a participant's employment with WRP Newco or service as a director terminates for any reason (other than death or disability), any unexercised or unexpired Options held by the participant (or its permitted transferee) will be deemed cancelled and terminated on the date of such 230 termination, unless the Committee decides to extend the term of such Options for a period not exceeding three months. In the case of a non-employee director, however, if such participant's service as a director terminates by reason of death, disability, or under mutually satisfactory conditions, any unexercised or unexpired Nonqualified Options held by the participant (or its permitted transferee) will be exercisable for a period of five years from the date of such termination or until the expiration of the Option, whichever is shorter. If a participant dies while employed by WRP Newco, including an employee who is also a director, any unexercised or unexpired Options will, to the extent exercisable on the date of death, be exercisable by the holder or by the participant's estate or by any person who acquired such Options by bequest or inheritance, at any time generally within one year after such death. If a participant becomes totally disabled and his employment terminates as a result of such disability, including an employee who is also a director, the holder or the participant (or his guardian or legal representative) will have the unqualified right to exercise any unexercised and unexpired Options held by the participant (or its permitted transferee) generally for one year after such termination. Share Appreciation Rights. The Management Incentive Plan provides that SARs may be granted in connection with a grant of Options. Each SAR must be associated with a specific Option and must be granted at the time of grant of such Option. A SAR is exercisable only to the extent the related Option is exercisable. Upon the exercise of a SAR, the recipient is entitled to receive from WRP Newco, without the payment of any cash (except for any applicable withholding taxes), up to, but no more than, an amount in cash or shares of WRP Newco Common equal to the excess of (A) the fair market value of one Common Share on the date of such exercise over (B) the exercise price of any related Option, times the number of shares of WRP Newco Common in respect of which such SAR shall have been exercised. Upon the exercise of a SAR, the related share Option, or the portion thereof in respect of which such SAR is exercised, will terminate. Upon the exercise of an Option granted in tandem with a SAR, such tandem SAR will terminate. Reload Options. The Committee may grant, concurrently with the award of any Option (each an "Underlying Option") to such participants, one or more reload options (each a "Reload Option") to purchase for cash or, if permissible under the Underlying Option, shares of WRP Newco Common, a number of shares of WRP Newco Common equal to the number of shares of WRP Newco Common delivered (or deemed delivered) by the participant to WRP Newco to exercise the Underlying Option. Although an Underlying Option may be an Incentive Option, a Reload Option is not intended to qualify as an Incentive Option. A Reload Option may be granted in connection with the exercise of an Option that is itself a Reload Option. Each Reload Option will have the same expiration date as the Underlying Option and an exercise price equal to the fair market value of the shares of WRP Newco Common on the date of grant of the Reload Option. A Reload Option is exercisable immediately. Reload Options permit a participant to retain, through the term of the original Option, his or her economic interest in the sum of the shares of WRP Newco Common covered by such 231 Options as well as the already-owned shares of WRP Newco Common that could be used to exercise such Option, by granting options on the number of shares of WRP Newco Common used to pay the exercise price of the original Option and subsequent Reload Options. In this way, Reload Options provide a participant with the opportunity to build up ownership of shares of WRP Newco Common covered by an original Option earlier during the Option term rather than through a single exercise at or near the end of the Option term. Restricted Shares. WRP Newco may award restricted shares of WRP Newco Common to a participant. Such a grant gives a participant the right to receive shares of WRP Newco Common subject to a risk of forfeiture based upon certain conditions. The forfeiture restrictions on the shares of WRP Newco Common may be based upon performance standards, length of service or other criteria as the Committee may determine. Until all restrictions are satisfied, lapsed or waived, WRP Newco will maintain custody over the restricted shares of WRP Newco Common but the participant will be able to vote the shares of WRP Newco Common and will be entitled to an amount equal to all distributions, if any, paid with respect to the shares of WRP Newco Common, as provided by the Committee. During such restrictive period, the restricted shares of WRP Newco Common may not be sold, assigned, transferred, pledged or otherwise encumbered. Upon termination of employment, the participant generally forfeits the right to the shares of WRP Newco Common to the extent the applicable performance standards, length of service requirements, or other measurement criteria have not been met. Share Purchase Awards. The Management Incentive Plan also permits the grant of share purchase awards to participants. Participants who are granted a share purchase award are provided with a share purchase loan to enable them to pay the purchase price for the shares of WRP Newco Common acquired pursuant to the award. The terms of each share purchase loan will be determined by the Committee. The purchase price of shares of WRP Newco Common acquired with a share purchase loan is the fair market value on the date of the award. The Management Incentive Plan provides that some or all of a share purchase loan can be forgiven under terms determined by the Committee. At the end of the loan term, the remainder of the share purchase loan will be due and payable. The interest rate, if any, on a share purchase loan will be determined by the Committee. Share purchase loans may be recourse or nonrecourse under terms determined by the Committee. If a participant's employment with WRP Newco is terminated for any reason other than death, disability or termination without "cause," the balance of the share purchase loans to such participant will be immediately due and payable. If a participant's employment terminates by reason of death, disability or termination without "cause," the balance of such participant's share purchase loans may be forgiven in full at the discretion of the Committee. Antidilution Provisions. The number of shares of WRP Newco Common authorized to be issued under the Management Incentive Plan and subject to outstanding awards (and the grant or exercise price thereof) may be adjusted to prevent dilution or enlargement of rights in the 232 event of any dividend or other distribution, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares of WRP Newco Common or other securities, or other similar capitalization change. Certain Federal Income Tax Consequences of the Management Incentive Plan. The following is a brief summary of the principal federal income tax consequences of awards under the Management Incentive Plan. The summary is based upon current federal income tax laws and interpretations thereof, all of which are subject to change at any time, possibly with retroactive effect. The summary is not intended to be exhaustive and, among other things, does not describe state, local or foreign tax consequences. In general, a participant is not subject to federal income tax either at the time of grant or at the time of exercise of an Incentive Option. However, upon exercise, the difference between the fair market value of the shares of WRP Newco Common and the exercise price is a tax preference item subject to the possible application of the alternative minimum tax. If a participant does not dispose of shares of WRP Newco Common acquired through the exercise of an Incentive Option in a "disqualifying disposition" (i.e., no disposition occurs within two years from the date of grant of the share option nor within one year of the transfer of the shares of WRP Newco Common to the participant), then the participant will be taxed only upon the gain, if any, from the sale of such shares of WRP Newco Common, and such gain will be taxable as gain from the sale of a capital asset. WRP Newco will not receive any tax deduction on the exercise of an Incentive Option or, if the above holding period requirements are met, on the sale of the underlying shares of WRP Newco Common. If there is a disqualifying disposition (i.e., one of the holding period requirements is not met), the participant will be treated as receiving compensation subject to ordinary income tax in the year of the disqualifying disposition and WRP Newco will be entitled to a deduction for compensation expense in an amount equal to the amount included in income by the participant. The participant generally will be required to include in income an amount equal to the difference between the fair market value of the shares of WRP Newco Common at the time of exercise and the exercise price. Any appreciation in value after the time of exercise will be taxed as capital gain and will not result in any deduction by WRP Newco. If Nonqualified Options are granted to a participant, there are no federal income tax consequences at the time of grant. Upon exercise of the Option, the participant must report as ordinary income an amount equal to the difference between the exercise price and the fair market value of the shares of WRP Newco Common on the date of exercise. WRP Newco will receive a tax deduction in like amount. Any appreciation in value after the time of exercise will be taxed as capital gain and will not result in any deduction by WRP Newco. No income will be realized by a participant in connection with the grant of any SAR. The participant must include in ordinary income the amount of cash received and the fair market value on the exercise date of any shares of WRP Newco Common received upon the exercise 233 of a SAR. WRP Newco will be entitled to a deduction equal to the amount included in such participant's income by reason of the exercise of any SAR. The receipt of a Reload Option by a holder of an Incentive Option or a Nonqualified Option (including a Reload Option) who pays the exercise price in full or in part with previously acquired shares of WRP Newco Common should not affect the tax treatment of the exercise of such Incentive or Nonqualified Option (including the amount of ordinary income, if any, recognized upon exercise). A participant will not be subject to tax at the time a Reload Option is granted (except for any income recognized upon the exercise of a Nonqualified Option at the time of grant of the Reload Option). A Reload Option will constitute a Nonqualified Option for federal income tax purposes and will be taxed as such in the manner set forth above. A grant of restricted shares of WRP Newco Common does not constitute a taxable event for either a participant or WRP Newco. However, the participant will be subject to tax, at ordinary income rates, when the shares of WRP Newco Common are no longer subject to a substantial risk of forfeiture or they become transferable. WRP Newco will be entitled to take a commensurate deduction at that time. A participant may elect to recognize taxable ordinary income at the time restricted shares of WRP Newco Common are awarded in an amount equal to the fair market value of the shares of WRP Newco Common at the time of grant, determined without regard to any forfeiture restrictions. If such an election is made, WRP Newco will be entitled to a deduction at that time in the same amount. Future appreciation on the shares of WRP Newco Common will be taxed at the capital gains rate when the shares of WRP Newco Common are sold. However, if, after making such an election, the shares of WRP Newco Common are forfeited, the participant will be unable to claim a deduction. In general, a participant who receives a share purchase award incurs no tax liability and WRP Newco does not receive any deduction at the time shares of WRP Newco Common are acquired through a share purchase award. However, as the share purchase loan is forgiven, the participant will be required to recognize income in an amount equal to the forgiven portion of the loan. WRP Newco will be entitled to take a commensurate deduction at such time. Applicable withholding taxes may be withheld in connection with any award under the Management Incentive Plan. In that regard, the Committee has the discretion to allow a participant to satisfy its withholding tax obligations with shares of WRP Newco Common. Change in Control. Depending on the terms of a particular award as determined by the Committee, upon the occurrence of a change in control of WRP Newco, all options and related SARs may become immediately exercisable, the restricted shares of WRP Newco Common may fully vest and share purchase loans may be forgiven in full. 234 Termination, Amendment and ERISA Status. The Management Incentive Plan will terminate by its terms and without any action by the Board on the tenth anniversary of the date of its effectiveness. No awards may be made after that date. Awards outstanding on such date will remain valid in accordance with their terms. The Committee may amend or alter the terms of awards under the Management Incentive Plan, including to provide for the forgiveness in whole or in part of share purchase loans, the release of the shares of WRP Newco Common securing such loans or the termination or modification of the vesting or performance provisions of the grants of restricted shares of WRP Newco Common but no such action shall in any way impair the rights of a participant under any award without such participant's consent. The Committee may amend or terminate the Management Incentive Plan. No such amendments or termination of the Management Incentive Plan shall in any way impair the rights of a participant under any award previously granted without such participant's consent. In addition, any amendment or termination will be subject to shareholder approval if approval is required by Federal or state law or regulation or rule of any stock exchange or quotation system on which the shares of WRP Newco Common are listed or quoted. The Management Incentive Plan is not subject to the provisions of the Employee Retirement Income Security Act of 1976, as amended. - -------------------------------------------------------------------------------- The Board of Trustees of Wellsford and the Board of Directors of WRP Newco recommend that you vote FOR the proposal to approve WRP Newco's 1997 Management Incentive Plan. - -------------------------------------------------------------------------------- LEGAL MATTERS Certain legal matters in connection with the Merger will be passed upon for EQR by Rudnick & Wolfe, Chicago, Illinois and Rosenberg & Liebentritt, P.C., Chicago, Illinois. Errol R. Halperin, a partner of Rudnick & Wolfe, is a trustee of EQR. Attorneys of Rudnick & Wolfe beneficially own less than 1% of the outstanding EQR Common, either directly or upon the exercise of options. Sheli Z. Rosenberg, a principal of Rosenberg & Liebentritt, P.C., is a trustee of EQR. Attorneys of Rosenberg & Liebentritt, P.C. beneficially own less than 1% of the outstanding EQR Common, either directly or upon the exercise of options. Certain legal matters in connection with the Merger will be passed upon for Wellsford by Robinson Silverman Pearce Aronsohn & Berman LLP, New York, New York. Ballard Spahr Andrews & Ingersoll, 235 Baltimore, Maryland, will pass upon certain matters of Maryland law relating to the Merger Agreement and Articles under Maryland law. EXPERTS The consolidated financial statements of EQR and its subsidiaries for the years ended December 31, 1995 and 1994 incorporated herein by reference have been audited by Grant Thornton LLP, independent public accountants, as indicated in their reports with respect thereto, and are incorporated in this Joint Proxy Statement/Prospectus/Information Statement in reliance upon the authority of said firm as experts in accounting and auditing. The combined financial statements of WRP Newco (Predecessor), at December 31, 1996 and 1995 and for the year ended December 31, 1996, and for the period from March 22 to December 31, 1995, appearing in this Joint Proxy Statement/ Prospectus/Information Statement; the consolidated financial statements of Wellsford and its subsidiaries appearing in Wellsford's Annual Report (Form 10-K) for the year ended December 31, 1996 and the consolidated financial statements of EQR appearing in EQR's Annual Report (Form 10-K/A) for the year ended December 31, 1996; the Combined Statement of Revenue and Certain Expenses of the 1996 Acquired Properties and Probable Properties for the year ended December 31, 1995, appearing in the Current Report of EQR on Form 8-K, as amended by Form 8-K/A, dated May 23, 1996; and the Combined Statement of Revenue and Certain Expenses of the 1996 Acquired Properties for the year ended December 31, 1995, appearing in the Current Report of EQR on Form 8-K/A, dated November 15, 1996; have all been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein or incorporated herein by reference, and in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. SHAREHOLDER PROPOSALS Any proposal which a shareholder of EQR intends to present at the 1997 Annual Meeting of Shareholders of EQR, if the Merger has not been consummated prior to the date such meeting is to be held, must have been received by the Secretary of EQR no later than November 29, 1996 to have been eligible for inclusion in EQR's proxy statement and proxy form relating to such meeting. Any proposal which a shareholder of Wellsford intends to present at the 1997 Annual Meeting of Shareholders of Wellsford, if the Merger has not been consumated prior to the date such meeting is to be held, must have been received by Wellsford at its principal executive offices on or before November 29, 1996 to have been eligible for inclusion in Wellsford's proxy statement and proxy form relating to such meeting. 236 APPENDIX A - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER BETWEEN EQUITY RESIDENTIAL PROPERTIES TRUST AND WELLSFORD RESIDENTIAL PROPERTY TRUST Dated as of January 16, 1997 - -------------------------------------------------------------------------------- TABLE OF CONTENTS -----------------
ARTICLE PAGE - ------- ---- 1 THE MERGER............................................................. 2 1.1 The Merger....................................................... 2 1.2 Newco Transactions............................................... 2 1.3 Closing.......................................................... 3 1.4 Effective Time................................................... 3 1.5 Amendments and Restatements of Wellsford's Declaration of Trust.. 3 1.6 Amendment and Restatement of Wellsford's Bylaws.................. 3 1.7 Trustees......................................................... 3 1.8 Effect on Shares of Beneficial Interest and Options.............. 3 1.9 Exchange Ratio................................................... 4 1.10 Completion of Contribution Agreement............................. 4 1.11 Reversal of Direction of Merger.................................. 5 1.12 Change in Number of Spin-Off Shares.............................. 5 2 REPRESENTATIONS AND WARRANTIES OF Wellsford............................ 6 2.1 Organization, Standing and Power of Wellsford.................... 6 2.2 Wellsford Subsidiaries........................................... 6 2.3 Capital Structure................................................ 7 2.4 Authority; Noncontravention; Consents............................ 9 2.5 SEC Documents; Financial Statements; Undisclosed Liabilities..... 10 2.6 Absence of Certain Changes or Events............................. 11 2.7 Litigation....................................................... 11 2.8 Properties....................................................... 12 2.9 Environmental Matters............................................ 14 2.10 Related Party Transactions....................................... 14 2.11 Absence of Changes in Benefit Plans; ERISA Compliance............ 14 2.12 Employee Policies................................................ 15 2.13 Taxes............................................................ 15 2.14 No Payments to Employees, Officers, Trustees or Directors........ 16 2.15 Brokers; Schedule of Fees and Expenses........................... 16 2.16 Compliance with Laws............................................. 17 2.17 Contracts; Debt Instruments...................................... 17 2.18 Opinion of Financial Advisor..................................... 18 2.19 State Takeover Statutes.......................................... 18 2.20 Registration Statement........................................... 18 2.21 Development Properties........................................... 18 2.22 EQR Shares of Beneficial Interest................................ 18 2.23 Investment Company Act of 1940................................... 18
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ARTICLE PAGE - ------- ---- 2.24 Intentionally Omitted............................................ 18 2.25 Definition of Knowledge of Wellsford............................. 18 3 REPRESENTATIONS AND WARRANTIES OF EQR.................................. 19 3.1 Organization, Standing and Power of EQR.......................... 19 3.2 Capital Structure................................................ 19 3.3 Organization, Standing and Power of ERP Operating Partnership............................................ 20 3.4 Capital Structure of ERP Operating Partnership................... 21 3.5 Authority; Noncontravention; Consents............................ 21 3.6 SEC Documents; Financial Statements; Undisclosed Liabilities..... 22 3.7 Absence of Certain Changes or Events............................. 23 3.8 Litigation....................................................... 23 3.9 Properties....................................................... 24 3.10 Environmental Matters............................................ 25 3.11 Taxes............................................................ 25 3.12 Brokers; Schedule of Fees and Expenses........................... 26 3.13 Compliance with Laws............................................. 26 3.14 Contracts; Debt Instruments...................................... 26 3.15 Opinion of Financial Advisor..................................... 26 3.16 State Takeover Statutes.......................................... 26 3.17 Registration Statement........................................... 27 3.18 Wellsford Shares of Beneficial Interest.......................... 27 3.19 Intentionally Omitted............................................ 27 3.20 Investment Company Act of 1940................................... 27 3.21 Definition of Knowledge of EQR................................... 27 4 COVENANTS.............................................................. 27 4.1 Acquisition Proposals............................................ 27 4.2 Conduct of Wellsford's Business Pending Merger................... 28 4.3 Conduct of EQR's Business Pending Merger......................... 33 4.4 Covenant of EQR.................................................. 34 4.5 Other Actions.................................................... 34 4.6 Filing of Certain Reports........................................ 34 5 ADDITIONAL COVENANTS................................................... 34 5.1 Preparation of the Registration Statement and the Proxy Statement; Wellsford Shareholders Meeting and EQR Shareholders Meeting...... 34 5.2 Access to Information: Confidentiality........................... 36 5.3 Best Efforts; Notification....................................... 36 5.4 Costs of Transaction............................................. 37 5.5 Tax Treatment.................................................... 37
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ARTICLE PAGE - ------- ---- 5.6 Public Announcements............................................. 37 5.7 Listing.......................................................... 37 5.8 Letters of Accountants........................................... 38 5.9 Transfer and Gains Taxes......................................... 38 5.10 Benefit Plans and Other Employee Arrangements.................... 38 5.11 Indemnification.................................................. 40 5.12 Contribution Agreement........................................... 41 5.13 Declaration of Dividends and Distributions....................... 41 5.14 Consulting Agreements............................................ 41 5.15 Transfer of Management Company Shares............................ 42 5.16 Transfer of Wellsford Assets After Effective Time................ 42 5.17 Notices.......................................................... 42 5.18 Resignations..................................................... 42 5.19 Third Party Management Agreements................................ 42 5.20 Repayment of Certain Indebtedness................................ 43 6 CONDITIONS............................................................. 44 6.1 Conditions to Each Party's Obligation to Effect the Merger....... 44 6.2 Conditions to Obligations of EQR................................. 45 6.3 Conditions to Obligations of Wellsford........................... 48 7 TERMINATION, AMENDMENT AND WAIVER...................................... 50 7.1 Termination...................................................... 50 7.2 Certain Fees and Expenses........................................ 51 7.3 Effect of Termination............................................ 52 7.4 Amendment........................................................ 53 7.5 Extension; Waiver................................................ 53 8 GENERAL PROVISIONS..................................................... 53 8.1 Nonsurvival of Representations and Warranties.................... 53 8.2 Notices.......................................................... 53 8.3 Interpretation................................................... 54 8.4 Counterparts..................................................... 54 8.5 Entire Agreement; No Third-Party Beneficiaries................... 55 8.6 Governing Law.................................................... 55 8.7 Assignment....................................................... 55 8.8 Enforcement...................................................... 55 8.9 Severability..................................................... 55 8.10 Non-Recourse..................................................... 56
iii EXHIBITS -------- Exhibit "A" - Articles of Merger Exhibit "B" - Contribution Agreement Exhibit "C" - Newco Stock Purchase Agreement Exhibit "D" - Palomino Agreement Exhibit "E" - Palomino Credit Enhancement Agreement Exhibit "F" - Sonterra Right of First Offer Agreement Exhibit "G" - Adjustment to Exchange Ratio Exhibit "H" - Transaction Costs Agreement Exhibit "I" - Retention Program Letter Exhibit "J" - Key Executives Exhibit "K" - Form of Consulting Agreement Exhibit "L" - Form of Letter for EQR Tax Opinion Exhibit "M" - Opinion of Counsel to Wellsford Exhibit "N" - Form of Letter for Wellsford Tax Opinion Exhibit "O" - Opinion of Counsel to EQR iv INDEX OF DEFINED TERMS ----------------------
DEFINED TERM SECTION - ------------ ------- Acquisition Proposal 4.1(a) Affiliate 2.10 Agreement Preamble Articles of Merger Recital C Average Closing Price 1.9 Base Amount 7.2 Break-Up Expenses 7.2 Break-Up Fee 7.2 Break-Up Fee Tax Opinion 7.2 Change in Control Share Grants 2.3(b) Closing 1.3 Closing Date 1.3 Code Recital E Commitment 4.2(q) Confidentiality Agreement 5.2 Contribution Agreement Recital D Denver Lease 5.22 Department 1.4 Effective Time 1.4 employee benefit plan 2.11(b) Encumbrances 2.8(a) EQR Preamble EQR Common Shares 1.9 EQR Disclosure Letter Article 3 EQR Employee Share Plans 3.2(a) EQR Financial Statement Date 3.7 EQR Material Adverse Change 3.7 EQR Material Adverse Effect 3.1 EQR Options 3.2(a) EQR Preferred Shares 3.2(a) EQR Properties 3.9 EQR SEC Documents 3.6 EQR Series A Preferred Shares 3.2(a) EQR Series B Preferred Shares 3.2(a) EQR Series C Preferred Shares 3.2(a) EQR Shareholder Approvals 3.5(a) EQR Shareholders Meeting 5.1(b) EQR Subsidiaries 3.1
v
DEFINED TERM SECTION - ------------- ------- EQR Units 3.2(c) ERISA 2.11(b) ERP Operating Partnership 1.2 ERP Operating Partnership Agreement 3.2(a) Exchange Act 2.4(b) Exchange Ratio 1.9 GAAP 2.5 Governmental Entity 2.4(b) Hazardous Materials 2.9 include, includes or including 8.3 Indebtedness 2.7(b) Indemnified Parties 5.11(a) IRS 1.11 Laws 2.4(b) Liens 2.2(b) Management Corp. 5.15 Merger Recital B New York Stock Exchange Composite Transactions 1.9 Newco Recital D Newco Stock Purchase Agreement 1.2(b) NYSE 2.4(b) 1940 Act 2.23 Palomino Agreement 1.2(c) Palomino Credit Enhancement Agreement 1.2(d) Palomino Development Agreements 4.2(i) Payor 7.2 Person 2.2(a) Property Restrictions 2.8(a) Proxy Statement 2.4(b) Qualifying Income 7.2 Recipient 7.2 Registration Statement 5.1(a) REIT 2.13(b) REIT Requirements 7.2 Restricted Share Grants 2.3(b) Retention Program 5.10(c) Revolver Rate 4.2 Retention Program Letter 5.10(c) Schedule 5.10 Employees 5.10(c) SEC 2.4(b) Securities Act 2.4(b)
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DEFINED TERM SECTION - ------------- ------- Share Loan and Acquisition Agreements 2.3(b) Shareholder Approvals 3.5(a) Sonterra Right of First Offer Agreement 1.2(e) Spin-Off 1.2 Springing Shares 2.3(b) Subsidiary 2.2(a) Superior Acquisition Proposal 4.1 Surviving Trust 1.1 Takeover Statute 2.19 Taxes 2.13(a) Third Party Management Agreements 2.17(d) Title 8 1.1 to the Knowledge of EQR 3.21 to the Knowledge of Wellsford 2.25 Transaction Costs Agreement 5.4 Transfer and Gains Taxes 5.9 Wellsford Preamble Wellsford Benefit Plans 2.11(a) Wellsford Common Shares 1.2(f) Wellsford Disclosure Letter Article 2 Wellsford Financial Statement Date 2.6 Wellsford Material Adverse Change 2.6 Wellsford Material Adverse Effect 2.1 Wellsford Options 2.3(b) Wellsford Properties 2.8(a) Wellsford SEC Documents 2.5 Wellsford Series A Preferred Shares 2.3(a) Wellsford Series B Preferred Shares 2.3(a) Wellsford Shareholder Approvals 2.4(a) Wellsford Shareholder Meeting 5.1(c) Wellsford Subsidiaries 2.2 WPHC 1.10 WPHC Non-Voting Shares 5.24 WPHC Voting Shares 5.24
vii AGREEMENT AND PLAN OF MERGER ---------------------------- THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of January 16, 1997 by and between EQUITY RESIDENTIAL PROPERTIES TRUST, a Maryland real estate investment trust ("EQR"), and WELLSFORD RESIDENTIAL PROPERTY TRUST, a Maryland real estate investment trust ("Wellsford"). R E C I T A L S: --------------- A. The Boards of Trustees of EQR and Wellsford deem it advisable and in the best interests of their respective shareholders, subject to the conditions and other provisions contained herein, that EQR acquire the assets and business of Wellsford and operate the business under the name "Equity Residential Properties Trust." B. The acquisition of the assets and business of Wellsford shall be effected by the merger of EQR and Wellsford (the "Merger"). C. Upon the terms and conditions set forth herein, EQR and Wellsford shall execute Articles of Merger in substantially the form attached hereto as Exhibit "A" (the "Articles of Merger") and shall file such articles in accordance with Maryland law to effectuate the Merger. D. Immediately prior to the Merger, it is contemplated that Wellsford shall contribute certain of its assets to Wellsford Real Properties, Inc., a Maryland corporation ("Newco"), and that Newco shall assume certain obligations of Wellsford, all as provided in the Contribution and Distribution Agreement in substantially the form attached hereto as Exhibit "B" (the "Contribution Agreement"). E. Immediately prior to the Merger, it is contemplated that Wellsford shall distribute to its common shareholders all the outstanding shares of Newco owned by it in a distribution subject to income tax under the Internal Revenue Code of 1986, as amended (the "Code"). F. For federal income tax purposes, it is intended that the Merger shall qualify as a tax-free reorganization within the meaning of Section 368(a) of the Code. G. EQR and Wellsford have each received a fairness opinion relating to the transactions contemplated hereby as more fully described herein. H. EQR and Wellsford desire to make certain representations, warranties and agreements in connection with the Merger. NOW, THEREFORE, in consideration of the premises, and the mutual representations, warranties, covenants and agreements contained herein, the parties hereto hereby agree as follows: ARTICLE 1 --------- THE MERGER ---------- 1.1 THE MERGER. Upon the terms and subject to the conditions of this Agreement, and in accordance with Title 8 of the Corporations and Associations Article of the Annotated Code of Maryland, as amended ("Title 8"), EQR shall be merged with and into Wellsford, with Wellsford as the surviving real estate investment trust (the "Surviving Trust"). 1.2 NEWCO TRANSACTIONS. Wellsford, on January 8, 1997, formed Newco. Immediately prior to the time of effectiveness of the Merger: (a) Wellsford shall, and shall cause Newco to, execute and deliver the Contribution Agreement and consummate the transactions contemplated thereby; (b) EQR will cause ERP Operating Limited Partnership, an Illinois limited partnership of which EQR is the sole general partner (the "ERP Operating Partnership"), to execute and deliver, and Wellsford shall cause Newco to execute and deliver, the Common Stock and Preferred Stock Purchase Agreement in substantially the form annexed hereto as Exhibit "C" (the "Newco Stock Purchase Agreement"); (c) EQR will cause ERP Operating Partnership to execute and deliver, and Wellsford shall cause Newco to execute and deliver, the Agreement Regarding Palomino Park in substantially the form annexed hereto as Exhibit "D" (the "Palomino Agreement"); (d) EQR will cause ERP Operating Partnership to execute and deliver, and Wellsford shall cause Newco to execute and deliver, the Credit Enhancement Agreement in substantially the form annexed hereto as Exhibit "E" (the "Palomino Credit Enhancement Agreement"); (e) EQR will cause ERP Operating Partnership to execute and deliver, and Wellsford shall cause Newco to execute and deliver, the Sonterra Right of First Offer Agreement in substantially the form annexed hereto as Exhibit "F" (the "Sonterra Right of First Offer Agreement"); and (f) Wellsford will distribute to its common shareholders, as a distribution taxable under Code Section 301, all the outstanding shares of Newco owned by Wellsford 2 as further described in the Contribution Agreement, so that each holder of common shares of beneficial interest of Wellsford, $0.01 par value per share ("Wellsford Common Shares"), receives one common share of Newco for each Wellsford Common Share held by such holder (such transactions being referred to collectively as the "Spin-Off"). Immediately after the Effective Time (as defined below), the transactions contemplated by the Newco Stock Purchase Agreement, the Palomino Agreement and the Palomino Credit Enhancement Agreement which are to occur on the Closing Date (as defined below) shall be consummated. 1.3 CLOSING. The closing of the Merger ("Closing") will take place at 10:00 a.m. on the date to be specified by the parties, which (subject to satisfaction or waiver of the conditions set forth in Article 6) shall be no later than the third business day after satisfaction or waiver of the conditions set forth in Section 6.1(a) (the "Closing Date"), at the offices of Rudnick & Wolfe, 203 North LaSalle Street, Chicago, Illinois 60601, unless another date or place is agreed to in writing by the parties. 1.4 EFFECTIVE TIME. As soon as practicable following the satisfaction or waiver of the conditions set forth in Article 6, the parties shall execute and file the Articles of Merger, executed in accordance with Title 8, with the State Department of Assessments and Taxation of Maryland (the "Department"), and shall make all other filings and recordings required under Title 8. The Merger shall become effective ("Effective Time") at such time as the Department accepts the Articles of Merger for record, or at such time as EQR and Wellsford shall agree should be specified in the Articles of Merger (not to exceed thirty (30) days after the Articles of Merger are accepted for record by the Department). Unless otherwise agreed, the parties shall cause the Effective Time to occur on the Closing Date. 1.5 AMENDMENTS AND RESTATEMENTS OF WELLSFORD'S DECLARATION OF TRUST. The Amended and Restated Declaration of Trust, as amended, of Wellsford shall be amended and restated at the Effective Time as provided in the Articles of Merger. 1.6 AMENDMENT AND RESTATEMENT OF WELLSFORD'S BYLAWS. From and after the Effective Time, the Bylaws of the Surviving Trust shall be the Bylaws of EQR as in effect immediately prior to the Merger, until further amended or restated in accordance therewith and Title 8. 1.7 TRUSTEES. The trustees of the Surviving Trust shall be the persons named in the Articles of Merger, each of whom shall serve for the term specified in the Articles of Merger. 1.8 EFFECT ON SHARES OF BENEFICIAL INTEREST AND OPTIONS. The effect of the Merger on the shares of beneficial interest, options to purchase shares of beneficial interest and restricted share awards of each of EQR and Wellsford shall be as provided in the Articles of Merger. 3 1.9 EXCHANGE RATIO. The exchange ratio to be set forth in the Articles of Merger ("Exchange Ratio") shall be 0.625 of a common share of beneficial interest of the Surviving Trust, $0.01 par value per share, for each Wellsford Common Share outstanding immediately prior to the Effective Time. In the event that the Average Closing Price (as defined below) is less than $40.00 per share, the Exchange Ratio shall be the rate per share specified in Exhibit "G" hereto. For the purposes of this Agreement, "Average Closing Price" shall mean the average of the daily closing prices of a common share of beneficial interest of EQR, $0.01 par value per share ("EQR Common Share"), reported as "New York Stock Exchange Composite Transactions" by The Wall Street Journal (Midwest Edition) during the consecutive twenty (20) trading day period ending at the end of the fifth (5th) trading day prior to the date which the proxy statements required by Section 5.1 hereof are dated. 1.10 COMPLETION OF CONTRIBUTION AGREEMENT. At the time the Contribution Agreement is executed, the parties shall complete the blank presently in the Contribution Agreement for the amount of Contribution Funds (as defined in the Contribution Agreement). The amount of the Contribution Funds shall be $13,355,600, adjusted as follows: (a) such amount shall be decreased by: (i) 80% of any cash (excluding loans) invested by Wellsford or any of its Subsidiaries in Wellsford Park Highlands Corp., a Colorado corporation ("WPHC"), and its Subsidiaries after September 30, 1996 and prior to the Spin-Off; (ii) 100% of any accrued interest on the Promissory Note dated June 28, 1996 made by Specified Properties VIII, L.P., a Texas limited partnership, to Wellsford remaining unpaid as of the Closing Date; and (iii) $2.50 for each share of Newco distributed to the shareholders of Wellsford in the Spin-Off less than 17,104,359 shares; and (b) such amount shall be increased by: (i) 80% of the accrued interest on the Bonds (as defined in the Credit Enhancement Agreement) which remains unpaid as of the Closing Date; (ii) $2.50 for each share of Newco distributed to the shareholders of Wellsford in the Spin-Off in excess of 17,104,359 shares; and 4 (iii) the amount, if any, provided for in Section 1(b) of the Transaction Costs Agreement (as defined in Section 5.4). 1.11 REVERSAL OF DIRECTION OF MERGER. In order to allow counsel to opine that the Merger, for federal income tax purposes, will qualify as a tax-free reorganization within the meaning of the Code, the parties have agreed that EQR shall be merged into Wellsford and that Wellsford shall be the Surviving Trust. The parties will jointly file a request for a private letter ruling with the Internal Revenue Service ("IRS"), as soon as practicable after the date hereof, to obtain a private letter ruling from the IRS to the effect that a merger of Wellsford into EQR with EQR being the Surviving Trust will not adversely affect the tax-free nature of the reorganization. If such a private letter ruling is received or in the event the IRS publishes a revenue ruling or other published announcement (including the promulgation of a Treasury regulation) to the effect that, and counsel for the parties are reasonably willing to opine that, a merger of Wellsford into EQR with EQR being the Surviving Trust will not adversely affect the tax-free nature of the reorganization, the parties will amend this Agreement, the Articles of Merger and all other agreements as may be necessary or desirable solely for the purposes of providing for the merger of Wellsford into EQR with EQR being the Surviving Trust; provided, however, that such amendments shall not modify the substantive provisions or economic terms of this Agreement and the transactions contemplated hereby; and further provided that both the Merger and the merger of Wellsford into EQR with EQR being the Surviving Trust are submitted to and approved by the shareholders of EQR and Wellsford in the manner required by applicable law. Any such amendment may be made before or after the approval of the Merger by the respective shareholders of EQR and Wellsford. The costs and expenses of seeking and obtaining any private letter ruling as contemplated by this Section 1.11 shall be borne by EQR. Any conditions to the Merger set forth in Article 6 that would be satisfied but for the reversal of direction of the Merger shall be deemed satisfied. 1.12 CHANGE IN NUMBER OF SPIN-OFF SHARES. If for any reason Wellsford shall determine to distribute in the Spin-Off less than one common share of Newco for each outstanding Wellsford Common Share, the parties will amend this Agreement and all other agreements contemplated hereby solely for the purpose of appropriately adjusting all numbers and dollar amounts which were based on one common share of Newco being distributed in the Spin-Off for each outstanding Wellsford Common Share. 5 ARTICLE 2 --------- REPRESENTATIONS AND WARRANTIES OF WELLSFORD ------------------------------------------- Except as set forth in the letter of even date herewith signed by the Chairman of the Board or President of Wellsford in his capacity as such and delivered to EQR prior to the execution hereof (the "Wellsford Disclosure Letter"), Wellsford represents and warrants to EQR as follows: 2.1 ORGANIZATION, STANDING AND POWER OF WELLSFORD. Wellsford is a real estate investment trust duly organized and validly existing under the laws of Maryland and has the requisite power and authority to carry on its business as now being conducted. Wellsford is duly qualified or licensed to do business as a foreign trust and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed, individually or in the aggregate, would not have a material adverse effect on the business, properties, assets, financial condition or results of operations of Wellsford and the Wellsford Subsidiaries (as defined below), taken as a whole (a "Wellsford Material Adverse Effect"). Wellsford has delivered to EQR complete and correct copies of its Amended and Restated Declaration of Trust (including all Articles Supplementary thereto) and Amended and Restated Bylaws, in each case, as amended to the date of this Agreement. 2.2 WELLSFORD SUBSIDIARIES. (a) Schedule 2.2 to the Wellsford Disclosure Letter sets forth (i) each Subsidiary of Wellsford (the "Wellsford Subsidiaries"), (ii) the ownership interest therein of Wellsford, (iii) if not wholly-owned by Wellsford, the identity and ownership interest of other owners of such Wellsford Subsidiary, and (iv) each apartment community owned by such Subsidiary. As used in this Agreement, "Subsidiary" of any Person means any corporation, partnership, limited liability company, joint venture or other legal entity of which such Person (either directly or through or together with another Subsidiary of such Person) owns any of the capital stock or other equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity. As used herein, "Person" means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity. (b) Except as set forth in Schedule 2.2 to the Wellsford Disclosure Letter, (i) all the outstanding shares of capital stock of each Wellsford Subsidiary that is a corporation have been validly issued and are (A) fully paid and nonassessable, (B) owned by Wellsford or by another Wellsford Subsidiary, and (C) owned free and clear of all pledges, claims, liens, charges, encumbrances and security interests of any kind or nature whatsoever (collectively, "Liens"), and (ii) all equity interests in each Wellsford Subsidiary that is a partnership, joint 6 venture, limited liability company or trust which are owned by Wellsford, by another Wellsford Subsidiary or by Wellsford and another Wellsford Subsidiary are owned free and clear of all Liens. Each Wellsford Subsidiary that is a corporation is duly incorporated and validly existing under the laws of its jurisdiction of incorporation and has the requisite corporate power and authority to carry on its business as now being conducted, and each Wellsford Subsidiary that is a partnership, limited liability company or trust is duly organized and validly existing under the laws of its jurisdiction of organization and has the requisite power and authority to carry on its business as now being conducted. Each Wellsford Subsidiary is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed, individually or in the aggregate, would not have a Wellsford Material Adverse Effect. Copies of the Articles of Incorporation, Bylaws, organization documents and partnership, joint venture and operating agreements of each Wellsford Subsidiary, as amended to the date of this Agreement, have been previously delivered or made available to EQR. 2.3 CAPITAL STRUCTURE. (a) The authorized shares of beneficial interest of Wellsford consist of 100,000,000 shares of beneficial interest, of which 4,600,000 are Series A Cumulative Convertible Preferred Shares of Beneficial Interest, $.01 par value per share ("Wellsford Series A Preferred Shares"), and 2,300,000 are Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share ("Wellsford Series B Preferred Shares"). On January 14, 1997, (i) 17,111,937 Wellsford Common Shares, 3,999,800 Wellsford Series A Preferred Shares and 2,300,000 Wellsford Series B Preferred Shares were issued and outstanding, (ii) 1,000,000 Wellsford Common Shares have been reserved for the Dividend Reinvestment and Share Purchase Plan of Wellsford, (iii) 979,325 Wellsford Common Shares were issuable upon exercise of outstanding options to purchase Wellsford Common Shares, (iv) 582,900 Wellsford Common Shares were reserved for issuance upon the exercise of options which may be granted under the 1992 Share Option Plan, (v) 750,000 Wellsford Common Shares were reserved for issuance under the Long-Term Management Incentive Plan of Wellsford, and (vi) a sufficient number of Wellsford Common Shares were reserved for issuance to permit the conversion of the then outstanding Wellsford Series A Preferred Shares. (b) Set forth in Schedule 2.3 of the Wellsford Disclosure Letter is a true and complete list of the following: (i) each qualified or nonqualified option to purchase Wellsford Common Shares granted under the 1992 Share Option Plan, Long-Term Management Incentive Plan, or any other formal or informal arrangement ("Wellsford Options"); (ii) each grant of Wellsford Common Shares to employees which are subject to any risk of forfeiture ("Restricted Share Grants"); (iii) any obligation of Wellsford to issue Wellsford Common Shares as a result of the transactions contemplated hereby ("Change in Control Share Grants"); and (iv) each loan made by Wellsford with respect to the purchase of Wellsford Common Shares which will be forgiven as a result of the transactions contemplated by this Agreement (the "Share Loan and 7 Acquisition Agreements"). The Restricted Share Grants are included in the number of outstanding Wellsford Common Shares set forth in Section 2.3(a). For each Wellsford Option held by the executive officers of Wellsford, Schedule 2.3 of the Wellsford Disclosure Letter sets forth the name of the grantee, the date of the grant, status of the option as qualified or nonqualified under Section 422 of the Code, the number of Wellsford Common Shares subject to such option, the number of shares subject to options that are currently exercisable, the exercise price per share, those options granting reload options, and the number of such shares subject to share appreciation rights. For each option to purchase Wellsford Common Shares held by employees of Wellsford or any of the Wellsford Subsidiaries who are not executive officers of Wellsford, Schedule 2.3 to the Wellsford Disclosure Letter sets forth the name of the grantee, the date of the grant, the number of Wellsford Common Shares subject to such option and the exercise price per share. For each Restricted Share Grant, Schedule 2.3 of the Wellsford Disclosure Letter sets forth the name of the grantee, the date of the grant and the number of Wellsford Common Shares granted. For each Change in Control Share Grant, Schedule 2.3 to the Wellsford Disclosure Letter sets forth the aggregate number of Wellsford Common Shares to be issued immediately prior to the Spin-Off and the Merger. For each Share Loan and Acquisition Agreement, Schedule 2.3 of the Wellsford Disclosure Letter sets forth the name of the borrower, the date of the loan, the aggregate principal amount of the loan, the number of shares originally pledged as security for each loan the number of shares that have been released from such pledge and the outstanding loan balance as of the date of the Wellsford Disclosure Letter. On the date of this Agreement, except as set forth in this Section 2.3 or Schedule 2.3 of the Wellsford Disclosure Letter, no shares of beneficial interest or other voting securities of Wellsford were issued, reserved for issuance, or outstanding. (c) All outstanding shares of beneficial interest of Wellsford are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights, except that the shareholders may be subject to further assessment with respect to certain claims for tort, contract, taxes, statutory liability and otherwise in some jurisdictions to the extent such claims are not satisfied by Wellsford. There are no bonds, debentures, notes or other indebtedness of Wellsford having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which shareholders of Wellsford may vote. (d) Except as set forth in this Section 2.3 or in Schedule 2.3 of the Wellsford Disclosure Letter, as of the date of this Agreement there are no outstanding securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which Wellsford or any Wellsford Subsidiary is a party or by which such entity is bound, obligating Wellsford or any Wellsford Subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of beneficial interest, voting securities or other ownership interests of Wellsford or any Wellsford Subsidiary or obligating Wellsford or any Wellsford Subsidiary to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking (other than to Wellsford or a Wellsford Subsidiary). 8 2.4 AUTHORITY; NONCONTRAVENTION; CONSENTS. (a) Wellsford has the requisite power and authority to enter into this Agreement and, subject to the requisite shareholder approval of the Merger (the "Wellsford Shareholder Approvals"), to consummate the transactions contemplated by this Agreement to which Wellsford is a party. The execution and delivery of this Agreement by Wellsford and the consummation by Wellsford of the transactions contemplated by this Agreement to which Wellsford is a party have been duly authorized by all necessary action on the part of Wellsford, subject to the Wellsford Shareholder Approvals. This Agreement has been duly executed and delivered by Wellsford and constitutes a valid and binding obligation of Wellsford, enforceable against Wellsford in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity. (b) Except as set forth in Schedule 2.4 to the Wellsford Disclosure Letter, the execution and delivery of this Agreement by Wellsford do not, and the consummation of the transactions contemplated by this Agreement to which Wellsford is a party and compliance by Wellsford with the provisions of this Agreement will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to loss of a material benefit under, or result in the creation of any Lien upon any of the properties or assets of Wellsford or any Wellsford Subsidiary under, (i) the Amended and Restated Declaration of Trust or the Amended and Restated Bylaws of Wellsford or the comparable charter or organizational documents or partnership or similar agreement (as the case may be) of any Wellsford Subsidiary, each as amended or supplemented to the date of this Agreement, (ii) any loan or credit agreement, note, bond, mortgage, indenture, reciprocal easement agreement, lease or other agreement, instrument, permit, concession, franchise or license applicable to Wellsford or any Wellsford Subsidiary or their respective properties or assets or (iii) subject to the governmental filings and other matters referred to in the following sentence, any judgment, order, decree, statute, law, ordinance, rule or regulation (collectively, "Laws") applicable to Wellsford or any Wellsford Subsidiary, or their respective properties or assets, other than, in the case of clause (ii) or (iii), any such conflicts, violations, defaults, rights, loss or Liens that individually or in the aggregate would not (x) have a Wellsford Material Adverse Effect or (y) prevent the consummation of the transactions contemplated by this Agreement. No consent, approval, order or authorization of, or registration, declaration or filing with, any federal, state or local government or any court, administrative or regulatory agency or commission or other governmental authority or agency, domestic or foreign (a "Governmental Entity"), is required by or with respect to Wellsford or any Wellsford Subsidiary in connection with the execution and delivery of this Agreement by Wellsford or the consummation by Wellsford of the transactions contemplated by this Agreement, except for (i) the filing with the Securities and Exchange Commission (the "SEC") of (x) a joint proxy statement relating to the approval by Wellsford's shareholders and EQR's shareholders of the transactions contemplated by this Agreement (as amended or supplemented from time to time, the "Proxy Statement"), (y) registration statements on appropriate forms under the Securities Act of 1933, as amended 9 (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (z) such reports under Section 13(a) of the Exchange Act as may be required in connection with this Agreement and the transactions contemplated by this Agreement, (ii) the filing of listing applications with the New York Stock Exchange Inc. ("NYSE") with respect to the shares of beneficial interest of the Surviving Trust to be issued in the Merger, (iii) the filing of the Articles of Merger with the Department and (iv) such other consents, approvals, orders, authorizations, registrations, declarations and filings (A) as are set forth in Schedule 2.4 to the Wellsford Disclosure Letter, (B) as may be required under (y) federal, state or local environmental laws, or (z) the "blue sky" laws of various states, to the extent applicable, or (C) which, if not obtained or made, would not prevent or delay in any material respect the consummation of any of the transactions contemplated by this Agreement or otherwise prevent Wellsford from performing its obligations under this Agreement in any material respect or have, individually or in the aggregate, a Wellsford Material Adverse Effect. (c) For purposes of determining compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, Wellsford confirms that the conduct of its business consists solely of investing in, owning and operating real estate for the benefit of its shareholders. 2.5 SEC DOCUMENTS; FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES. Wellsford has filed all required reports, schedules, forms, statements and other documents with the SEC since November 27, 1992 through the date hereof (the "Wellsford SEC Documents"). Schedule 2.5 of the Wellsford Disclosure Letter contains a complete list of all Wellsford SEC Documents filed by Wellsford with the SEC since January 1, 1996 and on or prior to the date of this Agreement. All of the Wellsford SEC Documents (other than preliminary material), as of their respective filing dates, complied in all material respects with all applicable requirements of the Securities Act and the Exchange Act and, in each case, the rules and regulations promulgated thereunder applicable to such Wellsford SEC Documents. None of the Wellsford SEC Documents at the time of filing contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except to the extent such statements have been modified or superseded by later Wellsford SEC Documents filed and publicly available prior to the date of this Agreement. The consolidated financial statements of Wellsford included in the Wellsford SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles ("GAAP") (except, in the case of unaudited statements, as permitted by the applicable rules and regulations of the SEC) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly presented, in accordance with the applicable requirements of GAAP and the applicable rules and regulations of the SEC, the consolidated financial position of Wellsford and the Wellsford Subsidiaries, taken as a whole, as of the dates thereof and the consolidated results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Wellsford 10 has no Subsidiaries which are not consolidated for accounting purposes. Except for liabilities and obligations set forth in the Wellsford SEC Documents or in Schedule 2.5 to the Wellsford Disclosure Letter, neither Wellsford nor any of the Wellsford Subsidiaries has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) required by GAAP to be set forth on a consolidated balance sheet of Wellsford or in the notes thereto and which, individually or in the aggregate, would have a Wellsford Material Adverse Effect. Management Corp. (as defined in Section 5.15) has assets of less than $1,000. On the date of this Agreement, Newco has no material assets. 2.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the Wellsford SEC Documents or the Wellsford Disclosure Letter, since the date of the most recent audited financial statements included in Wellsford SEC Documents (the "Wellsford Financial Statement Date") Wellsford and the Wellsford Subsidiaries have conducted their business only in the ordinary course (taking into account prior practices, including the acquisition of properties and issuance of securities) and there has not been (a) any material adverse change in the business, financial condition or results of operations of Wellsford and the Wellsford Subsidiaries taken as a whole (a "Wellsford Material Adverse Change"), nor has there been any occurrence or circumstance that with the passage of time would reasonably be expected to result in a Wellsford Material Adverse Change, (b) except for regular quarterly distributions (in the case of Wellsford) not in excess of $0.485 per Wellsford Common Share, $0.4375 per Wellsford Series A Preferred Share, and $0.603125 per Wellsford Series B Preferred Share, in each case with customary record and payment dates, any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to any of Wellsford's shares of beneficial interest, (c) any split, combination or reclassification of any of Wellsford's shares of beneficial interest or any issuance or the authorization of any issuance of any other securities in respect of, in lieu of or in substitution for, or giving the right to acquire by exchange or exercise, shares of its beneficial interest or any issuance of an ownership interest in, any Wellsford Subsidiary except as contemplated by this Agreement, (d) any damage, destruction or loss, whether or not covered by insurance, that has or would have a Wellsford Material Adverse Effect or (e) any change in accounting methods, principles or practices by Wellsford or any Wellsford Subsidiary materially affecting its assets, liabilities or business, except insofar as may have been disclosed in Wellsford SEC Documents or required by a change in GAAP or (f) any amendment of any employment, consulting, severance, retention or any other agreement between Wellsford and any officer or trustee of Wellsford. There are no distributions in arrears which have been scheduled for payment or unpaid distributions with respect to the Wellsford Series A Preferred Shares and Wellsford Series B Preferred Shares. 2.7 LITIGATION. Except as disclosed in the Wellsford SEC Documents or in Schedule 2.7 to the Wellsford Disclosure Letter, and other than personal injury and other routine tort litigation arising from the ordinary course of operations of Wellsford and the Wellsford Subsidiaries (a) which are covered by adequate insurance or (b) for which all material costs and liabilities arising therefrom are reimbursable pursuant to common area maintenance or similar agreements, there is no suit, action or proceeding pending or, to the Knowledge of Wellsford, 11 threatened in writing against or affecting Wellsford or any Wellsford Subsidiary that, individually or in the aggregate, could reasonably be expected to (i) have a Wellsford Material Adverse Effect or (ii) prevent the consummation of any of the transactions contemplated by this Agreement, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against Wellsford or any Wellsford Subsidiary having, or which, insofar as reasonably can be foreseen, in the future would have, any such effect. Notwithstanding the foregoing, Schedule 2.7 to the Wellsford Disclosure Letter sets forth each and every uninsured claim, equal employment opportunity claim and claim relating to sexual harassment and/or discrimination pending or, to the Knowledge of Wellsford, threatened as of the date hereof, in each case with a brief summary of such claim or threatened claim. 2.8 PROPERTIES. (a) Except as provided in Schedule 2.8 of the Wellsford Disclosure Letter, Wellsford or the Wellsford Subsidiary set forth on Schedule 2.2 of the Wellsford Disclosure Letter owns fee simple title to each of the real properties identified in Schedule 2.8 of the Wellsford Disclosure Letter (the "Wellsford Properties"), which are all of the real estate properties owned by them, in each case (except as provided below) free and clear of liens, mortgages or deeds of trust, claims against title, charges which are liens, security interests or other encumbrances on title ("Encumbrances"). Except as set forth in Schedule 2.2 or Schedule 2.8 of the Wellsford Disclosure Letter, no other Person has any ownership interest in any of the Wellsford Properties, and any such ownership interest so scheduled does not materially detract from the value of, or materially interfere with the present use of, any of the Wellsford Properties subject thereto or affected thereby. The Wellsford Properties are not subject to any rights of way, written agreements, laws, ordinances and regulations affecting building use or occupancy, or reservations of an interest in title (collectively, "Property Restrictions"), except for (i) Encumbrances and Property Restrictions set forth in the Wellsford Disclosure Letter, (ii) Property Restrictions imposed or promulgated by law or any governmental body or authority with respect to real property, including zoning regulations, provided they does not materially adversely affect the current use of any Wellsford Property, (iii) Encumbrances and Property Restrictions disclosed on existing title reports or existing surveys (in either case copies of which title reports and surveys have been delivered or made available to EQR and listed in the Wellsford Disclosure Letter), which Encumbrances and Property Restrictions, in any event, do not materially detract from the value of, or materially interfere with the present use of, any of the Wellsford Properties subject thereto or affected thereby, and (iv) mechanics', carriers', workmen's, repairmen's liens and other Encumbrances, Property Restrictions and other limitations of any kind, if any, which, individually or in the aggregate, do not materially detract from the value of or materially interfere with the present use of any of the Wellsford Properties subject thereto or affected thereby, and do not otherwise materially impair business operations conducted by Wellsford and the Wellsford Subsidiaries. Except as provided in Schedule 2.8 of the Wellsford Disclosure Letter, no portion of any of the Wellsford Properties is located in a flood zone area "V". 12 (b) Except as provided in Schedule 2.8 of the Wellsford Disclosure Letter, valid policies of title insurance have been issued insuring Wellsford's or the applicable Wellsford Subsidiaries' fee simple title to the Wellsford Properties in amounts at least equal to the purchase price thereof paid by Wellsford therefor, subject only to the matters disclosed above and on the Wellsford Disclosure Letter, and such policies are, at the date hereof, in full force and effect and no claim has been made against any such policy. (c) Except as provided in Schedule 2.8 of the Wellsford Disclosure Letter, Wellsford has no Knowledge (as defined in Section 2.25) (i) that, any certificate, permit or license from any governmental authority having jurisdiction over any of the Wellsford Properties or any agreement, easement or other right which is necessary to permit the lawful use and operation of the buildings and improvements on any of the Wellsford Properties or which is necessary to permit the lawful use and operation of all driveways, roads and other means of egress and ingress to and from any of the Wellsford Properties has not been obtained and is not in full force and effect, or of any pending threat of modification or cancellation of any of same; (ii) of any written notice of any violation of any federal, state or municipal law, ordinance, order, regulation or requirement materially and adversely affecting any of the Wellsford Properties issued by any governmental authority; (iii) of any material structural defects relating to any Wellsford Property which costs more than $100,000 to repair; (iv) of any Wellsford Property whose building systems are not in working order in any material respect and costs more than $100,000 to repair; (v) of any physical damage to any Wellsford Property in excess of $100,000 for which there is no insurance in effect covering the cost of the restoration; (vi) of any current renovation or uninsured restoration to any Wellsford Property the cost of which exceeds $100,000; or (vii) of items referred to in Section 2.8(c)(iii)-(vi) which aggregate for Wellsford and its Subsidiaries more than $5,000,000. (d) Neither Wellsford nor any of the Wellsford Subsidiaries has received any written notice to the effect that (i) any condemnation or rezoning proceedings are pending or threatened with respect to any of the Wellsford Properties or (ii) any zoning, building or similar law, code, ordinance, order or regulation is or will be violated by the continued maintenance, operation or use of any buildings or other improvements on any of the Wellsford Properties or by the continued maintenance, operation or use of the parking areas. All work to be performed, payments to be made and actions to be taken by Wellsford or the Wellsford Subsidiaries prior to the date hereof pursuant to any agreement entered into with a governmental body or authority in connection with a site approval, zoning reclassification or other similar action relating to any Wellsford Properties (e.g., Local Improvement District, Road Improvement District, Environmental Mitigation) has been performed, paid or taken, as the case may be, and Wellsford has no Knowledge of any planned or proposed work, payments or actions that may be required after the date hereof pursuant to such agreements. (e) Except as set forth in Schedule 2.8 of the Wellsford Disclosure Letter, all of the Wellsford Properties are managed by Wellsford or a wholly- owned Wellsford Subsidiary. 13 2.9 ENVIRONMENTAL MATTERS. None of Wellsford, any of the Wellsford Subsidiaries or, to Wellsford's Knowledge, any other Person has caused or permitted (a) the unlawful presence of any hazardous substances, hazardous materials, toxic substances or waste materials (collectively, "Hazardous Materials") on any of the Wellsford Properties, or (b) any unlawful spills, releases, discharges or disposal of Hazardous Materials to have occurred or be presently occurring on or from the Wellsford Properties as a result of any construction on or operation and use of such properties, which presence or occurrence would, individually or in the aggregate, have a Wellsford Material Adverse Effect; and in connection with the construction on or operation and use of the Wellsford Properties, Wellsford and the Wellsford Subsidiaries have not failed to comply in any material respect with all applicable local, state and federal environmental laws, regulations, ordinances and administrative and judicial orders relating to the generation, recycling, reuse, sale, storage, handling, transport and disposal of any Hazardous Materials, except to the extent such failure to comply, individually or in the aggregate, would not have a Wellsford Material Adverse Effect. 2.10 RELATED PARTY TRANSACTIONS. Set forth in Schedule 2.10 of the Wellsford Disclosure Letter is a list of all arrangements, agreements and contracts entered into by Wellsford or any of the Wellsford Subsidiaries with (a) any consultant, (b) any person who is an officer, trustee, director or Affiliate (as defined below) of Wellsford or any of the Wellsford Subsidiaries, any relative of any of the foregoing or any entity of which any of the foregoing is an Affiliate or (c) any person who acquired Wellsford Common Shares in a private placement, except those of a type available to Wellsford employees generally. Such documents, copies of all of which have previously been delivered or made available to EQR, are listed in Schedule 2.10 of the Wellsford Disclosure Letter. As used in this Agreement, the term "Affiliate" shall have the same meaning as such term is defined in Rule 405 promulgated under the Securities Act. 2.11 ABSENCE OF CHANGES IN BENEFIT PLANS; ERISA COMPLIANCE. (a) Except as disclosed in the Wellsford SEC Documents or in Schedule 2.11 to the Wellsford Disclosure Letter and except as contemplated by this Agreement, since the date of the most recent audited financial statements included in the Wellsford SEC Documents, there has not been any adoption or amendment in any respect by Wellsford or any Wellsford Subsidiary of any bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, retirement, vacation, severance, disability, death benefit, hospitalization, medical or other employee benefit plan, arrangement or understanding (whether or not legally binding) providing benefits to any current or former employee, officer or director of Wellsford, any Wellsford Subsidiary, or any person Affiliated with Wellsford under Section 414 (b), (c), (m) or (o) of the Code (collectively, "Wellsford Benefit Plans"). 14 (b) Except as described in the Wellsford SEC Documents or in Schedule 2.11 to the Wellsford Disclosure Letter, (i) all Wellsford Benefit Plans of Wellsford and the Wellsford Subsidiaries, including any such plan that is an "employee benefit plan" as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), are in compliance in all material respects with all applicable requirements of law, including but not limited to ERISA and the Code, and (ii) neither Wellsford nor any Wellsford Subsidiary has any material liabilities or obligations with respect to any such Wellsford Benefit Plan, whether accrued, contingent or otherwise. Except as set forth in Schedule 2.11 to the Wellsford Disclosure Letter, the execution of, and performance of the transactions contemplated in, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Wellsford Benefit Plan, policy, arrangement or agreement or any trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any employee, trustee or director. The only severance agreements or severance policies applicable to employees of Wellsford or any of the Wellsford Subsidiaries are the agreements and policies specifically referred to in Schedule 2.11 to the Wellsford Disclosure Letter and the severance program referred to in Section 5.10(c). 2.12 EMPLOYEE POLICIES. Schedule 2.12 of the Wellsford Disclosure Letter lists the employee handbooks of Wellsford and each of the Wellsford Subsidiaries currently in effect. A copy of each such employee handbook has previously been made available to EQR. Except as set forth in Schedule 2.12 of the Wellsford Disclosure Letter, such handbooks fairly and accurately summarize all material employee policies, vacation policies and payroll practices of Wellsford and the Wellsford Subsidiaries. 2.13 TAXES. (a) Each of Wellsford and the Wellsford Subsidiaries has filed all tax returns and reports required to be filed by it (after giving effect to any filing extension properly granted by a Governmental Entity having authority to do so) and has paid (or Wellsford has paid on its behalf) all Taxes (as defined below) shown on such returns and reports as required to be paid by it except (i) as set forth in Schedule 2.13 of the Wellsford Disclosure Letter, or (ii) real estate taxes that are being contested in good faith by appropriate proceedings and for which Wellsford or the applicable Wellsford Subsidiary shall have set aside on its books adequate reserves. The most recent audited financial statements contained in the Wellsford SEC Documents reflect an adequate reserve for all material Taxes payable by Wellsford and the Wellsford Subsidiaries for all taxable periods and portions thereof through the date of such financial statements. Since the Wellsford Financial Statement Date, Wellsford has incurred no liability for taxes under Sections 857(b), 860(c) or 4981 of the Code, including without limitation any tax arising from a prohibited transaction described in Section 857(b)(6) of the Code, and neither Wellsford nor any Wellsford Subsidiary has incurred any liability for taxes other than in the ordinary course of business. No event has occurred, and no condition or circumstance exists, which presents a material risk that any material Tax described in the preceding sentence will be imposed upon 15 Wellsford. To the Knowledge of Wellsford, no deficiencies for any Taxes have been proposed, asserted or assessed against Wellsford or any of the Wellsford Subsidiaries, and no requests for waivers of the time to assess any such Taxes are pending. As used in this Agreement, "Taxes" shall include all federal, state, local and foreign income, property, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, together with penalties, interest or additions to Tax with respect thereto. (b) Wellsford (i) for all taxable years commencing with 1993 through the most recent December 31, has been subject to taxation as a real estate investment trust (a "REIT") within the meaning of Section 856 of the Code and has satisfied all requirements to qualify as a REIT for such years, (ii) has operated, and intends to continue to operate, in such a manner as to qualify as a REIT for the taxable year ending December 31, 1997, and (iii) has not taken or omitted to take any action which would reasonably be expected to (A) result in any rents paid by the tenants of the Properties to be excluded from the definition of "rents from real property" under Section 856(d)(2)(C) of the Code, or (B) otherwise result in a challenge to its status as a REIT, and to Wellsford's Knowledge, no such challenge is pending or threatened. Each Wellsford Subsidiary which is a partnership, joint venture or limited liability company (i) has been since its formation and continues to be treated for federal income tax purposes as a partnership and not as a corporation or an association taxable as a corporation, and (ii) has not since its formation owned any assets (including, without limitation, securities) that would cause Wellsford to violate Section 856(b)(5) of the Code. Each Wellsford Subsidiary which is a corporation has been since its formation a qualified REIT subsidiary under Section 856(i) of the Code. 2.14 NO PAYMENTS TO EMPLOYEES, OFFICERS, TRUSTEES OR DIRECTORS. Set forth in Exhibit "J" to this Agreement (and the Exhibits referenced therein) and Schedule 2.3 of the Wellsford Disclosure Letter is a true and complete list of all cash and non-cash payments which will become payable to each employee, officer, trustee or director of Wellsford or any Wellsford Subsidiary as a result of the Spin-Off and Merger. Except as described in Exhibit "J" to this Agreement (and the Exhibits referenced therein) and in Schedule 2.3 to the Wellsford Disclosure Letter, or as otherwise provided for in this Agreement, there is no employment or severance contract, or other agreement requiring payments, cancellation of indebtedness or other obligation to be made on a change of control or otherwise as a result of the consummation of any of the transactions contemplated by this Agreement, with respect to any employee, officer, trustee or director of Wellsford or any Wellsford Subsidiary. 2.15 BROKERS; SCHEDULE OF FEES AND EXPENSES. No broker, investment banker, financial advisor or other person, other than Merrill Lynch & Co. and William Cockrum, the fees and expenses of which have previously been disclosed to EQR, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of Wellsford or any Wellsford Subsidiary. 16 2.16 COMPLIANCE WITH LAWS. Except as disclosed in the Wellsford SEC Documents, neither Wellsford nor any of the Wellsford Subsidiaries has violated or failed to comply with any statute, law, ordinance, regulation, rule, judgment, decree or order of any Governmental Entity applicable to its business, properties or operations, except to the extent that such violation or failure would not have a Wellsford Material Adverse Effect. 2.17 CONTRACTS; DEBT INSTRUMENTS. (a) Neither Wellsford nor any Wellsford Subsidiary has received a written notice that Wellsford or any Wellsford Subsidiary is in violation of or in default under (nor to the Knowledge of Wellsford does there exist any condition which upon the passage of time or the giving of notice or both would cause such a violation of or default under) any material loan or credit agreement, note, bond, mortgage, indenture, lease, permit, concession, franchise, license or any other material contract, agreement, arrangement or understanding, to which it is a party or by which it or any of its properties or assets is bound, except as set forth in Schedule 2.17 to the Wellsford Disclosure Letter, nor to the Knowledge of Wellsford does such a violation or default exist, except to the extent that such violation or default, individually or in the aggregate, would not have a Wellsford Material Adverse Effect. (b) Except for any of the following expressly identified in Wellsford SEC Documents, Schedule 2.17 to the Wellsford Disclosure Letter sets forth a list of each loan or credit agreement, note, bond, mortgage, indenture and any other agreement and instrument pursuant to which any indebtedness of Wellsford or any of Wellsford Subsidiaries, other than indebtedness payable to Wellsford or a Wellsford Subsidiary, in an aggregate principal amount in excess of $250,000 per item is outstanding or may be incurred. For purposes of this Section 2.17, "Indebtedness" shall mean, with respect to any Person, without duplication, (A) all indebtedness of such person for borrowed money, whether secured or unsecured, (B) all obligations of such person under conditional sale or other title retention agreements relating to property purchased by such person, (C) all capitalized lease obligations of such person, (D) all obligations of such person under interest rate cap, swap, collar or similar transaction or currency hedging transactions (valued at the termination value thereof) and (E) all guarantees of such person of any such indebtedness of any other person. (c) To the extent not set forth in response to the requirements of Paragraph 2.17(b), Schedule 2.17 to the Wellsford Disclosure Letter sets forth each interest rate cap, interest rate collar, interest rate swap, currency hedging transaction, and any other agreement relating to a similar transaction to which Wellsford or any Wellsford Subsidiary is a party or an obligor with respect thereto. (d) Neither Wellsford nor any of the Wellsford Subsidiaries is a party to any agreement relating to the management of any of the Wellsford Properties by any Person other than a wholly-owned Wellsford Subsidiary, except the agreements described in Schedule 2.17 to the Wellsford Disclosure Letter (the "Third Party Management Agreements"). True and 17 complete copies of the Third Party Management Agreements have previously been furnished to EQR. 2.18 OPINION OF FINANCIAL ADVISOR. Wellsford has received the opinion of Merrill Lynch & Co., dated January 16, 1997, satisfactory to Wellsford, a signed copy of which has been provided to EQR, to the effect that the proposed consideration to be received by the holders of common shares of beneficial interest of Wellsford pursuant to the Merger and Spin-Off is fair to such holders from a financial point of view. 2.19 STATE TAKEOVER STATUTES. Wellsford has taken all action necessary to exempt the transactions contemplated by this Agreement between EQR and Wellsford and its Affiliates from the operation of any "fair price," "moratorium," "control share acquisition" or any other anti-takeover statute or similar statute enacted under the state or federal laws of the United States or similar statute or regulation (a "Takeover Statute"). 2.20 REGISTRATION STATEMENT. The information relating to Wellsford and the Wellsford Subsidiaries included in the Registration Statement (as defined in Section 5.1) will not, as of the effective date of the Registration Statement, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 2.21 DEVELOPMENT PROPERTIES. Schedule 2.21 of the Wellsford Disclosure Letter lists all agreements entered into by Wellsford or any of the Wellsford Subsidiaries relating to the development or construction of, or additions or expansions to, any real properties which are currently in effect and under which Wellsford or any of the Wellsford Subsidiaries currently has, or expects to incur, an obligation in excess of $250,000. True and correct copies of such agreements have previously been delivered or made available to EQR. 2.22 EQR SHARES OF BENEFICIAL INTEREST. Neither Wellsford nor any of Wellsford Subsidiaries owns any shares of beneficial interest of EQR or other securities convertible into shares of beneficial interest of EQR. 2.23 INVESTMENT COMPANY ACT OF 1940. Neither Wellsford nor any of Wellsford Subsidiaries is, or at the Effective Time will be, required to be registered under the Investment Company Act of 1940, as amended (the "1940 Act"). 2.24 INTENTIONALLY OMITTED. 2.25 DEFINITION OF KNOWLEDGE OF WELLSFORD. As used in this Agreement, the phrase "to the Knowledge of Wellsford" (or words of similar import) means the knowledge of those individuals identified in Schedule 2.25 of the Wellsford Disclosure Letter. 18 ARTICLE 3 --------- REPRESENTATIONS AND WARRANTIES OF EQR ------------------------------------- Except as set forth in the letter of even date herewith signed by the President of EQR and delivered to Wellsford prior to the execution hereof (the "EQR Disclosure Letter"), EQR represents and warrants to Wellsford as follows: 3.1 ORGANIZATION, STANDING AND POWER OF EQR. EQR is a real estate investment trust duly organized and validly existing under the laws of Maryland and has the requisite power and authority to carry on its business as now being conducted. EQR is duly qualified or licensed to do business as a foreign trust and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed, individually or in the aggregate, would not have a material adverse effect on the business, properties, assets, financial condition or results of operations of EQR and the Subsidiaries of EQR ("EQR Subsidiaries"), taken as a whole ("EQR Material Adverse Effect"). EQR has delivered to Wellsford complete and correct copies of its Amended and Restated Declaration of Trust and Amended and Restated Bylaws as amended or supplemented to the date of this Agreement. 3.2 CAPITAL STRUCTURE. (a) The authorized shares of beneficial interest of EQR consist of 100,000,000 EQR Common Shares, and 10,000,000 preferred shares of beneficial interest ("EQR Preferred Shares"), of which 6,120,000 EQR Preferred Shares have been designated as 9-3/8% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (the "EQR Series A Preferred Shares"), 500,000 EQR Preferred Shares have been designated as 9-1/8% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share, that are represented by 5,000,000 depository shares (the "EQR Series B Preferred Shares"), and 460,000 EQR Preferred Shares have been designated as 9-1/8% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share, that are represented by 4,600,000 depository shares (the "EQR Series C Preferred Shares"). As of January 14, 1997, (a) 51,155,813 EQR Common Shares, 6,120,000 EQR Series A Preferred Shares, 500,000 EQR Series B Preferred Shares (represented by 5,000,000 depositary shares) and 460,000 EQR Series C Preferred Shares (represented by 4,600,000 depositary shares) were outstanding, (b) 960,542 EQR Common Shares were available for issuance under EQR's 1996 Non-Qualified Employee Share Purchase Plan (the "EQR Employee Share Plans"), (c) 2,328,715 EQR Common Shares were issuable upon exercise of outstanding share options (the "EQR Options") to purchase EQR Common Shares, and 975,353 EQR Common Shares were available for grant, under EQR's Second Amended and Restated 1993 Share Option and Share Award Plan (the "Employee Share Award and Option Plan"), (d) 21,541 EQR Common Shares are restricted 19 and subject to forfeiture, and (e) 7,857,933 EQR Common Shares were reserved for issuance upon exchange of EQR Units (as defined below) for EQR Common Shares pursuant to the Fourth Amended and Restated Agreement of Limited Partnership (the "ERP Operating Partnership Agreement") of the ERP Operating Partnership. On January 14, 1997, except as set forth in this Section 3.2, no shares of beneficial interest or other voting securities of EQR were issued, reserved for issuance or outstanding. (b) All outstanding shares of beneficial interest of EQR are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights, except that the shareholders may be subject to further assessment with respect to certain claims for tort, contract, taxes, statutory liability and otherwise in some jurisdictions to the extent such claims are not satisfied by EQR. There are no bonds, debentures, notes or other indebtedness of EQR having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which shareholders of EQR may vote. (c) Except (i) for the EQR Options, (ii) for the units ("EQR Units") of partnership interest held by partners in the ERP Operating Partnership (which, subject to certain restrictions, may be exchanged by the holders thereof for either EQR Common Shares on a one-for-one basis or, at EQR's option, cash), as are disclosed in Schedule 3.2 to the EQR Disclosure Letter or (iii) as set forth in Schedule 3.2 to the EQR Disclosure Letter, as of the date of this Agreement there are no outstanding securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which EQR or any EQR Subsidiary is a party or by which such entity is bound, obligating EQR or any EQR Subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of beneficial interest, voting securities or other ownership interests of EQR or of any EQR Subsidiary or obligating EQR or any EQR Subsidiary to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking (other than to EQR or an EQR Subsidiary). Except as set forth on Schedule 3.2 to the EQR Disclosure Letter or as required under the ERP Operating Partnership Agreement, there are no outstanding contractual obligations of EQR or any EQR Subsidiary to repurchase, redeem or otherwise acquire any shares of beneficial interest of EQR or any capital stock, voting securities, or other ownership interests in any EQR Subsidiary or make any material investment (in the form of a loan, capital contribution or otherwise) in any person (other than an EQR Subsidiary). (d) EQR owns all of its partnership interests in ERP Operating Partnership free and clear of all Liens. 3.3 ORGANIZATION, STANDING AND POWER OF ERP OPERATING PARTNERSHIP. ERP Operating Partnership is a limited partnership duly organized and validly existing under the laws of Illinois and has the requisite power and authority to carry on its business as now being conducted. ERP Operating Partnership is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions 20 where the failure to be so qualified or licensed, individually or in the aggregate, would not have an EQR Material Adverse Effect. EQR has delivered to Wellsford complete and correct copies of its Fourth Amended and Restated Agreement of Limited Partnership as amended or supplemented to the date of this Agreement. 3.4 CAPITAL STRUCTURE OF ERP OPERATING PARTNERSHIP. As of January 14, 1997, the number of outstanding units of partnership interest in ERP Operating Partnership consists of (a) 51,155,813 units of general partnership interest, (b) 7,857,933 units of limited partnership interest, (c) 6,120,000 9-3/8% Series A Cumulative Redeemable Preference Units, (d) 500,000 9-1/8% Series B Cumulative Redeemable Preference Units, and (e) 460,000 9-1/8% Series C Cumulative Redeemable Preference Units. Except for the units of limited partnership interest, all of the units of partnership interest in ERP Operating Partnership are owned by EQR free and clear of all Liens. 3.5 AUTHORITY; NONCONTRAVENTION; CONSENTS. (a) EQR has the requisite power and authority to enter into this Agreement, and subject to the requisite shareholder approval of the Merger (the "EQR Shareholder Approvals" and, together with the Wellsford Shareholder Approvals, the "Shareholder Approvals") to consummate the transactions contemplated by this Agreement to which EQR is a party. The execution and delivery of this Agreement by EQR and the consummation by EQR of the transactions contemplated by this Agreement to which EQR is a party have been duly authorized by all necessary action on the part of EQR, subject to the EQR Shareholder Approvals. This Agreement has been duly executed and delivered by EQR and constitutes a valid and binding obligation of EQR, enforceable against EQR in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity. (b) Except as set forth in Schedule 3.5 to the EQR Disclosure Letter, the execution and delivery of this Agreement by EQR do not, and the consummation of the transactions contemplated by this Agreement to which EQR is a party and compliance by EQR with the provisions of this Agreement will not, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to loss of a material benefit under, or result in the creation of any Lien upon any of the properties or assets of EQR or any EQR Subsidiary under, (i) the Amended and Restated Declaration of Trust or Amended and Restated Bylaws of EQR or the comparable charter or organizational documents or partnership or similar agreement (as the case may be) of any other EQR Subsidiary, each as amended or supplemented to the date of this Agreement, (ii) any loan or credit agreement, note, bond, mortgage, indenture, reciprocal easement agreement, lease or other agreement, instrument, permit, concession, franchise or license applicable to EQR or any EQR Subsidiary or their respective properties or assets or (iii) subject to the governmental filings and other matters referred to in the following sentence, any Laws applicable to EQR or any EQR 21 Subsidiary or their respective properties or assets, other than, in the case of clause (ii) or (iii), any such conflicts, violations, defaults, rights, loss or Liens that individually or in the aggregate would not (x) have an EQR Material Adverse Effect or (y) prevent the consummation of the transactions contemplated by this Agreement. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to EQR or any EQR Subsidiary in connection with the execution and delivery of this Agreement or the consummation by EQR of any of the transactions contemplated by this Agreement, except for (i) the filing with the SEC of (x) the Proxy Statement and (y) such reports under Section 13 (a) of the Exchange Act as may be required in connection with this Agreement and the transactions contemplated by this Agreement, (ii) the filing of the Articles of Merger with the Department, (iii) such filings as may be required in connection with the payment of any transfer and gains taxes and (iv) such other consents, approvals, orders, authorizations, registrations, declarations and filings (A) as are set forth in Schedule 3.5 to the EQR Disclosure Letter or (B) as may be required under (x) federal, state or local environmental laws or (y) the securities laws of the State of Maryland or (C) which, if not obtained or made, would not prevent or delay in any material respect the consummation of any of the transactions contemplated by this Agreement or otherwise prevent EQR from performing its obligations under this Agreement in any material respect or have, individually or in the aggregate, an EQR Material Adverse Effect. (c) For purposes of determining compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, EQR confirms that the conduct of its business consists solely of investing in, owning and operating real estate for the benefit of its shareholders. 3.6 SEC DOCUMENTS; FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES. EQR and ERP Operating Partnership have filed all required reports, schedules, forms, statements and other documents with the SEC since August 18, 1993 through the date hereof (the "EQR SEC Documents"). Schedule 3.6 of the EQR Disclosure Letter contains a complete list of all EQR SEC Documents filed by EQR under the Exchange Act since January 1, 1996 and on or prior to the date of this Agreement. All of the EQR SEC Documents (other than preliminary material), as of their respective filing dates, complied in all material respects with all applicable requirements of the Securities Act and the Exchange Act and, in each case, the rules and regulations promulgated thereunder applicable to such EQR SEC Documents. None of the EQR SEC Documents at the time of filing contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except to the extent such statements have been modified or superseded by later EQR SEC Documents filed and publicly available prior to the date of this Agreement. The consolidated financial statements of EQR and the EQR Subsidiaries included in the EQR SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP (except, in the case of unaudited statements, as permitted by the applicable rules and regulations of the SEC) applied on a consistent basis during the periods 22 involved (except as may be indicated in the notes thereto) and fairly presented, in accordance with the applicable requirements of GAAP and the applicable rules and regulations of the SEC, the consolidated financial position of EQR and the EQR Subsidiaries, taken as a whole, as of the dates thereof and the consolidated results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Except for liabilities and obligations set forth in the EQR SEC Documents or in Schedule 3.6 to the EQR Disclosure Letter, neither EQR nor any EQR Subsidiary has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) required by GAAP to be set forth on a consolidated balance sheet of EQR or in the notes thereto and which, individually or in the aggregate, would have an EQR Material Adverse Effect. 3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the EQR SEC Documents or in Section 3.7 to the EQR Disclosure Letter, since the date of the most recent audited financial statements included in the EQR SEC Documents (the "EQR Financial Statement Date"), EQR and the EQR Subsidiaries have conducted their business only in the ordinary course (taking into account prior practices, including the acquisition of properties and issuance of securities) and there has not been (a) any material adverse change in the business, financial condition or results of operations of EQR and the EQR Subsidiaries taken as a whole (a "EQR Material Adverse Change"), nor has there been any occurrence or circumstance that with the passage of time would reasonably be expected to result in an EQR Material Adverse Change, (b) except for regular quarterly distributions (in the case of EQR) not in excess of $.625 per EQR Common Share, $.5859 per EQR Series A Preferred Share, $5.703 per EQR Series B Preferred Share and $5.703 per EQR Series C Preferred Share, in each case subject to rounding adjustments as necessary and with customary record and payment dates, any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to any of EQR's shares of beneficial interest, (c) any split, combination or reclassification of any of EQR's shares of beneficial interest, (d) any damage, destruction or loss, whether or not covered by insurance, that has or would have an EQR Material Adverse Effect, or (e) any change made prior to the date of this Agreement in accounting methods, principles or practices by EQR or any EQR Subsidiary materially affecting its assets, liabilities or business, except insofar as may have been disclosed in the EQR SEC Documents or required by a change in GAAP. EQR is not in default in the payment of distributions on the EQR Series A Preferred Shares, EQR Series B Preferred Shares or EQR Series C Preferred Shares. 3.8 LITIGATION. Except as disclosed in the EQR SEC Documents or in Schedule 3.8 to the EQR Disclosure Letter, and other than personal injury and other routine tort litigation arising from the ordinary course of operations of EQR and the EQR Subsidiaries (a) which are covered by adequate insurance, or (b) for which all material costs and liabilities arising therefrom are reimbursable pursuant to common area maintenance or similar agreements, there is no suit, action or proceeding pending or, to the Knowledge of EQR, threatened in writing against or affecting EQR or any EQR Subsidiary that, individually or in the aggregate, could reasonably be expected to (i) have an EQR Material Adverse Effect, or (ii) prevent the consummation of any of the transactions contemplated by this Agreement, nor is there any 23 judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against EQR or any EQR Subsidiary having, or which, insofar as reasonably can be foreseen, in the future would have, any such effect. 3.9 PROPERTIES. (a) EQR or one of the EQR Subsidiaries owns fee simple title to each of the real properties listed in the EQR SEC Filings as owned by it (the "EQR Properties"), except where the failure to own such title would not have an EQR Material Adverse Effect. (b) The EQR Properties are not subject to any Encumbrances or Property Restrictions which could cause an EQR Material Adverse Affect. (c) Valid policies of title insurance have been issued insuring EQR's or the applicable EQR Subsidiaries' fee simple title to the EQR Properties in amounts at least equal to the purchase price thereof paid by EQR or the applicable EQR Subsidiaries therefor, except where the failure to obtain such title insurance would not have an EQR Material Adverse Effect. (d) EQR has no Knowledge (i) that it has failed to obtain a certificate, permit or license from any governmental authority having jurisdiction over any of the EQR Properties where such failure would have an EQR Material Adverse Effect, or of any pending threat of modification or cancellation of any of the same which would have an EQR Material Adverse Effect, (ii) of any written notice of any violation of any federal, state or municipal law, ordinance, order, rule, regulation or requirement affecting any of the EQR Properties issued by any governmental authorities which would have an EQR Material Adverse Effect, or (iii) of any structural defects relating to EQR Properties, EQR Properties whose building systems are not in working order, physical damage to any EQR Property for which there is no insurance in effect covering the cost of restoration, any current renovation or uninsured restoration, except such structural defects, building systems not in working order, physical damage, renovation and restoration which, in the aggregate, would not have an EQR Material Adverse Effect. (e) Neither EQR nor any of the EQR Subsidiaries has received any written notice to the effect that (i) any condemnation or rezoning proceedings are pending or threatened with respect to any of the EQR Properties, or (ii) any zoning, building or similar law, code, ordinance, order or regulation is or will be violated by the continued maintenance, operation or use of any buildings or other improvements on any of the EQR Properties or by the continued maintenance, operation or use of the parking areas, other than such notices which, in the aggregate, would not have an EQR Material Adverse Effect. (f) All work to be performed, payments to be made and actions to be taken by EQR or the EQR Subsidiaries prior to the date hereof pursuant to any agreement entered into with a governmental body or authority in connection with a site approval, zoning reclassification or similar action relating to any EQR Properties (e.g., Local Improvement District, Road 24 Improvement District, Environmental Mitigation), has been performed, paid or taken, as the case may be, except where the failure to do so would, in the aggregate, not have an EQR Material Adverse Effect, and EQR has no Knowledge of any planned or proposed work, payments or actions that may be required after the date hereof pursuant to such agreements which would have an EQR Material Adverse Effect. 3.10 ENVIRONMENTAL MATTERS. None of EQR, any of the EQR Subsidiaries or, to EQR's Knowledge, any other Person has caused or permitted (a) the unlawful presence of any hazardous substances, hazardous materials, toxic substances or waste materials (collectively, "Hazardous Materials") on any of the EQR Properties, or (b) any unlawful spills, releases, discharges or disposal of Hazardous Materials to have occurred or be presently occurring on or from the EQR Properties as a result of any construction on or operation and use of such properties, which presence or occurrence would, individually or in the aggregate, have an EQR Material Adverse Effect; and in connection with the construction on or operation and use of the EQR Properties, EQR and the EQR Subsidiaries have not failed to comply in any material respect with all applicable local, state and federal environmental laws, regulations, ordinances and administrative and judicial orders relating to the generation, recycling, reuse, sale, storage, handling, transport and disposal of any Hazardous Materials, except to the extent such failure to comply, individually or in the aggregate, would not have an EQR Material Adverse Effect. 3.11 TAXES. (a) Each of EQR and the EQR Subsidiaries has filed all tax returns and reports required to be filed by it (after giving effect to any filing extension properly granted by a Governmental Entity having authority to do so) and has paid (or EQR has paid on its behalf) all Taxes shown on such returns and reports as required to be paid by it except where the failure to file such tax returns or reports and failure to pay such Taxes would not have an EQR Material Adverse Effect. The most recent audited financial statements contained in the EQR SEC Documents reflect an adequate reserve for all material Taxes payable by EQR and the EQR Subsidiaries for all taxable periods and portions thereof through the date of such financial statements. Since the EQR Financial Statement Date, EQR has incurred no liability for taxes under Sections 857(b), 860(c) or 4981 of the Code, including without limitation any tax arising from a prohibited transaction described in Section 857(b)(6) of the Code, and neither EQR nor any EQR Subsidiary has incurred any liability for taxes other than in the ordinary course of business. No event has occurred, and no condition or circumstance exists, which presents a material risk that any material Tax described in the preceding sentence will be imposed upon EQR. To the Knowledge of EQR, no deficiencies for any Taxes have been proposed, asserted or assessed against EQR or any of the EQR Subsidiaries, and no requests for waivers of the time to assess any such Taxes are pending. (b) EQR (i) for all taxable years commencing with 1993 through the most recent December 31, has been subject to taxation as a REIT within the meaning of Section 856 of the Code and has satisfied all requirements to qualify as a REIT for such years, (ii) has 25 operated, and intends to continue to operate, in such a manner as to qualify as a REIT for the tax year ending December 31, 1997, and (iii) has not taken or omitted to take any action which would reasonably be expected to (A) result in any rents paid by tenants to the EQR Properties to be excluded from the definition of "rents from real property" under Section 856(d)(2) of the Code, or (B) otherwise result in a challenge to its status as a REIT, and to EQR's Knowledge, no such challenge is pending or threatened. Each EQR Subsidiary which is a partnership, joint venture or limited liability company has been treated since its formation and continues to be treated for federal income tax purposes as a partnership and not as a corporation or as an association taxable as a corporation. 3.12 BROKERS; SCHEDULE OF FEES AND EXPENSES. No broker, investment banker, financial advisor or other person, other than J.P. Morgan Securities, Inc., the fees and expenses of which have previously been disclosed to Wellsford and will be paid by EQR, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of EQR or any EQR Subsidiary. 3.13 COMPLIANCE WITH LAWS. Except as disclosed in the EQR SEC Documents, neither EQR nor any of the EQR Subsidiaries has violated or failed to comply with any statute, law, ordinance, regulation, rule, judgment, decree or order of any Governmental Entity applicable to its business, properties or operations, except to the extent that such violation or failure would not have an EQR Material Adverse Effect. 3.14 CONTRACTS; DEBT INSTRUMENTS. Neither EQR nor any EQR Subsidiary has received a written notice that EQR or any EQR Subsidiary is in violation of or in default under (nor to the Knowledge of EQR does there exist any condition which upon the passage of time or the giving of notice or both would cause such a violation of or default under) any material loan or credit agreement, note, bond, mortgage, indenture, lease, permit, concession, franchise, license or any other material contract, agreement, arrangement or understanding, to which it is a party or by which it or any of its properties or assets is bound, nor to the Knowledge of EQR does such a violation or default exist, except to the extent such violation or default, individually or in the aggregate, would not have an EQR Material Adverse Effect, except as set forth in Schedule 3.14 to the EQR Disclosure Letter. 3.15 OPINION OF FINANCIAL ADVISOR. EQR has received the opinion of J. P. Morgan Securities, Inc., dated January 15, 1997, satisfactory to EQR, a signed copy of which has been provided to Wellsford, to the effect that the consideration to be paid by EQR in connection with the Merger is fair, from a financial point of view, to EQR. 3.16 STATE TAKEOVER STATUTES. EQR has taken all action necessary to exempt transactions between EQR and Wellsford and its Affiliates from the operation of Takeover Statutes. 26 3.17 REGISTRATION STATEMENT. The information with respect to EQR and the EQR Subsidiaries included in the Registration Statement will not, as of the effective date of the Registration Statement, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.18 WELLSFORD SHARES OF BENEFICIAL INTEREST. Neither EQR nor any of the EQR Subsidiaries owns any shares of beneficial interest of Wellsford or other securities convertible into shares of beneficial interest of Wellsford. 3.19 INTENTIONALLY OMITTED. 3.20 INVESTMENT COMPANY ACT OF 1940. Neither EQR nor any of the EQR Subsidiaries is, or at the Effective Time will be, required to be registered under the 1940 Act. 3.21 DEFINITION OF KNOWLEDGE OF EQR. As used in this Agreement, the phrase "to the Knowledge of EQR" (or words of similar import) means the knowledge of those individuals identified in Schedule 3.21 of the EQR Disclosure Letter. ARTICLE 4 --------- COVENANTS --------- 4.1 ACQUISITION PROPOSALS. Except as set forth in the Wellsford Disclosure Letter, prior to the Effective Time, Wellsford agrees that: (a) neither it nor any of the Wellsford Subsidiaries shall initiate, solicit or encourage, directly or indirectly, any inquiries or the making or implementation of any proposal or offer (including, without limitation, any proposal or offer to its shareholders) with respect to a merger, acquisition, tender offer, exchange offer, consolidation, sale of assets or similar transaction involving all or any significant portion of the assets or any equity securities of, Wellsford or any of the Wellsford Subsidiaries, other than the transactions contemplated by this Agreement (any such proposal or offer being hereinafter referred to as an "Acquisition Proposal") or engage in any negotiations concerning or provide any confidential information or data to, or have any discussions with, any person relating to an Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal; (b) it will use its best efforts not to permit any of its officers, trustees, employees, agents or financial advisors to engage in any of the activities described in Section 4.1(a); 27 (c) it will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing and will take the necessary steps to inform the individuals or entities referred to in Section 4.1(b) of the obligations undertaken in this Section 4.1; and (d) it will notify EQR immediately if Wellsford receives any such inquiries or proposals, or any requests for such information, or if any such negotiations or discussions are sought to be initiated or continued with it; provided, however, that nothing contained in this Section 4.1 shall prohibit the Board of Trustees of Wellsford from (i) furnishing information to or entering into discussions or negotiations with, any person or entity that makes an unsolicited Acquisition Proposal, if, and only to the extent that (A) the Board of Trustees of Wellsford determines in good faith that such action is required for the Board of Trustees to comply with its duties to shareholders imposed by law, (B) prior to furnishing such information to, or entering into discussions or negotiations with, such person or entity, Wellsford provides written notice to EQR to the effect that it is furnishing information to, or entering into discussions with, such person or entity, and (C) subject to any confidentiality agreement with such person or entity (which Wellsford determined in good faith was required to be executed in order for the Board of Trustees to comply with its duties to shareholders imposed by law), Wellsford keeps EQR informed of the status (not the terms) of any such discussions or negotiations; and (ii) to the extent applicable, complying with Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition Proposal. Nothing in this Section 4.1 shall (x) permit Wellsford to terminate this Agreement (except as specifically provided in Article 7 hereof), (y) permit Wellsford to enter into an agreement with respect to an Acquisition Proposal during the term of this Agreement (it being agreed that during the term of this Agreement, Wellsford shall not enter into an agreement with any Person that provides for, or in any way facilitates, an Acquisition Proposal (other than a confidentiality agreement in customary form executed as provided above)) or (z) affect any other obligation of Wellsford under this Agreement; provided, however, that the Board of Trustees of Wellsford may approve and recommend a Superior Acquisition Proposal and, in connection therewith, withdraw or modify its approval or recommendation of this Agreement and the Merger. As used herein, "Superior Acquisition Proposal" means a bona fide Acquisition Proposal made by a third party which a majority of the members of the Board of Trustees of Wellsford determines in good faith to be more favorable to Wellsford's shareholders from a financial point of view than the Merger and which the Board of Trustees of Wellsford determines is reasonably capable of being consummated. 4.2 CONDUCT OF WELLSFORD'S BUSINESS PENDING MERGER. Prior to the Effective Time, except as (i) contemplated by this Agreement, (ii) necessary to accomplish the Spin-Off, (iii) disclosed in the Wellsford Disclosure Letter or Exhibit "J" or (iv) consented to in writing by EQR, Wellsford shall, and shall cause each of the Wellsford Subsidiaries to: 28 (a) conduct its business only in the usual, regular and ordinary course and in substantially the same manner as heretofore; (b) use its reasonable efforts to preserve intact its business organizations and goodwill and keep available the services of its officers and employees; (c) confer on a regular basis with one or more representatives of EQR to report operational matters of materiality and, subject to Section 4.1, any proposals to engage in material transactions; (d) promptly notify EQR of any material emergency or other material change in the condition (financial or otherwise), business, properties, assets, liabilities, prospects or the normal course of its businesses or in the operation of its properties, or of any material governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated); (e) promptly deliver to EQR true and correct copies of any report, statement or schedule filed with the SEC subsequent to the date of this Agreement; (f) maintain its books and records in accordance with GAAP consistently applied and not change in any material manner any of its methods, principles or practices of accounting in effect at the Financial Statement Date, except as may be required by the SEC, applicable law or GAAP; (g) duly and timely file all reports, tax returns and other documents required to be filed with federal, state, local and other authorities, subject to extensions permitted by law, provided Wellsford notifies EQR that it is availing itself of such extensions and provided such extensions do not adversely affect Wellsford's status as a qualified REIT under the Code; (h) not make or rescind any express or deemed election relative to Taxes (unless required by law or necessary to preserve Wellsford's status as a REIT or the status of any Wellsford Subsidiary as a partnership for federal income tax purposes or as a qualified REIT subsidiary under Section 856(i) of the Code, as the case may be); (i) not acquire, enter into any option to acquire, or exercise an option or contract to acquire, additional real property, incur additional indebtedness except for working capital under its revolving line(s) of credit, encumber assets or commence construction of, or enter into any agreement or commitment to develop or construct, other real estate projects, except in the ordinary course of the multi-family apartment business, which shall include all activities necessary to proceed with the acquisition, ownership and construction of Phases I, II and III of the multi-family residential project in Douglas County, Colorado referred to as "Palomino Park" in accordance with the 29 agreements in existence on the date of this Agreement and previously furnished to EQR (the "Palomino Development Agreements"); (j) not amend its Amended and Restated Declaration of Trust, Articles or Certificate of Incorporation, Bylaws, code of regulations or partnership agreement or comparable charter or organizational document or the articles of incorporation, by-laws, partnership agreement, joint venture agreement or comparable charter or organization document of any Wellsford Subsidiary without EQR's prior written consent, which shall not be unreasonably withheld or delayed; (k) make no change in the number of shares of beneficial interest or capital stock, membership interests or units of limited partnership interest issued and outstanding, other than pursuant to (i) the exercise of options disclosed in Schedule 2.3 to the Wellsford Disclosure Letter and the issuance of shares and options described in Exhibit "J" to this Agreement, (ii) the conversion of Wellsford Series A Preferred Shares pursuant to the terms of the Articles Supplementary for the Wellsford Series A Preferred Shares, (iii) options to purchase Wellsford Common Shares which are issued, and (iv) the Dividend Reinvestment and Share Purchase Plan of Wellsford; (l) grant no options or other right or commitment relating to its shares of beneficial interest or capital stock, membership interests or units of limited partnership interest or any security convertible into its shares of beneficial interest or capital stock, membership interests or units of limited partnership interest, or any security the value of which is measured by shares of beneficial interest, or any security subordinated to the claim of its general creditors; (m) except as provided in Section 5.13 hereof and in connection with the use of shares of beneficial interest of Wellsford to pay the exercise price or tax withholding in connection with equity-based employee benefit plans by the participants therein, not (i) authorize, declare, set aside or pay any dividend or make any other distribution or payment with respect to any shares of its beneficial interest or capital stock, or (ii) directly or indirectly redeem, purchase or otherwise acquire any shares of beneficial interest, shares of capital stock, membership interests or units of partnership interest or any option, warrant or right to acquire, or security convertible into, shares of beneficial interest, shares of capital stock, membership interests, or units of partnership interest; (n) not sell, lease, mortgage, subject to Lien or otherwise dispose of any material part of its assets, individually or in the aggregate, except in the ordinary course of business; (o) not make any loans, advances or capital contributions to, or investments in, any other Person, other than (i) loans, advances and capital contributions to Wellsford Subsidiaries in existence on the date hereof (other than Newco and Subsidiaries of 30 Newco), and (ii) loans to Newco and Subsidiaries of Newco bearing interest at a rate per annum equal to the rate of interest payable under the Second Amended and Restated Revolving Credit Agreement dated June 30, 1995 between Wellsford and First National Bank of Boston, as agent for itself and other banks ("Revolver Rate"), which loans to Newco and its Subsidiaries shall become due and payable in full on the Closing Date; provided the proceeds of such loans are not applied to activities which are not permitted under this Section 4.2; (p) not pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction, in the ordinary course of business consistent with past practice or in accordance with their terms, of liabilities reflected or reserved against in, or contemplated by, the most recent consolidated financial statements (or the notes thereto) furnished to EQR or incurred in the ordinary course of business consistent with past practice; (q) not enter into any commitment, contractual obligation, capital expenditure or transaction (each, a "Commitment") which may result in total payments or liability by or to it in excess of $1,000,000 or aggregate Commitments in excess of $5,000,000; (r) not guarantee the indebtedness of another Person, enter into any "keep well" or other agreement to maintain any financial statement condition of another Person or enter into any arrangement having the economic effect of any of the foregoing, other than guarantees of indebtedness of Newco and Subsidiaries of Newco; provided, that on the Closing Date, the Surviving Trust is unconditionally and irrevocably released from any obligations with respect to such guarantees or the indebtedness so guaranteed is paid in full without the payment of any consideration by the Surviving Trust and its Subsidiaries; (s) not enter into any Commitment with any officer, trustee, consultant or Affiliate of Wellsford or any of the Wellsford Subsidiaries; (t) not increase any compensation or enter into or amend any employment agreement with any of its officers, directors or employees earning more than $50,000 per annum, other than waivers by employees of benefits under such agreements; (u) not adopt any new employee benefit plan or amend any existing plans or rights, except for changes which are required by law and changes which are not more favorable to participants than provisions presently in effect; (v) not settle any shareholder derivative or class action claims arising out of or in connection with any of the transactions contemplated by this Agreement; 31 (w) not change the ownership of any of its Subsidiaries except pursuant to the Contribution Agreement on the Closing Date; and (x) not accept a promissory note in payment of the exercise price payable under any option to purchase Wellsford Common Shares. For purposes of this Section 4.2 only, any contract, transaction or other event shall be deemed to be material if it would result or is expected to result in a net impact on Wellsford's consolidated income statement in excess of $1,000,000, or on Wellsford's consolidated balance sheet in excess of $1,000,000. Notwithstanding anything to the contrary herein contained, prior to the Effective Time, Newco and its Subsidiaries shall not be bound by the restrictions which would otherwise be applicable under Sections 4.2(a), (b), (c), (d), (i), (j), (k), (l), (m)(ii), (n), (o), (p), (q), (r), (s), (t), (u), or (w); provided, however, that in no event may Newco: (i) issue any of its shares to any Person other than Wellsford prior to the Spin-Off for less than fair value; (ii) take any action or fail to take any action which would reasonably be expected to result in the termination of or a challenge to Wellsford's status as a REIT within the meaning of Section 856 of the Code, or result in a Wellsford Material Adverse Effect; (iii) enter into any contract which creates or imposes any obligation on, or otherwise purports to bind, Wellsford or any of the other Wellsford Subsidiaries; (iv) take any action or omit to take any action which causes a default under any loan agreement to which Wellsford is a party; (v) amend its Articles of Incorporation or By-laws in any manner which is inconsistent with the provisions of the Newco Stock Purchase Agreement. Notwithstanding anything to the contrary herein contained, prior to the Effective Time, WPHC and its Subsidiaries may: (A) amend the existing operating agreements of the Subsidiaries of WPHC in a manner which is not adverse to the interests of WPHC in such Subsidiaries; 32 (B) purchase the interest of Al Feld in the Subsidiaries of WPHC in accordance with the agreements granting such right in effect on the date of this Agreement and previously furnished to EQR; and (C) fulfill their respective obligations under the Palomino Development Agreements. 4.3 CONDUCT OF EQR'S BUSINESS PENDING MERGER. Prior to the Effective Time, except as (i) contemplated by this Agreement, or (ii) consented to in writing by Wellsford, EQR shall, and shall cause each of the EQR Subsidiaries to: (a) use its reasonable efforts to preserve intact its business organizations and goodwill and keep available the services of its officers and employees; (b) confer on a regular basis with one or more representatives of Wellsford to report operational matters of materiality which would have an EQR Material Adverse Effect; (c) promptly notify Wellsford of any material emergency or other material change in the condition (financial or otherwise), business, properties, assets, liabilities, prospects or the normal course of its businesses or in the operation of its properties, or of any material governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated); (d) promptly deliver to Wellsford true and correct copies of any report, statement or schedule filed with the SEC subsequent to the date of this Agreement; (e) maintain its books and records in accordance with GAAP consistently applied; and (f) duly and timely file all reports, tax returns and other documents required to be filed with federal, state, local and other authorities. For purposes of this Section 4.3 only, an emergency, change, complaint, investigation or hearing shall be deemed material if it would reasonably be expected to have an EQR Material Adverse Effect. In addition, during the period beginning the day after the fifth (5th) trading day prior to the date which the proxy statements required by Section 5.1 hereof are dated and ending on (but including) the Closing Date, EQR will not (a) issue any EQR Common Shares or other securities convertible into EQR Common Shares in any single transaction or series of transactions having an aggregate issuance price in excess of $250,000,000, or (b) announce any merger with or acquisition of all or substantially all the assets of another entity which has net assets in excess of $250,000,000. 33 4.4 COVENANT OF EQR. If EQR enters into negotiations with another Person who has a class of equity securities registered under the Exchange Act regarding the acquisition of such Person (whether effected through a merger, consolidation, share exchange, tender offer or other form), then at least three (3) business days prior to executing any definitive agreement with such Person with respect to such acquisition or making a tender offer for the shares or other ownership interests of such Person, EQR shall notify Wellsford of such transaction and consult with Wellsford with respect thereto, it being understood, however, that Wellsford shall have no approval rights with respect thereto. 4.5 OTHER ACTIONS. Each of Wellsford on the one hand and EQR on the other hand shall not, and shall use commercially reasonable efforts to cause their Subsidiaries not to take, any action that would result in (i) any of the representations and warranties of such party (without giving effect to any "knowledge" qualification) set forth in this Agreement that are qualified as to materiality becoming untrue, (ii) any of such representations and warranties (without giving effect to any "knowledge" qualification) that are not so qualified becoming untrue in any material respect or (iii) except as contemplated by Section 4.1, any of the conditions to the Merger set forth in Article 6 not being satisfied. 4.6 FILING OF CERTAIN REPORTS. The Surviving Trust shall file the reports required to be filed by it under the Exchange Act and the rules and regulations adopted by the SEC thereunder, and it will take such further action as any Affiliate of Wellsford or EQR may reasonably request, all to the extent required from time to time to enable such Affiliate to sell shares of beneficial interest of the Surviving Trust received by such Affiliate in the Merger without registration under the Securities Act pursuant to (i) Rule 145(d)(1) under the Securities Act, as such Rule may be amended from to time, or (ii) any successor rule or regulation hereafter adopted by the SEC. ARTICLE 5 --------- ADDITIONAL COVENANTS -------------------- 5.1 PREPARATION OF THE REGISTRATION STATEMENT AND THE PROXY STATEMENT; WELLSFORD SHAREHOLDERS MEETING AND EQR SHAREHOLDERS MEETING. (a) As soon as practicable following the date of this Agreement, Wellsford and EQR shall prepare and file with the SEC a preliminary Proxy Statement in form and substance satisfactory to each of EQR and Wellsford and such registration statements under the Securities Act and Exchange Act as may be required (collectively, the "Registration Statement"). To the extent practicable, the parties shall utilize one document for transmittal to their respective shareholders to meet applicable legal requirements. Each of Wellsford and EQR shall use its reasonable best efforts to (i) respond to any comments of the SEC and (ii) have the Registration 34 Statement declared effective under the Securities Act and the rules and regulations promulgated thereunder as promptly as practicable after such filing and to keep the Registration Statement effective as long as is necessary to consummate the Merger. Each of Wellsford and EQR will use its reasonable best efforts to cause the Proxy Statement to be mailed to Wellsford's shareholders and EQR's shareholders, respectively, as promptly as practicable after the Registration Statement is declared effective under the Securities Act. Each party agrees to date its Proxy Statement as of the same date, which shall be the approximate date of mailing to the shareholders of the respective parties. Each party will notify the other promptly of the receipt of any comments from the SEC and of any request by the SEC for amendments or supplements to the Registration Statement or the Proxy Statement or for additional information and will supply the other with copies of all correspondence between such party or any of its representatives and the SEC, with respect to the Registration Statement or the Proxy Statement. The Registration Statement and the Proxy Statement shall comply in all material respects with all applicable requirements of law. Prior to mailing the Proxy Statement to their respective shareholders, EQR and Wellsford shall have received the letters from their respective accountants provided for by Section 5.8. Whenever any event occurs which is required to be set forth in an amendment or supplement to the Registration Statement or the Proxy Statement, EQR or Wellsford, as the case may be, shall promptly inform the other of such occurrences and cooperate in filing with the SEC and/or mailing to the shareholders of EQR and the shareholders of Wellsford such amendment or supplement to the Proxy Statement. Wellsford or EQR, whichever shall become the Surviving Trust, also shall take any action required to be taken under any applicable state securities or "blue sky" laws in connection with the issuance of shares of beneficial interest of the Surviving Trust pursuant to the Merger, and the other party shall furnish all information concerning such party and the holders of the shares of beneficial interest of such party and rights to acquire shares of beneficial interest as may be reasonably requested in connection with any such action. (b) EQR will, as soon as practicable following the date of this Agreement (but in no event sooner than 20 business days following the date the Proxy Statement is mailed to the shareholders of Wellsford), duly call, give notice of, convene and hold a meeting of its shareholders (the "EQR Shareholders Meeting") for the purpose of obtaining the EQR Shareholder Approvals. EQR will, through its Board of Trustees, recommend to its shareholders approval of this Agreement, the Merger, and the transactions contemplated by this Agreement. (c) Wellsford will, as soon as practicable following the date of this Agreement (but in no event sooner than 20 business days following the date the Proxy Statement is mailed to the shareholders of Wellsford), duly call, give notice of, convene and hold a meeting of its shareholders (the "Wellsford Shareholders Meeting") for the purpose of obtaining Wellsford Shareholder Approvals. Wellsford will, through its Board of Trustees, recommend to its shareholders approval of this Agreement, the Merger and the transactions contemplated by this Agreement; provided, that prior to the Wellsford Shareholders Meeting, such recommendation may be withdrawn, modified or amended to the extent that, as a result of the commencement or receipt of a proposal constituting a Superior Acquisition Proposal, the Board of Trustees of 35 Wellsford determines in good faith that such withdrawal, modification or amendment is appropriate. (d) EQR and Wellsford shall use their best efforts to hold their respective shareholder meetings on the same day, which day, subject to the provisions of Sections 5.1(b) and 5.1(c), shall be a day not later than 45 days after the date the Proxy Statement is mailed. (e) If on the date for the EQR Shareholders Meeting and Wellsford Shareholders Meeting established pursuant to Section 5.1(d) of this Agreement, either EQR or Wellsford has not received a sufficient number of proxies to approve the Merger (but less than 1/3rd of the outstanding common shares of beneficial interest of such party have voted against the Merger), then both parties shall adjourn their respective shareholders meetings until the first to occur of (i) the date ten (10) days after the originally scheduled date of the shareholders meetings or (ii) the date on which the requisite number of proxies approving the Merger has been obtained or proxies have been received representing more than one-third of its outstanding common shares of beneficial interest which voted against the Merger. 5.2 ACCESS TO INFORMATION: CONFIDENTIALITY. Subject to the requirements of confidentiality agreements with third parties, each of Wellsford and EQR shall, and shall cause each of its Subsidiaries to, afford to the other party and to the officers, employees, accountants, counsel, financial advisors and other representatives of such other party, reasonable access during normal business hours prior to the Effective Time to all their respective properties, books, contracts, commitments, personnel and records and, during such period, each of Wellsford and EQR shall, and shall cause each of its Subsidiaries to, furnish promptly to the other party (a) a copy of each report, schedule, registration statement and other document filed by it during such period pursuant to the requirements of federal or state securities laws and (b) all other information concerning its business, properties and personnel as such other party may reasonably request. Each of Wellsford and EQR, shall cause its Subsidiaries to, and shall use commercially reasonable efforts to cause its officers, employees, accountants, counsel, financial advisors and other representatives and affiliates to, hold any nonpublic information in confidence to the extent required by, and in accordance with, and will comply with the provisions of the letter agreement dated as of October 9, 1996 between Wellsford and EQR (the "Confidentiality Agreement"). 5.3 BEST EFFORTS; NOTIFICATION. (a) Subject to the terms and conditions herein provided, Wellsford and EQR shall: (i) use all reasonable best efforts to cooperate with one another in (A) determining which filings are required to be made prior to the Effective Time with, and which consents, approvals, permits or authorizations are required to be obtained prior to the Effective Time from, governmental or regulatory authorities of the United States, the several states and foreign jurisdictions and any third parties in connection with the execution and delivery of this Agreement, and the consummation of the transactions contemplated by such agreements and (B) 36 timely making all such filings and timely seeking all such consents, approvals, permits and authorizations; (ii) use all reasonable best efforts to obtain in writing any consents required from third parties to effectuate the Merger, such consents to be in form reasonably satisfactory to Wellsford and EQR; and (iii) use all reasonable best efforts to take, or cause to be taken, all other action and do, or cause to be done, all other things necessary, proper or appropriate to consummate and make effective the transactions contemplated by this Agreement. If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purpose of this Agreement, the proper officers and trustees of Wellsford and EQR shall take all such necessary action. (b) Wellsford shall give prompt notice to EQR, and EQR shall give prompt notice to Wellsford, (i) if any representation or warranty made by it contained in this Agreement that is qualified as to materiality becomes untrue or inaccurate in any respect or any such representation or warranty that is not so qualified becomes untrue or inaccurate in any material respect or (ii) of the failure by it to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement; provided, however, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under this Agreement. 5.4 COSTS OF TRANSACTION. On the Closing Date, Wellsford and EQR shall execute, and Wellsford shall cause Newco to execute, the Transaction and Termination Costs Agreement in substantially in the form attached as Exhibit "H" hereto (the "Transaction Costs Agreement"). 5.5 TAX TREATMENT. Each of EQR and Wellsford shall use its reasonable best efforts to cause the Merger to qualify as a reorganization under the provisions of Sections 368(a) of the Code and to obtain the opinions of counsel referred to in Sections 6.2(e) and 6.3(f). 5.6 PUBLIC ANNOUNCEMENTS. EQR and Wellsford will consult with each other before issuing, and provide each other the opportunity to review and comment upon, any press release or other written public statements with respect to the transactions contemplated by this Agreement, including the Merger and the Spin- Off, and shall not issue any such press release or make any such written public statement prior to such consultation, except as may be required by applicable law, court process or by obligations pursuant to any listing agreement with any national securities exchange. The parties agree that the initial press release to be issued with respect to the transactions contemplated by this Agreement will be in the form agreed to by the parties hereto prior to the execution of this Agreement. 5.7 LISTING. Prior to the Effective Time, EQR or Wellsford (whichever shall be the Surviving Trust), shall use its best efforts to have the NYSE approve for listing, upon official notice of issuance, the shares of beneficial interest to be issued in the Merger. 37 5.8 LETTERS OF ACCOUNTANTS. (a) Wellsford shall use its reasonable best efforts to cause to be delivered to EQR the "comfort" letter of Ernst & Young, Wellsford's independent public accountants, dated and delivered the date on which the Registration Statement shall become effective and as of the Effective Time, and addressed to EQR, in form and substance reasonably satisfactory to EQR and reasonably customary in scope and substance for letters delivered by independent public accountants in connection with transactions such as those contemplated by this Agreement. (b) EQR shall use its reasonable best efforts to cause to be delivered to Wellsford the "comfort" letter of Ernst & Young, EQR's independent public accountants, dated the date on which the Registration Statement shall become effective and as of the Effective Time, and addressed to Wellsford, in form and substance reasonably satisfactory to Wellsford and reasonably customary in scope and substance for letters delivered by independent public accountants in connection with transactions such as those contemplated by this Agreement. 5.9 TRANSFER AND GAINS TAXES. EQR and Wellsford shall cooperate in the preparation, execution and filing of all returns, questionnaires, applications or other documents regarding any real property transfer or gains, sales, use, transfer, value added stock transfer and stamp taxes, any transfer, recording, registration and other fees and any similar taxes which become payable in connection with the transactions contemplated by this Agreement (together with any related interests, penalties or additions to tax, "Transfer and Gains Taxes"). From and after the Effective Time, the Surviving Trust shall, or shall cause ERP Operating Partnership, as appropriate, to pay or cause to be paid, without deduction or withholding from any amounts payable to the holders of beneficial interests in the Surviving Trust, all Transfer and Gains Taxes. 5.10 BENEFIT PLANS AND OTHER EMPLOYEE ARRANGEMENTS. (a) BENEFIT PLANS. After the Effective Time, all employees of Wellsford who are employed by the Surviving Trust shall, at the option of the Surviving Trust, either continue to be eligible to participate in an "employee benefit plan", as defined in Section 3(3) of ERISA, of Wellsford which is, at the option of the Surviving Trust, continued by the Surviving Trust, or alternatively shall be eligible to participate in the same manner as other similarly situated employees of the Surviving Trust who were formerly employees of EQR in any "employee benefit plan," as defined in Section 3(3) of ERISA, sponsored or maintained by the Surviving Trust after the Effective Time. With respect to each such employee benefit plan, service with EQR or any EQR Subsidiary or with Wellsford or any Wellsford Subsidiary (as applicable) shall be included for purposes of determining eligibility to participate, vesting (if applicable) and entitlement to benefits. With respect to medical benefits provided by the Surviving Trust on and after the Closing Date, coverage that would otherwise be denied due to a preexisting illness shall be provided to those employees who were covered by a plan sponsored by EQR, Wellsford or 38 any of their Subsidiaries before the Closing Date, but only to the extent that such illness was covered under such a plan before the Closing Date. (b) SHARE INCENTIVE PLANS. The share incentive plans of Wellsford and EQR, respectively, shall be terminated or continued, as specifically set forth in the Articles of Merger. (c) RETENTION PROGRAM. As of the Effective Time, the Surviving Trust shall adopt a severance and retention program (the "Retention Program") with respect to those employees of Wellsford and the Wellsford Subsidiaries set forth in Schedule 5.10 to the Wellsford Disclosure Letter (the "Schedule 5.10 Employees") by issuing to such Schedule 5.10 Employees a letter substantially in the form attached hereto as Exhibit "I" (the "Retention Program Letter"); provided, however, that in no event may the aggregate obligations of Wellsford and the Surviving Trust under the Retention Program exceed $544,575. The Surviving Trust shall maintain the Retention Program in accordance with the terms thereof. In no event shall Wellsford adopt or agree to any other severance or retention program in addition to the Retention Program, except as otherwise specifically set forth in this Agreement. Neither the Retention Program nor any other term of this Agreement shall require the Surviving Trust to continue the employment of any employee of Wellsford after the Effective Time. The Surviving Trust shall pay the amount set forth in Schedule 5.10 to the Wellsford Disclosure Letter to each Schedule 5.10 Employee whose employment is involuntarily terminated by the Surviving Trust without cause prior to such employee's receipt of the Retention Program Letter. (d) AGREEMENT OF OPTIONEES. Prior to the Closing, Wellsford shall use its best efforts to obtain the written agreement of each employee (other than the Executives of Wellsford as set forth in Exhibit "J" to this Agreement) holding an option to purchase Wellsford Common Shares described in Schedule 2.3 to the Wellsford Disclosure Letter and of David Kelley to the cancellation of such option at the Effective Time for cash in an amount equal to the difference between $27.50 and the applicable exercise price set forth in such option, multiplied by the number of Wellsford Common Shares subject to such option. (e) RELEASE OF SURVIVING TRUST. At the Closing, each of (i) Jeffrey H. Lynford, (ii) Edward Lowenthal, and (iii) each of the other Key Executives set forth in Exhibit "J" who have agreed to the conversion of their options to purchase Wellsford Common Shares into options to purchase common shares of Newco, shall release the Surviving Trust from any obligations of Wellsford to him under options to purchase Wellsford Common Shares which are exchanged for or converted into options to purchase common shares of Newco. (f) WITHHOLDING. Wellsford shall require each employee who exercises an option to purchase Wellsford Common Shares or who receives Wellsford Common Shares pursuant to any existing commitment to pay to Wellsford in cash or Wellsford Common Shares an amount sufficient to satisfy in full Wellsford's obligation to withhold Taxes incurred by reason of such exercise or issuance. 39 (g) EXECUTIVES. The compensation, benefits, payments, accelerations, share options and share appreciation rights of the "Executives" and the trustees of Wellsford, as set forth in Exhibit "J" to this Agreement, shall be satisfied at the Effective Time in accordance with the terms set forth in Exhibit "J" and Schedule 5.10(g) to the Wellsford Disclosure Letter. For purposes of valuing all existing options to be converted into options to purchase common shares of Newco, Wellsford has utilized the Merrill Lynch trading desk formula pricing model and take into account the number of options held, the exercise price and duration thereof, the volatility of the market price of the shares involved, and other required factors. (h) COMMITTEE ACTION. Wellsford shall cause the appropriate committee to take the appropriate action under Wellsford's 1992 Share Option Plan and under its Long-Term Management Incentive Plan to cause each option to purchase Wellsford Common Shares which remains unexercised as of the Effective Time to be amended to adjust the number of shares for which such option is thereafter exercisable and the exercise price by the Exchange Ratio, as provided for in the Articles of Merger. 5.11 INDEMNIFICATION. (a) From and after the Effective Time, the Surviving Trust shall provide exculpation and indemnification for each person who is now or has been at any time prior to the date hereof or who becomes prior to the Effective Time, an officer or trustee of Wellsford or any Wellsford Subsidiary (the "Indemnified Parties") which is the same as the exculpation and indemnification provided to the Indemnified Parties by Wellsford and the Wellsford Subsidiaries immediately prior to the Effective Time in its Amended and Restated Declaration of Trust and Bylaws, as in effect on the date hereof; provided, that such exculpation and indemnification covers actions on or prior to the Effective Time, including, without limitation, all transactions contemplated by this Agreement. In no event shall the Surviving Trust be obligated to provide directors' and officers' liability insurance. If the Surviving Trust has directors and officers' insurance, such insurance shall apply to all directors and officers of the Surviving Trust serving as such during the period such coverage is in effect. (b) The Surviving Trust shall continue in force and effect after the Effective Time each Indemnification Agreement between EQR and any Person which was in force and effect immediately prior to the Effective Time. (c) The provisions of this Section 5.11 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party, his or her heirs and his or her personal representatives and shall be binding on all successors and assigns of EQR and Wellsford. (d) In the event that the Surviving Trust or any of its respective successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers all or 40 substantially all of its properties and assets to any person, then, and in each such case the successors and assigns of such entity shall assume the obligations set forth in this Section 5.11, which obligations are expressly intended to be for the irrevocable benefit of, and shall be enforceable by, each trustee and officer covered hereby. 5.12 CONTRIBUTION AGREEMENT. Wellsford shall cause Newco to execute the Contribution Agreement and any other agreement related to the transactions contemplated hereby to which Newco is a party provided that Wellsford has obtained all material consents required to be obtained by Wellsford and the Wellsford Subsidiaries from third parties in order to perform their respective obligations under the Contribution Agreement and the other agreements contemplated hereby to which Newco is a party. Wellsford shall diligently seek and use its best efforts to obtain such consents prior to the Closing Date. Wellsford shall keep EQR currently apprised of its progress in obtaining such consents. Wellsford shall inform EQR promptly if it appears unlikely that any given consent will be obtained. Wellsford shall cooperate with EQR in taking any action to either obtain such consents or to put Wellsford and the Wellsford Subsidiaries in a position so that such consents are no longer required; provided such action does not cost Wellsford a material amount or materially adversely affect Wellsford and the Wellsford Subsidiaries. 5.13 DECLARATION OF DIVIDENDS AND DISTRIBUTIONS. From and after the date of this Agreement, Wellsford shall not make any dividend or distribution to its shareholders without the prior written consent of EQR; provided, however, the written consent of EQR shall not be required for the distribution of Newco shares pursuant to the Spin-Off and for the authorization and payment of quarterly distributions with respect to the Wellsford Common Shares of up to $0.485 per share, the Wellsford Series A Preferred Shares of up to $0.4375 per share and the Wellsford Series B Preferred Shares of up to $0.603125 per share; provided, however, the record date for each distribution with respect to the Wellsford Common Shares shall be the same date as the record date for the quarterly distribution for the Common Shares of EQR as provided to Wellsford by notice not less than twenty (20) business days prior to the record date for any quarterly EQR distribution; provided, however, in the event EQR has not notified Wellsford of the record date for a quarterly distribution with respect to the EQR Common Shares for any quarter prior to the last twenty (20) business days of such quarter, Wellsford may authorize a distribution on the Wellsford Common Shares, subject to the terms and conditions of this Section 5.13. Notwithstanding the foregoing, if EQR is to be the Surviving Trust, Wellsford may make distributions to its shareholders in excess of the foregoing amounts without the consent of EQR but only to the extent such distributions are required to comply with the minimum distribution requirements set forth in Section 857(b) of the Code. 5.14 CONSULTING AGREEMENTS. ERP Operating Partnership shall enter into a consulting agreement with each of Jeffrey H. Lynford and Edward Lowenthal which shall become effective as of the Effective Time and shall be in substantially the forms attached hereto as Exhibit "K". 41 5.15 TRANSFER OF MANAGEMENT COMPANY SHARES. At the Closing, Wellsford shall cause the owners (other than Wellsford or a wholly-owned subsidiary of Wellsford) to transfer to such person or persons as EQR shall designate by written notice delivered to Wellsford prior to the Closing, all of the shares of Wellsford Holly Management Inc. ("Management Corp.") owned by them, constituting all the outstanding shares of the Management Corp. which are not owned by Wellsford or a wholly-owned subsidiary of Wellsford for an aggregate consideration of $1.00, unless Management Corp. was dissolved prior to the Closing Date. 5.16 TRANSFER OF WELLSFORD ASSETS AFTER EFFECTIVE TIME. Wellsford acknowledges that immediately after the Effective Time, the real properties owned by Wellsford and the Wellsford Subsidiaries and the equity interests in certain of the Wellsford Subsidiaries shall be transferred to ERP Operating Partnership, subject to all liabilities of Wellsford and the Wellsford Subsidiaries, as a capital contribution in exchange for a number of units and preferred units of ERP Operating Partnership equal to the number of common shares of beneficial interest and preferred shares of beneficial interest of the Surviving Trust issued in the Merger to the owners of the shares of beneficial interest of Wellsford in the Merger; provided, however, that Wellsford makes no representation or warranty regarding EQR's ability to accomplish the foregoing, the costs that would be incurred in connection therewith or any consents or approvals that may be required therefor. 5.17 NOTICES. (a) Within the time period provided for in the Amended and Restated Declaration of Trust of the Surviving Trust, the Surviving Trust shall notify the holders of Wellsford Series A Preferred Shares (which have been converted into Series D Preferred Shares of the Surviving Trust) of the conversion rate applicable to such shares after giving effect to the Merger. (b) Each party shall provide such notice to its shareholders of the Merger as is required under Maryland law. 5.18 RESIGNATIONS. On the Closing Date, Wellsford shall cause the trustees, directors and officers of Wellsford and each of the Wellsford Subsidiaries (excluding Newco and its Subsidiaries) to submit their resignations from such positions, effective as of the Effective Time. 5.19 THIRD PARTY MANAGEMENT AGREEMENTS. Wellsford shall not amend the existing Third Party Management Agreement which provides that such agreement may be cancelled by Wellsford on thirty days' notice or less without any charge, penalty or other cost for such cancellation. Wellsford shall not renew the other existing Third Party Management Agreement which expires in April, 1997 except on terms which permit its cancellation by Wellsford on thirty days' notice or less without any charge, penalty or other cost for such cancellation, and shall not thereafter amend such terms. 42 5.20 REPAYMENT OF CERTAIN INDEBTEDNESS. Wellsford covenants that on the Closing Date it shall cause Newco and its Subsidiaries to repay all loans made to any of them by Wellsford or the other Wellsford Subsidiaries and to procure on the Closing Date the unconditional and irrevocable release of Wellsford and such other Wellsford Subsidiaries from any guaranties of the obligations of Newco and its Subsidiaries (whether effected directly or indirectly through the repayment of the indebtedness so guaranteed), other than the guaranties contemplated under the Credit Enhancement Agreement and the Palomino Agreement. Wellsford covenants that it shall cause Newco to apply the Contribution Funds (as defined in the Contribution Agreement) and shall cause Newco to request purchases of shares of Newco under the Newco Stock Purchase Agreement to the extent that Newco does not repay such indebtedness from other sources and obtain such releases by other means. 5.21 10B-17 NOTICE. Wellsford shall give any notice required under Rule 10b-17 promulgated under the Exchange Act of the record date for determining the holders of Wellsford Common Shares entitled to receive the distribution of the shares of Newco owned by Wellsford. The parties shall co-operate in establishing the date for the Closing Date in order to facilitate compliance with said Rule. 5.22 DENVER LEASE. Prior to the Closing Date, Wellsford may sublease the office space in Denver, Colorado currently leased by Wellsford (the "Denver Space") to a subtenant with EQR's prior consent, which consent shall not be withheld if such prospective tenant is financially capable of making the rental payments under the sublease. If the Denver Space has not been subleased by Wellsford by the Closing Date, the Surviving Trust shall use reasonable commercial efforts to sublease the Denver Space; provided that the Surviving Trust shall not be required to sublease such space to any Person which is not financially capable of making the payments required under the sublease. Newco may refer potential tenants to the Surviving Trust and may sublease the Denver Space itself. If the Denver Space is not subleased by the Closing Date, but is thereafter subleased by the Surviving Trust, the Surviving Trust shall pay to Newco the present value (determined using an interest rate of 8%) of all base rent payable under such sublease (net of third party brokers' commissions) promptly after such sublease is executed by the parties. 5.23 NEW YORK LEASE. If prior to the Effective Time Wellsford is unable to obtain the consent of the landlord under the lease of the office space in New York, New York currently leased by Wellsford (the "New York Lease") to either (a) the assignment of the New York Lease to Newco and the release of the Surviving Trust from all liability under the New York Lease, or (ii) the sublease to Newco of the space leased under the New York Lease, then the Surviving Trust will reasonably co-operate with Newco to provide Newco with the benefits of the New York Lease, including becoming a 50% joint venture partner with Newco in an entity formed to sublease such space. 43 5.24 AMENDMENT TO ARTICLES OF WPHC. Prior to the Closing Date, Wellsford shall cause: (a) the Articles of Incorporation of WPHC to be amended so as to provide (i) for two classes of common shares which shall be identical in all respects except that (A) one class shall be voting (the "WPHC Voting Shares") and one class shall be non-voting (the "WPHC Non-Voting Shares"), and (B) each WPHC Non-Voting Share shall be convertible at any time into one WPHC Voting Share, and (ii) that no dividend may be declared or paid on the outstanding shares of either class of common shares of WPHC unless the same dividend is declared on both classes of common shares of WPHC, except that any stock dividend payable solely in common shares of WPHC shall be paid in WPHC Voting Shares, as to such dividends on WPHC Voting Shares, or WPHC Non-Voting Shares, as to dividends on WPHC Non-Voting Shares, and (b) the shares of WPHC owned by Wellsford to be converted or exchanged for 80 WPHC Voting Shares, which shall be contributed to Newco pursuant to the Contribution Agreement, and 20 WPHC Non- Voting Shares, which shall continue to be owned by the Surviving Trust after the Effective Time. 5.25 COMPLETION OF ARTICLES OF MERGER. If the Closing Date occurs on or after the annual meeting of the shareholders of EQR for 1997, Exhibit "B" to the Articles of Merger shall be completed prior to the execution thereof by the parties in such a manner so that each of Jeffrey H. Lynford and Edward Lowenthal shall be designated as trustees whose terms expire at the annual meeting of the shareholders of the Surviving Trust held in 2000. If the Closing Date occurs before the annual meeting of the shareholders of EQR for 1997, (a) Exhibit "B" to the Articles of Merger shall be completed prior to the execution thereof by the parties in such a manner so that each of Jeffrey H. Lynford and Edward Lowenthal shall be designated as trustees whose terms expire at the annual meeting of the shareholders of the Surviving Trust held in 1998, and (b) Jerry H. Lynford and Edward Lowenthal shall be designated as management's designees in the Surviving Trust's proxy material for its annual meeting of shareholders held in 1998 to serve as trustees of the Surviving Trust with terms expiring at the annual meeting of shareholders of the Surviving Trust held in 2000. The terms of the remaining trustees of the Surviving Trust shall be completed in Exhibit "B" in the manner designated by EQR. ARTICLE 6 --------- CONDITIONS ---------- 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The obligations of each party to effect the Merger shall be subject to the fulfillment at or prior to the Closing Date of the following conditions: (a) SHAREHOLDER APPROVALS. This Agreement, the Merger and the transactions contemplated by this Agreement shall have been approved and adopted by the Shareholder Approvals. 44 (b) LISTING OF SHARES. The NYSE shall have approved for listing the shares of beneficial interest of the Surviving Trust to be issued in the Merger, subject in each case to official notice of issuance. (c) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. (d) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger or any of the other transactions contemplated hereby shall be in effect. (e) BLUE SKY LAWS. The Surviving Trust shall have received all state securities or "blue sky" permits and other authorizations necessary to issue shares of beneficial interest to the shareholders of EQR and Wellsford. (f) OPINION OF MARYLAND COUNSEL. EQR and Wellsford shall have received the opinion of Ballard Spahr Andrews & Ingersoll to the effect that this Agreement and the Articles of Merger are enforceable under Maryland law, that all requisite approval of the Merger by the shareholders of EQR and Wellsford has been obtained, and as to such other matters as are customary in a transaction such as the Merger. 6.2 CONDITIONS TO OBLIGATIONS OF EQR. The obligations of EQR to effect the Merger and to consummate the other transactions contemplated to occur on the Closing Date are further subject to the following conditions, any one or more of which may be waived by EQR: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Wellsford set forth in this Agreement shall be true and correct as of the Closing Date (other than changes thereto which occurred solely by reason of the Spin-Off), as though made on and as of the Closing Date, except to the extent the representation or warranty is expressly limited by its terms to another date, and EQR shall have received a certificate (which certificate may be qualified by Knowledge to the same extent as the representations and warranties of Wellsford contained herein are so qualified) signed on behalf of Wellsford by the chief executive officer or the chief financial officer of Wellsford, in such capacity, to such effect; provided, however, that no representation or warranty shall be deemed to have been breached as a result of any act of Newco and its Subsidiaries taken or omitted to be taken after the date of this Agreement, if such act or omission was taken or omitted to be taken without causing Newco to breach Section 4.2 of this Agreement. For the purposes of Section 6.2(a), the representations and warranties of Wellsford shall be deemed true and correct unless the breach of such representations 45 and warranties, in the aggregate, could reasonably be expected to have a Wellsford Material Adverse Effect. (b) PERFORMANCE OF OBLIGATIONS OF WELLSFORD. Wellsford shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Effective Time, and EQR shall have received a certificate signed on behalf of Wellsford by the chief executive officer or the chief financial officer of Wellsford, in such capacity, to such effect. For purposes of this Agreement, the inability of Newco to (i) repay all of the loans and advances made to it by Wellsford or any of the other Wellsford Subsidiaries, after giving effect to all cash to be received by Newco on the Closing Date (including any amounts to be received under the Newco Stock Purchase Agreement), shall be deemed to be a material default, and (ii) the inability of Newco to obtain the unconditional and irrevocable release from any obligations of Newco and its Subsidiaries issued after the date of this Agreement (whether directly through a release or indirectly through the payment of the indebtedness so guaranteed) shall be deemed to be a material default. Notwithstanding the foregoing, if Newco is unable to repay such indebtedness to Wellsford on the Closing Date, after giving effect to all cash to be received by Newco on the Closing Date (including any amounts to be received under the Newco Stock Purchase Agreement), EQR may, at its option, and in lieu of terminating this Agreement, require Newco to execute and deliver to the Surviving Trust a promissory note in the amount of such indebtedness which Newco is unable to pay, payable in twelve (12) equal consecutive monthly installments on the last day of each month, commencing with the month next following the month in which the Merger occurs, together with interest thereon at a rate equal to the Revolver Rate plus 2%, payable with each installment of principal. (c) MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there shall have been no Wellsford Material Adverse Change and EQR shall have received a certificate of the chief executive officer or chief financial officer of Wellsford, in such capacity, certifying to such effect. (d) OPINIONS RELATING TO REIT AND PARTNERSHIP STATUS. EQR shall have received an opinion of counsel to Wellsford, reasonably satisfactory to EQR, that, commencing with its taxable year ended December 31, 1993, Wellsford was organized and has operated in conformity with the requirements for qualification as a REIT under the Code (with customary exceptions, assumptions and qualifications and based upon customary representations). (e) OTHER TAX OPINION. EQR shall have received an opinion dated the Closing Date from counsel to EQR, based upon certificates and letters, which letters and certificates are substantially in the form set forth in Exhibit "L" hereto and dated the 46 Closing Date, to the effect that the Merger will qualify as a reorganization under the provisions of Section 368(a) of the Code. (f) COMFORT LETTER. EQR shall have received the letter from the accountants for Wellsford required by Section 5.8 hereof. (g) OPINION OF COUNSEL. EQR shall have received an opinion from Robinson Silverman Pearce Aronsohn & Berman LLP or other counsel to Wellsford reasonably satisfactory to EQR dated the Closing Date in form and substance reasonably satisfactory to EQR addressing the matters set forth in Exhibit "M" hereto. (h) CONSENTS. All consents and waivers (including, without limitation, waivers of rights of first refusal) from third parties necessary in connection with the consummation of the transactions contemplated by this Agreement shall have been obtained, other than such consents and waivers from third parties, which, if not obtained, would not result, individually or in the aggregate, in an EQR Material Adverse Effect or a Wellsford Material Adverse Effect. (i) CONSULTING AGREEMENTS. Jeffrey H. Lynford and Edward Lowenthal shall have executed and delivered their respective Consulting Agreements. (j) SHARES OF MANAGEMENT CORP. Unless Management Corp. was dissolved before the Closing Date, the voting shares of Management Corp. shall have been transferred to EQR's designees in accordance with Section 5.15. (k) RELEASES. The Key Executives shall have executed the releases described in Section 5.10(e). (l) WPHC ARTICLES. The Articles of Incorporation of WPHC shall have been amended as provided in Section 5.24 and immediately prior to the Spin- off, Wellsford's ownership interest in WPHC shall consist solely of 80 WPHC Voting Shares and 20 WPHC Non-Voting Shares. (m) CONTRIBUTION AGREEMENT. Wellsford and Newco shall have entered into the Contribution Agreement and each of the transactions contemplated thereby shall have been completed to the extent required to be completed thereunder as of such time. (n) NEWCO STOCK PURCHASE AGREEMENT. Newco shall have executed and delivered the Newco Stock Purchase Agreement. (o) PALOMINO CREDIT ENHANCEMENT AGREEMENT. Newco shall have executed and delivered the Palomino Credit Enhancement Agreement. 47 (p) PALOMINO AGREEMENT. Newco shall have executed and delivered the Palomino Agreement. (q) SONTERRA RIGHT OF FIRST OFFER. Newco shall have executed and delivered the Sonterra Right of First Offer Agreement. (r) TRANSACTION COSTS AGREEMENT. Each of Wellsford and Newco shall have executed and delivered the Transaction Costs Agreement. 6.3 CONDITIONS TO OBLIGATIONS OF WELLSFORD. The obligation of Wellsford to effect the Merger and to consummate the other transactions contemplated to occur on the Closing Date is further subject to the following conditions, any one or more of which may be waived by Wellsford: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of EQR set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date, as though made on and as of the Closing Date, except to the extent the representation or warranty is expressly limited by its terms to another date, and Wellsford shall have received a certificate (which certificate may be qualified by Knowledge to the same extent as the representations and warranties of EQR contained herein are so qualified) signed on behalf of EQR by the chief executive officer and the chief financial officer of such party to such effect. For the purposes of this Section 6.3(a), the representations and warranties of EQR shall be deemed true and correct unless the breach of such representations and warranties, in the aggregate, could reasonably be expected to have an EQR Material Adverse Effect. (b) PERFORMANCE OF OBLIGATIONS OF EQR. EQR shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Effective Time, and Wellsford shall have received a certificate of EQR signed on behalf of EQR by the chief executive officer or the chief financial officer of EQR, in such capacity, to such effect. (c) MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there shall have been no EQR Material Adverse Change and Wellsford shall have received a certificate of the chief executive officer or chief financial officer of EQR, in such capacity, certifying to such effect. (d) COMFORT LETTER. Wellsford shall have received the letter from the accountants for EQR required by Section 5.8 hereof. (e) OPINION RELATING TO REIT STATUS AND PARTNERSHIP STATUS. Wellsford shall have received an opinion of counsel to EQR, reasonably satisfactory to Wellsford, 48 that, commencing with its taxable year ended December 31, 1993, (A) EQR was organized and has operated in conformity with the requirements for qualification as a REIT under the Code and (B) ERP Operating Partnership has been during and since 1993 and continues to be, treated of federal income tax purposes as a partnership, and not as a corporation or association taxable as a corporation (with customary exceptions, assumptions and qualifications and based upon customary representations). (f) OTHER TAX OPINION. Wellsford shall have received an opinion dated the Closing Date from counsel to Wellsford, based upon certificates and letters, which letters and certificates are substantially in the form set forth in Exhibit "N" hereto and dated the Closing Date, to the effect that the Merger will qualify as a reorganization under the provisions of Section 368(a) of the Code. (g) OPINION OF COUNSEL. Wellsford shall have received an opinion from Rudnick & Wolfe or other counsel to EQR reasonably satisfactory to Wellsford dated the Closing Date in form and substance reasonably satisfactory to Wellsford addressing the matters set forth in Exhibit "O" hereto dated the Closing Date. (h) CONSENTS. All consents and waivers (including, without limitation, waivers or rights of first refusal) from third parties necessary in connection with the consummation of the transactions contemplated hereby shall have been obtained, other than such consents and waivers from third parties, which, if not obtained, would not result, individually or in the aggregate, in an EQR Material Adverse Effect or a Wellsford Material Adverse Effect. (i) CONSULTING AGREEMENT. ERP Operating Partnership shall have executed the Consulting Agreements with each of Jeffrey H. Lynford and Edward Lowenthal. (j) NEWCO STOCK PURCHASE AGREEMENT. ERP Operating Partnership shall have executed and delivered the Newco Stock Purchase Agreement. (k) PALOMINO CREDIT ENHANCEMENT AGREEMENT. ERP Operating Partnership shall have executed and delivered the Palomino Credit Enhancement Agreement. (l) PALOMINO AGREEMENT. ERP Operating Partnership shall have executed and delivered the Palomino Agreement. (m) SONTERRA RIGHT OF FIRST OFFER. ERP Operating Partnership shall have executed and delivered the Sonterra Right of First Offer Agreement. (n) TRANSACTION COSTS AGREEMENT. EQR shall have executed and delivered the Transaction Costs Agreement. 49 ARTICLE 7 --------- TERMINATION, AMENDMENT AND WAIVER --------------------------------- 7.1 TERMINATION. This Agreement may be terminated at any time prior to the filing of the Articles of Merger with the Department, whether before or after either of the Shareholder Approvals are obtained: (a) by mutual written consent duly authorized by the respective Boards of Trustees of EQR and Wellsford; (b) by EQR, upon a breach of any representation, warranty, covenant, obligation or agreement on the part of Wellsford set forth in this Agreement, in either case such that the conditions set forth in Section 6.2(a) or Section 6.2(b), as the case may be, would be incapable of being satisfied by August 1, 1997 (or as otherwise extended); (c) by Wellsford, upon a breach of any representation, warranty, covenant obligation or agreement on the part of EQR set forth in this Agreement, in either case such that the conditions set forth in Section 6.3(a) or Section 6.3(b), as the case may be, would be incapable of being satisfied by August 1, 1997 (or as otherwise extended); (d) by either EQR or Wellsford, if any judgment, injunction, order, decree or action by any Governmental Entity of competent authority preventing the consummation of the Merger shall have become final and nonappealable; (e) by either EQR or Wellsford, if the Merger shall not have been consummated before August 1, 1997; provided, in the case of termination pursuant to this Section 7.1(e), the terminating party shall not have breached in any material respect its obligations under this Agreement in any manner that shall have proximately contributed to the occurrence of the failure referred to in this Section; (f) by either EQR or Wellsford if, upon a vote at a duly held Wellsford Shareholders Meeting or any adjournment thereof, Wellsford Shareholder Approvals shall not have been obtained as contemplated by Section 5.1; (g) by either EQR or Wellsford if, upon a vote at a duly held EQR Shareholders Meeting or any adjournment thereof, the EQR Shareholder Approvals shall not have been obtained as contemplated by Section 5.1; (h) by Wellsford, if prior to the Wellsford Shareholders Meeting, the Board of Trustees of Wellsford shall have withdrawn or modified its approval or 50 recommendation of the Merger or this Agreement in connection with, or approved or recommended, a Superior Acquisition Proposal; (i) by EQR if (i) prior to the Wellsford Shareholders Meeting, the Board of Trustees of Wellsford shall have withdrawn or modified in any manner adverse to EQR its approval or recommendation of the Merger or this Agreement in connection with, or approved or recommended, any Superior Acquisition Proposal, or (ii) Wellsford shall have entered into a definitive agreement with respect to any Acquisition Proposal; and (j) by Wellsford or EQR if the Average Closing Price is less than $37.00 per share; provided, however, any notice of termination given pursuant to this Section 7.1(j) shall be given within three (3) business days after the date that such right of termination accrues. 7.2 CERTAIN FEES AND EXPENSES. If this Agreement shall be terminated (i) pursuant to Section 7.1(h) or 7.1(i), then Wellsford will pay EQR (provided Wellsford was not entitled to terminate this Agreement pursuant to Section 7.1(c) at the time of such termination) a fee equal to the Break-Up Fee (as defined below), (ii) pursuant to Section 7.1(b) or 7.1(f), then Wellsford will pay EQR (provided Wellsford was not entitled to terminate this Agreement pursuant to Section 7.1(c) at the time of such termination) an amount equal to the Break-Up Expenses (as defined below). If this Agreement shall be terminated pursuant to Section 7.1(c) or 7.1(g), then EQR will pay Wellsford (provided EQR was not entitled to terminate this Agreement pursuant to Section 7.1(b) at the time of such termination), an amount equal to the Break-Up Expenses. If the Merger is not consummated (other than due to the termination of this Agreement pursuant to Section 7.1(a), 7.1(g) or 7.1(j) or EQR's failure to perform its obligations under this Agreement in such a manner so as to entitle Wellsford to terminate this Agreement pursuant to Section 7.1(c)) and at the time of the termination of this Agreement an Acquisition Proposal has been received by Wellsford, and either prior to the termination of this Agreement or within twelve (12) months thereafter Wellsford or any Wellsford Subsidiary enters into any written Acquisition Proposal which is subsequently consummated (whether or not such Acquisition Proposal is the same Acquisition Proposal which had been received at the time of the termination of this Agreement), then Wellsford shall pay the Break-Up Fee to EQR. The payment of the Break Up Fee shall be compensation and liquidated damages for the loss suffered by EQR as a result of the failure of the Merger to be consummated and to avoid the difficulty of determining damages under the circumstances and neither party shall have any other liability to the other after the payment of the Break-Up Fee. The Break- Up Fee shall be paid by Wellsford to EQR, or the Break-Up Expenses shall be paid by Wellsford to EQR or EQR to Wellsford (as applicable), in immediately available funds within fifteen (15) days after the date the event giving rise to the obligation to make such payment occurred. As used in this Agreement, "Break-Up Fee" shall be an amount equal to the lesser of (i) $14,000,000 plus Break-Up Expenses (the "Base Amount") and (ii) the sum of (A) the maximum amount that can be paid to EQR without causing it to fail to meet the requirements of Sections 856(c)(2) and (3) of the Code determined as if the payment of such amount did not constitute income described 51 in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of the Code ("Qualifying Income"), as determined by independent accountants to EQR, and (B) in the event EQR receives a letter from outside counsel (the "Break-Up Fee Tax Opinion") indicating that EQR has received a ruling from the IRS holding that EQR's receipt of the Base Amount would either constitute Qualifying Income or would be excluded from gross income within the meaning of Sections 856(c)(2) and (3) of the Code (the "REIT Requirements") or that the receipt by EQR of the remaining balance of the Base Amount following the receipt of and pursuant to such ruling would not be deemed constructively received prior thereto, the Base Amount less the amount payable under clause (A) above. Wellsford's obligation to pay any unpaid portion of the Break-Up Fee shall terminate three years from the date of this Agreement. In the event that EQR is not able to receive the full Base Amount, Wellsford shall place the unpaid amount in escrow and shall not release any portion thereof to EQR unless and until Wellsford receives any one or combination of the following: (i) a letter from EQR's independent accountants indicating the maximum amount that can be paid at that time to EQR without causing EQR to fail to meet the REIT Requirements or (ii) a Break-Up Fee Tax Opinion, in which event Wellsford shall pay to EQR the lesser of the unpaid Base Amount or the maximum amount stated in the letter referred to in (i) above. The "Break-Up Expenses" payable to EQR or Wellsford, as the case may be (the "Recipient"), shall be an amount equal to the lesser of (i) $2,500,000, (ii) the Recipient's out-of-pocket expenses incurred in connection with this Agreement and the transactions contemplated hereby (including, without limitation, all attorneys', accountants' and investment bankers' fees and expenses) and (iii) the sum of (A) the maximum amount that can be paid to the Recipient without causing it to fail to meet the requirements of Sections 856(c)(2) and (3) of the Code determined as if the payment of such amount did not constitute Qualifying Income, as determined by independent accountants to the Recipient, and (B) in the event the Recipient receives a Break Up Fee Tax Opinion indicating that the Recipient has received a ruling from the IRS holding that the Recipient's receipt of the Expense Fee would either constitute Qualifying Income or would be excluded from gross income within the meaning of the REIT Requirements or that receipt by the Recipient of the remaining balance of the Expense Fee following the receipt of and pursuant to such ruling would not be deemed constructively received prior thereto, the Expense Fee less the amount payable under clause (A) above. The obligation of EQR or Wellsford, as applicable ("Payor"), to pay any unpaid portion of the Break Up Expenses shall terminate three years from the date of this Agreement. In the event that the Recipient is not able to receive the full Expense Fee, the Payor shall place the unpaid amount in escrow and shall not release any portion thereof to the Recipient unless and until the Payor receives any one or combination of the following: (i) a letter from the Recipient's independent accountants indicating the maximum amount that can be paid at that time to the Recipient without causing the Recipient to fail to meet the REIT Requirements or (ii) a Break-Up Fee Tax Opinion, in which event the Payor shall pay to the Recipient the lesser of the unpaid Expense Fee or the maximum amount stated in the letter referred to in (i) above. 7.3 EFFECT OF TERMINATION. In the event of termination of this Agreement by either Wellsford or EQR as provided in Section 7.1, this Agreement shall forthwith become void and have no effect, without any liability or obligation on the part of EQR, or Wellsford, other than 52 the last sentence of Section 5.2, Section 7.2, this Section 7.3 and Article 8; provided that (a) if this Agreement is terminated by EQR pursuant to Section 7.1(b), Wellsford shall not be entitled to any of the benefits of Section 7.2, or (b) if this Agreement is terminated by Wellsford pursuant to Section 7.1(c), EQR shall not be entitled to any of the benefits of Section 7.2. 7.4 AMENDMENT. This Agreement may be amended by the parties in writing by action of their respective Boards of Trustees at any time before or after any Shareholder Approvals are obtained and prior to the filing of the Articles of Merger with the Department; provided, however, that, after the Shareholder Approvals are obtained, no such amendment, modification or supplement shall be made which by law requires the further approval of shareholders without obtaining such further approval. 7.5 EXTENSION; WAIVER. At any time prior to the Effective Time, the parties may (a) extend the time for the performance of any of the obligations or other acts of the other party, (b) waive any inaccuracies in the representations and warranties of the other party contained in this Agreement or in any document delivered pursuant to this Agreement or (c) subject to the proviso of Section 7.4, waive compliance with any of the agreements or conditions of the other party contained in this Agreement. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights. ARTICLE 8 --------- GENERAL PROVISIONS ------------------ 8.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement confirming the representations and warranties in this Agreement shall survive the Effective Time. This Section 8.1 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time. 8.2 NOTICES. All notices, requests, claims, demands and other communications under this Agreement shall be in writing and shall be delivered personally, sent by overnight courier (providing proof of delivery) to the parties or sent by telecopy (providing confirmation of transmission) at the following addresses or telecopy numbers (or at such other address or telecopy number for a party as shall be specified by like notice): 53 (a) if to EQR, to: Equity Residential Properties Trust Two North Riverside Plaza, Suite 400 Chicago, Illinois 60606 Attention: President Fax No. (312) 207-5243 with a copy to: Equity Residential Properties Trust Two North Riverside Plaza, Suite 400 Chicago, Illinois 60606 Attention: Bruce C. Strohm, Esq. Fax No. (312) 454-0039 Rudnick & Wolfe 203 N. LaSalle St., Suite 1800 Chicago, Illinois 60601 Attention: Errol R. Halperin, Esq. Fax No. (312) 236-7516 (b) if to Wellsford, to: Wellsford Residential Property Trust 610 Fifth Avenue, 7th Floor New York, New York 10020 Attention: President Fax No. (212) 333-2323 with a copy to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, New York 10104-0053 Attention: Alan S. Pearce, Esq. Fax No. (212) 541-1411 All notices shall be deemed given only when actually received. 8.3 INTERPRETATION. When a reference is made in this -Agreement to a Section, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." 8.4 COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. 54 8.5 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This Agreement, the Wellsford Disclosure Letter, the EQR Disclosure Letter, the Confidentiality Agreement and the other agreements entered into in connection with the Transactions (a) constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter of this Agreement and (b) except as provided in Section 5.10 (with respect to the Schedule 5.10 Employees who do not receive Retention Program Letters) and Section 5.11 ("Third Party Provisions"), are not intended to confer upon any person other than the parties hereto any rights or remedies. The Third Party Provisions may be enforced by the beneficiaries thereof or on behalf of the beneficiaries thereof by the trustees of Wellsford who had been trustees of Wellsford prior to the Effective Time. 8.6 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF MARYLAND, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICT OF LAWS THEREOF. 8.7 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned or delegated, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns. 8.8 ENFORCEMENT. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any court of the United States located in the State of Illinois or New York or in any Illinois or New York State court located in Illinois or New York, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (a) consents to submit itself (without making such submission exclusive) to the personal jurisdiction of any federal court located in the State of Illinois or New York or any Illinois or New York State court in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement and (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court. 8.9 SEVERABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so 55 broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. 8.10 NON-RECOURSE. (a) This Agreement and all documents, agreements, understandings and arrangements relating hereto have been entered into or executed on behalf of Wellsford by the undersigned in his capacity as a trustee or officer of Wellsford, which has been formed as a Maryland real estate investment trust pursuant to an Amended and Restated Declaration of Trust of Wellsford dated as of November 2, 1992, as amended and restated, and not individually, and neither the trustees, officers nor shareholders of Wellsford shall be personally bound or have any personal liability hereunder. EQR shall look solely to the assets of Wellsford for satisfaction of any liability of Wellsford with respect to this Agreement and any other agreements to which it is a party. EQR will not seek recourse or commence any action against any of the shareholders of Wellsford or any of their personal assets, and will not commence any action for money judgments against any of the trustees or officers of Wellsford or seek recourse against any of their personal assets, for the performance or payment of any obligation of Wellsford hereunder or thereunder. (b) This Agreement and all documents, agreements, understandings and arrangements relating hereto have been entered into or executed on behalf of EQR by the undersigned in his capacity as a trustee or officer of EQR, which has been formed as a Maryland real estate investment trust pursuant to an Amended and Restated Declaration of Trust of EQR dated as of August 10, 1993, as amended and restated, and not individually, and neither the trustees, officers nor shareholders of EQR shall be personally bound or have any personal liability hereunder. Wellsford shall look solely to the assets of EQR for satisfaction of any liability of EQR with respect to this Agreement and any other agreements to which it is a party. Wellsford will not seek recourse or commence any action against any of the shareholders of EQR or any of their personal assets, and will not commence any action for money judgments against any of the trustees or officers of EQR or seek recourse against any of their personal assets, for the performance or payment of any obligation of EQR hereunder or thereunder. 56 IN WITNESS WHEREOF, EQR and Wellsford have caused this Agreement to be signed by their respective officers thereunto duly authorized all as of the date first written above. EQUITY RESIDENTIAL PROPERTIES TRUST By:/s/ Douglas J. Crocker II ------------------------------------------ Name: Douglas J. Crocker II ------------------------------------- Title: Chief Executive Officer & President ------------------------------------ WELLSFORD RESIDENTIAL PROPERTY TRUST By:/s/ Edward Lowenthal ------------------------------------------ Name: Edward Lowenthal ------------------------------------- Title: President ------------------------------------ 57 EXHIBIT "G" ----------- ADJUSTMENT TO EXCHANGE RATIO ----------------------------
IF AVERAGE PRICE IS: EXCHANGE RATIO IS: -------------------- ------------------ $40.000 0.625 $39.875 0.627 $39.750 0.629 $39.625 0.631 $39.500 0.633 $39.375 0.635 $39.250 0.637 $39.125 0.639 $39.000 0.641 $38.875 0.643 $38.750 0.645 $38.625 0.647 $38.500 0.649 $38.375 0.651 $38.250 0.654 $38.125 0.656 $38.000 0.658 $37.875 0.659 $37.750 0.660 $37.625 0.661 $37.500 0.662 $37.375 0.663 $37.250 0.664 $37.125 0.665 $37.000 0.666
G-1 APPENDIX B - -------------------------------------------------------------------------------- EQUITY RESIDENTIAL PROPERTIES TRUST WELLSFORD RESIDENTIAL PROPERTY TRUST ARTICLES OF MERGER ------------------ Wellsford Residential Property Trust, a Maryland real estate investment trust ("Wellsford"), and Equity Residential Properties Trust, a Maryland real estate investment trust ("Equity"), certify to the State Department of Assessments and Taxation of Maryland: 1. The Merger. Equity and Wellsford agree to merge in the manner hereinafter set forth. Subject to the acceptance for record of these Articles by the State Department of Assessments and Taxation of Maryland (the "Department"), Equity shall be merged with and into Wellsford in accordance with Section 8.501.1 of the Corporations and Associations Article of the Annotated Code of Maryland (the "Maryland Code"), and the separate existence of Equity shall thereupon cease (the "Merger"). 2. The Surviving Trust. Wellsford is the real estate investment trust to survive the Merger and shall be known as Equity Residential Properties Trust. When used in these Articles, the term "Surviving Trust" shall mean Wellsford, thereinafter known as "Equity Residential Properties Trust", as the trust surviving in the Merger as of the Effective Time (as defined below) and thereafter. 3. Formation. Both Wellsford and Equity are formed under Title 8 of the Maryland Code. 4. Principal Offices. The principal office of each of Wellsford and Equity in the State of Maryland is located in Baltimore City. 5. Ownership of Land Interests. Equity owns interests in land in the following counties located within the State of Maryland: Montgomery, Prince George, Anne Arundel and Fredrick County. 6. Declaration of Trust. Effective as of the Effective Time, the Amended and Restated Declaration of Trust of the Surviving Trust (the "Declaration") shall be amended and restated in its entirety as set forth in Exhibit "A" to these Articles, until duly amended in accordance with its terms and applicable law. The name and address of the Surviving Trust's Resident Agent is as set forth in Section 1.2 of Exhibit "A". 7. Effective Time. The Merger shall be effective at the time the Department accepts these Articles for Record (the "Effective Time") (The date on which the Effective Time occurs is herein referred to as the "Effective Date"). 8. Effects. The Merger shall have the effects specified in Section 8.501.1(n) of the Maryland Code. If at any time the Surviving Trust shall consider or be advised that any further assignments, conveyances or assurances in law are necessary or desirable to vest, perfect or confirm in the Surviving Trust the title to any property or rights of Equity or Wellsford or otherwise to carry out the provisions hereof, the persons who are the proper officers and trustees of Equity or Wellsford immediately prior to the Effective Time (or their successors in office) shall execute and deliver any and all proper deeds, assignments and assurances in law, and do all things necessary or proper, to vest, perfect or confirm title to such property or rights in the Surviving Trust and otherwise to carry out the provisions hereof. The Surviving Trust shall be governed by the laws of the State of Maryland. 9. Approval of Merger. The terms and conditions of the Merger were duly advised, authorized and approved by Equity in the manner and by the vote required by the laws of the State of Maryland and the Amended and Restated Declaration of Trust of Equity as follows: (a) The Board of Trustees of Equity, at a meeting duly called and held, adopted a resolution declaring that the terms and conditions of the Merger described herein were advisable and directing that the proposed transaction be submitted for consideration by the shareholders of Equity. (b) The shareholders of Equity entitled to vote on the proposed merger, at a meeting duly called and held, adopted a resolution approving the Merger. The terms and conditions of the Merger were duly advised, authorized and approved by the Wellsford in the manner and by the vote required by the laws of the State of Maryland and the Amended and Restated Declaration of Trust of Wellsford as follows: (a) The Board of Trustees of Wellsford, at a meeting duly called and held, adopted a resolution declaring that the terms and conditions of the Merger described herein were advisable and directing that the proposed transaction be submitted for consideration by the shareholders of Wellsford. (b) The shareholders of Wellsford entitled to vote on the proposed merger, at a meeting duly called and held, adopted a resolution approving the Merger. 2 10. Trustees. As of the Effective Time, the trustees of the Surviving Trust and their terms of office shall be as set forth on Exhibit "B" attached hereto. If any of the individuals named in Exhibit "B" are unable to serve as a trustee of the Surviving Trust at the Effective Time, his successor will be nominated and elected in accordance with the Bylaws of the Surviving Trust. 11. Capital. (a) Wellsford's Declaration authorizes the issuance of 100,000,000 shares of beneficial interest, which consists of common shares, $.01 par value per share ("Wellsford Common") and such other types or classes as the trustees may create and authorize from time to time. Wellsford has established the following classes of preferred shares: (i) 4,600,000 shares of Series A Convertible Preferred Shares of Beneficial Interest, par value $.01 per share ("Wellsford Series A") and (ii) 2,300,000 shares of Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $.01 per share ("Wellsford Series B"). (b) Equity's Declaration authorizes the issuance of 110,000,000 shares, of which 100,000,000 are common shares, $.01 par value per share ("Equity Common"), and 10,000,000 are preferred shares. Equity has established the following series of preferred shares: (i) 6,900,000 shares of 9-3/8% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $.01 per share ("Equity Series A"); (ii) 575,000 shares of 9-1/8% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $.01 per share ("Equity Series B"); and (iii) 460,000 shares of 9-1/8% Series C Cumulative Redeemable Preferred Shares, par value $.01 per share ("Equity Series C"). (c) Effective at the Effective Time, the Declaration of the Surviving Trust will be amended and restated to, among other things, increase the number of authorized shares of beneficial interest to 300,000,000, of which 200,000,000 shall be common shares ("Survivor Common") and 100,000,000 shall be preferred shares. Shares of Survivor Common will have a par value of $.01 per share. The Declaration of the Surviving Trust will establish the following classes of preferred shares: (i) 6,900,000 shares of 9 3/8% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $.01 per share ("Survivor Series A"); (ii) 575,000 shares of 9 1/8% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $.01 per share ("Survivor Series B"); (iii) 460,000 shares of 9 1/8% Series C Cumulative Redeemable Preferred Shares, par value $.01 per share ("Survivor Series C"); (iv) 4,600,000 shares of Series D Convertible Preferred Shares of Beneficial Interest, par value $.01 per share ("Survivor Series D"); and (v) 2,300,000 shares of Series E Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $.01 per share ("Survivor Series E"). 3 12. Conversion. The manner of converting the shares of Wellsford and Equity shall be as follows: (a) At the Effective Time, each share of Equity Common outstanding immediately prior to the Effective Time shall without any action on the part of the holder thereof, be converted in the Merger into, and continue as, one legally and validly issued, fully paid and nonassessable common share of Survivor Common. (b) Subject to the provisions of Section 12(j) hereof, at the Effective Time, each share of Wellsford Common outstanding immediately prior to the Effective Time shall, without any action on the part of the holder thereof, be converted into 0.625 of a share of Survivor Common. (c) At the Effective Time, each share of Equity Series A shall, without any action on the part of the holder thereof, be converted in the Merger into, and continue as, one share of Survivor Series A. (d) At the Effective Time, each share of Equity Series B shall, without any action on the part of the holder thereof, and be converted in the Merger into, and continue as, one share of Survivor Series B. (e) At the Effective Time, each share of Equity Series C shall, without any action on the part of the holder thereof, be converted in the Merger into, and continue as, one share of Survivor Series C. (f) At the Effective Time, each share of Wellsford Series A shall, without any action on the part of the holder thereof, continue as a preferred share of the Surviving Trust with its same preferences, rights and powers, and be converted in the Merger into one share of Survivor Series D. (g) At the Effective Time, each share of Wellsford Series B shall, without any action on the part of the holder thereof, continue as a preferred share of the Surviving Trust with its same preferences, rights and powers, and be converted in the Merger into one share of Survivor Series E. (h) At the Effective Time, each certificate representing outstanding shares of Equity Common, Equity Series A, Equity Series B and Equity Series C will, without any action on the part of the holder thereof, thereafter represent an equal number of shares of Survivor Common, Survivor Series A, Survivor Series B or Survivor Series C, as the case may be. 4 (i) At the Effective Time, each share of Wellsford Common shall cease to be outstanding and shall be cancelled and retired, and each holder of a certificate representing such shares of Wellsford Common shall thereafter cease to have any rights with respect to such shares, except the right to receive, without interest, the Survivor Common as calculated pursuant to Section 12(b) above and cash in lieu of fractional shares of the Survivor Common in accordance with Section 12(j), upon the surrender of such Wellsford certificate. At the Effective Time each certificate representing outstanding shares of Wellsford Series A and Wellsford Series B will cease to have any rights with respect to such shares, except the right to receive a certificate of the Surviving Trust representing an equal number of Survivor Series D or Survivor Series E, as the case may be. (j) Notwithstanding any other provision hereof, no fractional shares of Survivor Common shall be issued in connection with the Merger. Instead, each holder of outstanding Wellsford Common having a fractional interest arising upon the conversion or exchange of such shares in connection with the Merger shall, at the time of surrender of its Wellsford certificate, be paid an amount in cash equal to the Closing Price (as hereinafter defined) multiplied by the fraction of a share of Survivor Common to which such holder would otherwise be entitled. No such holder shall be entitled to dividends or other distributions, voting rights or any other shareholder rights in respect of any fractional share. For purposes of this Section 12(j), "Closing Price" shall mean the unweighted average closing price of a share of Equity Common (as reported in the New York Stock Exchange, Inc. Composite Tape) for the five (5) Trading Days immediately preceding the Effective Date, and "Trading Day" shall mean any day on which Equity Common is traded on the New York Stock Exchange and reported on its Composite Tape. (k) At the Effective Time, each outstanding option to acquire shares of Wellsford Common shall be converted and exchanged, without any action on the part of the holder thereof, into (i) an option to acquire, upon payment of the exercise price (which shall equal the exercise price per share for the option immediately prior to the Merger, divided by the Exchange Ratio (as defined in the Merger Agreement) multiplied by the number of shares to which the option relates), the number of shares of Survivor Common the option holder would have received pursuant to the Merger if the holder had exercised his or her option immediately prior thereto, rounded to the next lowest whole number and (ii) cash in lieu of the portion of any option that would have related to any fractional shares of Survivor Common absent the rounding required by the previous clause; provided, however, that in respect of any stock option which is an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended ("Code"), the conversion hereinabove provided for shall comply with the requirements of Section 424(a) of the Code, including the requirement that such converted options shall not give to the holder thereof any benefits additional to those 5 which such holder had prior to such conversion under the option as originally granted. The amount payable in lieu of the portion of any option that would have related to each fractional share pursuant to this Section 12(m) shall be payable on the Effective Date, and shall be calculated by applying the formula set forth in Section 12(j) hereof to that fraction of Survivor Common which the holder would otherwise have been entitled and reducing such calculated amount by an amount equal to the exercise price per share for the options as adjusted in clause (i) above times the fraction of unit of Survivor Common to which such holder would otherwise have been entitled. (l) As of the date hereof, Equity has in effect the Second Amended and Restated 1993 Share Option and Share Award Plan (the "1993 Plan") and the 1996 Non-Qualified Employee Share Purchase Plan (the "1996 Plan", and, collectively with the 1993 Plan, the "Equity Plans"). The Equity Plans shall continue in existence in full force and effect in accordance with their terms following the Effective Time as share option plans of the Surviving Trust and all options issued under the Equity Plans outstanding as of the Effective Time shall continue in full force and effect in accordance with its terms as options to purchase shares of the Surviving Trust. 13. Exchange of Certificates. (a) As of the Effective Time, Equity shall deposit, or shall cause to be deposited, with an exchange agent selected by Equity (the "Exchange Agent"), for the benefit of the holders of certificates (the "Wellsford Certificates") representing Wellsford Common, Wellsford Series A and Wellsford Series B (collectively, the "Wellsford Shares") for exchange in accordance with this Section 13, certificates (the "Survivor Certificates") representing Survivor Common, Survivor Series D and Survivor Series E (collectively, the "Survivor Shares") to be issued pursuant to this Section 13. (b) Promptly after the Effective Time, the Surviving Trust shall cause the Exchange Agent to mail to each holder of record of Wellsford Shares a letter of transmittal which shall specify (i) that delivery shall be effected, and risk of loss and title to Wellsford Certificates shall pass, only upon delivery of such Wellsford Certificates to the Exchange Agent, and shall be in such form and have such other provisions as the Surviving Trust may reasonably specify, and (ii) instructions for use in effecting the surrender of such Wellsford Certificates in exchange for Survivor Certificates and cash in lieu of fractional shares. Upon surrender of a Wellsford Certificate for cancellation to the Exchange Agent, duly executed and completed in accordance with the instructions thereto, together with such letter of transmittal, the holder of such Wellsford Certificate shall be entitled to receive in exchange therefor (x) a Survivor Certificate representing the number of whole shares of Survivor Shares and (y) a check representing the amount of cash in lieu of fractional shares of Survivor Common, if any, and unpaid dividends and distributions, if any, which such holder has the right to receive pursuant to the provisions of Section 13(c) in respect of the Wellsford Certificate surrendered, after 6 giving effect to any required withholding tax, and the Wellsford Certificate so surrendered shall forthwith be cancelled. No interest will be paid or accrued on the cash in lieu of fractional shares of Survivor Common and unpaid dividends and distributions, if any, payable to holders of Wellsford Certificates. In the event of a transfer of ownership of Wellsford Shares which is not registered in the transfer records of Wellsford, a Survivor Certificate representing the proper number of Survivor Shares, together with a check for the cash to be paid in lieu of any fractional shares of Survivor Common, if any, and unpaid dividends and distributions, if any, which such holder has the right to receive pursuant to the provisions of Section 13(c) in respect of the Wellsford Certificate so surrendered, after giving effect to any required withholding tax, may be issued to such a transferee if the Wellsford Certificate is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. All Wellsford Certificates so surrendered will be cancelled forthwith. Notwithstanding the foregoing, neither the Exchange Agent nor any party hereto shall be liable to a holder of Wellsford Shares for any Survivor Shares or dividends or other distributions thereon, or cash in lieu of any fractional Survivor Common, delivered to a public official pursuant to applicable escheat law. (c) Notwithstanding any other provisions of these Articles of Merger, no dividends or other distributions on Survivor Shares shall be paid with respect to any Wellsford Shares represented by a Wellsford Certificate until such Wellsford Certificate is surrendered for exchange as provided herein. Subject to the effect of applicable laws, following surrender of any such Wellsford Certificate, there shall be paid to the holder of the Survivor Certificate issued in exchange therefor, without interest, (i) at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore payable with respect to such whole shares of Survivor Shares and not paid, less the amount of any withholding taxes which may be required thereon, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time but prior to surrender and a payment date subsequent to surrender payable with respect to such whole shares of Survivor Shares, less the amount of any withholding taxes which may be required thereon. (d) At and after the Effective Time, there shall be no transfers on the share transfer books of Wellsford of the Wellsford Shares which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Wellsford Certificates are presented to the Surviving Trust, they shall be cancelled and exchanged for certificates representing Survivor Shares and cash in lieu of fractional Survivor Common, if any, and unpaid dividends and distributions deliverable in respect thereof pursuant to these Articles of Merger in accordance with the procedures set forth in this Section 13. Wellsford Certificates surrendered for exchange by any person constituting an "affiliate" of Wellsford for purposes of Rule 145(c) under the Securities Act of 1933, as amended (the 7 "Securities Act"), shall not be exchanged until the Surviving Trust has received a written agreement from such person as provided in Section 5.4 of the Merger Agreement. (e) Any portion of the Survivor Certificates made available to the Exchange Agent pursuant to Section 13(a) which remains unclaimed by the holders of Wellsford Shares for one hundred twenty (120) days after the Effective Time shall be delivered to the Surviving Trust, upon demand of the Surviving Trust, and any former shareholders of Wellsford who have not theretofore complied with this Section 13 shall look only to the Surviving Trust for payment of their shares of Survivor Shares, cash in lieu of fractional shares and unpaid dividends and distributions on the Survivor Shares deliverable in respect of each share of Wellsford Shares such shareholder holds as determined pursuant to these Articles, in each case, without any interest thereon. (f) None of Wellsford, Equity, the Exchange Agent or any other person shall be liable to any former holder of Wellsford Shares for any amount properly delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. (g) In the event any Wellsford Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such certificate to be lost, stolen or destroyed and, if required by the Surviving Trust, the posting by such person of a bond in such reasonable amount as the Surviving Trust may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent or the Surviving Trust will issue in exchange for such lost, stolen or destroyed Wellsford Certificate the Survivor Shares and cash in lieu of fractional Survivor Common, and unpaid dividends and distributions on Survivor Shares as provided in Section 13(c), deliverable in respect thereof pursuant to these Articles. 14. Conditions. The obligations of the parties hereto to effect the Merger as herein provided shall be subject to satisfaction, unless duly waived, of the conditions set forth in that certain Agreement and Plan of Merger dated as of January 16, 1997, by and between Equity and Wellsford. 15. Amendment. The parties hereto may amend, modify or supplement these Articles in whole or in part and in such manner as may be agreed upon by them in writing at any time before or after the adoption of these Articles by the shareholders contemplated hereby; provided, however, that after any such shareholder approval, any such amendment will be subject to further approval of such shareholders if such further approval is required under the Declaration of Trust or Bylaws of Equity, or the Declaration of Trust or Bylaws of Wellsford, as the case may be, or under applicable law. 16. Waiver. Any term or provision of these Articles (other than any matter which cannot under applicable law be waived) may be waived in writing at any time by the party which 8 is, or whose shareholders are, entitled to the benefits thereof. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect such party's right at a later time to enforce the same. No waiver by any party of a condition or of the breach of these Articles, whether by conduct or otherwise, in any one or more instances shall be deemed to be construed as a further or continuing waiver of any such condition or breach or a waiver of any other condition or of the breach of any other term, covenant, representation or warranty of these Articles. 17. Notice. Any notice or other communication required or permitted under these Articles shall be given, and shall be effective, in accordance with the provisions of the Merger Agreement. 18. Governing Law. These Articles shall be governed by and construed in accordance with the laws of the State of Maryland. 19. Counterparts. These Articles may be executed in multiple counterparts, each of which shall be deemed an original and all of which together shall constitute one agreement. IN WITNESS WHEREOF, Each of Equity and Wellsford have caused these Articles of Merger to be signed in its name by the undersigned and attested to on this _________ day of ___________________, 1997, and each of the undersigned acknowledges these Articles of Merger to be the trust act of the entity on whose behalf he has signed, and as to all matters or facts required to be verified under oath, each of the undersigned acknowledges that to the best of his knowledge, information, and belief, the matters and facts relating to the real estate investment trust on behalf of which he has signed are true in all material respects and this statement is made under the penalties for perjury. Equity Residential Properties Trust Wellsford Residential Property Trust By:________________________________ By:__________________________________ Title:____________________________ Title:___________________________ Attest:____________________________ Attest:______________________________ 9 EXHIBIT A --------- SECOND AMENDED AND RESTATED DECLARATION OF TRUST -------------------- EXHIBIT B --------- TRUSTEES OF SURVIVING TRUST ---------------------------
Trustee Term Expires - ------- ------------ Samuel Zell 1999 Douglas Crocker II 1998 Sheli Z. Rosenberg 1998 Gerald A. Spector 1997 James D. Harper, Jr. 1998 Errol R. Halperin 1999 Barry S. Sternlicht 1997 John W. Alexander 1999 B. Joseph White 1997 Henry H. Goldberg 1999
APPENDIX C [LETTERHEAD OF JP MORGAN] January 16, 1997 The Board of Trustees Equity Residential Properties Trust Two North Riverside Plaza Chicago, Illinois 60606 Ladies and Gentlemen: You have requested our opinion as to the fairness, from a financial point of view, to Equity Residential Properties Trust (the "Company") of the consideration proposed to be paid by the Company in connection with the proposed merger (the "Merger") of the Company with Wellsford Residential Property Trust (the "Seller"). Pursuant to the Agreement and Plan of Merger, dated as of January 16, 1997 (the "Agreement"), between the Company and the Seller, each share of common beneficial interest of the Seller, $0.01 par value per share, will be converted into 0.625 shares of common beneficial interest of the surviving trust, subject to adjustment as provided in the Agreement, after distribution of Newco (as defined in the Agreement). In addition, the Company will pay certain amounts to key executives of the Seller in compensation, benefits, payments, accelerations, share options and share appreciation rights, as more particularly described in the Agreement. In arriving at our opinion set forth below, we have reviewed, among other things: (i) the Agreement; (ii) certain publicly available information concerning the business of the Seller and of certain other companies engaged in businesses comparable to those of the Seller, and the reported market prices for certain other companies' securities deemed comparable; (iii) publicly available terms of certain transactions involving companies comparable to the Seller and the consideration received for such companies; (iv) current and historical market prices of the common stock of the Company and the Seller; (v) audited financial statements of the Company and the Seller for the fiscal year ended December 31, 1995, and unaudited financial statements of the Company and the Seller for the nine months ended September 30, 1996; (vi) certain agreements with respect to outstanding indebtedness or obligations of the Company and the Seller; (vii) certain internal financial analyses and estimates of budgeted 1997 funds from operations and net operating income prepared by the Company and the Seller and their respective managements; and (viii) the terms of other business combinations that we deemed relevant. In addition, we have held discussions with certain members of the management of the Company and the Seller with respect to certain aspects of the Merger, and the past and current business operations of the Company and the Seller, the financial condition and future prospects and operations of the Company and the Seller, the effects of the Merger on the financial condition and future prospects of the Company and the Seller, and certain other matters we believed necessary or appropriate to our inquiry. We have reviewed such other [LOGO JP MORGAN] -2- financial studies and analyses and considered such other information as we deemed appropriate for the purposes of this opinion. In giving our opinion, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information that was publicly available or was furnished to us by the Company and the Seller or otherwise reviewed by us, and we have not assumed any responsibility or liability therefor. We have not conducted any valuation or appraisal of any assets or liabilities, nor have any such valuations or appraisals been provided to us. In relying on financial analyses and forecasts provided to us, we have assumed that they have been reasonably prepared based on assumptions reflecting the best currently available estimates and judgments by management as to the expected future results of operations and financial condition of the Company and the Seller to which such analyses or forecasts relate. We have also assumed that the Merger will have the tax consequences described in discussions with, and materials furnished to us by, representatives of the Company, and that the other transactions contemplated by the Agreement will be consummated as described in the Agreement. We have relied as to all legal matters relevant to rendering our opinion upon the advice of counsel. Our opinion is necessarily based on economic, market and other conditions as in effect on, and the information made available to us as of, the date hereof. It should be understood that subsequent developments may affect this opinion and that we do not have any obligation to update, revise, or reaffirm this opinion. We are expressing no opinion herein as to the price at which the Company's or the Seller's stock will trade at any future time. In addition, we were not requested to and did not provide advice concerning the structure, the specific amount of the consideration, or any other aspects of the Merger, or to provide services other than the delivery of this opinion. We did not participate in negotiations with respect to the terms of the Merger and related transactions. Consequently, we have assumed that such terms are the most beneficial terms from the Company's perspective that could under the circumstances be negotiated among the parties to such transactions. We will receive a fee from the Company for the delivery of this opinion. Our affiliate, Morgan Guaranty Trust Company of New York, is a co-agent on the Company's revolving credit facility. We have also provided other financial advisory services to the Company and its affiliates in the past and have received fees for such services. In the ordinary course of their businesses, our affiliates may actively trade the debt and equity securities of the Company or the Seller for their own account or for the accounts of customers and, accordingly, they may at any time hold long or short positions in such securities. On the basis of and subject to the foregoing, it is our opinion as of the date hereof that the consideration to be paid by the Company in connection with the proposed Merger is fair, from a financial point of view, to the Company. [LOGO JP MORGAN] -3- This letter is provided to the Board of Trustees of the Company in connection with and for the purposes of its evaluation of the Merger. This opinion does not constitute a recommendation to any stockholder of the Company as to how such stockholder should vote with respect to the Merger. This opinion may not be disclosed, referred to, or communicated (in whole or in part) to any third party for any purpose whatsoever except with our prior written consent in each instance. This opinion may be reproduced in full in any proxy or information statement mailed to stockholders of the Company but may not otherwise be disclosed publicly in any manner without our prior written approval and must otherwise be treated as confidential. Very truly yours, J.P. MORGAN SECURITIES INC. By: /s/ Nicholas B. Paumgarten -------------------------- Name: Nicholas B. Paumgarten Title: Managing Director APPENDIX D [LETTERHEAD OF MERRILL LYNCH] January 16, 1997 Board of Trustees Wellsford Residential Property Trust 610 Fifth Avenue New York, New York 10020 Gentlemen: Wellsford Residential Property Trust (the "Company") and Equity Residential Properties Trust ("Equity Residential") have entered into an agreement dated January 16, 1997 (the "Agreement") pursuant to which Equity Residential will be merged with and into the Company in a transaction (the "Merger") in which each common share of beneficial interest, par value $.01 per share, of Equity Residential (the "Shares") will be converted into the right to receive 1 common share of beneficial interest, par value $.01 per share, of the Company (the "Company Shares") and each Company Share outstanding immediately prior to the effective time of the Merger (the "Effective Time") will be converted into the right to receive 0.625 (the "Exchange Ratio") Company Shares (the Company Shares issued to the holders of Company Shares outstanding immediately prior to the Effective Time are referred to herein as the "Surviving Company Shares"). In the event that the average of the closing prices of the Shares for the twenty consecutive trading days ending on the fifth trading day prior to the date of the joint proxy statement/prospectus that will be used to solicit the votes of the shareholders of the Company and Equity Residential to approve the Merger is less than $40.00 per share but not less than $37.00 per Share, the Exchange Ratio shall be incrementally adjusted as set forth in Exhibit "G" to the Agreement. We understand that in the event Equity Residential and the Company receive a ruling from the Internal Revenue Service and opinions of counsel to the effect that a merger of the Company into Equity Residential will not adversely affect the tax-free nature of the Merger, the Company and Equity Residential will amend the Agreement to provide that the Merger will be restructured such that the Company will be merged with and into Equity Residential, as a result of which each Company Share would be converted into the right to receive 0.625 Shares, subject to adjustment to give effect to the adjustment provision described above, and each Share outstanding immediately prior to the Effective Time would remain outstanding and unaffected by the Merger (the Shares issuable to the holders of Company Shares in such event are referred to herein as the "Reverse Merger Shares"). We further understand that the Agreement provides, and for purposes of arriving at the opinion expressed below we have assumed, that immediately prior to the Merger the Company will contribute certain assets and assign certain obligations to its wholly owned subsidiary Wellsford Real Properties, Inc., a Maryland corporation ("Newco"), pursuant to a contribution, distribution and assumption agreement to be entered into between the Company and Newco immediately prior to the Effective Time (the "Contribution Agreement"), and that the Company will declare a special dividend consisting of all outstanding shares of Newco common stock, par value $.01 per share (the "Newco Common Stock"), owned by it and that such dividend will be distributed pro rata to the Company's existing shareholders immediately prior to the Merger (the "Distribution"). You have advised us that the Distribution will result in the imposition of federal income tax liability to the Company's shareholders. In addition, pursuant to the Agreement, ERP Operating Limited 2 Partnership, an Illinois limited partnership of which Equity Residential is the sole general partner ("Equity Residential OP"), and Newco will enter into a preferred stock and common stock purchase agreement immediately prior to the Effective Time (the "Stock Purchase Agreement") pursuant to which Equity Residential OP has agreed to purchase (i) on the closing date under the Stock Purchase Agreement a number of shares of Newco Class A common stock determined in accordance with Section 2.1 of the Stock Purchase Agreement for an aggregate purchase price of $3,500,000 in cash and (ii) from time to time as requested by Newco up to the third anniversary of the closing date under the Stock Purchase Agreement, a maximum of $25,000,000 of Newco's Series A Convertible Redeemable Preferred Stock on the terms and conditions set forth in the Stock Purchase Agreement. The terms and conditions of the Merger and the Distribution are more fully set forth in the Agreement, the Contribution Agreement and the Stock Purchase Agreement. You have asked us whether, in our opinion, the proposed consideration (defined as the Newco Common Stock received in the Distribution plus the Surviving Company Shares or the Reverse Merger Shares, as applicable) to be received by the holders of the Company Shares pursuant to the Merger and the Distribution is fair to such shareholders from a financial point of view. In arriving at the opinion set forth below, we have, among other things: 1. Reviewed the Company's Annual Report on Form 10-K and related financial information for the fiscal year ended December 31, 1995, and the Company's Forms 10-Q and the related unaudited financial information for the quarterly periods ending March 31, 1996, June 30, 1996 and September 30, 1996; 2. Reviewed Equity Residential's Annual Report on Form 10-K and related financial information for the fiscal year ended December 31, 1995, and Equity Residential's Forms 10-Q and the related unaudited financial information for the quarterly periods ending March 31, 1996, June 30, 1996 and September 30, 1996; 3. Reviewed certain information, including certain financial forecasts and assumptions, relating to the business, earnings, cash flow, assets and prospects of (i) the Company and Newco and (ii) Equity Residential, furnished to us by the Company and Equity Residential, respectively; 4. Reviewed estimates of prospective synergies resulting from the Merger prepared by the managements of the Company and Equity Residential and discussed such estimates with the managements of both companies; 5. Conducted discussions with members of senior management of the Company and Equity Residential concerning the respective businesses and prospects of (i) the Company and Newco and (ii) Equity Residential; 6. Reviewed the historical market prices and trading activity for the Shares and the Company Shares and compared them with that of certain publicly traded companies which we deemed to be reasonably similar to Equity Residential and the Company, respectively; 7. Compared the results of operations of Equity Residential and the Company with that of certain companies which we deemed to be reasonably similar to Equity Residential and the Company, respectively; 3 8. Compared the proposed financial terms of the Merger with the financial terms of certain other mergers and acquisitions which we deemed to be relevant; 9. Considered the pro forma effect of the Merger on the combined entity's capitalization ratios and earnings, cash flow and book value per share; 10. Reviewed the Agreement; 11. Reviewed the financial terms of the Distribution as set forth in the Agreement and the forms of Contribution Agreement and Stock Purchase Agreement attached as exhibits thereto; and 12. Reviewed such other financial studies and analyses and performed such other investigations and took into account such other matters as we deemed necessary, including our assessment of general economic, market and monetary conditions. In preparing our opinion, we have relied on the accuracy and completeness of all information supplied or otherwise made available to us by the Company and Equity Residential, and we have not independently verified such information or undertaken an independent appraisal or evaluation of the assets or liabilities of the Company or Equity Residential. With respect to the financial forecasts and estimates of prospective synergies resulting from the Merger furnished by the Company and the financial forecasts, assumptions and estimates of prospective synergies resulting from the Merger furnished by Equity Residential, we have assumed that they have been reasonably prepared and reflect the best currently available estimates and judgment of the Company's or Equity Residential's management as to the expected future financial performance of the Company, Newco or Equity Residential, as the case may be. We have further assumed that the Merger will qualify as a tax-free reorganization to the Company's shareholders (except to the extent, if any, of cash received in lieu of fractional shares). In addition, we have further assumed that the Distribution will be consummated without any material modification to the terms set forth in the forms of Contribution Agreement and Stock Purchase Agreement reviewed by us. In connection with the preparation of this opinion, we have not been authorized to, and did not, solicit indications of interest from third parties to purchase the outstanding Company Shares or otherwise enter into a business combination with the Company. Our opinion expressed herein as to the fairness to the Company's shareholders from a financial point of view of the proposed consideration to be received by the holders of the Company Shares addresses the ownership position in the combined entity to be received by the Company's shareholders pursuant to the Merger on the terms set forth in the Agreement based upon the relative contributions of the Company and Equity Residential to the combined entity and after giving effect to the Distribution, and we express no opinion as to prices at which the Company Shares (or, if applicable, the Shares) and the Newco Common Stock will trade following the consummation of the Distribution and the Merger or prices which could be obtained for the Company Shares (or, if applicable, the Shares) in a sale of the combined entity following the consummation of the Merger. In addition, our opinion does not address the relative merits of the Merger and alternative business combinations with third parties. This opinion is addressed to the Board of Trustees of the Company and does not constitute a recommendation to any shareholder as to how such shareholder should vote on the proposed Merger. We have in the past provided financial advisory and financing services to both the Company and Equity Residential and have received fees for the rendering of such services. In the ordinary course of our business, 4 we actively trade in the securities of the Company and Equity Residential for our own account and the accounts of our customers and, accordingly, may at any time hold a long or short position in such securities. On the basis of, and subject to the foregoing, we are of the opinion that the proposed consideration to be received by the holders of the Company Shares pursuant to the Merger and the Distribution is fair to such shareholders from a financial point of view. Very truly yours, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: /s/ Michael F. Profenius ------------------------ Managing Director Investment Banking Group PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. INDEMNIFICATION OF TRUSTEES AND OFFICERS Under Maryland law, a real estate investment trust formed in Maryland is permitted to eliminate, by provision in its Declaration of Trust, the liability of trustees and officers to the trust and its shareholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) acts or omissions established by a final judgment as involving active and deliberate dishonesty and being material to the matter giving rise to the proceeding. The Company's Declaration of Trust includes such a provision eliminating such liability to the maximum extent permitted by Maryland law. The Maryland REIT law, effective October 1, 1994, permits a Maryland real estate investment trust to indemnify and advance expenses to its trustees, officers, employees and agents to the same extent as permitted by the MGCL for directors, officers, employees and agents of Maryland corporations. In accordance with the MGCL, the Company's bylaws require it to indemnify (a) any present or former trustee, officer or shareholder or any individual who, while a trustee, officer of shareholder, served or is serving as a trustee, officer, director, shareholder or partner of another entity at the Company's express request who has been successful, on the merits or otherwise, in the defense of a proceeding to which he was made a party by reason of service in such capacity, against reasonable expenses incurred by him in connection with the proceeding, (b) any present or former trustee or officer or any individual who, while a trustee or officer served or is serving as a trustee, officer, director, shareholder or partner of another entity at the Company's express request against any claim or liability to which he may become subject by reason of service in such capacity unless it is established that (i) his act or omission was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and delivered dishonesty, (ii) he actually received an improper personal benefit in money, property or services or (iii) in the case of a criminal proceeding, he had reasonable cause to believe that his act or omission was unlawful and (c) any present or former shareholder against any claim or liability to which he may become subject by reason of such status. In addition, the Company's bylaws require it to pay or reimburse, in advance of final disposition of a proceeding, reasonable expenses incurred by a present or former trustee, officer or shareholder or any individual who, while a trustee, officer or shareholder, served or is serving as a trustee, officer, director, shareholder or partner of another entity at the Company's express request made a party to a proceeding by reason of such status, provided that, in the case of a trustee or officer, the Company shall have received (1) a written affirmation by such person of his good faith belief that he has met the standard of conduct necessary for indemnification by the Company as authorized by the bylaws and (2) a written undertaking by or on his behalf to repay the amount paid or reimbursed by the Company if it shall ultimately be determined that the applicable standard of conduct was not met. The Company's bylaws also (x) permit the Company to provide indemnification and payment or reimbursement of expenses to a present or former trustee, officer or shareholder who served a predecessor of the Company or to any employee or agent of the Company or a predecessor of the Company, (y) provide that any indemnification and payment or reimbursement of the expenses permitted by the bylaws shall be furnished in accordance with the procedures provided for indemnification and payment or reimbursement of expenses under Section 2-418 of the MGCL for directors of Maryland corporations and (z) permit the Company to provide to the trustees and officers such other and further indemnification or payment or reimbursement of expenses to the fullest extent permitted by Section 2-418 of the MGCL for directors of Maryland corporations. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to trustees and officers of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that, although the validity and scope of the governing statute have not been tested in court, in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In addition, indemnification may be limited by state securities law. Item 21. Exhibits Exhibit Index 2.1** Agreement and Plan of Merger by and between Equity Residential Properties Trust and Wellsford Residential Property Trust, and all exhibits thereto 2.2 Articles of Merger by and between Equity Residential Properties Trust and Wellsford Residential Property Trust (included as Appendix B to the Prospectus contained in the Registration Statement) 5.1** Opinion of Ballard Spahr Andrews & Ingersoll regarding legality of issued shares 8.1** Opinion of Rudnick & Wolfe regarding certain tax aspects of the Merger 8.2** Opinion of Rudnick & Wolfe regarding REIT qualifications of the Surviving Trust 8.3** Opinion of Robinson Silverman Pearce Aronsohn & Berman LLP regarding certain tax aspects of the Merger 8.4** Opinion of Robinson Silverman Pearce Aronsohn & Berman LLP regarding REIT qualifications of Wellsford 23.1** Consent of Ernst & Young LLP (Chicago) 23.2** Consent of Ernst & Young LLP (New York) 23.3** Consent of Grant Thornton LLP 23.4 Consent of Rudnick & Wolfe (included in Exhibits 8.1 and 8.2 hereof) 23.5 Consent of Robinson Silverman Pearce Aronsohn & Berman LLP (included in Exhibits 8.3 and 8.4 hereof) 23.6 Consent of Ballard Spahr Andrews & Ingersoll (included in Exhibit 5.1 hereof) 23.7* Consent of J.P. Morgan Securities Inc. 23.8* Consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated 99.1** Proposed Form of Declaration of Trust of the Surviving Trust and additional provisions thereto 99.2* Amended and Restated Bylaws of the Surviving Trust 99.3* Form of Proxy Card for Special Meeting of Shareholders of Equity Residential Properties Trust 99.4** Form of Proxy Card for Special Meeting of Shareholders of Wellsford Residential Property Trust 99.5 Opinion of J.P. Morgan Securities Inc. (Included as Appendix C to the Prospectus contained in the Registration Statement) 99.6 Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated (Included as Appendix D to the Prospectus contained in the Registration Statement) 99.7* Consent of Persons named to become trustees - -------- * Previously filed ** Filed herewith II-2 Item 22. Undertakings The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (a) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) The undersigned registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by II-3 persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (c) The registrant undertakes that every prospectus (A) that is filed pursuant to paragraph (b) immediately preceding, or (B) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (d) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (e) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporation documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (f) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chicago, State of Illinois, on April 21, 1997. EQUITY RESIDENTIAL PROPERTIES TRUST By:/s/ Douglas Crocker II ---------------------- Douglas Crocker II, President, Chief Executive Officer and Trustee Pursuant to the requirements of the Securities Act of 1933, this Amendment has been signed by the following persons in the capacities and on the dates indicated: Name Title Date - ---- ----- ---- Samuel Zell* Chairman of the Board of Trustees April 21, 1997 Douglas Crocker II* President, Chief Executive Officer April 21, 1997 and Trustee David J. Neithercut* Executive Vice President and Chief April 21, 1997 Financial Officer Michael J. McHugh* Senior Vice President, Chief April 21, 1997 Accounting Officer and Treasurer Gerald A. Spector* Trustee April 21, 1997 Sheli Z. Rosenberg* Trustee April 21, 1997 James D. Harper, Jr.* Trustee April 21, 1997 Errol R. Halperin* Trustee April 21, 1997 John Alexander* Trustee April 21, 1997 Barry S. Sternlicht* Trustee April 21, 1997 B. Joseph White* Trustee April 21, 1997 Henry H. Goldberg* Trustee April 21, 1997 *By: /s/ Douglas Crocker II Individually and April 21, 1997 ---------------------- as attorney-in-fact Douglas Crocker II II-5 Exhibit Index 2.1** Agreement and Plan of Merger by and between Equity Residential Properties Trust and Wellsford Residential Property Trust, and all exhibits thereto 2.2 Articles of Merger by and between Equity Residential Properties Trust and Wellsford Residential Property Trust (included as Appendix B to the Prospectus contained in the Registration Statement) 5.1** Opinion of Ballard Spahr Andrews & Ingersoll regarding legality of issued shares 8.1** Opinion of Rudnick & Wolfe regarding certain tax aspects of the Merger 8.2** Opinion of Rudnick & Wolfe regarding REIT qualifications of the Surviving Trust 8.3** Opinion of Robinson Silverman Pearce Aronsohn & Berman LLP regarding certain tax aspects of the Merger 8.4** Opinion of Robinson Silverman Pearce Aronsohn & Berman LLP regarding REIT qualifications of Wellsford 23.1** Consent of Ernst & Young LLP (Chicago) 23.2** Consent of Ernst & Young LLP (New York) 23.3** Consent of Grant Thornton LLP 23.4 Consent of Rudnick & Wolfe (included in Exhibits 8.1 and 8.2 hereof) 23.5 Consent of Robinson Silverman Pearce Aronsohn & Berman LLP (included in Exhibits 8.3 and 8.4 hereof) 23.6 Consent of Ballard Spahr Andrews & Ingersoll (included in Exhibit 5.1 hereof) 23.7* Consent of J.P. Morgan Securities Inc. 23.8* Consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated 99.1** Proposed Form of Declaration of Trust of the Surviving Trust and additional provisions thereto 99.2* Amended and Restated Bylaws of the Surviving Trust 99.3* Form of Proxy Card for Special Meeting of Shareholders of Equity Residential Properties Trust 99.4** Form of Proxy Card for Special Meeting of Shareholders of Wellsford Residential Property Trust 99.5 Opinion of J.P. Morgan Securities Inc. (Included as Appendix C to the Prospectus contained in the Registration Statement) 99.6 Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated (Included as Appendix D to the Prospectus contained in the Registration Statement) 99.7* Consent of Persons named to become trustees - -------- * Previously filed ** Filed herewith II-6 EX-2.1 2 AGREEMENT & PLAN OF MERGER Exhibit 2.1 - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER BETWEEN EQUITY RESIDENTIAL PROPERTIES TRUST AND WELLSFORD RESIDENTIAL PROPERTY TRUST Dated as of January 16, 1997 - -------------------------------------------------------------------------------- TABLE OF CONTENTS -----------------
ARTICLE PAGE - ------- ---- 1 THE MERGER............................................................. 2 1.1 The Merger....................................................... 2 1.2 Newco Transactions............................................... 2 1.3 Closing.......................................................... 3 1.4 Effective Time................................................... 3 1.5 Amendments and Restatements of Wellsford's Declaration of Trust.. 3 1.6 Amendment and Restatement of Wellsford's Bylaws.................. 3 1.7 Trustees......................................................... 3 1.8 Effect on Shares of Beneficial Interest and Options.............. 3 1.9 Exchange Ratio................................................... 4 1.10 Completion of Contribution Agreement............................. 4 1.11 Reversal of Direction of Merger.................................. 5 1.12 Change in Number of Spin-Off Shares.............................. 5 2 REPRESENTATIONS AND WARRANTIES OF Wellsford............................ 6 2.1 Organization, Standing and Power of Wellsford.................... 6 2.2 Wellsford Subsidiaries........................................... 6 2.3 Capital Structure................................................ 7 2.4 Authority; Noncontravention; Consents............................ 9 2.5 SEC Documents; Financial Statements; Undisclosed Liabilities..... 10 2.6 Absence of Certain Changes or Events............................. 11 2.7 Litigation....................................................... 11 2.8 Properties....................................................... 12 2.9 Environmental Matters............................................ 14 2.10 Related Party Transactions....................................... 14 2.11 Absence of Changes in Benefit Plans; ERISA Compliance............ 14 2.12 Employee Policies................................................ 15 2.13 Taxes............................................................ 15 2.14 No Payments to Employees, Officers, Trustees or Directors........ 16 2.15 Brokers; Schedule of Fees and Expenses........................... 16 2.16 Compliance with Laws............................................. 17 2.17 Contracts; Debt Instruments...................................... 17 2.18 Opinion of Financial Advisor..................................... 18 2.19 State Takeover Statutes.......................................... 18 2.20 Registration Statement........................................... 18 2.21 Development Properties........................................... 18 2.22 EQR Shares of Beneficial Interest................................ 18 2.23 Investment Company Act of 1940................................... 18
i
ARTICLE PAGE - ------- ---- 2.24 Intentionally Omitted............................................ 18 2.25 Definition of Knowledge of Wellsford............................. 18 3 REPRESENTATIONS AND WARRANTIES OF EQR.................................. 19 3.1 Organization, Standing and Power of EQR.......................... 19 3.2 Capital Structure................................................ 19 3.3 Organization, Standing and Power of ERP Operating Partnership............................................ 20 3.4 Capital Structure of ERP Operating Partnership................... 21 3.5 Authority; Noncontravention; Consents............................ 21 3.6 SEC Documents; Financial Statements; Undisclosed Liabilities..... 22 3.7 Absence of Certain Changes or Events............................. 23 3.8 Litigation....................................................... 23 3.9 Properties....................................................... 24 3.10 Environmental Matters............................................ 25 3.11 Taxes............................................................ 25 3.12 Brokers; Schedule of Fees and Expenses........................... 26 3.13 Compliance with Laws............................................. 26 3.14 Contracts; Debt Instruments...................................... 26 3.15 Opinion of Financial Advisor..................................... 26 3.16 State Takeover Statutes.......................................... 26 3.17 Registration Statement........................................... 27 3.18 Wellsford Shares of Beneficial Interest.......................... 27 3.19 Intentionally Omitted............................................ 27 3.20 Investment Company Act of 1940................................... 27 3.21 Definition of Knowledge of EQR................................... 27 4 COVENANTS.............................................................. 27 4.1 Acquisition Proposals............................................ 27 4.2 Conduct of Wellsford's Business Pending Merger................... 28 4.3 Conduct of EQR's Business Pending Merger......................... 33 4.4 Covenant of EQR.................................................. 34 4.5 Other Actions.................................................... 34 4.6 Filing of Certain Reports........................................ 34 5 ADDITIONAL COVENANTS................................................... 34 5.1 Preparation of the Registration Statement and the Proxy Statement; Wellsford Shareholders Meeting and EQR Shareholders Meeting...... 34 5.2 Access to Information: Confidentiality........................... 36 5.3 Best Efforts; Notification....................................... 36 5.4 Costs of Transaction............................................. 37 5.5 Tax Treatment.................................................... 37
ii
ARTICLE PAGE - ------- ---- 5.6 Public Announcements............................................. 37 5.7 Listing.......................................................... 37 5.8 Letters of Accountants........................................... 38 5.9 Transfer and Gains Taxes......................................... 38 5.10 Benefit Plans and Other Employee Arrangements.................... 38 5.11 Indemnification.................................................. 40 5.12 Contribution Agreement........................................... 41 5.13 Declaration of Dividends and Distributions....................... 41 5.14 Consulting Agreements............................................ 41 5.15 Transfer of Management Company Shares............................ 42 5.16 Transfer of Wellsford Assets After Effective Time................ 42 5.17 Notices.......................................................... 42 5.18 Resignations..................................................... 42 5.19 Third Party Management Agreements................................ 42 5.20 Repayment of Certain Indebtedness................................ 43 6 CONDITIONS............................................................. 44 6.1 Conditions to Each Party's Obligation to Effect the Merger....... 44 6.2 Conditions to Obligations of EQR................................. 45 6.3 Conditions to Obligations of Wellsford........................... 48 7 TERMINATION, AMENDMENT AND WAIVER...................................... 50 7.1 Termination...................................................... 50 7.2 Certain Fees and Expenses........................................ 51 7.3 Effect of Termination............................................ 52 7.4 Amendment........................................................ 53 7.5 Extension; Waiver................................................ 53 8 GENERAL PROVISIONS..................................................... 53 8.1 Nonsurvival of Representations and Warranties.................... 53 8.2 Notices.......................................................... 53 8.3 Interpretation................................................... 54 8.4 Counterparts..................................................... 54 8.5 Entire Agreement; No Third-Party Beneficiaries................... 55 8.6 Governing Law.................................................... 55 8.7 Assignment....................................................... 55 8.8 Enforcement...................................................... 55 8.9 Severability..................................................... 55 8.10 Non-Recourse..................................................... 56
iii EXHIBITS -------- Exhibit "A" - Articles of Merger Exhibit "B" - Contribution Agreement Exhibit "C" - Newco Stock Purchase Agreement Exhibit "D" - Palomino Agreement Exhibit "E" - Palomino Credit Enhancement Agreement Exhibit "F" - Sonterra Right of First Offer Agreement Exhibit "G" - Adjustment to Exchange Ratio Exhibit "H" - Transaction Costs Agreement Exhibit "I" - Retention Program Letter Exhibit "J" - Key Executives Exhibit "K" - Form of Consulting Agreement Exhibit "L" - Form of Letter for EQR Tax Opinion Exhibit "M" - Opinion of Counsel to Wellsford Exhibit "N" - Form of Letter for Wellsford Tax Opinion Exhibit "O" - Opinion of Counsel to EQR iv INDEX OF DEFINED TERMS ----------------------
DEFINED TERM SECTION - ------------ ------- Acquisition Proposal 4.1(a) Affiliate 2.10 Agreement Preamble Articles of Merger Recital C Average Closing Price 1.9 Base Amount 7.2 Break-Up Expenses 7.2 Break-Up Fee 7.2 Break-Up Fee Tax Opinion 7.2 Change in Control Share Grants 2.3(b) Closing 1.3 Closing Date 1.3 Code Recital E Commitment 4.2(q) Confidentiality Agreement 5.2 Contribution Agreement Recital D Denver Lease 5.22 Department 1.4 Effective Time 1.4 employee benefit plan 2.11(b) Encumbrances 2.8(a) EQR Preamble EQR Common Shares 1.9 EQR Disclosure Letter Article 3 EQR Employee Share Plans 3.2(a) EQR Financial Statement Date 3.7 EQR Material Adverse Change 3.7 EQR Material Adverse Effect 3.1 EQR Options 3.2(a) EQR Preferred Shares 3.2(a) EQR Properties 3.9 EQR SEC Documents 3.6 EQR Series A Preferred Shares 3.2(a) EQR Series B Preferred Shares 3.2(a) EQR Series C Preferred Shares 3.2(a) EQR Shareholder Approvals 3.5(a) EQR Shareholders Meeting 5.1(b) EQR Subsidiaries 3.1
v
DEFINED TERM SECTION - ------------- ------- EQR Units 3.2(c) ERISA 2.11(b) ERP Operating Partnership 1.2 ERP Operating Partnership Agreement 3.2(a) Exchange Act 2.4(b) Exchange Ratio 1.9 GAAP 2.5 Governmental Entity 2.4(b) Hazardous Materials 2.9 include, includes or including 8.3 Indebtedness 2.7(b) Indemnified Parties 5.11(a) IRS 1.11 Laws 2.4(b) Liens 2.2(b) Management Corp. 5.15 Merger Recital B New York Stock Exchange Composite Transactions 1.9 Newco Recital D Newco Stock Purchase Agreement 1.2(b) NYSE 2.4(b) 1940 Act 2.23 Palomino Agreement 1.2(c) Palomino Credit Enhancement Agreement 1.2(d) Palomino Development Agreements 4.2(i) Payor 7.2 Person 2.2(a) Property Restrictions 2.8(a) Proxy Statement 2.4(b) Qualifying Income 7.2 Recipient 7.2 Registration Statement 5.1(a) REIT 2.13(b) REIT Requirements 7.2 Restricted Share Grants 2.3(b) Retention Program 5.10(c) Revolver Rate 4.2 Retention Program Letter 5.10(c) Schedule 5.10 Employees 5.10(c) SEC 2.4(b) Securities Act 2.4(b)
vi
DEFINED TERM SECTION - ------------- ------- Share Loan and Acquisition Agreements 2.3(b) Shareholder Approvals 3.5(a) Sonterra Right of First Offer Agreement 1.2(e) Spin-Off 1.2 Springing Shares 2.3(b) Subsidiary 2.2(a) Superior Acquisition Proposal 4.1 Surviving Trust 1.1 Takeover Statute 2.19 Taxes 2.13(a) Third Party Management Agreements 2.17(d) Title 8 1.1 to the Knowledge of EQR 3.21 to the Knowledge of Wellsford 2.25 Transaction Costs Agreement 5.4 Transfer and Gains Taxes 5.9 Wellsford Preamble Wellsford Benefit Plans 2.11(a) Wellsford Common Shares 1.2(f) Wellsford Disclosure Letter Article 2 Wellsford Financial Statement Date 2.6 Wellsford Material Adverse Change 2.6 Wellsford Material Adverse Effect 2.1 Wellsford Options 2.3(b) Wellsford Properties 2.8(a) Wellsford SEC Documents 2.5 Wellsford Series A Preferred Shares 2.3(a) Wellsford Series B Preferred Shares 2.3(a) Wellsford Shareholder Approvals 2.4(a) Wellsford Shareholder Meeting 5.1(c) Wellsford Subsidiaries 2.2 WPHC 1.10 WPHC Non-Voting Shares 5.24 WPHC Voting Shares 5.24
vii AGREEMENT AND PLAN OF MERGER ---------------------------- THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of January 16, 1997 by and between EQUITY RESIDENTIAL PROPERTIES TRUST, a Maryland real estate investment trust ("EQR"), and WELLSFORD RESIDENTIAL PROPERTY TRUST, a Maryland real estate investment trust ("Wellsford"). R E C I T A L S: --------------- A. The Boards of Trustees of EQR and Wellsford deem it advisable and in the best interests of their respective shareholders, subject to the conditions and other provisions contained herein, that EQR acquire the assets and business of Wellsford and operate the business under the name "Equity Residential Properties Trust." B. The acquisition of the assets and business of Wellsford shall be effected by the merger of EQR and Wellsford (the "Merger"). C. Upon the terms and conditions set forth herein, EQR and Wellsford shall execute Articles of Merger in substantially the form attached hereto as Exhibit "A" (the "Articles of Merger") and shall file such articles in accordance with Maryland law to effectuate the Merger. D. Immediately prior to the Merger, it is contemplated that Wellsford shall contribute certain of its assets to Wellsford Real Properties, Inc., a Maryland corporation ("Newco"), and that Newco shall assume certain obligations of Wellsford, all as provided in the Contribution and Distribution Agreement in substantially the form attached hereto as Exhibit "B" (the "Contribution Agreement"). E. Immediately prior to the Merger, it is contemplated that Wellsford shall distribute to its common shareholders all the outstanding shares of Newco owned by it in a distribution subject to income tax under the Internal Revenue Code of 1986, as amended (the "Code"). F. For federal income tax purposes, it is intended that the Merger shall qualify as a tax-free reorganization within the meaning of Section 368(a) of the Code. G. EQR and Wellsford have each received a fairness opinion relating to the transactions contemplated hereby as more fully described herein. H. EQR and Wellsford desire to make certain representations, warranties and agreements in connection with the Merger. NOW, THEREFORE, in consideration of the premises, and the mutual representations, warranties, covenants and agreements contained herein, the parties hereto hereby agree as follows: ARTICLE 1 --------- THE MERGER ---------- 1.1 THE MERGER. Upon the terms and subject to the conditions of this Agreement, and in accordance with Title 8 of the Corporations and Associations Article of the Annotated Code of Maryland, as amended ("Title 8"), EQR shall be merged with and into Wellsford, with Wellsford as the surviving real estate investment trust (the "Surviving Trust"). 1.2 NEWCO TRANSACTIONS. Wellsford, on January 8, 1997, formed Newco. Immediately prior to the time of effectiveness of the Merger: (a) Wellsford shall, and shall cause Newco to, execute and deliver the Contribution Agreement and consummate the transactions contemplated thereby; (b) EQR will cause ERP Operating Limited Partnership, an Illinois limited partnership of which EQR is the sole general partner (the "ERP Operating Partnership"), to execute and deliver, and Wellsford shall cause Newco to execute and deliver, the Common Stock and Preferred Stock Purchase Agreement in substantially the form annexed hereto as Exhibit "C" (the "Newco Stock Purchase Agreement"); (c) EQR will cause ERP Operating Partnership to execute and deliver, and Wellsford shall cause Newco to execute and deliver, the Agreement Regarding Palomino Park in substantially the form annexed hereto as Exhibit "D" (the "Palomino Agreement"); (d) EQR will cause ERP Operating Partnership to execute and deliver, and Wellsford shall cause Newco to execute and deliver, the Credit Enhancement Agreement in substantially the form annexed hereto as Exhibit "E" (the "Palomino Credit Enhancement Agreement"); (e) EQR will cause ERP Operating Partnership to execute and deliver, and Wellsford shall cause Newco to execute and deliver, the Sonterra Right of First Offer Agreement in substantially the form annexed hereto as Exhibit "F" (the "Sonterra Right of First Offer Agreement"); and (f) Wellsford will distribute to its common shareholders, as a distribution taxable under Code Section 301, all the outstanding shares of Newco owned by Wellsford 2 as further described in the Contribution Agreement, so that each holder of common shares of beneficial interest of Wellsford, $0.01 par value per share ("Wellsford Common Shares"), receives one common share of Newco for each Wellsford Common Share held by such holder (such transactions being referred to collectively as the "Spin-Off"). Immediately after the Effective Time (as defined below), the transactions contemplated by the Newco Stock Purchase Agreement, the Palomino Agreement and the Palomino Credit Enhancement Agreement which are to occur on the Closing Date (as defined below) shall be consummated. 1.3 CLOSING. The closing of the Merger ("Closing") will take place at 10:00 a.m. on the date to be specified by the parties, which (subject to satisfaction or waiver of the conditions set forth in Article 6) shall be no later than the third business day after satisfaction or waiver of the conditions set forth in Section 6.1(a) (the "Closing Date"), at the offices of Rudnick & Wolfe, 203 North LaSalle Street, Chicago, Illinois 60601, unless another date or place is agreed to in writing by the parties. 1.4 EFFECTIVE TIME. As soon as practicable following the satisfaction or waiver of the conditions set forth in Article 6, the parties shall execute and file the Articles of Merger, executed in accordance with Title 8, with the State Department of Assessments and Taxation of Maryland (the "Department"), and shall make all other filings and recordings required under Title 8. The Merger shall become effective ("Effective Time") at such time as the Department accepts the Articles of Merger for record, or at such time as EQR and Wellsford shall agree should be specified in the Articles of Merger (not to exceed thirty (30) days after the Articles of Merger are accepted for record by the Department). Unless otherwise agreed, the parties shall cause the Effective Time to occur on the Closing Date. 1.5 AMENDMENTS AND RESTATEMENTS OF WELLSFORD'S DECLARATION OF TRUST. The Amended and Restated Declaration of Trust, as amended, of Wellsford shall be amended and restated at the Effective Time as provided in the Articles of Merger. 1.6 AMENDMENT AND RESTATEMENT OF WELLSFORD'S BYLAWS. From and after the Effective Time, the Bylaws of the Surviving Trust shall be the Bylaws of EQR as in effect immediately prior to the Merger, until further amended or restated in accordance therewith and Title 8. 1.7 TRUSTEES. The trustees of the Surviving Trust shall be the persons named in the Articles of Merger, each of whom shall serve for the term specified in the Articles of Merger. 1.8 EFFECT ON SHARES OF BENEFICIAL INTEREST AND OPTIONS. The effect of the Merger on the shares of beneficial interest, options to purchase shares of beneficial interest and restricted share awards of each of EQR and Wellsford shall be as provided in the Articles of Merger. 3 1.9 EXCHANGE RATIO. The exchange ratio to be set forth in the Articles of Merger ("Exchange Ratio") shall be 0.625 of a common share of beneficial interest of the Surviving Trust, $0.01 par value per share, for each Wellsford Common Share outstanding immediately prior to the Effective Time. In the event that the Average Closing Price (as defined below) is less than $40.00 per share, the Exchange Ratio shall be the rate per share specified in Exhibit "G" hereto. For the purposes of this Agreement, "Average Closing Price" shall mean the average of the daily closing prices of a common share of beneficial interest of EQR, $0.01 par value per share ("EQR Common Share"), reported as "New York Stock Exchange Composite Transactions" by The Wall Street Journal (Midwest Edition) during the consecutive twenty (20) trading day period ending at the end of the fifth (5th) trading day prior to the date which the proxy statements required by Section 5.1 hereof are dated. 1.10 COMPLETION OF CONTRIBUTION AGREEMENT. At the time the Contribution Agreement is executed, the parties shall complete the blank presently in the Contribution Agreement for the amount of Contribution Funds (as defined in the Contribution Agreement). The amount of the Contribution Funds shall be $13,355,600, adjusted as follows: (a) such amount shall be decreased by: (i) 80% of any cash (excluding loans) invested by Wellsford or any of its Subsidiaries in Wellsford Park Highlands Corp., a Colorado corporation ("WPHC"), and its Subsidiaries after September 30, 1996 and prior to the Spin-Off; (ii) 100% of any accrued interest on the Promissory Note dated June 28, 1996 made by Specified Properties VIII, L.P., a Texas limited partnership, to Wellsford remaining unpaid as of the Closing Date; and (iii) $2.50 for each share of Newco distributed to the shareholders of Wellsford in the Spin-Off less than 17,104,359 shares; and (b) such amount shall be increased by: (i) 80% of the accrued interest on the Bonds (as defined in the Credit Enhancement Agreement) which remains unpaid as of the Closing Date; (ii) $2.50 for each share of Newco distributed to the shareholders of Wellsford in the Spin-Off in excess of 17,104,359 shares; and 4 (iii) the amount, if any, provided for in Section 1(b) of the Transaction Costs Agreement (as defined in Section 5.4). 1.11 REVERSAL OF DIRECTION OF MERGER. In order to allow counsel to opine that the Merger, for federal income tax purposes, will qualify as a tax-free reorganization within the meaning of the Code, the parties have agreed that EQR shall be merged into Wellsford and that Wellsford shall be the Surviving Trust. The parties will jointly file a request for a private letter ruling with the Internal Revenue Service ("IRS"), as soon as practicable after the date hereof, to obtain a private letter ruling from the IRS to the effect that a merger of Wellsford into EQR with EQR being the Surviving Trust will not adversely affect the tax-free nature of the reorganization. If such a private letter ruling is received or in the event the IRS publishes a revenue ruling or other published announcement (including the promulgation of a Treasury regulation) to the effect that, and counsel for the parties are reasonably willing to opine that, a merger of Wellsford into EQR with EQR being the Surviving Trust will not adversely affect the tax-free nature of the reorganization, the parties will amend this Agreement, the Articles of Merger and all other agreements as may be necessary or desirable solely for the purposes of providing for the merger of Wellsford into EQR with EQR being the Surviving Trust; provided, however, that such amendments shall not modify the substantive provisions or economic terms of this Agreement and the transactions contemplated hereby; and further provided that both the Merger and the merger of Wellsford into EQR with EQR being the Surviving Trust are submitted to and approved by the shareholders of EQR and Wellsford in the manner required by applicable law. Any such amendment may be made before or after the approval of the Merger by the respective shareholders of EQR and Wellsford. The costs and expenses of seeking and obtaining any private letter ruling as contemplated by this Section 1.11 shall be borne by EQR. Any conditions to the Merger set forth in Article 6 that would be satisfied but for the reversal of direction of the Merger shall be deemed satisfied. 1.12 CHANGE IN NUMBER OF SPIN-OFF SHARES. If for any reason Wellsford shall determine to distribute in the Spin-Off less than one common share of Newco for each outstanding Wellsford Common Share, the parties will amend this Agreement and all other agreements contemplated hereby solely for the purpose of appropriately adjusting all numbers and dollar amounts which were based on one common share of Newco being distributed in the Spin-Off for each outstanding Wellsford Common Share. 5 ARTICLE 2 --------- REPRESENTATIONS AND WARRANTIES OF WELLSFORD ------------------------------------------- Except as set forth in the letter of even date herewith signed by the Chairman of the Board or President of Wellsford in his capacity as such and delivered to EQR prior to the execution hereof (the "Wellsford Disclosure Letter"), Wellsford represents and warrants to EQR as follows: 2.1 ORGANIZATION, STANDING AND POWER OF WELLSFORD. Wellsford is a real estate investment trust duly organized and validly existing under the laws of Maryland and has the requisite power and authority to carry on its business as now being conducted. Wellsford is duly qualified or licensed to do business as a foreign trust and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed, individually or in the aggregate, would not have a material adverse effect on the business, properties, assets, financial condition or results of operations of Wellsford and the Wellsford Subsidiaries (as defined below), taken as a whole (a "Wellsford Material Adverse Effect"). Wellsford has delivered to EQR complete and correct copies of its Amended and Restated Declaration of Trust (including all Articles Supplementary thereto) and Amended and Restated Bylaws, in each case, as amended to the date of this Agreement. 2.2 WELLSFORD SUBSIDIARIES. (a) Schedule 2.2 to the Wellsford Disclosure Letter sets forth (i) each Subsidiary of Wellsford (the "Wellsford Subsidiaries"), (ii) the ownership interest therein of Wellsford, (iii) if not wholly-owned by Wellsford, the identity and ownership interest of other owners of such Wellsford Subsidiary, and (iv) each apartment community owned by such Subsidiary. As used in this Agreement, "Subsidiary" of any Person means any corporation, partnership, limited liability company, joint venture or other legal entity of which such Person (either directly or through or together with another Subsidiary of such Person) owns any of the capital stock or other equity interests of such corporation, partnership, limited liability company, joint venture or other legal entity. As used herein, "Person" means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity. (b) Except as set forth in Schedule 2.2 to the Wellsford Disclosure Letter, (i) all the outstanding shares of capital stock of each Wellsford Subsidiary that is a corporation have been validly issued and are (A) fully paid and nonassessable, (B) owned by Wellsford or by another Wellsford Subsidiary, and (C) owned free and clear of all pledges, claims, liens, charges, encumbrances and security interests of any kind or nature whatsoever (collectively, "Liens"), and (ii) all equity interests in each Wellsford Subsidiary that is a partnership, joint 6 venture, limited liability company or trust which are owned by Wellsford, by another Wellsford Subsidiary or by Wellsford and another Wellsford Subsidiary are owned free and clear of all Liens. Each Wellsford Subsidiary that is a corporation is duly incorporated and validly existing under the laws of its jurisdiction of incorporation and has the requisite corporate power and authority to carry on its business as now being conducted, and each Wellsford Subsidiary that is a partnership, limited liability company or trust is duly organized and validly existing under the laws of its jurisdiction of organization and has the requisite power and authority to carry on its business as now being conducted. Each Wellsford Subsidiary is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed, individually or in the aggregate, would not have a Wellsford Material Adverse Effect. Copies of the Articles of Incorporation, Bylaws, organization documents and partnership, joint venture and operating agreements of each Wellsford Subsidiary, as amended to the date of this Agreement, have been previously delivered or made available to EQR. 2.3 CAPITAL STRUCTURE. (a) The authorized shares of beneficial interest of Wellsford consist of 100,000,000 shares of beneficial interest, of which 4,600,000 are Series A Cumulative Convertible Preferred Shares of Beneficial Interest, $.01 par value per share ("Wellsford Series A Preferred Shares"), and 2,300,000 are Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, $.01 par value per share ("Wellsford Series B Preferred Shares"). On January 14, 1997, (i) 17,111,937 Wellsford Common Shares, 3,999,800 Wellsford Series A Preferred Shares and 2,300,000 Wellsford Series B Preferred Shares were issued and outstanding, (ii) 1,000,000 Wellsford Common Shares have been reserved for the Dividend Reinvestment and Share Purchase Plan of Wellsford, (iii) 979,325 Wellsford Common Shares were issuable upon exercise of outstanding options to purchase Wellsford Common Shares, (iv) 582,900 Wellsford Common Shares were reserved for issuance upon the exercise of options which may be granted under the 1992 Share Option Plan, (v) 750,000 Wellsford Common Shares were reserved for issuance under the Long-Term Management Incentive Plan of Wellsford, and (vi) a sufficient number of Wellsford Common Shares were reserved for issuance to permit the conversion of the then outstanding Wellsford Series A Preferred Shares. (b) Set forth in Schedule 2.3 of the Wellsford Disclosure Letter is a true and complete list of the following: (i) each qualified or nonqualified option to purchase Wellsford Common Shares granted under the 1992 Share Option Plan, Long-Term Management Incentive Plan, or any other formal or informal arrangement ("Wellsford Options"); (ii) each grant of Wellsford Common Shares to employees which are subject to any risk of forfeiture ("Restricted Share Grants"); (iii) any obligation of Wellsford to issue Wellsford Common Shares as a result of the transactions contemplated hereby ("Change in Control Share Grants"); and (iv) each loan made by Wellsford with respect to the purchase of Wellsford Common Shares which will be forgiven as a result of the transactions contemplated by this Agreement (the "Share Loan and 7 Acquisition Agreements"). The Restricted Share Grants are included in the number of outstanding Wellsford Common Shares set forth in Section 2.3(a). For each Wellsford Option held by the executive officers of Wellsford, Schedule 2.3 of the Wellsford Disclosure Letter sets forth the name of the grantee, the date of the grant, status of the option as qualified or nonqualified under Section 422 of the Code, the number of Wellsford Common Shares subject to such option, the number of shares subject to options that are currently exercisable, the exercise price per share, those options granting reload options, and the number of such shares subject to share appreciation rights. For each option to purchase Wellsford Common Shares held by employees of Wellsford or any of the Wellsford Subsidiaries who are not executive officers of Wellsford, Schedule 2.3 to the Wellsford Disclosure Letter sets forth the name of the grantee, the date of the grant, the number of Wellsford Common Shares subject to such option and the exercise price per share. For each Restricted Share Grant, Schedule 2.3 of the Wellsford Disclosure Letter sets forth the name of the grantee, the date of the grant and the number of Wellsford Common Shares granted. For each Change in Control Share Grant, Schedule 2.3 to the Wellsford Disclosure Letter sets forth the aggregate number of Wellsford Common Shares to be issued immediately prior to the Spin-Off and the Merger. For each Share Loan and Acquisition Agreement, Schedule 2.3 of the Wellsford Disclosure Letter sets forth the name of the borrower, the date of the loan, the aggregate principal amount of the loan, the number of shares originally pledged as security for each loan the number of shares that have been released from such pledge and the outstanding loan balance as of the date of the Wellsford Disclosure Letter. On the date of this Agreement, except as set forth in this Section 2.3 or Schedule 2.3 of the Wellsford Disclosure Letter, no shares of beneficial interest or other voting securities of Wellsford were issued, reserved for issuance, or outstanding. (c) All outstanding shares of beneficial interest of Wellsford are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights, except that the shareholders may be subject to further assessment with respect to certain claims for tort, contract, taxes, statutory liability and otherwise in some jurisdictions to the extent such claims are not satisfied by Wellsford. There are no bonds, debentures, notes or other indebtedness of Wellsford having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which shareholders of Wellsford may vote. (d) Except as set forth in this Section 2.3 or in Schedule 2.3 of the Wellsford Disclosure Letter, as of the date of this Agreement there are no outstanding securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which Wellsford or any Wellsford Subsidiary is a party or by which such entity is bound, obligating Wellsford or any Wellsford Subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of beneficial interest, voting securities or other ownership interests of Wellsford or any Wellsford Subsidiary or obligating Wellsford or any Wellsford Subsidiary to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking (other than to Wellsford or a Wellsford Subsidiary). 8 2.4 AUTHORITY; NONCONTRAVENTION; CONSENTS. (a) Wellsford has the requisite power and authority to enter into this Agreement and, subject to the requisite shareholder approval of the Merger (the "Wellsford Shareholder Approvals"), to consummate the transactions contemplated by this Agreement to which Wellsford is a party. The execution and delivery of this Agreement by Wellsford and the consummation by Wellsford of the transactions contemplated by this Agreement to which Wellsford is a party have been duly authorized by all necessary action on the part of Wellsford, subject to the Wellsford Shareholder Approvals. This Agreement has been duly executed and delivered by Wellsford and constitutes a valid and binding obligation of Wellsford, enforceable against Wellsford in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity. (b) Except as set forth in Schedule 2.4 to the Wellsford Disclosure Letter, the execution and delivery of this Agreement by Wellsford do not, and the consummation of the transactions contemplated by this Agreement to which Wellsford is a party and compliance by Wellsford with the provisions of this Agreement will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to loss of a material benefit under, or result in the creation of any Lien upon any of the properties or assets of Wellsford or any Wellsford Subsidiary under, (i) the Amended and Restated Declaration of Trust or the Amended and Restated Bylaws of Wellsford or the comparable charter or organizational documents or partnership or similar agreement (as the case may be) of any Wellsford Subsidiary, each as amended or supplemented to the date of this Agreement, (ii) any loan or credit agreement, note, bond, mortgage, indenture, reciprocal easement agreement, lease or other agreement, instrument, permit, concession, franchise or license applicable to Wellsford or any Wellsford Subsidiary or their respective properties or assets or (iii) subject to the governmental filings and other matters referred to in the following sentence, any judgment, order, decree, statute, law, ordinance, rule or regulation (collectively, "Laws") applicable to Wellsford or any Wellsford Subsidiary, or their respective properties or assets, other than, in the case of clause (ii) or (iii), any such conflicts, violations, defaults, rights, loss or Liens that individually or in the aggregate would not (x) have a Wellsford Material Adverse Effect or (y) prevent the consummation of the transactions contemplated by this Agreement. No consent, approval, order or authorization of, or registration, declaration or filing with, any federal, state or local government or any court, administrative or regulatory agency or commission or other governmental authority or agency, domestic or foreign (a "Governmental Entity"), is required by or with respect to Wellsford or any Wellsford Subsidiary in connection with the execution and delivery of this Agreement by Wellsford or the consummation by Wellsford of the transactions contemplated by this Agreement, except for (i) the filing with the Securities and Exchange Commission (the "SEC") of (x) a joint proxy statement relating to the approval by Wellsford's shareholders and EQR's shareholders of the transactions contemplated by this Agreement (as amended or supplemented from time to time, the "Proxy Statement"), (y) registration statements on appropriate forms under the Securities Act of 1933, as amended 9 (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (z) such reports under Section 13(a) of the Exchange Act as may be required in connection with this Agreement and the transactions contemplated by this Agreement, (ii) the filing of listing applications with the New York Stock Exchange Inc. ("NYSE") with respect to the shares of beneficial interest of the Surviving Trust to be issued in the Merger, (iii) the filing of the Articles of Merger with the Department and (iv) such other consents, approvals, orders, authorizations, registrations, declarations and filings (A) as are set forth in Schedule 2.4 to the Wellsford Disclosure Letter, (B) as may be required under (y) federal, state or local environmental laws, or (z) the "blue sky" laws of various states, to the extent applicable, or (C) which, if not obtained or made, would not prevent or delay in any material respect the consummation of any of the transactions contemplated by this Agreement or otherwise prevent Wellsford from performing its obligations under this Agreement in any material respect or have, individually or in the aggregate, a Wellsford Material Adverse Effect. (c) For purposes of determining compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, Wellsford confirms that the conduct of its business consists solely of investing in, owning and operating real estate for the benefit of its shareholders. 2.5 SEC DOCUMENTS; FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES. Wellsford has filed all required reports, schedules, forms, statements and other documents with the SEC since November 27, 1992 through the date hereof (the "Wellsford SEC Documents"). Schedule 2.5 of the Wellsford Disclosure Letter contains a complete list of all Wellsford SEC Documents filed by Wellsford with the SEC since January 1, 1996 and on or prior to the date of this Agreement. All of the Wellsford SEC Documents (other than preliminary material), as of their respective filing dates, complied in all material respects with all applicable requirements of the Securities Act and the Exchange Act and, in each case, the rules and regulations promulgated thereunder applicable to such Wellsford SEC Documents. None of the Wellsford SEC Documents at the time of filing contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except to the extent such statements have been modified or superseded by later Wellsford SEC Documents filed and publicly available prior to the date of this Agreement. The consolidated financial statements of Wellsford included in the Wellsford SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles ("GAAP") (except, in the case of unaudited statements, as permitted by the applicable rules and regulations of the SEC) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly presented, in accordance with the applicable requirements of GAAP and the applicable rules and regulations of the SEC, the consolidated financial position of Wellsford and the Wellsford Subsidiaries, taken as a whole, as of the dates thereof and the consolidated results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Wellsford 10 has no Subsidiaries which are not consolidated for accounting purposes. Except for liabilities and obligations set forth in the Wellsford SEC Documents or in Schedule 2.5 to the Wellsford Disclosure Letter, neither Wellsford nor any of the Wellsford Subsidiaries has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) required by GAAP to be set forth on a consolidated balance sheet of Wellsford or in the notes thereto and which, individually or in the aggregate, would have a Wellsford Material Adverse Effect. Management Corp. (as defined in Section 5.15) has assets of less than $1,000. On the date of this Agreement, Newco has no material assets. 2.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the Wellsford SEC Documents or the Wellsford Disclosure Letter, since the date of the most recent audited financial statements included in Wellsford SEC Documents (the "Wellsford Financial Statement Date") Wellsford and the Wellsford Subsidiaries have conducted their business only in the ordinary course (taking into account prior practices, including the acquisition of properties and issuance of securities) and there has not been (a) any material adverse change in the business, financial condition or results of operations of Wellsford and the Wellsford Subsidiaries taken as a whole (a "Wellsford Material Adverse Change"), nor has there been any occurrence or circumstance that with the passage of time would reasonably be expected to result in a Wellsford Material Adverse Change, (b) except for regular quarterly distributions (in the case of Wellsford) not in excess of $0.485 per Wellsford Common Share, $0.4375 per Wellsford Series A Preferred Share, and $0.603125 per Wellsford Series B Preferred Share, in each case with customary record and payment dates, any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to any of Wellsford's shares of beneficial interest, (c) any split, combination or reclassification of any of Wellsford's shares of beneficial interest or any issuance or the authorization of any issuance of any other securities in respect of, in lieu of or in substitution for, or giving the right to acquire by exchange or exercise, shares of its beneficial interest or any issuance of an ownership interest in, any Wellsford Subsidiary except as contemplated by this Agreement, (d) any damage, destruction or loss, whether or not covered by insurance, that has or would have a Wellsford Material Adverse Effect or (e) any change in accounting methods, principles or practices by Wellsford or any Wellsford Subsidiary materially affecting its assets, liabilities or business, except insofar as may have been disclosed in Wellsford SEC Documents or required by a change in GAAP or (f) any amendment of any employment, consulting, severance, retention or any other agreement between Wellsford and any officer or trustee of Wellsford. There are no distributions in arrears which have been scheduled for payment or unpaid distributions with respect to the Wellsford Series A Preferred Shares and Wellsford Series B Preferred Shares. 2.7 LITIGATION. Except as disclosed in the Wellsford SEC Documents or in Schedule 2.7 to the Wellsford Disclosure Letter, and other than personal injury and other routine tort litigation arising from the ordinary course of operations of Wellsford and the Wellsford Subsidiaries (a) which are covered by adequate insurance or (b) for which all material costs and liabilities arising therefrom are reimbursable pursuant to common area maintenance or similar agreements, there is no suit, action or proceeding pending or, to the Knowledge of Wellsford, 11 threatened in writing against or affecting Wellsford or any Wellsford Subsidiary that, individually or in the aggregate, could reasonably be expected to (i) have a Wellsford Material Adverse Effect or (ii) prevent the consummation of any of the transactions contemplated by this Agreement, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against Wellsford or any Wellsford Subsidiary having, or which, insofar as reasonably can be foreseen, in the future would have, any such effect. Notwithstanding the foregoing, Schedule 2.7 to the Wellsford Disclosure Letter sets forth each and every uninsured claim, equal employment opportunity claim and claim relating to sexual harassment and/or discrimination pending or, to the Knowledge of Wellsford, threatened as of the date hereof, in each case with a brief summary of such claim or threatened claim. 2.8 PROPERTIES. (a) Except as provided in Schedule 2.8 of the Wellsford Disclosure Letter, Wellsford or the Wellsford Subsidiary set forth on Schedule 2.2 of the Wellsford Disclosure Letter owns fee simple title to each of the real properties identified in Schedule 2.8 of the Wellsford Disclosure Letter (the "Wellsford Properties"), which are all of the real estate properties owned by them, in each case (except as provided below) free and clear of liens, mortgages or deeds of trust, claims against title, charges which are liens, security interests or other encumbrances on title ("Encumbrances"). Except as set forth in Schedule 2.2 or Schedule 2.8 of the Wellsford Disclosure Letter, no other Person has any ownership interest in any of the Wellsford Properties, and any such ownership interest so scheduled does not materially detract from the value of, or materially interfere with the present use of, any of the Wellsford Properties subject thereto or affected thereby. The Wellsford Properties are not subject to any rights of way, written agreements, laws, ordinances and regulations affecting building use or occupancy, or reservations of an interest in title (collectively, "Property Restrictions"), except for (i) Encumbrances and Property Restrictions set forth in the Wellsford Disclosure Letter, (ii) Property Restrictions imposed or promulgated by law or any governmental body or authority with respect to real property, including zoning regulations, provided they does not materially adversely affect the current use of any Wellsford Property, (iii) Encumbrances and Property Restrictions disclosed on existing title reports or existing surveys (in either case copies of which title reports and surveys have been delivered or made available to EQR and listed in the Wellsford Disclosure Letter), which Encumbrances and Property Restrictions, in any event, do not materially detract from the value of, or materially interfere with the present use of, any of the Wellsford Properties subject thereto or affected thereby, and (iv) mechanics', carriers', workmen's, repairmen's liens and other Encumbrances, Property Restrictions and other limitations of any kind, if any, which, individually or in the aggregate, do not materially detract from the value of or materially interfere with the present use of any of the Wellsford Properties subject thereto or affected thereby, and do not otherwise materially impair business operations conducted by Wellsford and the Wellsford Subsidiaries. Except as provided in Schedule 2.8 of the Wellsford Disclosure Letter, no portion of any of the Wellsford Properties is located in a flood zone area "V". 12 (b) Except as provided in Schedule 2.8 of the Wellsford Disclosure Letter, valid policies of title insurance have been issued insuring Wellsford's or the applicable Wellsford Subsidiaries' fee simple title to the Wellsford Properties in amounts at least equal to the purchase price thereof paid by Wellsford therefor, subject only to the matters disclosed above and on the Wellsford Disclosure Letter, and such policies are, at the date hereof, in full force and effect and no claim has been made against any such policy. (c) Except as provided in Schedule 2.8 of the Wellsford Disclosure Letter, Wellsford has no Knowledge (as defined in Section 2.25) (i) that, any certificate, permit or license from any governmental authority having jurisdiction over any of the Wellsford Properties or any agreement, easement or other right which is necessary to permit the lawful use and operation of the buildings and improvements on any of the Wellsford Properties or which is necessary to permit the lawful use and operation of all driveways, roads and other means of egress and ingress to and from any of the Wellsford Properties has not been obtained and is not in full force and effect, or of any pending threat of modification or cancellation of any of same; (ii) of any written notice of any violation of any federal, state or municipal law, ordinance, order, regulation or requirement materially and adversely affecting any of the Wellsford Properties issued by any governmental authority; (iii) of any material structural defects relating to any Wellsford Property which costs more than $100,000 to repair; (iv) of any Wellsford Property whose building systems are not in working order in any material respect and costs more than $100,000 to repair; (v) of any physical damage to any Wellsford Property in excess of $100,000 for which there is no insurance in effect covering the cost of the restoration; (vi) of any current renovation or uninsured restoration to any Wellsford Property the cost of which exceeds $100,000; or (vii) of items referred to in Section 2.8(c)(iii)-(vi) which aggregate for Wellsford and its Subsidiaries more than $5,000,000. (d) Neither Wellsford nor any of the Wellsford Subsidiaries has received any written notice to the effect that (i) any condemnation or rezoning proceedings are pending or threatened with respect to any of the Wellsford Properties or (ii) any zoning, building or similar law, code, ordinance, order or regulation is or will be violated by the continued maintenance, operation or use of any buildings or other improvements on any of the Wellsford Properties or by the continued maintenance, operation or use of the parking areas. All work to be performed, payments to be made and actions to be taken by Wellsford or the Wellsford Subsidiaries prior to the date hereof pursuant to any agreement entered into with a governmental body or authority in connection with a site approval, zoning reclassification or other similar action relating to any Wellsford Properties (e.g., Local Improvement District, Road Improvement District, Environmental Mitigation) has been performed, paid or taken, as the case may be, and Wellsford has no Knowledge of any planned or proposed work, payments or actions that may be required after the date hereof pursuant to such agreements. (e) Except as set forth in Schedule 2.8 of the Wellsford Disclosure Letter, all of the Wellsford Properties are managed by Wellsford or a wholly- owned Wellsford Subsidiary. 13 2.9 ENVIRONMENTAL MATTERS. None of Wellsford, any of the Wellsford Subsidiaries or, to Wellsford's Knowledge, any other Person has caused or permitted (a) the unlawful presence of any hazardous substances, hazardous materials, toxic substances or waste materials (collectively, "Hazardous Materials") on any of the Wellsford Properties, or (b) any unlawful spills, releases, discharges or disposal of Hazardous Materials to have occurred or be presently occurring on or from the Wellsford Properties as a result of any construction on or operation and use of such properties, which presence or occurrence would, individually or in the aggregate, have a Wellsford Material Adverse Effect; and in connection with the construction on or operation and use of the Wellsford Properties, Wellsford and the Wellsford Subsidiaries have not failed to comply in any material respect with all applicable local, state and federal environmental laws, regulations, ordinances and administrative and judicial orders relating to the generation, recycling, reuse, sale, storage, handling, transport and disposal of any Hazardous Materials, except to the extent such failure to comply, individually or in the aggregate, would not have a Wellsford Material Adverse Effect. 2.10 RELATED PARTY TRANSACTIONS. Set forth in Schedule 2.10 of the Wellsford Disclosure Letter is a list of all arrangements, agreements and contracts entered into by Wellsford or any of the Wellsford Subsidiaries with (a) any consultant, (b) any person who is an officer, trustee, director or Affiliate (as defined below) of Wellsford or any of the Wellsford Subsidiaries, any relative of any of the foregoing or any entity of which any of the foregoing is an Affiliate or (c) any person who acquired Wellsford Common Shares in a private placement, except those of a type available to Wellsford employees generally. Such documents, copies of all of which have previously been delivered or made available to EQR, are listed in Schedule 2.10 of the Wellsford Disclosure Letter. As used in this Agreement, the term "Affiliate" shall have the same meaning as such term is defined in Rule 405 promulgated under the Securities Act. 2.11 ABSENCE OF CHANGES IN BENEFIT PLANS; ERISA COMPLIANCE. (a) Except as disclosed in the Wellsford SEC Documents or in Schedule 2.11 to the Wellsford Disclosure Letter and except as contemplated by this Agreement, since the date of the most recent audited financial statements included in the Wellsford SEC Documents, there has not been any adoption or amendment in any respect by Wellsford or any Wellsford Subsidiary of any bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, retirement, vacation, severance, disability, death benefit, hospitalization, medical or other employee benefit plan, arrangement or understanding (whether or not legally binding) providing benefits to any current or former employee, officer or director of Wellsford, any Wellsford Subsidiary, or any person Affiliated with Wellsford under Section 414 (b), (c), (m) or (o) of the Code (collectively, "Wellsford Benefit Plans"). 14 (b) Except as described in the Wellsford SEC Documents or in Schedule 2.11 to the Wellsford Disclosure Letter, (i) all Wellsford Benefit Plans of Wellsford and the Wellsford Subsidiaries, including any such plan that is an "employee benefit plan" as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), are in compliance in all material respects with all applicable requirements of law, including but not limited to ERISA and the Code, and (ii) neither Wellsford nor any Wellsford Subsidiary has any material liabilities or obligations with respect to any such Wellsford Benefit Plan, whether accrued, contingent or otherwise. Except as set forth in Schedule 2.11 to the Wellsford Disclosure Letter, the execution of, and performance of the transactions contemplated in, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Wellsford Benefit Plan, policy, arrangement or agreement or any trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any employee, trustee or director. The only severance agreements or severance policies applicable to employees of Wellsford or any of the Wellsford Subsidiaries are the agreements and policies specifically referred to in Schedule 2.11 to the Wellsford Disclosure Letter and the severance program referred to in Section 5.10(c). 2.12 EMPLOYEE POLICIES. Schedule 2.12 of the Wellsford Disclosure Letter lists the employee handbooks of Wellsford and each of the Wellsford Subsidiaries currently in effect. A copy of each such employee handbook has previously been made available to EQR. Except as set forth in Schedule 2.12 of the Wellsford Disclosure Letter, such handbooks fairly and accurately summarize all material employee policies, vacation policies and payroll practices of Wellsford and the Wellsford Subsidiaries. 2.13 TAXES. (a) Each of Wellsford and the Wellsford Subsidiaries has filed all tax returns and reports required to be filed by it (after giving effect to any filing extension properly granted by a Governmental Entity having authority to do so) and has paid (or Wellsford has paid on its behalf) all Taxes (as defined below) shown on such returns and reports as required to be paid by it except (i) as set forth in Schedule 2.13 of the Wellsford Disclosure Letter, or (ii) real estate taxes that are being contested in good faith by appropriate proceedings and for which Wellsford or the applicable Wellsford Subsidiary shall have set aside on its books adequate reserves. The most recent audited financial statements contained in the Wellsford SEC Documents reflect an adequate reserve for all material Taxes payable by Wellsford and the Wellsford Subsidiaries for all taxable periods and portions thereof through the date of such financial statements. Since the Wellsford Financial Statement Date, Wellsford has incurred no liability for taxes under Sections 857(b), 860(c) or 4981 of the Code, including without limitation any tax arising from a prohibited transaction described in Section 857(b)(6) of the Code, and neither Wellsford nor any Wellsford Subsidiary has incurred any liability for taxes other than in the ordinary course of business. No event has occurred, and no condition or circumstance exists, which presents a material risk that any material Tax described in the preceding sentence will be imposed upon 15 Wellsford. To the Knowledge of Wellsford, no deficiencies for any Taxes have been proposed, asserted or assessed against Wellsford or any of the Wellsford Subsidiaries, and no requests for waivers of the time to assess any such Taxes are pending. As used in this Agreement, "Taxes" shall include all federal, state, local and foreign income, property, sales, franchise, employment, excise and other taxes, tariffs or governmental charges of any nature whatsoever, together with penalties, interest or additions to Tax with respect thereto. (b) Wellsford (i) for all taxable years commencing with 1993 through the most recent December 31, has been subject to taxation as a real estate investment trust (a "REIT") within the meaning of Section 856 of the Code and has satisfied all requirements to qualify as a REIT for such years, (ii) has operated, and intends to continue to operate, in such a manner as to qualify as a REIT for the taxable year ending December 31, 1997, and (iii) has not taken or omitted to take any action which would reasonably be expected to (A) result in any rents paid by the tenants of the Properties to be excluded from the definition of "rents from real property" under Section 856(d)(2)(C) of the Code, or (B) otherwise result in a challenge to its status as a REIT, and to Wellsford's Knowledge, no such challenge is pending or threatened. Each Wellsford Subsidiary which is a partnership, joint venture or limited liability company (i) has been since its formation and continues to be treated for federal income tax purposes as a partnership and not as a corporation or an association taxable as a corporation, and (ii) has not since its formation owned any assets (including, without limitation, securities) that would cause Wellsford to violate Section 856(b)(5) of the Code. Each Wellsford Subsidiary which is a corporation has been since its formation a qualified REIT subsidiary under Section 856(i) of the Code. 2.14 NO PAYMENTS TO EMPLOYEES, OFFICERS, TRUSTEES OR DIRECTORS. Set forth in Exhibit "J" to this Agreement (and the Exhibits referenced therein) and Schedule 2.3 of the Wellsford Disclosure Letter is a true and complete list of all cash and non-cash payments which will become payable to each employee, officer, trustee or director of Wellsford or any Wellsford Subsidiary as a result of the Spin-Off and Merger. Except as described in Exhibit "J" to this Agreement (and the Exhibits referenced therein) and in Schedule 2.3 to the Wellsford Disclosure Letter, or as otherwise provided for in this Agreement, there is no employment or severance contract, or other agreement requiring payments, cancellation of indebtedness or other obligation to be made on a change of control or otherwise as a result of the consummation of any of the transactions contemplated by this Agreement, with respect to any employee, officer, trustee or director of Wellsford or any Wellsford Subsidiary. 2.15 BROKERS; SCHEDULE OF FEES AND EXPENSES. No broker, investment banker, financial advisor or other person, other than Merrill Lynch & Co. and William Cockrum, the fees and expenses of which have previously been disclosed to EQR, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of Wellsford or any Wellsford Subsidiary. 16 2.16 COMPLIANCE WITH LAWS. Except as disclosed in the Wellsford SEC Documents, neither Wellsford nor any of the Wellsford Subsidiaries has violated or failed to comply with any statute, law, ordinance, regulation, rule, judgment, decree or order of any Governmental Entity applicable to its business, properties or operations, except to the extent that such violation or failure would not have a Wellsford Material Adverse Effect. 2.17 CONTRACTS; DEBT INSTRUMENTS. (a) Neither Wellsford nor any Wellsford Subsidiary has received a written notice that Wellsford or any Wellsford Subsidiary is in violation of or in default under (nor to the Knowledge of Wellsford does there exist any condition which upon the passage of time or the giving of notice or both would cause such a violation of or default under) any material loan or credit agreement, note, bond, mortgage, indenture, lease, permit, concession, franchise, license or any other material contract, agreement, arrangement or understanding, to which it is a party or by which it or any of its properties or assets is bound, except as set forth in Schedule 2.17 to the Wellsford Disclosure Letter, nor to the Knowledge of Wellsford does such a violation or default exist, except to the extent that such violation or default, individually or in the aggregate, would not have a Wellsford Material Adverse Effect. (b) Except for any of the following expressly identified in Wellsford SEC Documents, Schedule 2.17 to the Wellsford Disclosure Letter sets forth a list of each loan or credit agreement, note, bond, mortgage, indenture and any other agreement and instrument pursuant to which any indebtedness of Wellsford or any of Wellsford Subsidiaries, other than indebtedness payable to Wellsford or a Wellsford Subsidiary, in an aggregate principal amount in excess of $250,000 per item is outstanding or may be incurred. For purposes of this Section 2.17, "Indebtedness" shall mean, with respect to any Person, without duplication, (A) all indebtedness of such person for borrowed money, whether secured or unsecured, (B) all obligations of such person under conditional sale or other title retention agreements relating to property purchased by such person, (C) all capitalized lease obligations of such person, (D) all obligations of such person under interest rate cap, swap, collar or similar transaction or currency hedging transactions (valued at the termination value thereof) and (E) all guarantees of such person of any such indebtedness of any other person. (c) To the extent not set forth in response to the requirements of Paragraph 2.17(b), Schedule 2.17 to the Wellsford Disclosure Letter sets forth each interest rate cap, interest rate collar, interest rate swap, currency hedging transaction, and any other agreement relating to a similar transaction to which Wellsford or any Wellsford Subsidiary is a party or an obligor with respect thereto. (d) Neither Wellsford nor any of the Wellsford Subsidiaries is a party to any agreement relating to the management of any of the Wellsford Properties by any Person other than a wholly-owned Wellsford Subsidiary, except the agreements described in Schedule 2.17 to the Wellsford Disclosure Letter (the "Third Party Management Agreements"). True and 17 complete copies of the Third Party Management Agreements have previously been furnished to EQR. 2.18 OPINION OF FINANCIAL ADVISOR. Wellsford has received the opinion of Merrill Lynch & Co., dated January 16, 1997, satisfactory to Wellsford, a signed copy of which has been provided to EQR, to the effect that the proposed consideration to be received by the holders of common shares of beneficial interest of Wellsford pursuant to the Merger and Spin-Off is fair to such holders from a financial point of view. 2.19 STATE TAKEOVER STATUTES. Wellsford has taken all action necessary to exempt the transactions contemplated by this Agreement between EQR and Wellsford and its Affiliates from the operation of any "fair price," "moratorium," "control share acquisition" or any other anti-takeover statute or similar statute enacted under the state or federal laws of the United States or similar statute or regulation (a "Takeover Statute"). 2.20 REGISTRATION STATEMENT. The information relating to Wellsford and the Wellsford Subsidiaries included in the Registration Statement (as defined in Section 5.1) will not, as of the effective date of the Registration Statement, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 2.21 DEVELOPMENT PROPERTIES. Schedule 2.21 of the Wellsford Disclosure Letter lists all agreements entered into by Wellsford or any of the Wellsford Subsidiaries relating to the development or construction of, or additions or expansions to, any real properties which are currently in effect and under which Wellsford or any of the Wellsford Subsidiaries currently has, or expects to incur, an obligation in excess of $250,000. True and correct copies of such agreements have previously been delivered or made available to EQR. 2.22 EQR SHARES OF BENEFICIAL INTEREST. Neither Wellsford nor any of Wellsford Subsidiaries owns any shares of beneficial interest of EQR or other securities convertible into shares of beneficial interest of EQR. 2.23 INVESTMENT COMPANY ACT OF 1940. Neither Wellsford nor any of Wellsford Subsidiaries is, or at the Effective Time will be, required to be registered under the Investment Company Act of 1940, as amended (the "1940 Act"). 2.24 INTENTIONALLY OMITTED. 2.25 DEFINITION OF KNOWLEDGE OF WELLSFORD. As used in this Agreement, the phrase "to the Knowledge of Wellsford" (or words of similar import) means the knowledge of those individuals identified in Schedule 2.25 of the Wellsford Disclosure Letter. 18 ARTICLE 3 --------- REPRESENTATIONS AND WARRANTIES OF EQR ------------------------------------- Except as set forth in the letter of even date herewith signed by the President of EQR and delivered to Wellsford prior to the execution hereof (the "EQR Disclosure Letter"), EQR represents and warrants to Wellsford as follows: 3.1 ORGANIZATION, STANDING AND POWER OF EQR. EQR is a real estate investment trust duly organized and validly existing under the laws of Maryland and has the requisite power and authority to carry on its business as now being conducted. EQR is duly qualified or licensed to do business as a foreign trust and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed, individually or in the aggregate, would not have a material adverse effect on the business, properties, assets, financial condition or results of operations of EQR and the Subsidiaries of EQR ("EQR Subsidiaries"), taken as a whole ("EQR Material Adverse Effect"). EQR has delivered to Wellsford complete and correct copies of its Amended and Restated Declaration of Trust and Amended and Restated Bylaws as amended or supplemented to the date of this Agreement. 3.2 CAPITAL STRUCTURE. (a) The authorized shares of beneficial interest of EQR consist of 100,000,000 EQR Common Shares, and 10,000,000 preferred shares of beneficial interest ("EQR Preferred Shares"), of which 6,120,000 EQR Preferred Shares have been designated as 9-3/8% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share (the "EQR Series A Preferred Shares"), 500,000 EQR Preferred Shares have been designated as 9-1/8% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share, that are represented by 5,000,000 depository shares (the "EQR Series B Preferred Shares"), and 460,000 EQR Preferred Shares have been designated as 9-1/8% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest, $0.01 par value per share, that are represented by 4,600,000 depository shares (the "EQR Series C Preferred Shares"). As of January 14, 1997, (a) 51,155,813 EQR Common Shares, 6,120,000 EQR Series A Preferred Shares, 500,000 EQR Series B Preferred Shares (represented by 5,000,000 depositary shares) and 460,000 EQR Series C Preferred Shares (represented by 4,600,000 depositary shares) were outstanding, (b) 960,542 EQR Common Shares were available for issuance under EQR's 1996 Non-Qualified Employee Share Purchase Plan (the "EQR Employee Share Plans"), (c) 2,328,715 EQR Common Shares were issuable upon exercise of outstanding share options (the "EQR Options") to purchase EQR Common Shares, and 975,353 EQR Common Shares were available for grant, under EQR's Second Amended and Restated 1993 Share Option and Share Award Plan (the "Employee Share Award and Option Plan"), (d) 21,541 EQR Common Shares are restricted 19 and subject to forfeiture, and (e) 7,857,933 EQR Common Shares were reserved for issuance upon exchange of EQR Units (as defined below) for EQR Common Shares pursuant to the Fourth Amended and Restated Agreement of Limited Partnership (the "ERP Operating Partnership Agreement") of the ERP Operating Partnership. On January 14, 1997, except as set forth in this Section 3.2, no shares of beneficial interest or other voting securities of EQR were issued, reserved for issuance or outstanding. (b) All outstanding shares of beneficial interest of EQR are duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights, except that the shareholders may be subject to further assessment with respect to certain claims for tort, contract, taxes, statutory liability and otherwise in some jurisdictions to the extent such claims are not satisfied by EQR. There are no bonds, debentures, notes or other indebtedness of EQR having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which shareholders of EQR may vote. (c) Except (i) for the EQR Options, (ii) for the units ("EQR Units") of partnership interest held by partners in the ERP Operating Partnership (which, subject to certain restrictions, may be exchanged by the holders thereof for either EQR Common Shares on a one-for-one basis or, at EQR's option, cash), as are disclosed in Schedule 3.2 to the EQR Disclosure Letter or (iii) as set forth in Schedule 3.2 to the EQR Disclosure Letter, as of the date of this Agreement there are no outstanding securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind to which EQR or any EQR Subsidiary is a party or by which such entity is bound, obligating EQR or any EQR Subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of beneficial interest, voting securities or other ownership interests of EQR or of any EQR Subsidiary or obligating EQR or any EQR Subsidiary to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking (other than to EQR or an EQR Subsidiary). Except as set forth on Schedule 3.2 to the EQR Disclosure Letter or as required under the ERP Operating Partnership Agreement, there are no outstanding contractual obligations of EQR or any EQR Subsidiary to repurchase, redeem or otherwise acquire any shares of beneficial interest of EQR or any capital stock, voting securities, or other ownership interests in any EQR Subsidiary or make any material investment (in the form of a loan, capital contribution or otherwise) in any person (other than an EQR Subsidiary). (d) EQR owns all of its partnership interests in ERP Operating Partnership free and clear of all Liens. 3.3 ORGANIZATION, STANDING AND POWER OF ERP OPERATING PARTNERSHIP. ERP Operating Partnership is a limited partnership duly organized and validly existing under the laws of Illinois and has the requisite power and authority to carry on its business as now being conducted. ERP Operating Partnership is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions 20 where the failure to be so qualified or licensed, individually or in the aggregate, would not have an EQR Material Adverse Effect. EQR has delivered to Wellsford complete and correct copies of its Fourth Amended and Restated Agreement of Limited Partnership as amended or supplemented to the date of this Agreement. 3.4 CAPITAL STRUCTURE OF ERP OPERATING PARTNERSHIP. As of January 14, 1997, the number of outstanding units of partnership interest in ERP Operating Partnership consists of (a) 51,155,813 units of general partnership interest, (b) 7,857,933 units of limited partnership interest, (c) 6,120,000 9-3/8% Series A Cumulative Redeemable Preference Units, (d) 500,000 9-1/8% Series B Cumulative Redeemable Preference Units, and (e) 460,000 9-1/8% Series C Cumulative Redeemable Preference Units. Except for the units of limited partnership interest, all of the units of partnership interest in ERP Operating Partnership are owned by EQR free and clear of all Liens. 3.5 AUTHORITY; NONCONTRAVENTION; CONSENTS. (a) EQR has the requisite power and authority to enter into this Agreement, and subject to the requisite shareholder approval of the Merger (the "EQR Shareholder Approvals" and, together with the Wellsford Shareholder Approvals, the "Shareholder Approvals") to consummate the transactions contemplated by this Agreement to which EQR is a party. The execution and delivery of this Agreement by EQR and the consummation by EQR of the transactions contemplated by this Agreement to which EQR is a party have been duly authorized by all necessary action on the part of EQR, subject to the EQR Shareholder Approvals. This Agreement has been duly executed and delivered by EQR and constitutes a valid and binding obligation of EQR, enforceable against EQR in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity. (b) Except as set forth in Schedule 3.5 to the EQR Disclosure Letter, the execution and delivery of this Agreement by EQR do not, and the consummation of the transactions contemplated by this Agreement to which EQR is a party and compliance by EQR with the provisions of this Agreement will not, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to loss of a material benefit under, or result in the creation of any Lien upon any of the properties or assets of EQR or any EQR Subsidiary under, (i) the Amended and Restated Declaration of Trust or Amended and Restated Bylaws of EQR or the comparable charter or organizational documents or partnership or similar agreement (as the case may be) of any other EQR Subsidiary, each as amended or supplemented to the date of this Agreement, (ii) any loan or credit agreement, note, bond, mortgage, indenture, reciprocal easement agreement, lease or other agreement, instrument, permit, concession, franchise or license applicable to EQR or any EQR Subsidiary or their respective properties or assets or (iii) subject to the governmental filings and other matters referred to in the following sentence, any Laws applicable to EQR or any EQR 21 Subsidiary or their respective properties or assets, other than, in the case of clause (ii) or (iii), any such conflicts, violations, defaults, rights, loss or Liens that individually or in the aggregate would not (x) have an EQR Material Adverse Effect or (y) prevent the consummation of the transactions contemplated by this Agreement. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to EQR or any EQR Subsidiary in connection with the execution and delivery of this Agreement or the consummation by EQR of any of the transactions contemplated by this Agreement, except for (i) the filing with the SEC of (x) the Proxy Statement and (y) such reports under Section 13 (a) of the Exchange Act as may be required in connection with this Agreement and the transactions contemplated by this Agreement, (ii) the filing of the Articles of Merger with the Department, (iii) such filings as may be required in connection with the payment of any transfer and gains taxes and (iv) such other consents, approvals, orders, authorizations, registrations, declarations and filings (A) as are set forth in Schedule 3.5 to the EQR Disclosure Letter or (B) as may be required under (x) federal, state or local environmental laws or (y) the securities laws of the State of Maryland or (C) which, if not obtained or made, would not prevent or delay in any material respect the consummation of any of the transactions contemplated by this Agreement or otherwise prevent EQR from performing its obligations under this Agreement in any material respect or have, individually or in the aggregate, an EQR Material Adverse Effect. (c) For purposes of determining compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, EQR confirms that the conduct of its business consists solely of investing in, owning and operating real estate for the benefit of its shareholders. 3.6 SEC DOCUMENTS; FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES. EQR and ERP Operating Partnership have filed all required reports, schedules, forms, statements and other documents with the SEC since August 18, 1993 through the date hereof (the "EQR SEC Documents"). Schedule 3.6 of the EQR Disclosure Letter contains a complete list of all EQR SEC Documents filed by EQR under the Exchange Act since January 1, 1996 and on or prior to the date of this Agreement. All of the EQR SEC Documents (other than preliminary material), as of their respective filing dates, complied in all material respects with all applicable requirements of the Securities Act and the Exchange Act and, in each case, the rules and regulations promulgated thereunder applicable to such EQR SEC Documents. None of the EQR SEC Documents at the time of filing contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except to the extent such statements have been modified or superseded by later EQR SEC Documents filed and publicly available prior to the date of this Agreement. The consolidated financial statements of EQR and the EQR Subsidiaries included in the EQR SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP (except, in the case of unaudited statements, as permitted by the applicable rules and regulations of the SEC) applied on a consistent basis during the periods 22 involved (except as may be indicated in the notes thereto) and fairly presented, in accordance with the applicable requirements of GAAP and the applicable rules and regulations of the SEC, the consolidated financial position of EQR and the EQR Subsidiaries, taken as a whole, as of the dates thereof and the consolidated results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Except for liabilities and obligations set forth in the EQR SEC Documents or in Schedule 3.6 to the EQR Disclosure Letter, neither EQR nor any EQR Subsidiary has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) required by GAAP to be set forth on a consolidated balance sheet of EQR or in the notes thereto and which, individually or in the aggregate, would have an EQR Material Adverse Effect. 3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the EQR SEC Documents or in Section 3.7 to the EQR Disclosure Letter, since the date of the most recent audited financial statements included in the EQR SEC Documents (the "EQR Financial Statement Date"), EQR and the EQR Subsidiaries have conducted their business only in the ordinary course (taking into account prior practices, including the acquisition of properties and issuance of securities) and there has not been (a) any material adverse change in the business, financial condition or results of operations of EQR and the EQR Subsidiaries taken as a whole (a "EQR Material Adverse Change"), nor has there been any occurrence or circumstance that with the passage of time would reasonably be expected to result in an EQR Material Adverse Change, (b) except for regular quarterly distributions (in the case of EQR) not in excess of $.625 per EQR Common Share, $.5859 per EQR Series A Preferred Share, $5.703 per EQR Series B Preferred Share and $5.703 per EQR Series C Preferred Share, in each case subject to rounding adjustments as necessary and with customary record and payment dates, any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to any of EQR's shares of beneficial interest, (c) any split, combination or reclassification of any of EQR's shares of beneficial interest, (d) any damage, destruction or loss, whether or not covered by insurance, that has or would have an EQR Material Adverse Effect, or (e) any change made prior to the date of this Agreement in accounting methods, principles or practices by EQR or any EQR Subsidiary materially affecting its assets, liabilities or business, except insofar as may have been disclosed in the EQR SEC Documents or required by a change in GAAP. EQR is not in default in the payment of distributions on the EQR Series A Preferred Shares, EQR Series B Preferred Shares or EQR Series C Preferred Shares. 3.8 LITIGATION. Except as disclosed in the EQR SEC Documents or in Schedule 3.8 to the EQR Disclosure Letter, and other than personal injury and other routine tort litigation arising from the ordinary course of operations of EQR and the EQR Subsidiaries (a) which are covered by adequate insurance, or (b) for which all material costs and liabilities arising therefrom are reimbursable pursuant to common area maintenance or similar agreements, there is no suit, action or proceeding pending or, to the Knowledge of EQR, threatened in writing against or affecting EQR or any EQR Subsidiary that, individually or in the aggregate, could reasonably be expected to (i) have an EQR Material Adverse Effect, or (ii) prevent the consummation of any of the transactions contemplated by this Agreement, nor is there any 23 judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against EQR or any EQR Subsidiary having, or which, insofar as reasonably can be foreseen, in the future would have, any such effect. 3.9 PROPERTIES. (a) EQR or one of the EQR Subsidiaries owns fee simple title to each of the real properties listed in the EQR SEC Filings as owned by it (the "EQR Properties"), except where the failure to own such title would not have an EQR Material Adverse Effect. (b) The EQR Properties are not subject to any Encumbrances or Property Restrictions which could cause an EQR Material Adverse Affect. (c) Valid policies of title insurance have been issued insuring EQR's or the applicable EQR Subsidiaries' fee simple title to the EQR Properties in amounts at least equal to the purchase price thereof paid by EQR or the applicable EQR Subsidiaries therefor, except where the failure to obtain such title insurance would not have an EQR Material Adverse Effect. (d) EQR has no Knowledge (i) that it has failed to obtain a certificate, permit or license from any governmental authority having jurisdiction over any of the EQR Properties where such failure would have an EQR Material Adverse Effect, or of any pending threat of modification or cancellation of any of the same which would have an EQR Material Adverse Effect, (ii) of any written notice of any violation of any federal, state or municipal law, ordinance, order, rule, regulation or requirement affecting any of the EQR Properties issued by any governmental authorities which would have an EQR Material Adverse Effect, or (iii) of any structural defects relating to EQR Properties, EQR Properties whose building systems are not in working order, physical damage to any EQR Property for which there is no insurance in effect covering the cost of restoration, any current renovation or uninsured restoration, except such structural defects, building systems not in working order, physical damage, renovation and restoration which, in the aggregate, would not have an EQR Material Adverse Effect. (e) Neither EQR nor any of the EQR Subsidiaries has received any written notice to the effect that (i) any condemnation or rezoning proceedings are pending or threatened with respect to any of the EQR Properties, or (ii) any zoning, building or similar law, code, ordinance, order or regulation is or will be violated by the continued maintenance, operation or use of any buildings or other improvements on any of the EQR Properties or by the continued maintenance, operation or use of the parking areas, other than such notices which, in the aggregate, would not have an EQR Material Adverse Effect. (f) All work to be performed, payments to be made and actions to be taken by EQR or the EQR Subsidiaries prior to the date hereof pursuant to any agreement entered into with a governmental body or authority in connection with a site approval, zoning reclassification or similar action relating to any EQR Properties (e.g., Local Improvement District, Road 24 Improvement District, Environmental Mitigation), has been performed, paid or taken, as the case may be, except where the failure to do so would, in the aggregate, not have an EQR Material Adverse Effect, and EQR has no Knowledge of any planned or proposed work, payments or actions that may be required after the date hereof pursuant to such agreements which would have an EQR Material Adverse Effect. 3.10 ENVIRONMENTAL MATTERS. None of EQR, any of the EQR Subsidiaries or, to EQR's Knowledge, any other Person has caused or permitted (a) the unlawful presence of any hazardous substances, hazardous materials, toxic substances or waste materials (collectively, "Hazardous Materials") on any of the EQR Properties, or (b) any unlawful spills, releases, discharges or disposal of Hazardous Materials to have occurred or be presently occurring on or from the EQR Properties as a result of any construction on or operation and use of such properties, which presence or occurrence would, individually or in the aggregate, have an EQR Material Adverse Effect; and in connection with the construction on or operation and use of the EQR Properties, EQR and the EQR Subsidiaries have not failed to comply in any material respect with all applicable local, state and federal environmental laws, regulations, ordinances and administrative and judicial orders relating to the generation, recycling, reuse, sale, storage, handling, transport and disposal of any Hazardous Materials, except to the extent such failure to comply, individually or in the aggregate, would not have an EQR Material Adverse Effect. 3.11 TAXES. (a) Each of EQR and the EQR Subsidiaries has filed all tax returns and reports required to be filed by it (after giving effect to any filing extension properly granted by a Governmental Entity having authority to do so) and has paid (or EQR has paid on its behalf) all Taxes shown on such returns and reports as required to be paid by it except where the failure to file such tax returns or reports and failure to pay such Taxes would not have an EQR Material Adverse Effect. The most recent audited financial statements contained in the EQR SEC Documents reflect an adequate reserve for all material Taxes payable by EQR and the EQR Subsidiaries for all taxable periods and portions thereof through the date of such financial statements. Since the EQR Financial Statement Date, EQR has incurred no liability for taxes under Sections 857(b), 860(c) or 4981 of the Code, including without limitation any tax arising from a prohibited transaction described in Section 857(b)(6) of the Code, and neither EQR nor any EQR Subsidiary has incurred any liability for taxes other than in the ordinary course of business. No event has occurred, and no condition or circumstance exists, which presents a material risk that any material Tax described in the preceding sentence will be imposed upon EQR. To the Knowledge of EQR, no deficiencies for any Taxes have been proposed, asserted or assessed against EQR or any of the EQR Subsidiaries, and no requests for waivers of the time to assess any such Taxes are pending. (b) EQR (i) for all taxable years commencing with 1993 through the most recent December 31, has been subject to taxation as a REIT within the meaning of Section 856 of the Code and has satisfied all requirements to qualify as a REIT for such years, (ii) has 25 operated, and intends to continue to operate, in such a manner as to qualify as a REIT for the tax year ending December 31, 1997, and (iii) has not taken or omitted to take any action which would reasonably be expected to (A) result in any rents paid by tenants to the EQR Properties to be excluded from the definition of "rents from real property" under Section 856(d)(2) of the Code, or (B) otherwise result in a challenge to its status as a REIT, and to EQR's Knowledge, no such challenge is pending or threatened. Each EQR Subsidiary which is a partnership, joint venture or limited liability company has been treated since its formation and continues to be treated for federal income tax purposes as a partnership and not as a corporation or as an association taxable as a corporation. 3.12 BROKERS; SCHEDULE OF FEES AND EXPENSES. No broker, investment banker, financial advisor or other person, other than J.P. Morgan Securities, Inc., the fees and expenses of which have previously been disclosed to Wellsford and will be paid by EQR, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of EQR or any EQR Subsidiary. 3.13 COMPLIANCE WITH LAWS. Except as disclosed in the EQR SEC Documents, neither EQR nor any of the EQR Subsidiaries has violated or failed to comply with any statute, law, ordinance, regulation, rule, judgment, decree or order of any Governmental Entity applicable to its business, properties or operations, except to the extent that such violation or failure would not have an EQR Material Adverse Effect. 3.14 CONTRACTS; DEBT INSTRUMENTS. Neither EQR nor any EQR Subsidiary has received a written notice that EQR or any EQR Subsidiary is in violation of or in default under (nor to the Knowledge of EQR does there exist any condition which upon the passage of time or the giving of notice or both would cause such a violation of or default under) any material loan or credit agreement, note, bond, mortgage, indenture, lease, permit, concession, franchise, license or any other material contract, agreement, arrangement or understanding, to which it is a party or by which it or any of its properties or assets is bound, nor to the Knowledge of EQR does such a violation or default exist, except to the extent such violation or default, individually or in the aggregate, would not have an EQR Material Adverse Effect, except as set forth in Schedule 3.14 to the EQR Disclosure Letter. 3.15 OPINION OF FINANCIAL ADVISOR. EQR has received the opinion of J. P. Morgan Securities, Inc., dated January 15, 1997, satisfactory to EQR, a signed copy of which has been provided to Wellsford, to the effect that the consideration to be paid by EQR in connection with the Merger is fair, from a financial point of view, to EQR. 3.16 STATE TAKEOVER STATUTES. EQR has taken all action necessary to exempt transactions between EQR and Wellsford and its Affiliates from the operation of Takeover Statutes. 26 3.17 REGISTRATION STATEMENT. The information with respect to EQR and the EQR Subsidiaries included in the Registration Statement will not, as of the effective date of the Registration Statement, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.18 WELLSFORD SHARES OF BENEFICIAL INTEREST. Neither EQR nor any of the EQR Subsidiaries owns any shares of beneficial interest of Wellsford or other securities convertible into shares of beneficial interest of Wellsford. 3.19 INTENTIONALLY OMITTED. 3.20 INVESTMENT COMPANY ACT OF 1940. Neither EQR nor any of the EQR Subsidiaries is, or at the Effective Time will be, required to be registered under the 1940 Act. 3.21 DEFINITION OF KNOWLEDGE OF EQR. As used in this Agreement, the phrase "to the Knowledge of EQR" (or words of similar import) means the knowledge of those individuals identified in Schedule 3.21 of the EQR Disclosure Letter. ARTICLE 4 --------- COVENANTS --------- 4.1 ACQUISITION PROPOSALS. Except as set forth in the Wellsford Disclosure Letter, prior to the Effective Time, Wellsford agrees that: (a) neither it nor any of the Wellsford Subsidiaries shall initiate, solicit or encourage, directly or indirectly, any inquiries or the making or implementation of any proposal or offer (including, without limitation, any proposal or offer to its shareholders) with respect to a merger, acquisition, tender offer, exchange offer, consolidation, sale of assets or similar transaction involving all or any significant portion of the assets or any equity securities of, Wellsford or any of the Wellsford Subsidiaries, other than the transactions contemplated by this Agreement (any such proposal or offer being hereinafter referred to as an "Acquisition Proposal") or engage in any negotiations concerning or provide any confidential information or data to, or have any discussions with, any person relating to an Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal; (b) it will use its best efforts not to permit any of its officers, trustees, employees, agents or financial advisors to engage in any of the activities described in Section 4.1(a); 27 (c) it will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing and will take the necessary steps to inform the individuals or entities referred to in Section 4.1(b) of the obligations undertaken in this Section 4.1; and (d) it will notify EQR immediately if Wellsford receives any such inquiries or proposals, or any requests for such information, or if any such negotiations or discussions are sought to be initiated or continued with it; provided, however, that nothing contained in this Section 4.1 shall prohibit the Board of Trustees of Wellsford from (i) furnishing information to or entering into discussions or negotiations with, any person or entity that makes an unsolicited Acquisition Proposal, if, and only to the extent that (A) the Board of Trustees of Wellsford determines in good faith that such action is required for the Board of Trustees to comply with its duties to shareholders imposed by law, (B) prior to furnishing such information to, or entering into discussions or negotiations with, such person or entity, Wellsford provides written notice to EQR to the effect that it is furnishing information to, or entering into discussions with, such person or entity, and (C) subject to any confidentiality agreement with such person or entity (which Wellsford determined in good faith was required to be executed in order for the Board of Trustees to comply with its duties to shareholders imposed by law), Wellsford keeps EQR informed of the status (not the terms) of any such discussions or negotiations; and (ii) to the extent applicable, complying with Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition Proposal. Nothing in this Section 4.1 shall (x) permit Wellsford to terminate this Agreement (except as specifically provided in Article 7 hereof), (y) permit Wellsford to enter into an agreement with respect to an Acquisition Proposal during the term of this Agreement (it being agreed that during the term of this Agreement, Wellsford shall not enter into an agreement with any Person that provides for, or in any way facilitates, an Acquisition Proposal (other than a confidentiality agreement in customary form executed as provided above)) or (z) affect any other obligation of Wellsford under this Agreement; provided, however, that the Board of Trustees of Wellsford may approve and recommend a Superior Acquisition Proposal and, in connection therewith, withdraw or modify its approval or recommendation of this Agreement and the Merger. As used herein, "Superior Acquisition Proposal" means a bona fide Acquisition Proposal made by a third party which a majority of the members of the Board of Trustees of Wellsford determines in good faith to be more favorable to Wellsford's shareholders from a financial point of view than the Merger and which the Board of Trustees of Wellsford determines is reasonably capable of being consummated. 4.2 CONDUCT OF WELLSFORD'S BUSINESS PENDING MERGER. Prior to the Effective Time, except as (i) contemplated by this Agreement, (ii) necessary to accomplish the Spin-Off, (iii) disclosed in the Wellsford Disclosure Letter or Exhibit "J" or (iv) consented to in writing by EQR, Wellsford shall, and shall cause each of the Wellsford Subsidiaries to: 28 (a) conduct its business only in the usual, regular and ordinary course and in substantially the same manner as heretofore; (b) use its reasonable efforts to preserve intact its business organizations and goodwill and keep available the services of its officers and employees; (c) confer on a regular basis with one or more representatives of EQR to report operational matters of materiality and, subject to Section 4.1, any proposals to engage in material transactions; (d) promptly notify EQR of any material emergency or other material change in the condition (financial or otherwise), business, properties, assets, liabilities, prospects or the normal course of its businesses or in the operation of its properties, or of any material governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated); (e) promptly deliver to EQR true and correct copies of any report, statement or schedule filed with the SEC subsequent to the date of this Agreement; (f) maintain its books and records in accordance with GAAP consistently applied and not change in any material manner any of its methods, principles or practices of accounting in effect at the Financial Statement Date, except as may be required by the SEC, applicable law or GAAP; (g) duly and timely file all reports, tax returns and other documents required to be filed with federal, state, local and other authorities, subject to extensions permitted by law, provided Wellsford notifies EQR that it is availing itself of such extensions and provided such extensions do not adversely affect Wellsford's status as a qualified REIT under the Code; (h) not make or rescind any express or deemed election relative to Taxes (unless required by law or necessary to preserve Wellsford's status as a REIT or the status of any Wellsford Subsidiary as a partnership for federal income tax purposes or as a qualified REIT subsidiary under Section 856(i) of the Code, as the case may be); (i) not acquire, enter into any option to acquire, or exercise an option or contract to acquire, additional real property, incur additional indebtedness except for working capital under its revolving line(s) of credit, encumber assets or commence construction of, or enter into any agreement or commitment to develop or construct, other real estate projects, except in the ordinary course of the multi-family apartment business, which shall include all activities necessary to proceed with the acquisition, ownership and construction of Phases I, II and III of the multi-family residential project in Douglas County, Colorado referred to as "Palomino Park" in accordance with the 29 agreements in existence on the date of this Agreement and previously furnished to EQR (the "Palomino Development Agreements"); (j) not amend its Amended and Restated Declaration of Trust, Articles or Certificate of Incorporation, Bylaws, code of regulations or partnership agreement or comparable charter or organizational document or the articles of incorporation, by-laws, partnership agreement, joint venture agreement or comparable charter or organization document of any Wellsford Subsidiary without EQR's prior written consent, which shall not be unreasonably withheld or delayed; (k) make no change in the number of shares of beneficial interest or capital stock, membership interests or units of limited partnership interest issued and outstanding, other than pursuant to (i) the exercise of options disclosed in Schedule 2.3 to the Wellsford Disclosure Letter and the issuance of shares and options described in Exhibit "J" to this Agreement, (ii) the conversion of Wellsford Series A Preferred Shares pursuant to the terms of the Articles Supplementary for the Wellsford Series A Preferred Shares, (iii) options to purchase Wellsford Common Shares which are issued, and (iv) the Dividend Reinvestment and Share Purchase Plan of Wellsford; (l) grant no options or other right or commitment relating to its shares of beneficial interest or capital stock, membership interests or units of limited partnership interest or any security convertible into its shares of beneficial interest or capital stock, membership interests or units of limited partnership interest, or any security the value of which is measured by shares of beneficial interest, or any security subordinated to the claim of its general creditors; (m) except as provided in Section 5.13 hereof and in connection with the use of shares of beneficial interest of Wellsford to pay the exercise price or tax withholding in connection with equity-based employee benefit plans by the participants therein, not (i) authorize, declare, set aside or pay any dividend or make any other distribution or payment with respect to any shares of its beneficial interest or capital stock, or (ii) directly or indirectly redeem, purchase or otherwise acquire any shares of beneficial interest, shares of capital stock, membership interests or units of partnership interest or any option, warrant or right to acquire, or security convertible into, shares of beneficial interest, shares of capital stock, membership interests, or units of partnership interest; (n) not sell, lease, mortgage, subject to Lien or otherwise dispose of any material part of its assets, individually or in the aggregate, except in the ordinary course of business; (o) not make any loans, advances or capital contributions to, or investments in, any other Person, other than (i) loans, advances and capital contributions to Wellsford Subsidiaries in existence on the date hereof (other than Newco and Subsidiaries of 30 Newco), and (ii) loans to Newco and Subsidiaries of Newco bearing interest at a rate per annum equal to the rate of interest payable under the Second Amended and Restated Revolving Credit Agreement dated June 30, 1995 between Wellsford and First National Bank of Boston, as agent for itself and other banks ("Revolver Rate"), which loans to Newco and its Subsidiaries shall become due and payable in full on the Closing Date; provided the proceeds of such loans are not applied to activities which are not permitted under this Section 4.2; (p) not pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction, in the ordinary course of business consistent with past practice or in accordance with their terms, of liabilities reflected or reserved against in, or contemplated by, the most recent consolidated financial statements (or the notes thereto) furnished to EQR or incurred in the ordinary course of business consistent with past practice; (q) not enter into any commitment, contractual obligation, capital expenditure or transaction (each, a "Commitment") which may result in total payments or liability by or to it in excess of $1,000,000 or aggregate Commitments in excess of $5,000,000; (r) not guarantee the indebtedness of another Person, enter into any "keep well" or other agreement to maintain any financial statement condition of another Person or enter into any arrangement having the economic effect of any of the foregoing, other than guarantees of indebtedness of Newco and Subsidiaries of Newco; provided, that on the Closing Date, the Surviving Trust is unconditionally and irrevocably released from any obligations with respect to such guarantees or the indebtedness so guaranteed is paid in full without the payment of any consideration by the Surviving Trust and its Subsidiaries; (s) not enter into any Commitment with any officer, trustee, consultant or Affiliate of Wellsford or any of the Wellsford Subsidiaries; (t) not increase any compensation or enter into or amend any employment agreement with any of its officers, directors or employees earning more than $50,000 per annum, other than waivers by employees of benefits under such agreements; (u) not adopt any new employee benefit plan or amend any existing plans or rights, except for changes which are required by law and changes which are not more favorable to participants than provisions presently in effect; (v) not settle any shareholder derivative or class action claims arising out of or in connection with any of the transactions contemplated by this Agreement; 31 (w) not change the ownership of any of its Subsidiaries except pursuant to the Contribution Agreement on the Closing Date; and (x) not accept a promissory note in payment of the exercise price payable under any option to purchase Wellsford Common Shares. For purposes of this Section 4.2 only, any contract, transaction or other event shall be deemed to be material if it would result or is expected to result in a net impact on Wellsford's consolidated income statement in excess of $1,000,000, or on Wellsford's consolidated balance sheet in excess of $1,000,000. Notwithstanding anything to the contrary herein contained, prior to the Effective Time, Newco and its Subsidiaries shall not be bound by the restrictions which would otherwise be applicable under Sections 4.2(a), (b), (c), (d), (i), (j), (k), (l), (m)(ii), (n), (o), (p), (q), (r), (s), (t), (u), or (w); provided, however, that in no event may Newco: (i) issue any of its shares to any Person other than Wellsford prior to the Spin-Off for less than fair value; (ii) take any action or fail to take any action which would reasonably be expected to result in the termination of or a challenge to Wellsford's status as a REIT within the meaning of Section 856 of the Code, or result in a Wellsford Material Adverse Effect; (iii) enter into any contract which creates or imposes any obligation on, or otherwise purports to bind, Wellsford or any of the other Wellsford Subsidiaries; (iv) take any action or omit to take any action which causes a default under any loan agreement to which Wellsford is a party; (v) amend its Articles of Incorporation or By-laws in any manner which is inconsistent with the provisions of the Newco Stock Purchase Agreement. Notwithstanding anything to the contrary herein contained, prior to the Effective Time, WPHC and its Subsidiaries may: (A) amend the existing operating agreements of the Subsidiaries of WPHC in a manner which is not adverse to the interests of WPHC in such Subsidiaries; 32 (B) purchase the interest of Al Feld in the Subsidiaries of WPHC in accordance with the agreements granting such right in effect on the date of this Agreement and previously furnished to EQR; and (C) fulfill their respective obligations under the Palomino Development Agreements. 4.3 CONDUCT OF EQR'S BUSINESS PENDING MERGER. Prior to the Effective Time, except as (i) contemplated by this Agreement, or (ii) consented to in writing by Wellsford, EQR shall, and shall cause each of the EQR Subsidiaries to: (a) use its reasonable efforts to preserve intact its business organizations and goodwill and keep available the services of its officers and employees; (b) confer on a regular basis with one or more representatives of Wellsford to report operational matters of materiality which would have an EQR Material Adverse Effect; (c) promptly notify Wellsford of any material emergency or other material change in the condition (financial or otherwise), business, properties, assets, liabilities, prospects or the normal course of its businesses or in the operation of its properties, or of any material governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated); (d) promptly deliver to Wellsford true and correct copies of any report, statement or schedule filed with the SEC subsequent to the date of this Agreement; (e) maintain its books and records in accordance with GAAP consistently applied; and (f) duly and timely file all reports, tax returns and other documents required to be filed with federal, state, local and other authorities. For purposes of this Section 4.3 only, an emergency, change, complaint, investigation or hearing shall be deemed material if it would reasonably be expected to have an EQR Material Adverse Effect. In addition, during the period beginning the day after the fifth (5th) trading day prior to the date which the proxy statements required by Section 5.1 hereof are dated and ending on (but including) the Closing Date, EQR will not (a) issue any EQR Common Shares or other securities convertible into EQR Common Shares in any single transaction or series of transactions having an aggregate issuance price in excess of $250,000,000, or (b) announce any merger with or acquisition of all or substantially all the assets of another entity which has net assets in excess of $250,000,000. 33 4.4 COVENANT OF EQR. If EQR enters into negotiations with another Person who has a class of equity securities registered under the Exchange Act regarding the acquisition of such Person (whether effected through a merger, consolidation, share exchange, tender offer or other form), then at least three (3) business days prior to executing any definitive agreement with such Person with respect to such acquisition or making a tender offer for the shares or other ownership interests of such Person, EQR shall notify Wellsford of such transaction and consult with Wellsford with respect thereto, it being understood, however, that Wellsford shall have no approval rights with respect thereto. 4.5 OTHER ACTIONS. Each of Wellsford on the one hand and EQR on the other hand shall not, and shall use commercially reasonable efforts to cause their Subsidiaries not to take, any action that would result in (i) any of the representations and warranties of such party (without giving effect to any "knowledge" qualification) set forth in this Agreement that are qualified as to materiality becoming untrue, (ii) any of such representations and warranties (without giving effect to any "knowledge" qualification) that are not so qualified becoming untrue in any material respect or (iii) except as contemplated by Section 4.1, any of the conditions to the Merger set forth in Article 6 not being satisfied. 4.6 FILING OF CERTAIN REPORTS. The Surviving Trust shall file the reports required to be filed by it under the Exchange Act and the rules and regulations adopted by the SEC thereunder, and it will take such further action as any Affiliate of Wellsford or EQR may reasonably request, all to the extent required from time to time to enable such Affiliate to sell shares of beneficial interest of the Surviving Trust received by such Affiliate in the Merger without registration under the Securities Act pursuant to (i) Rule 145(d)(1) under the Securities Act, as such Rule may be amended from to time, or (ii) any successor rule or regulation hereafter adopted by the SEC. ARTICLE 5 --------- ADDITIONAL COVENANTS -------------------- 5.1 PREPARATION OF THE REGISTRATION STATEMENT AND THE PROXY STATEMENT; WELLSFORD SHAREHOLDERS MEETING AND EQR SHAREHOLDERS MEETING. (a) As soon as practicable following the date of this Agreement, Wellsford and EQR shall prepare and file with the SEC a preliminary Proxy Statement in form and substance satisfactory to each of EQR and Wellsford and such registration statements under the Securities Act and Exchange Act as may be required (collectively, the "Registration Statement"). To the extent practicable, the parties shall utilize one document for transmittal to their respective shareholders to meet applicable legal requirements. Each of Wellsford and EQR shall use its reasonable best efforts to (i) respond to any comments of the SEC and (ii) have the Registration 34 Statement declared effective under the Securities Act and the rules and regulations promulgated thereunder as promptly as practicable after such filing and to keep the Registration Statement effective as long as is necessary to consummate the Merger. Each of Wellsford and EQR will use its reasonable best efforts to cause the Proxy Statement to be mailed to Wellsford's shareholders and EQR's shareholders, respectively, as promptly as practicable after the Registration Statement is declared effective under the Securities Act. Each party agrees to date its Proxy Statement as of the same date, which shall be the approximate date of mailing to the shareholders of the respective parties. Each party will notify the other promptly of the receipt of any comments from the SEC and of any request by the SEC for amendments or supplements to the Registration Statement or the Proxy Statement or for additional information and will supply the other with copies of all correspondence between such party or any of its representatives and the SEC, with respect to the Registration Statement or the Proxy Statement. The Registration Statement and the Proxy Statement shall comply in all material respects with all applicable requirements of law. Prior to mailing the Proxy Statement to their respective shareholders, EQR and Wellsford shall have received the letters from their respective accountants provided for by Section 5.8. Whenever any event occurs which is required to be set forth in an amendment or supplement to the Registration Statement or the Proxy Statement, EQR or Wellsford, as the case may be, shall promptly inform the other of such occurrences and cooperate in filing with the SEC and/or mailing to the shareholders of EQR and the shareholders of Wellsford such amendment or supplement to the Proxy Statement. Wellsford or EQR, whichever shall become the Surviving Trust, also shall take any action required to be taken under any applicable state securities or "blue sky" laws in connection with the issuance of shares of beneficial interest of the Surviving Trust pursuant to the Merger, and the other party shall furnish all information concerning such party and the holders of the shares of beneficial interest of such party and rights to acquire shares of beneficial interest as may be reasonably requested in connection with any such action. (b) EQR will, as soon as practicable following the date of this Agreement (but in no event sooner than 20 business days following the date the Proxy Statement is mailed to the shareholders of Wellsford), duly call, give notice of, convene and hold a meeting of its shareholders (the "EQR Shareholders Meeting") for the purpose of obtaining the EQR Shareholder Approvals. EQR will, through its Board of Trustees, recommend to its shareholders approval of this Agreement, the Merger, and the transactions contemplated by this Agreement. (c) Wellsford will, as soon as practicable following the date of this Agreement (but in no event sooner than 20 business days following the date the Proxy Statement is mailed to the shareholders of Wellsford), duly call, give notice of, convene and hold a meeting of its shareholders (the "Wellsford Shareholders Meeting") for the purpose of obtaining Wellsford Shareholder Approvals. Wellsford will, through its Board of Trustees, recommend to its shareholders approval of this Agreement, the Merger and the transactions contemplated by this Agreement; provided, that prior to the Wellsford Shareholders Meeting, such recommendation may be withdrawn, modified or amended to the extent that, as a result of the commencement or receipt of a proposal constituting a Superior Acquisition Proposal, the Board of Trustees of 35 Wellsford determines in good faith that such withdrawal, modification or amendment is appropriate. (d) EQR and Wellsford shall use their best efforts to hold their respective shareholder meetings on the same day, which day, subject to the provisions of Sections 5.1(b) and 5.1(c), shall be a day not later than 45 days after the date the Proxy Statement is mailed. (e) If on the date for the EQR Shareholders Meeting and Wellsford Shareholders Meeting established pursuant to Section 5.1(d) of this Agreement, either EQR or Wellsford has not received a sufficient number of proxies to approve the Merger (but less than 1/3rd of the outstanding common shares of beneficial interest of such party have voted against the Merger), then both parties shall adjourn their respective shareholders meetings until the first to occur of (i) the date ten (10) days after the originally scheduled date of the shareholders meetings or (ii) the date on which the requisite number of proxies approving the Merger has been obtained or proxies have been received representing more than one-third of its outstanding common shares of beneficial interest which voted against the Merger. 5.2 ACCESS TO INFORMATION: CONFIDENTIALITY. Subject to the requirements of confidentiality agreements with third parties, each of Wellsford and EQR shall, and shall cause each of its Subsidiaries to, afford to the other party and to the officers, employees, accountants, counsel, financial advisors and other representatives of such other party, reasonable access during normal business hours prior to the Effective Time to all their respective properties, books, contracts, commitments, personnel and records and, during such period, each of Wellsford and EQR shall, and shall cause each of its Subsidiaries to, furnish promptly to the other party (a) a copy of each report, schedule, registration statement and other document filed by it during such period pursuant to the requirements of federal or state securities laws and (b) all other information concerning its business, properties and personnel as such other party may reasonably request. Each of Wellsford and EQR, shall cause its Subsidiaries to, and shall use commercially reasonable efforts to cause its officers, employees, accountants, counsel, financial advisors and other representatives and affiliates to, hold any nonpublic information in confidence to the extent required by, and in accordance with, and will comply with the provisions of the letter agreement dated as of October 9, 1996 between Wellsford and EQR (the "Confidentiality Agreement"). 5.3 BEST EFFORTS; NOTIFICATION. (a) Subject to the terms and conditions herein provided, Wellsford and EQR shall: (i) use all reasonable best efforts to cooperate with one another in (A) determining which filings are required to be made prior to the Effective Time with, and which consents, approvals, permits or authorizations are required to be obtained prior to the Effective Time from, governmental or regulatory authorities of the United States, the several states and foreign jurisdictions and any third parties in connection with the execution and delivery of this Agreement, and the consummation of the transactions contemplated by such agreements and (B) 36 timely making all such filings and timely seeking all such consents, approvals, permits and authorizations; (ii) use all reasonable best efforts to obtain in writing any consents required from third parties to effectuate the Merger, such consents to be in form reasonably satisfactory to Wellsford and EQR; and (iii) use all reasonable best efforts to take, or cause to be taken, all other action and do, or cause to be done, all other things necessary, proper or appropriate to consummate and make effective the transactions contemplated by this Agreement. If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purpose of this Agreement, the proper officers and trustees of Wellsford and EQR shall take all such necessary action. (b) Wellsford shall give prompt notice to EQR, and EQR shall give prompt notice to Wellsford, (i) if any representation or warranty made by it contained in this Agreement that is qualified as to materiality becomes untrue or inaccurate in any respect or any such representation or warranty that is not so qualified becomes untrue or inaccurate in any material respect or (ii) of the failure by it to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement; provided, however, that no such notification shall affect the representations, warranties, covenants or agreements of the parties or the conditions to the obligations of the parties under this Agreement. 5.4 COSTS OF TRANSACTION. On the Closing Date, Wellsford and EQR shall execute, and Wellsford shall cause Newco to execute, the Transaction and Termination Costs Agreement in substantially in the form attached as Exhibit "H" hereto (the "Transaction Costs Agreement"). 5.5 TAX TREATMENT. Each of EQR and Wellsford shall use its reasonable best efforts to cause the Merger to qualify as a reorganization under the provisions of Sections 368(a) of the Code and to obtain the opinions of counsel referred to in Sections 6.2(e) and 6.3(f). 5.6 PUBLIC ANNOUNCEMENTS. EQR and Wellsford will consult with each other before issuing, and provide each other the opportunity to review and comment upon, any press release or other written public statements with respect to the transactions contemplated by this Agreement, including the Merger and the Spin- Off, and shall not issue any such press release or make any such written public statement prior to such consultation, except as may be required by applicable law, court process or by obligations pursuant to any listing agreement with any national securities exchange. The parties agree that the initial press release to be issued with respect to the transactions contemplated by this Agreement will be in the form agreed to by the parties hereto prior to the execution of this Agreement. 5.7 LISTING. Prior to the Effective Time, EQR or Wellsford (whichever shall be the Surviving Trust), shall use its best efforts to have the NYSE approve for listing, upon official notice of issuance, the shares of beneficial interest to be issued in the Merger. 37 5.8 LETTERS OF ACCOUNTANTS. (a) Wellsford shall use its reasonable best efforts to cause to be delivered to EQR the "comfort" letter of Ernst & Young, Wellsford's independent public accountants, dated and delivered the date on which the Registration Statement shall become effective and as of the Effective Time, and addressed to EQR, in form and substance reasonably satisfactory to EQR and reasonably customary in scope and substance for letters delivered by independent public accountants in connection with transactions such as those contemplated by this Agreement. (b) EQR shall use its reasonable best efforts to cause to be delivered to Wellsford the "comfort" letter of Ernst & Young, EQR's independent public accountants, dated the date on which the Registration Statement shall become effective and as of the Effective Time, and addressed to Wellsford, in form and substance reasonably satisfactory to Wellsford and reasonably customary in scope and substance for letters delivered by independent public accountants in connection with transactions such as those contemplated by this Agreement. 5.9 TRANSFER AND GAINS TAXES. EQR and Wellsford shall cooperate in the preparation, execution and filing of all returns, questionnaires, applications or other documents regarding any real property transfer or gains, sales, use, transfer, value added stock transfer and stamp taxes, any transfer, recording, registration and other fees and any similar taxes which become payable in connection with the transactions contemplated by this Agreement (together with any related interests, penalties or additions to tax, "Transfer and Gains Taxes"). From and after the Effective Time, the Surviving Trust shall, or shall cause ERP Operating Partnership, as appropriate, to pay or cause to be paid, without deduction or withholding from any amounts payable to the holders of beneficial interests in the Surviving Trust, all Transfer and Gains Taxes. 5.10 BENEFIT PLANS AND OTHER EMPLOYEE ARRANGEMENTS. (a) BENEFIT PLANS. After the Effective Time, all employees of Wellsford who are employed by the Surviving Trust shall, at the option of the Surviving Trust, either continue to be eligible to participate in an "employee benefit plan", as defined in Section 3(3) of ERISA, of Wellsford which is, at the option of the Surviving Trust, continued by the Surviving Trust, or alternatively shall be eligible to participate in the same manner as other similarly situated employees of the Surviving Trust who were formerly employees of EQR in any "employee benefit plan," as defined in Section 3(3) of ERISA, sponsored or maintained by the Surviving Trust after the Effective Time. With respect to each such employee benefit plan, service with EQR or any EQR Subsidiary or with Wellsford or any Wellsford Subsidiary (as applicable) shall be included for purposes of determining eligibility to participate, vesting (if applicable) and entitlement to benefits. With respect to medical benefits provided by the Surviving Trust on and after the Closing Date, coverage that would otherwise be denied due to a preexisting illness shall be provided to those employees who were covered by a plan sponsored by EQR, Wellsford or 38 any of their Subsidiaries before the Closing Date, but only to the extent that such illness was covered under such a plan before the Closing Date. (b) SHARE INCENTIVE PLANS. The share incentive plans of Wellsford and EQR, respectively, shall be terminated or continued, as specifically set forth in the Articles of Merger. (c) RETENTION PROGRAM. As of the Effective Time, the Surviving Trust shall adopt a severance and retention program (the "Retention Program") with respect to those employees of Wellsford and the Wellsford Subsidiaries set forth in Schedule 5.10 to the Wellsford Disclosure Letter (the "Schedule 5.10 Employees") by issuing to such Schedule 5.10 Employees a letter substantially in the form attached hereto as Exhibit "I" (the "Retention Program Letter"); provided, however, that in no event may the aggregate obligations of Wellsford and the Surviving Trust under the Retention Program exceed $544,575. The Surviving Trust shall maintain the Retention Program in accordance with the terms thereof. In no event shall Wellsford adopt or agree to any other severance or retention program in addition to the Retention Program, except as otherwise specifically set forth in this Agreement. Neither the Retention Program nor any other term of this Agreement shall require the Surviving Trust to continue the employment of any employee of Wellsford after the Effective Time. The Surviving Trust shall pay the amount set forth in Schedule 5.10 to the Wellsford Disclosure Letter to each Schedule 5.10 Employee whose employment is involuntarily terminated by the Surviving Trust without cause prior to such employee's receipt of the Retention Program Letter. (d) AGREEMENT OF OPTIONEES. Prior to the Closing, Wellsford shall use its best efforts to obtain the written agreement of each employee (other than the Executives of Wellsford as set forth in Exhibit "J" to this Agreement) holding an option to purchase Wellsford Common Shares described in Schedule 2.3 to the Wellsford Disclosure Letter and of David Kelley to the cancellation of such option at the Effective Time for cash in an amount equal to the difference between $27.50 and the applicable exercise price set forth in such option, multiplied by the number of Wellsford Common Shares subject to such option. (e) RELEASE OF SURVIVING TRUST. At the Closing, each of (i) Jeffrey H. Lynford, (ii) Edward Lowenthal, and (iii) each of the other Key Executives set forth in Exhibit "J" who have agreed to the conversion of their options to purchase Wellsford Common Shares into options to purchase common shares of Newco, shall release the Surviving Trust from any obligations of Wellsford to him under options to purchase Wellsford Common Shares which are exchanged for or converted into options to purchase common shares of Newco. (f) WITHHOLDING. Wellsford shall require each employee who exercises an option to purchase Wellsford Common Shares or who receives Wellsford Common Shares pursuant to any existing commitment to pay to Wellsford in cash or Wellsford Common Shares an amount sufficient to satisfy in full Wellsford's obligation to withhold Taxes incurred by reason of such exercise or issuance. 39 (g) EXECUTIVES. The compensation, benefits, payments, accelerations, share options and share appreciation rights of the "Executives" and the trustees of Wellsford, as set forth in Exhibit "J" to this Agreement, shall be satisfied at the Effective Time in accordance with the terms set forth in Exhibit "J" and Schedule 5.10(g) to the Wellsford Disclosure Letter. For purposes of valuing all existing options to be converted into options to purchase common shares of Newco, Wellsford has utilized the Merrill Lynch trading desk formula pricing model and take into account the number of options held, the exercise price and duration thereof, the volatility of the market price of the shares involved, and other required factors. (h) COMMITTEE ACTION. Wellsford shall cause the appropriate committee to take the appropriate action under Wellsford's 1992 Share Option Plan and under its Long-Term Management Incentive Plan to cause each option to purchase Wellsford Common Shares which remains unexercised as of the Effective Time to be amended to adjust the number of shares for which such option is thereafter exercisable and the exercise price by the Exchange Ratio, as provided for in the Articles of Merger. 5.11 INDEMNIFICATION. (a) From and after the Effective Time, the Surviving Trust shall provide exculpation and indemnification for each person who is now or has been at any time prior to the date hereof or who becomes prior to the Effective Time, an officer or trustee of Wellsford or any Wellsford Subsidiary (the "Indemnified Parties") which is the same as the exculpation and indemnification provided to the Indemnified Parties by Wellsford and the Wellsford Subsidiaries immediately prior to the Effective Time in its Amended and Restated Declaration of Trust and Bylaws, as in effect on the date hereof; provided, that such exculpation and indemnification covers actions on or prior to the Effective Time, including, without limitation, all transactions contemplated by this Agreement. In no event shall the Surviving Trust be obligated to provide directors' and officers' liability insurance. If the Surviving Trust has directors and officers' insurance, such insurance shall apply to all directors and officers of the Surviving Trust serving as such during the period such coverage is in effect. (b) The Surviving Trust shall continue in force and effect after the Effective Time each Indemnification Agreement between EQR and any Person which was in force and effect immediately prior to the Effective Time. (c) The provisions of this Section 5.11 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party, his or her heirs and his or her personal representatives and shall be binding on all successors and assigns of EQR and Wellsford. (d) In the event that the Surviving Trust or any of its respective successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers all or 40 substantially all of its properties and assets to any person, then, and in each such case the successors and assigns of such entity shall assume the obligations set forth in this Section 5.11, which obligations are expressly intended to be for the irrevocable benefit of, and shall be enforceable by, each trustee and officer covered hereby. 5.12 CONTRIBUTION AGREEMENT. Wellsford shall cause Newco to execute the Contribution Agreement and any other agreement related to the transactions contemplated hereby to which Newco is a party provided that Wellsford has obtained all material consents required to be obtained by Wellsford and the Wellsford Subsidiaries from third parties in order to perform their respective obligations under the Contribution Agreement and the other agreements contemplated hereby to which Newco is a party. Wellsford shall diligently seek and use its best efforts to obtain such consents prior to the Closing Date. Wellsford shall keep EQR currently apprised of its progress in obtaining such consents. Wellsford shall inform EQR promptly if it appears unlikely that any given consent will be obtained. Wellsford shall cooperate with EQR in taking any action to either obtain such consents or to put Wellsford and the Wellsford Subsidiaries in a position so that such consents are no longer required; provided such action does not cost Wellsford a material amount or materially adversely affect Wellsford and the Wellsford Subsidiaries. 5.13 DECLARATION OF DIVIDENDS AND DISTRIBUTIONS. From and after the date of this Agreement, Wellsford shall not make any dividend or distribution to its shareholders without the prior written consent of EQR; provided, however, the written consent of EQR shall not be required for the distribution of Newco shares pursuant to the Spin-Off and for the authorization and payment of quarterly distributions with respect to the Wellsford Common Shares of up to $0.485 per share, the Wellsford Series A Preferred Shares of up to $0.4375 per share and the Wellsford Series B Preferred Shares of up to $0.603125 per share; provided, however, the record date for each distribution with respect to the Wellsford Common Shares shall be the same date as the record date for the quarterly distribution for the Common Shares of EQR as provided to Wellsford by notice not less than twenty (20) business days prior to the record date for any quarterly EQR distribution; provided, however, in the event EQR has not notified Wellsford of the record date for a quarterly distribution with respect to the EQR Common Shares for any quarter prior to the last twenty (20) business days of such quarter, Wellsford may authorize a distribution on the Wellsford Common Shares, subject to the terms and conditions of this Section 5.13. Notwithstanding the foregoing, if EQR is to be the Surviving Trust, Wellsford may make distributions to its shareholders in excess of the foregoing amounts without the consent of EQR but only to the extent such distributions are required to comply with the minimum distribution requirements set forth in Section 857(b) of the Code. 5.14 CONSULTING AGREEMENTS. ERP Operating Partnership shall enter into a consulting agreement with each of Jeffrey H. Lynford and Edward Lowenthal which shall become effective as of the Effective Time and shall be in substantially the forms attached hereto as Exhibit "K". 41 5.15 TRANSFER OF MANAGEMENT COMPANY SHARES. At the Closing, Wellsford shall cause the owners (other than Wellsford or a wholly-owned subsidiary of Wellsford) to transfer to such person or persons as EQR shall designate by written notice delivered to Wellsford prior to the Closing, all of the shares of Wellsford Holly Management Inc. ("Management Corp.") owned by them, constituting all the outstanding shares of the Management Corp. which are not owned by Wellsford or a wholly-owned subsidiary of Wellsford for an aggregate consideration of $1.00, unless Management Corp. was dissolved prior to the Closing Date. 5.16 TRANSFER OF WELLSFORD ASSETS AFTER EFFECTIVE TIME. Wellsford acknowledges that immediately after the Effective Time, the real properties owned by Wellsford and the Wellsford Subsidiaries and the equity interests in certain of the Wellsford Subsidiaries shall be transferred to ERP Operating Partnership, subject to all liabilities of Wellsford and the Wellsford Subsidiaries, as a capital contribution in exchange for a number of units and preferred units of ERP Operating Partnership equal to the number of common shares of beneficial interest and preferred shares of beneficial interest of the Surviving Trust issued in the Merger to the owners of the shares of beneficial interest of Wellsford in the Merger; provided, however, that Wellsford makes no representation or warranty regarding EQR's ability to accomplish the foregoing, the costs that would be incurred in connection therewith or any consents or approvals that may be required therefor. 5.17 NOTICES. (a) Within the time period provided for in the Amended and Restated Declaration of Trust of the Surviving Trust, the Surviving Trust shall notify the holders of Wellsford Series A Preferred Shares (which have been converted into Series D Preferred Shares of the Surviving Trust) of the conversion rate applicable to such shares after giving effect to the Merger. (b) Each party shall provide such notice to its shareholders of the Merger as is required under Maryland law. 5.18 RESIGNATIONS. On the Closing Date, Wellsford shall cause the trustees, directors and officers of Wellsford and each of the Wellsford Subsidiaries (excluding Newco and its Subsidiaries) to submit their resignations from such positions, effective as of the Effective Time. 5.19 THIRD PARTY MANAGEMENT AGREEMENTS. Wellsford shall not amend the existing Third Party Management Agreement which provides that such agreement may be cancelled by Wellsford on thirty days' notice or less without any charge, penalty or other cost for such cancellation. Wellsford shall not renew the other existing Third Party Management Agreement which expires in April, 1997 except on terms which permit its cancellation by Wellsford on thirty days' notice or less without any charge, penalty or other cost for such cancellation, and shall not thereafter amend such terms. 42 5.20 REPAYMENT OF CERTAIN INDEBTEDNESS. Wellsford covenants that on the Closing Date it shall cause Newco and its Subsidiaries to repay all loans made to any of them by Wellsford or the other Wellsford Subsidiaries and to procure on the Closing Date the unconditional and irrevocable release of Wellsford and such other Wellsford Subsidiaries from any guaranties of the obligations of Newco and its Subsidiaries (whether effected directly or indirectly through the repayment of the indebtedness so guaranteed), other than the guaranties contemplated under the Credit Enhancement Agreement and the Palomino Agreement. Wellsford covenants that it shall cause Newco to apply the Contribution Funds (as defined in the Contribution Agreement) and shall cause Newco to request purchases of shares of Newco under the Newco Stock Purchase Agreement to the extent that Newco does not repay such indebtedness from other sources and obtain such releases by other means. 5.21 10B-17 NOTICE. Wellsford shall give any notice required under Rule 10b-17 promulgated under the Exchange Act of the record date for determining the holders of Wellsford Common Shares entitled to receive the distribution of the shares of Newco owned by Wellsford. The parties shall co-operate in establishing the date for the Closing Date in order to facilitate compliance with said Rule. 5.22 DENVER LEASE. Prior to the Closing Date, Wellsford may sublease the office space in Denver, Colorado currently leased by Wellsford (the "Denver Space") to a subtenant with EQR's prior consent, which consent shall not be withheld if such prospective tenant is financially capable of making the rental payments under the sublease. If the Denver Space has not been subleased by Wellsford by the Closing Date, the Surviving Trust shall use reasonable commercial efforts to sublease the Denver Space; provided that the Surviving Trust shall not be required to sublease such space to any Person which is not financially capable of making the payments required under the sublease. Newco may refer potential tenants to the Surviving Trust and may sublease the Denver Space itself. If the Denver Space is not subleased by the Closing Date, but is thereafter subleased by the Surviving Trust, the Surviving Trust shall pay to Newco the present value (determined using an interest rate of 8%) of all base rent payable under such sublease (net of third party brokers' commissions) promptly after such sublease is executed by the parties. 5.23 NEW YORK LEASE. If prior to the Effective Time Wellsford is unable to obtain the consent of the landlord under the lease of the office space in New York, New York currently leased by Wellsford (the "New York Lease") to either (a) the assignment of the New York Lease to Newco and the release of the Surviving Trust from all liability under the New York Lease, or (ii) the sublease to Newco of the space leased under the New York Lease, then the Surviving Trust will reasonably co-operate with Newco to provide Newco with the benefits of the New York Lease, including becoming a 50% joint venture partner with Newco in an entity formed to sublease such space. 43 5.24 AMENDMENT TO ARTICLES OF WPHC. Prior to the Closing Date, Wellsford shall cause: (a) the Articles of Incorporation of WPHC to be amended so as to provide (i) for two classes of common shares which shall be identical in all respects except that (A) one class shall be voting (the "WPHC Voting Shares") and one class shall be non-voting (the "WPHC Non-Voting Shares"), and (B) each WPHC Non-Voting Share shall be convertible at any time into one WPHC Voting Share, and (ii) that no dividend may be declared or paid on the outstanding shares of either class of common shares of WPHC unless the same dividend is declared on both classes of common shares of WPHC, except that any stock dividend payable solely in common shares of WPHC shall be paid in WPHC Voting Shares, as to such dividends on WPHC Voting Shares, or WPHC Non-Voting Shares, as to dividends on WPHC Non-Voting Shares, and (b) the shares of WPHC owned by Wellsford to be converted or exchanged for 80 WPHC Voting Shares, which shall be contributed to Newco pursuant to the Contribution Agreement, and 20 WPHC Non- Voting Shares, which shall continue to be owned by the Surviving Trust after the Effective Time. 5.25 COMPLETION OF ARTICLES OF MERGER. If the Closing Date occurs on or after the annual meeting of the shareholders of EQR for 1997, Exhibit "B" to the Articles of Merger shall be completed prior to the execution thereof by the parties in such a manner so that each of Jeffrey H. Lynford and Edward Lowenthal shall be designated as trustees whose terms expire at the annual meeting of the shareholders of the Surviving Trust held in 2000. If the Closing Date occurs before the annual meeting of the shareholders of EQR for 1997, (a) Exhibit "B" to the Articles of Merger shall be completed prior to the execution thereof by the parties in such a manner so that each of Jeffrey H. Lynford and Edward Lowenthal shall be designated as trustees whose terms expire at the annual meeting of the shareholders of the Surviving Trust held in 1998, and (b) Jerry H. Lynford and Edward Lowenthal shall be designated as management's designees in the Surviving Trust's proxy material for its annual meeting of shareholders held in 1998 to serve as trustees of the Surviving Trust with terms expiring at the annual meeting of shareholders of the Surviving Trust held in 2000. The terms of the remaining trustees of the Surviving Trust shall be completed in Exhibit "B" in the manner designated by EQR. ARTICLE 6 --------- CONDITIONS ---------- 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The obligations of each party to effect the Merger shall be subject to the fulfillment at or prior to the Closing Date of the following conditions: (a) SHAREHOLDER APPROVALS. This Agreement, the Merger and the transactions contemplated by this Agreement shall have been approved and adopted by the Shareholder Approvals. 44 (b) LISTING OF SHARES. The NYSE shall have approved for listing the shares of beneficial interest of the Surviving Trust to be issued in the Merger, subject in each case to official notice of issuance. (c) REGISTRATION STATEMENT. The Registration Statement shall have become effective under the Securities Act and shall not be the subject of any stop order or proceedings by the SEC seeking a stop order. (d) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger or any of the other transactions contemplated hereby shall be in effect. (e) BLUE SKY LAWS. The Surviving Trust shall have received all state securities or "blue sky" permits and other authorizations necessary to issue shares of beneficial interest to the shareholders of EQR and Wellsford. (f) OPINION OF MARYLAND COUNSEL. EQR and Wellsford shall have received the opinion of Ballard Spahr Andrews & Ingersoll to the effect that this Agreement and the Articles of Merger are enforceable under Maryland law, that all requisite approval of the Merger by the shareholders of EQR and Wellsford has been obtained, and as to such other matters as are customary in a transaction such as the Merger. 6.2 CONDITIONS TO OBLIGATIONS OF EQR. The obligations of EQR to effect the Merger and to consummate the other transactions contemplated to occur on the Closing Date are further subject to the following conditions, any one or more of which may be waived by EQR: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Wellsford set forth in this Agreement shall be true and correct as of the Closing Date (other than changes thereto which occurred solely by reason of the Spin-Off), as though made on and as of the Closing Date, except to the extent the representation or warranty is expressly limited by its terms to another date, and EQR shall have received a certificate (which certificate may be qualified by Knowledge to the same extent as the representations and warranties of Wellsford contained herein are so qualified) signed on behalf of Wellsford by the chief executive officer or the chief financial officer of Wellsford, in such capacity, to such effect; provided, however, that no representation or warranty shall be deemed to have been breached as a result of any act of Newco and its Subsidiaries taken or omitted to be taken after the date of this Agreement, if such act or omission was taken or omitted to be taken without causing Newco to breach Section 4.2 of this Agreement. For the purposes of Section 6.2(a), the representations and warranties of Wellsford shall be deemed true and correct unless the breach of such representations 45 and warranties, in the aggregate, could reasonably be expected to have a Wellsford Material Adverse Effect. (b) PERFORMANCE OF OBLIGATIONS OF WELLSFORD. Wellsford shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Effective Time, and EQR shall have received a certificate signed on behalf of Wellsford by the chief executive officer or the chief financial officer of Wellsford, in such capacity, to such effect. For purposes of this Agreement, the inability of Newco to (i) repay all of the loans and advances made to it by Wellsford or any of the other Wellsford Subsidiaries, after giving effect to all cash to be received by Newco on the Closing Date (including any amounts to be received under the Newco Stock Purchase Agreement), shall be deemed to be a material default, and (ii) the inability of Newco to obtain the unconditional and irrevocable release from any obligations of Newco and its Subsidiaries issued after the date of this Agreement (whether directly through a release or indirectly through the payment of the indebtedness so guaranteed) shall be deemed to be a material default. Notwithstanding the foregoing, if Newco is unable to repay such indebtedness to Wellsford on the Closing Date, after giving effect to all cash to be received by Newco on the Closing Date (including any amounts to be received under the Newco Stock Purchase Agreement), EQR may, at its option, and in lieu of terminating this Agreement, require Newco to execute and deliver to the Surviving Trust a promissory note in the amount of such indebtedness which Newco is unable to pay, payable in twelve (12) equal consecutive monthly installments on the last day of each month, commencing with the month next following the month in which the Merger occurs, together with interest thereon at a rate equal to the Revolver Rate plus 2%, payable with each installment of principal. (c) MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there shall have been no Wellsford Material Adverse Change and EQR shall have received a certificate of the chief executive officer or chief financial officer of Wellsford, in such capacity, certifying to such effect. (d) OPINIONS RELATING TO REIT AND PARTNERSHIP STATUS. EQR shall have received an opinion of counsel to Wellsford, reasonably satisfactory to EQR, that, commencing with its taxable year ended December 31, 1993, Wellsford was organized and has operated in conformity with the requirements for qualification as a REIT under the Code (with customary exceptions, assumptions and qualifications and based upon customary representations). (e) OTHER TAX OPINION. EQR shall have received an opinion dated the Closing Date from counsel to EQR, based upon certificates and letters, which letters and certificates are substantially in the form set forth in Exhibit "L" hereto and dated the 46 Closing Date, to the effect that the Merger will qualify as a reorganization under the provisions of Section 368(a) of the Code. (f) COMFORT LETTER. EQR shall have received the letter from the accountants for Wellsford required by Section 5.8 hereof. (g) OPINION OF COUNSEL. EQR shall have received an opinion from Robinson Silverman Pearce Aronsohn & Berman LLP or other counsel to Wellsford reasonably satisfactory to EQR dated the Closing Date in form and substance reasonably satisfactory to EQR addressing the matters set forth in Exhibit "M" hereto. (h) CONSENTS. All consents and waivers (including, without limitation, waivers of rights of first refusal) from third parties necessary in connection with the consummation of the transactions contemplated by this Agreement shall have been obtained, other than such consents and waivers from third parties, which, if not obtained, would not result, individually or in the aggregate, in an EQR Material Adverse Effect or a Wellsford Material Adverse Effect. (i) CONSULTING AGREEMENTS. Jeffrey H. Lynford and Edward Lowenthal shall have executed and delivered their respective Consulting Agreements. (j) SHARES OF MANAGEMENT CORP. Unless Management Corp. was dissolved before the Closing Date, the voting shares of Management Corp. shall have been transferred to EQR's designees in accordance with Section 5.15. (k) RELEASES. The Key Executives shall have executed the releases described in Section 5.10(e). (l) WPHC ARTICLES. The Articles of Incorporation of WPHC shall have been amended as provided in Section 5.24 and immediately prior to the Spin- off, Wellsford's ownership interest in WPHC shall consist solely of 80 WPHC Voting Shares and 20 WPHC Non-Voting Shares. (m) CONTRIBUTION AGREEMENT. Wellsford and Newco shall have entered into the Contribution Agreement and each of the transactions contemplated thereby shall have been completed to the extent required to be completed thereunder as of such time. (n) NEWCO STOCK PURCHASE AGREEMENT. Newco shall have executed and delivered the Newco Stock Purchase Agreement. (o) PALOMINO CREDIT ENHANCEMENT AGREEMENT. Newco shall have executed and delivered the Palomino Credit Enhancement Agreement. 47 (p) PALOMINO AGREEMENT. Newco shall have executed and delivered the Palomino Agreement. (q) SONTERRA RIGHT OF FIRST OFFER. Newco shall have executed and delivered the Sonterra Right of First Offer Agreement. (r) TRANSACTION COSTS AGREEMENT. Each of Wellsford and Newco shall have executed and delivered the Transaction Costs Agreement. 6.3 CONDITIONS TO OBLIGATIONS OF WELLSFORD. The obligation of Wellsford to effect the Merger and to consummate the other transactions contemplated to occur on the Closing Date is further subject to the following conditions, any one or more of which may be waived by Wellsford: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of EQR set forth in this Agreement shall be true and correct as of the date of this Agreement and as of the Closing Date, as though made on and as of the Closing Date, except to the extent the representation or warranty is expressly limited by its terms to another date, and Wellsford shall have received a certificate (which certificate may be qualified by Knowledge to the same extent as the representations and warranties of EQR contained herein are so qualified) signed on behalf of EQR by the chief executive officer and the chief financial officer of such party to such effect. For the purposes of this Section 6.3(a), the representations and warranties of EQR shall be deemed true and correct unless the breach of such representations and warranties, in the aggregate, could reasonably be expected to have an EQR Material Adverse Effect. (b) PERFORMANCE OF OBLIGATIONS OF EQR. EQR shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Effective Time, and Wellsford shall have received a certificate of EQR signed on behalf of EQR by the chief executive officer or the chief financial officer of EQR, in such capacity, to such effect. (c) MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there shall have been no EQR Material Adverse Change and Wellsford shall have received a certificate of the chief executive officer or chief financial officer of EQR, in such capacity, certifying to such effect. (d) COMFORT LETTER. Wellsford shall have received the letter from the accountants for EQR required by Section 5.8 hereof. (e) OPINION RELATING TO REIT STATUS AND PARTNERSHIP STATUS. Wellsford shall have received an opinion of counsel to EQR, reasonably satisfactory to Wellsford, 48 that, commencing with its taxable year ended December 31, 1993, (A) EQR was organized and has operated in conformity with the requirements for qualification as a REIT under the Code and (B) ERP Operating Partnership has been during and since 1993 and continues to be, treated of federal income tax purposes as a partnership, and not as a corporation or association taxable as a corporation (with customary exceptions, assumptions and qualifications and based upon customary representations). (f) OTHER TAX OPINION. Wellsford shall have received an opinion dated the Closing Date from counsel to Wellsford, based upon certificates and letters, which letters and certificates are substantially in the form set forth in Exhibit "N" hereto and dated the Closing Date, to the effect that the Merger will qualify as a reorganization under the provisions of Section 368(a) of the Code. (g) OPINION OF COUNSEL. Wellsford shall have received an opinion from Rudnick & Wolfe or other counsel to EQR reasonably satisfactory to Wellsford dated the Closing Date in form and substance reasonably satisfactory to Wellsford addressing the matters set forth in Exhibit "O" hereto dated the Closing Date. (h) CONSENTS. All consents and waivers (including, without limitation, waivers or rights of first refusal) from third parties necessary in connection with the consummation of the transactions contemplated hereby shall have been obtained, other than such consents and waivers from third parties, which, if not obtained, would not result, individually or in the aggregate, in an EQR Material Adverse Effect or a Wellsford Material Adverse Effect. (i) CONSULTING AGREEMENT. ERP Operating Partnership shall have executed the Consulting Agreements with each of Jeffrey H. Lynford and Edward Lowenthal. (j) NEWCO STOCK PURCHASE AGREEMENT. ERP Operating Partnership shall have executed and delivered the Newco Stock Purchase Agreement. (k) PALOMINO CREDIT ENHANCEMENT AGREEMENT. ERP Operating Partnership shall have executed and delivered the Palomino Credit Enhancement Agreement. (l) PALOMINO AGREEMENT. ERP Operating Partnership shall have executed and delivered the Palomino Agreement. (m) SONTERRA RIGHT OF FIRST OFFER. ERP Operating Partnership shall have executed and delivered the Sonterra Right of First Offer Agreement. (n) TRANSACTION COSTS AGREEMENT. EQR shall have executed and delivered the Transaction Costs Agreement. 49 ARTICLE 7 --------- TERMINATION, AMENDMENT AND WAIVER --------------------------------- 7.1 TERMINATION. This Agreement may be terminated at any time prior to the filing of the Articles of Merger with the Department, whether before or after either of the Shareholder Approvals are obtained: (a) by mutual written consent duly authorized by the respective Boards of Trustees of EQR and Wellsford; (b) by EQR, upon a breach of any representation, warranty, covenant, obligation or agreement on the part of Wellsford set forth in this Agreement, in either case such that the conditions set forth in Section 6.2(a) or Section 6.2(b), as the case may be, would be incapable of being satisfied by August 1, 1997 (or as otherwise extended); (c) by Wellsford, upon a breach of any representation, warranty, covenant obligation or agreement on the part of EQR set forth in this Agreement, in either case such that the conditions set forth in Section 6.3(a) or Section 6.3(b), as the case may be, would be incapable of being satisfied by August 1, 1997 (or as otherwise extended); (d) by either EQR or Wellsford, if any judgment, injunction, order, decree or action by any Governmental Entity of competent authority preventing the consummation of the Merger shall have become final and nonappealable; (e) by either EQR or Wellsford, if the Merger shall not have been consummated before August 1, 1997; provided, in the case of termination pursuant to this Section 7.1(e), the terminating party shall not have breached in any material respect its obligations under this Agreement in any manner that shall have proximately contributed to the occurrence of the failure referred to in this Section; (f) by either EQR or Wellsford if, upon a vote at a duly held Wellsford Shareholders Meeting or any adjournment thereof, Wellsford Shareholder Approvals shall not have been obtained as contemplated by Section 5.1; (g) by either EQR or Wellsford if, upon a vote at a duly held EQR Shareholders Meeting or any adjournment thereof, the EQR Shareholder Approvals shall not have been obtained as contemplated by Section 5.1; (h) by Wellsford, if prior to the Wellsford Shareholders Meeting, the Board of Trustees of Wellsford shall have withdrawn or modified its approval or 50 recommendation of the Merger or this Agreement in connection with, or approved or recommended, a Superior Acquisition Proposal; (i) by EQR if (i) prior to the Wellsford Shareholders Meeting, the Board of Trustees of Wellsford shall have withdrawn or modified in any manner adverse to EQR its approval or recommendation of the Merger or this Agreement in connection with, or approved or recommended, any Superior Acquisition Proposal, or (ii) Wellsford shall have entered into a definitive agreement with respect to any Acquisition Proposal; and (j) by Wellsford or EQR if the Average Closing Price is less than $37.00 per share; provided, however, any notice of termination given pursuant to this Section 7.1(j) shall be given within three (3) business days after the date that such right of termination accrues. 7.2 CERTAIN FEES AND EXPENSES. If this Agreement shall be terminated (i) pursuant to Section 7.1(h) or 7.1(i), then Wellsford will pay EQR (provided Wellsford was not entitled to terminate this Agreement pursuant to Section 7.1(c) at the time of such termination) a fee equal to the Break-Up Fee (as defined below), (ii) pursuant to Section 7.1(b) or 7.1(f), then Wellsford will pay EQR (provided Wellsford was not entitled to terminate this Agreement pursuant to Section 7.1(c) at the time of such termination) an amount equal to the Break-Up Expenses (as defined below). If this Agreement shall be terminated pursuant to Section 7.1(c) or 7.1(g), then EQR will pay Wellsford (provided EQR was not entitled to terminate this Agreement pursuant to Section 7.1(b) at the time of such termination), an amount equal to the Break-Up Expenses. If the Merger is not consummated (other than due to the termination of this Agreement pursuant to Section 7.1(a), 7.1(g) or 7.1(j) or EQR's failure to perform its obligations under this Agreement in such a manner so as to entitle Wellsford to terminate this Agreement pursuant to Section 7.1(c)) and at the time of the termination of this Agreement an Acquisition Proposal has been received by Wellsford, and either prior to the termination of this Agreement or within twelve (12) months thereafter Wellsford or any Wellsford Subsidiary enters into any written Acquisition Proposal which is subsequently consummated (whether or not such Acquisition Proposal is the same Acquisition Proposal which had been received at the time of the termination of this Agreement), then Wellsford shall pay the Break-Up Fee to EQR. The payment of the Break Up Fee shall be compensation and liquidated damages for the loss suffered by EQR as a result of the failure of the Merger to be consummated and to avoid the difficulty of determining damages under the circumstances and neither party shall have any other liability to the other after the payment of the Break-Up Fee. The Break- Up Fee shall be paid by Wellsford to EQR, or the Break-Up Expenses shall be paid by Wellsford to EQR or EQR to Wellsford (as applicable), in immediately available funds within fifteen (15) days after the date the event giving rise to the obligation to make such payment occurred. As used in this Agreement, "Break-Up Fee" shall be an amount equal to the lesser of (i) $14,000,000 plus Break-Up Expenses (the "Base Amount") and (ii) the sum of (A) the maximum amount that can be paid to EQR without causing it to fail to meet the requirements of Sections 856(c)(2) and (3) of the Code determined as if the payment of such amount did not constitute income described 51 in Sections 856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of the Code ("Qualifying Income"), as determined by independent accountants to EQR, and (B) in the event EQR receives a letter from outside counsel (the "Break-Up Fee Tax Opinion") indicating that EQR has received a ruling from the IRS holding that EQR's receipt of the Base Amount would either constitute Qualifying Income or would be excluded from gross income within the meaning of Sections 856(c)(2) and (3) of the Code (the "REIT Requirements") or that the receipt by EQR of the remaining balance of the Base Amount following the receipt of and pursuant to such ruling would not be deemed constructively received prior thereto, the Base Amount less the amount payable under clause (A) above. Wellsford's obligation to pay any unpaid portion of the Break-Up Fee shall terminate three years from the date of this Agreement. In the event that EQR is not able to receive the full Base Amount, Wellsford shall place the unpaid amount in escrow and shall not release any portion thereof to EQR unless and until Wellsford receives any one or combination of the following: (i) a letter from EQR's independent accountants indicating the maximum amount that can be paid at that time to EQR without causing EQR to fail to meet the REIT Requirements or (ii) a Break-Up Fee Tax Opinion, in which event Wellsford shall pay to EQR the lesser of the unpaid Base Amount or the maximum amount stated in the letter referred to in (i) above. The "Break-Up Expenses" payable to EQR or Wellsford, as the case may be (the "Recipient"), shall be an amount equal to the lesser of (i) $2,500,000, (ii) the Recipient's out-of-pocket expenses incurred in connection with this Agreement and the transactions contemplated hereby (including, without limitation, all attorneys', accountants' and investment bankers' fees and expenses) and (iii) the sum of (A) the maximum amount that can be paid to the Recipient without causing it to fail to meet the requirements of Sections 856(c)(2) and (3) of the Code determined as if the payment of such amount did not constitute Qualifying Income, as determined by independent accountants to the Recipient, and (B) in the event the Recipient receives a Break Up Fee Tax Opinion indicating that the Recipient has received a ruling from the IRS holding that the Recipient's receipt of the Expense Fee would either constitute Qualifying Income or would be excluded from gross income within the meaning of the REIT Requirements or that receipt by the Recipient of the remaining balance of the Expense Fee following the receipt of and pursuant to such ruling would not be deemed constructively received prior thereto, the Expense Fee less the amount payable under clause (A) above. The obligation of EQR or Wellsford, as applicable ("Payor"), to pay any unpaid portion of the Break Up Expenses shall terminate three years from the date of this Agreement. In the event that the Recipient is not able to receive the full Expense Fee, the Payor shall place the unpaid amount in escrow and shall not release any portion thereof to the Recipient unless and until the Payor receives any one or combination of the following: (i) a letter from the Recipient's independent accountants indicating the maximum amount that can be paid at that time to the Recipient without causing the Recipient to fail to meet the REIT Requirements or (ii) a Break-Up Fee Tax Opinion, in which event the Payor shall pay to the Recipient the lesser of the unpaid Expense Fee or the maximum amount stated in the letter referred to in (i) above. 7.3 EFFECT OF TERMINATION. In the event of termination of this Agreement by either Wellsford or EQR as provided in Section 7.1, this Agreement shall forthwith become void and have no effect, without any liability or obligation on the part of EQR, or Wellsford, other than 52 the last sentence of Section 5.2, Section 7.2, this Section 7.3 and Article 8; provided that (a) if this Agreement is terminated by EQR pursuant to Section 7.1(b), Wellsford shall not be entitled to any of the benefits of Section 7.2, or (b) if this Agreement is terminated by Wellsford pursuant to Section 7.1(c), EQR shall not be entitled to any of the benefits of Section 7.2. 7.4 AMENDMENT. This Agreement may be amended by the parties in writing by action of their respective Boards of Trustees at any time before or after any Shareholder Approvals are obtained and prior to the filing of the Articles of Merger with the Department; provided, however, that, after the Shareholder Approvals are obtained, no such amendment, modification or supplement shall be made which by law requires the further approval of shareholders without obtaining such further approval. 7.5 EXTENSION; WAIVER. At any time prior to the Effective Time, the parties may (a) extend the time for the performance of any of the obligations or other acts of the other party, (b) waive any inaccuracies in the representations and warranties of the other party contained in this Agreement or in any document delivered pursuant to this Agreement or (c) subject to the proviso of Section 7.4, waive compliance with any of the agreements or conditions of the other party contained in this Agreement. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights. ARTICLE 8 --------- GENERAL PROVISIONS ------------------ 8.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement confirming the representations and warranties in this Agreement shall survive the Effective Time. This Section 8.1 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time. 8.2 NOTICES. All notices, requests, claims, demands and other communications under this Agreement shall be in writing and shall be delivered personally, sent by overnight courier (providing proof of delivery) to the parties or sent by telecopy (providing confirmation of transmission) at the following addresses or telecopy numbers (or at such other address or telecopy number for a party as shall be specified by like notice): 53 (a) if to EQR, to: Equity Residential Properties Trust Two North Riverside Plaza, Suite 400 Chicago, Illinois 60606 Attention: President Fax No. (312) 207-5243 with a copy to: Equity Residential Properties Trust Two North Riverside Plaza, Suite 400 Chicago, Illinois 60606 Attention: Bruce C. Strohm, Esq. Fax No. (312) 454-0039 Rudnick & Wolfe 203 N. LaSalle St., Suite 1800 Chicago, Illinois 60601 Attention: Errol R. Halperin, Esq. Fax No. (312) 236-7516 (b) if to Wellsford, to: Wellsford Residential Property Trust 610 Fifth Avenue, 7th Floor New York, New York 10020 Attention: President Fax No. (212) 333-2323 with a copy to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, New York 10104-0053 Attention: Alan S. Pearce, Esq. Fax No. (212) 541-1411 All notices shall be deemed given only when actually received. 8.3 INTERPRETATION. When a reference is made in this -Agreement to a Section, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." 8.4 COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. 54 8.5 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This Agreement, the Wellsford Disclosure Letter, the EQR Disclosure Letter, the Confidentiality Agreement and the other agreements entered into in connection with the Transactions (a) constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter of this Agreement and (b) except as provided in Section 5.10 (with respect to the Schedule 5.10 Employees who do not receive Retention Program Letters) and Section 5.11 ("Third Party Provisions"), are not intended to confer upon any person other than the parties hereto any rights or remedies. The Third Party Provisions may be enforced by the beneficiaries thereof or on behalf of the beneficiaries thereof by the trustees of Wellsford who had been trustees of Wellsford prior to the Effective Time. 8.6 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF MARYLAND, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICT OF LAWS THEREOF. 8.7 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned or delegated, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns. 8.8 ENFORCEMENT. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any court of the United States located in the State of Illinois or New York or in any Illinois or New York State court located in Illinois or New York, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (a) consents to submit itself (without making such submission exclusive) to the personal jurisdiction of any federal court located in the State of Illinois or New York or any Illinois or New York State court in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement and (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court. 8.9 SEVERABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so 55 broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. 8.10 NON-RECOURSE. (a) This Agreement and all documents, agreements, understandings and arrangements relating hereto have been entered into or executed on behalf of Wellsford by the undersigned in his capacity as a trustee or officer of Wellsford, which has been formed as a Maryland real estate investment trust pursuant to an Amended and Restated Declaration of Trust of Wellsford dated as of November 2, 1992, as amended and restated, and not individually, and neither the trustees, officers nor shareholders of Wellsford shall be personally bound or have any personal liability hereunder. EQR shall look solely to the assets of Wellsford for satisfaction of any liability of Wellsford with respect to this Agreement and any other agreements to which it is a party. EQR will not seek recourse or commence any action against any of the shareholders of Wellsford or any of their personal assets, and will not commence any action for money judgments against any of the trustees or officers of Wellsford or seek recourse against any of their personal assets, for the performance or payment of any obligation of Wellsford hereunder or thereunder. (b) This Agreement and all documents, agreements, understandings and arrangements relating hereto have been entered into or executed on behalf of EQR by the undersigned in his capacity as a trustee or officer of EQR, which has been formed as a Maryland real estate investment trust pursuant to an Amended and Restated Declaration of Trust of EQR dated as of August 10, 1993, as amended and restated, and not individually, and neither the trustees, officers nor shareholders of EQR shall be personally bound or have any personal liability hereunder. Wellsford shall look solely to the assets of EQR for satisfaction of any liability of EQR with respect to this Agreement and any other agreements to which it is a party. Wellsford will not seek recourse or commence any action against any of the shareholders of EQR or any of their personal assets, and will not commence any action for money judgments against any of the trustees or officers of EQR or seek recourse against any of their personal assets, for the performance or payment of any obligation of EQR hereunder or thereunder. 56 IN WITNESS WHEREOF, EQR and Wellsford have caused this Agreement to be signed by their respective officers thereunto duly authorized all as of the date first written above. EQUITY RESIDENTIAL PROPERTIES TRUST By:/s/ Douglas J. Crocker II ------------------------------------------ Name: Douglas J. Crocker II ------------------------------------- Title: Chief Executive Officer & President ------------------------------------ WELLSFORD RESIDENTIAL PROPERTY TRUST By:/s/ Edward Lowenthal ------------------------------------------ Name: Edward Lowenthal ------------------------------------- Title: President ------------------------------------ 57 EXHIBIT A --------- ARTICLES OF MERGER ------------------ THESE ARTICLES OF MERGER dated as of __________________, 1997 by and between Wellsford Residential Property Trust, a Maryland Real Estate Investment Trust ("Wellsford"), and Equity Residential Properties Trust, a Maryland Real Estate Investment Trust ("Equity"), is as follows: W I T N E S S E T H: ------------------- WHEREAS, the trustees and shareholders of Wellsford and Equity have approved these Articles of Merger (the "Articles") under which Equity shall be merged with and into Wellsford (the "Merger"), and have authorized the execution hereof; and WHEREAS, the parties hereto have previously entered into an Agreement and Plan of Merger dated as of January __, 1997 (the "Merger Agreement"), which contemplates the Merger. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto hereby agree as follows: 1. The Merger. Subject to the acceptance for record of these Articles by the Maryland Department of Assessments and Taxation (the "Department"), Equity shall be merged with and into Wellsford in accordance with Section 8.501.1 of the Corporations and Associations Article of the Annotated Code of Maryland (the "Maryland Code"), and the separate corporate existence of Equity shall thereupon cease. The Merger shall be effective at the time the Department accepts these Articles for Record [or a different time established herein, not to exceed 30 days after the Articles are accepted for Record] (the "Effective Time") (The date on which the Effective Time occurs is herein referred to as the "Effective Date"). When used in these Articles, the term "Surviving Trust" shall mean Wellsford as the trust surviving in the Merger as of the Effective Time and thereafter. As of the Effective Time, the name of the Surviving Trust shall be Equity. The Merger shall have the effects specified in Section 8.501.1(n) of the Maryland Code. If at any time the Surviving Trust shall consider or be advised that any further assignments, conveyances or assurances in law are necessary or desirable to vest, perfect or confirm in the Surviving Trust the title to any property or rights of Equity or Wellsford or otherwise to carry out the provisions hereof, the persons who are the proper officers and trustees of Equity or Wellsford immediately prior to the Effective Time (or their successors in office) shall execute and deliver any and all proper deeds, assignments and assurances in law, and do all things necessary or proper, to vest, perfect or confirm title to such property or rights in the Surviving Trust and otherwise to carry out the provisions hereof. The Surviving Trust shall be governed by the laws 1 of the State of Maryland. The parties hereto shall take all actions necessary in accordance with applicable law and their respective Amended and Restated Declarations of Trust ("Declarations") and Bylaws to cause the Merger to be consummated at the earliest lawful and practicable date. 2. Approval of Merger. The terms and conditions of the Merger set forth in these Articles were advised, authorized and approved by the trustees and shareholders of both Wellsford and Equity in the manner and by the vote required by their respective Declarations and Section 8-501.1 of the Maryland Code. Such advisement, authorization, and approval consisted of the Boards of Trustees of Wellsford and Equity both passing a resolution declaring the Merger advisable on substantially the same terms and conditions as set forth herein. Thereafter, these Articles were approved by the shareholders of Wellsford and Equity by the affirmative vote of at least two thirds of all the votes entitled to be cast on the matter, pursuant to Section 8-501.1(f) of the Maryland Code. 3. Offices and Resident Agents. Neither Wellsford nor Equity presently have offices located within the State of Maryland. The name and address of the Resident Agent of Wellsford is James J. Hanks, Jr., c/o Ballard Spahr Andrews & Ingersoll, 300 East Lombard Street, Baltimore, Maryland, 21202. The name and address of the Resident Agent of Equity is The Prentice-Hall Corporation System, Maryland, 11 East Chase Street, Baltimore, Maryland 21202. 4. Ownership of Land Interests. Equity owns interests in land in the following counties located within the State of Maryland: [list counties] 5. Declaration of Trust. Effective as of the Effective Time, the Declaration of the Surviving Trust shall be amended and restated as set forth in Exhibit "A" to these Articles, until duly amended in accordance with its terms and applicable law. The name and address of the Surviving Trust's Resident Agent is as set forth in Section 1.2 of Exhibit "A". 6. Trustees. As of the Effective Time, the trustees of the Surviving Trust and their terms of office shall be as set forth on Exhibit "B" attached hereto. If any of the individuals named in Exhibit "B" are unable to serve as a trustee of the Surviving Trust at the Effective Time, his successor will be nominated and elected in accordance with the Bylaws of the Surviving Trust. 7. Capital. (a) Wellsford's Declaration authorizes the issuance of 100,000,000 shares of beneficial interest, which consists of common shares and such other types or classes as the trustees may create and authorize from time to time. Common shares of beneficial interest in Wellsford ("Wellsford Common") have a par value of $.01 per share. Wellsford has established the following classes of preferred shares: (i) 4,600,000 shares of Series A Convertible Preferred Shares of Beneficial Interest, par value $.01 per share ("Wellsford 2 Series A"); and (ii) 2,300,000 shares of Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $.01 per share ("Wellsford Series B"). (b) Equity's Declaration authorizes the issuance of 110,000,000 shares, of which 100,000,000 are common shares ("Equity Common") and 10,000,000 are preferred shares which the trustees may issue from time to time in one or more series. Shares of Equity Common have a par value of $.01 per share. Equity has established the following series of preferred shares: (i) 6,900,000 shares of 9-3/8% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $.01 per share ("Equity Series A"); (ii) 575,000 shares of 9-1/8% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $.01 per share ("Equity Series B"); and (iii) 460,000 shares of 9-1/8% Series C Cumulative Redeemable Preferred Shares, par value $.01 per share ("Equity Series C"). (c) Effective at the Effective Time, the Declaration of the Surviving Trust will be amended and restated to, among other things, increase the number of authorized shares of beneficial interest to 200,000,000, of which 150,000,000 shall be common shares ("Survivor Common") and 50,000,000 shall be preferred shares. Shares of Equity Common will have a par value of $.01 per share. The Declaration of the Surviving Trust will establish the following classes of preferred shares: (i) 6,900,000 shares of Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $.01 per share ("Survivor Series A"); (ii) 575,000 shares of Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $.01 per share ("Survivor Series B"); (iii) 460,000 shares of Series C Cumulative Redeemable Preferred Shares, par value $.01 per share ("Survivor Series C"); (iv) 4,600,000 shares of Series D Convertible Preferred Shares of Beneficial Interest, par value $.01 per share ("Survivor Series D"); and (v) 2,300,000 shares of Series E Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $.01 per share ("Survivor Series E"). 8. Conversion. The manner of converting the shares of Wellsford and Equity shall be as follows: (a) At the Effective Time, each share of Equity Common outstanding immediately prior to the Effective Time shall without any action on the part of the holder thereof, be converted in the Merger into one legally and validly issued, fully paid and nonassessable common share of Survivor Common. (b) Subject to the provisions of Section 8(j) hereof, at the Effective Time, each share of Wellsford Common outstanding immediately prior to the Effective Time shall, without any action on the part of the holder thereof, be converted into 0.625 of a share of Survivor Common. 3 (c) At the Effective Time, each share of Equity Series A shall, without any action on the part of the holder thereof, continue as a preferred share of the Surviving Trust with its same rights, preferences, privileges and voting powers, and be converted in the Merger into one share of Survivor Series A. (d) At the Effective Time, each share of Equity Series B shall, without any action on the part of the holder thereof, continue as a preferred share of the Surviving Trust with its same rights, preferences, privileges and voting powers, and be converted in the Merger into one share of Survivor Series B. (e) At the Effective Time, each share of Equity Series C shall, without any action on the part of the holder thereof, continue as a preferred share of the Surviving Trust with its same rights, preferences, privileges and voting powers, and be converted in the Merger into one share of Survivor Series C. (f) At the Effective Time, each share of Wellsford Series A shall, without any action on the part of the holder thereof, continue as a preferred share of the Surviving Trust with its same preferences, rights and powers, and be converted in the Merger into one share of Survivor Series D. (g) At the Effective Time, each share of Wellsford Series B shall, without any action on the part of the holder thereof, continue as a preferred share of the Surviving Trust with its same preferences, rights and powers, and be converted in the Merger into one share of Survivor Series E. (h) At the Effective Time, each certificate representing outstanding shares of Equity Common, Equity Series A, Equity Series B and Equity Series C will, without any action on the part of the holder thereof, thereafter represent an equal number of shares of Survivor Common, Survivor Series A, Survivor Series B or Survivor Series C, as the case may be. (i) At the Effective Time, each share of Wellsford Common shall cease to be outstanding and shall be cancelled and retired, and each holder of a certificate representing such shares of Wellsford Common shall thereafter cease to have any rights with respect to such shares, except the right to receive, without interest, the Survivor Common as calculated pursuant to Section 8(b) above and cash in lieu of fractional shares of the Survivor Common in accordance with Section 8(j), upon the surrender of such Wellsford certificate. At the Effective Time each certificate representing outstanding shares of Wellsford Series A and Wellsford Series B will cease to have any rights with respect to such shares, except the right to receive a certificate of the Surviving Trust representing an equal number of Survivor Series D or Survivor Series E, as the case may be. 4 (j) Notwithstanding any other provision hereof, no fractional shares of Survivor Common shall be issued in connection with the Merger. Instead, each holder of outstanding Wellsford Common having a fractional interest arising upon the conversion or exchange of such shares in connection with the Merger shall, at the time of surrender of its Wellsford certificate, be paid an amount in cash equal to the Closing Price (as hereinafter defined) times the fraction of Survivor Common to which such holder would otherwise be entitled. No such holder shall be entitled to dividends, voting rights or any other shareholder rights in respect of any fractional share. For purposes of this Section 8(j), "Closing Price" shall mean the unweighted average closing price of a share of Equity Common (as reported in the New York Stock Exchange, Inc. Composite Tape) for the five (5) Trading Days immediately preceding the Effective Date, and "Trading Day" shall mean any day on which Wellsford Common is traded on the New York Stock Exchange and reported on its Composite Tape. (k) Each share of Wellsford Common issued and held in Wellsford's treasury at the Effective Time, if any, shall by virtue of the Merger cease to be outstanding and shall be cancelled and retired and shall cease to exist without payment of any consideration therefor. (l) Each share of Equity Common issued and held in Equity's treasury at the Effective Time, if any, shall by virtue of the Merger cease to be outstanding and shall be cancelled and retired and shall cease to exist without payment of any consideration therefor. (m) At the Effective Time, each outstanding stock option to acquire shares of Wellsford Common shall be converted and exchanged, without any action on the part of the holder thereof, into (i) an option to acquire, upon payment of the exercise price (which shall equal the exercise price per share for the option immediately prior to the Merger, divided by the Exchange Ratio (as defined in the Merger Agreement) multiplied by the number of shares to which the option relates), the number of shares of Survivor Common the option holder would have received pursuant to the Merger if the holder had exercised his or her option immediately prior thereto, rounded to the next lowest whole number and (ii) cash in lieu of the portion of any option that would have related to any fractional shares of Survivor Common absent the rounding required by the previous clause; provided, however, that in respect of any stock option which is an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended ("Code"), the conversion hereinabove provided for shall comply with the requirements of Section 424(a) of the Code, including the requirement that such converted options shall not give to the holder thereof any benefits additional to those which such holder had prior to such conversion under the option as originally granted. The amount payable in lieu of the portion of any option that would have related to each fractional share pursuant to this 5 Section 8(m) shall be payable on the Effective Date, and shall be calculated by applying the formula set forth in Section 8(j) hereof to that fraction of Survivor Common which the holder would otherwise have been entitled and reducing such calculated amount by an amount equal to the exercise price per share for the options as adjusted in clause (i) above times the fraction of unit of Survivor Common to which such holder would otherwise have been entitled. (n) As of the date hereof, Equity has in effect the "1993 Stock Option Plan" and the "1993 Director Stock Option Plan" (collectively, the "Equity Plans"). Each of the Equity Plans shall continue in existence in full force and effect in accordance with their terms following the Effective Time as stock option plans of the Surviving Trust and all options issued under the Equity plans outstanding as of the Effective Time shall continue in full force and effect in accordance with their terms as options to purchase shares of the Surviving Trust. 9. Exchange of Certificates. ------------------------ (a) As of the Effective Time, Equity shall deposit, or shall cause to be deposited, with an exchange agent selected by Equity (the "Exchange Agent"), for the benefit of the holders of certificates (the "Wellsford Certificates") representing Wellsford Common, Wellsford Series A or Wellsford Series B (collectively, the "Wellsford Shares") for exchange in accordance with this Section 9, certificates (the "Survivor Certificates") representing Survivor Common, Survivor Series D and Survivor Series E (collectively, the "Survivor Shares") to be issued pursuant to this Section 9. (b) Promptly after the Effective Time, the Surviving Trust shall cause the Exchange Agent to mail to each holder of record of Wellsford Shares a letter of transmittal which shall specify (i) that delivery shall be effected, and risk of loss and title to Wellsford Certificates shall pass, only upon delivery of such Wellsford Certificates to the Exchange Agent, and shall be in such form and have such other provisions as the Surviving Trust may reasonably specify, and (ii) instructions for use in effecting the surrender of such Wellsford Certificates in exchange for Survivor Certificates and cash in lieu of fractional shares. Upon surrender of a Wellsford Certificate for cancellation to the Exchange Agent together with such letter of transmittal, duly executed and completed in accordance with the instructions thereto, the holder of such Wellsford Certificate shall be entitled to receive in exchange therefor (x) a Survivor Certificate representing the number of whole shares of Survivor Shares and (y) a check representing the amount of cash in lieu of fractional shares of Survivor Common, if any, and unpaid dividends and distributions, if any, which such holder has the right to receive pursuant to the provisions of Section 9(c) in respect of the Wellsford Certificate surrendered, after giving effect to any required withholding tax, and the Wellsford Certificate so surrendered shall forthwith be cancelled. No interest will 6 be paid or accrued on the cash in lieu of fractional shares of Survivor Common and unpaid dividends and distributions, if any, payable to holders of Wellsford Certificates. In the event of a transfer of ownership of Wellsford Shares which is not registered in the transfer records of Wellsford, a Survivor Certificate representing the proper number of Survivor Shares, together with a check for the cash to be paid in lieu of any fractional shares of Survivor Common, if any, and unpaid dividends and distributions, if any, which such holder has the right to receive pursuant to the provisions of Section 9(c) in respect of the Wellsford Certificate so surrendered, after giving effect to any required withholding tax, may be issued to such a transferee if the Wellsford Certificate is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. All Wellsford Certificates so surrendered will be cancelled forthwith. Notwithstanding the foregoing, neither the Exchange Agent nor any party hereto shall be liable to a holder of Wellsford Shares for any Survivor Shares or dividends thereon, or cash in lieu of any fractional Survivor Common, delivered to a public official pursuant to applicable escheat law. (c) Notwithstanding any other provisions of these Articles of Merger, no dividends or other distributions on Survivor Shares shall be paid with respect to any Wellsford Shares represented by a Wellsford Certificate until such Wellsford Certificate is surrendered for exchange as provided herein. Subject to the effect of applicable laws, following surrender of any such Wellsford Certificate, there shall be paid to the holder of the Survivor Certificate issued in exchange therefor, without interest, (i) at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore payable with respect to such whole shares of Survivor Shares and not paid, less the amount of any withholding taxes which may be required thereon, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time but prior to surrender and a payment date subsequent to surrender payable with respect to such whole shares of Survivor Shares, less the amount of any withholding taxes which may be required thereon. (d) At and after the Effective Time, there shall be no transfers on the stock transfer books of Wellsford of the Wellsford Shares which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Wellsford Certificates are presented to the Surviving Trust, they shall be cancelled and exchanged for certificates for Survivor Shares and cash in lieu of fractional Survivor Common, if any, and unpaid dividends and distributions deliverable in respect thereof pursuant to these Articles of Merger in accordance with the procedures set forth in this Section 9. Wellsford Certificates surrendered for exchange by any person constituting an "affiliate" of Wellsford for purposes of Rule 145(c) under the Securities Act of 1933, as amended (the "Securities Act"), shall not be exchanged until the Surviving Trust has received a written agreement from such person as provided in Section 5.4 of the Merger Agreement. 7 (e) Any portion of the Survivor Certificates made available to the Exchange Agent pursuant to Section 9(a) which remains unclaimed by the holders of Wellsford Shares for one hundred twenty (120) days after the Effective Time shall be delivered to the Surviving Trust, upon demand of the Surviving Trust, and any former shareholders of Wellsford who have not theretofore complied with this Section 9 shall look only to the Surviving Trust for payment of their shares of Survivor Shares, cash in lieu of fractional shares and unpaid dividends and distributions on the Survivor Shares deliverable in respect of each share of Wellsford Shares such stockholder holds as determined pursuant to these Articles, in each case, without any interest thereon. (f) None of Wellsford, Equity, the Exchange Agent or any other person shall be liable to any former holder of Wellsford Shares for any amount properly delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. (g) In the event any Wellsford Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such certificate to be lost, stolen or destroyed and, if required by the Surviving Trust, the posting by such person of a bond in such reasonable amount as the Surviving Trust may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Exchange Agent or the Surviving Trust will issue in exchange for such lost, stolen or destroyed Wellsford Certificate the Survivor Shares and cash in lieu of fractional Survivor Common, and unpaid dividends and distributions on Survivor Shares as provided in Section 9(c), deliverable in respect thereof pursuant to these Articles. 10. Conditions. The obligations of the parties hereto to effect the Merger as herein provided shall be subject to satisfaction, unless duly waived, of the conditions set forth in the Merger Agreement. 11. Amendment. The parties hereto may amend, modify or supplement these Articles in whole or in part and in such manner as may be agreed upon by them in writing at any time before or after the adoption of these Articles by the shareholders contemplated hereby; provided, however, that after any such shareholder approval, any such amendment will be subject to further approval of such shareholders if such further approval is required under the Declaration of Trust or Bylaws of Equity, or the Declaration of Trust or Bylaws of Wellsford, as the case may be, or under applicable law. 12. Waiver. Any term or provision of these Articles (other than any matter which cannot under applicable law be waived) may be waived in writing at any time by the party which is, or whose shareholders are, entitled to the benefits thereof. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect such party's right at a later time to enforce the same. No waiver by any party of a condition or of the breach 8 of these Articles, whether by conduct or otherwise, in any one or more instances shall be deemed to be construed as a further or continuing waiver of any such condition or breach or a waiver of any other condition or of the breach of any other term, covenant, representation or warranty of these Articles. 13. Notice. Any notice or other communication required or permitted under these Articles shall be given, and shall be effective, in accordance with the provisions of the Merger Agreement. 14. Governing Law. These Articles shall be governed by and construed in accordance with the laws of the State of Maryland. 15. Counterparts. These Articles may be executed in multiple counterparts, each of which shall be deemed an original and all of which together shall constitute one agreement. 9 IN WITNESS WHEREOF, these Articles of Merger have been signed on this _________ day of __________________, 199__ by a majority of the entire Board of Trustees of each of Wellsford and Equity, and each of the undersigned trustees acknowledges these Articles of Merger to be the trust act of the entity on whose behalf he has signed, and as to all matters or facts required to be verified under oath, each of the undersigned trustees acknowledges that to the best of his knowledge, information, and belief, the matters and facts are true in all material respects and such statement is made under the penalties for perjury. Equity Wellsford - -------------------- -------------------- Samuel Zell Jeffery H. Lynford - -------------------- -------------------- Douglas Crocker II Edward Lowenthal - -------------------- -------------------- Sheli Z. Rosenberg Daniel M. Kelly - -------------------- -------------------- Gerald A. Spector Rodney F. DuBois - -------------------- -------------------- James D. Harper, Jr. Mark S. Germain - -------------------- -------------------- Errol R. Halperin Frank J. Hoenemeyer - -------------------- -------------------- Barry S. Sternlicht Frank J. Sixt - -------------------- -------------------- John Alexander Larry W. Wells - -------------------- 10 B. Joseph White - --------------------- Henry H. Goldberg 11 EXHIBIT A --------- AMENDED AND RESTATED DECLARATION OF TRUST -------------------- 12 EXHIBIT A --------- EQUITY RESIDENTIAL PROPERTIES TRUST ----------------------------------- AMENDED AND RESTATED DECLARATION OF TRUST Dated ______ __, 1997 This AMENDED AND RESTATED DECLARATION OF TRUST is made as of the date set forth above by the undersigned Trustees. ARTICLE I THE TRUST; CERTAIN DEFINITIONS SECTION 1.1. Name. The name of the trust (hereinafter called the "Trust") is: Equity Residential Properties Trust SECTION 1.2 Resident Agent. The name and address of the resident agent of the Trust in the State of Maryland are The Prentice-Hall Corporation System, Maryland, 11 East Chase Street, Baltimore, Maryland 21202. The Trust may have such offices or places of business within or without the State of Maryland as the Trustees may from time to time determine. SECTION 1.3 Nature of Trust. The Trust is a real estate investment trust within the meaning of Title 8 (as hereinafter defined). SECTION 1.4 Powers. The Trust shall have all of the powers granted to real estate investment trusts generally by Title 8 and shall have any other and further powers as are not inconsistent with Title 8 or any other applicable law. SECTION 1.5 Definitions. As used in this Declaration of Trust, the following terms shall have the following meanings unless the context otherwise requires: "Affiliate" or "Affiliated" means, as to any corporation, partnership, trust or other association (other than the Trust), any Person (i) that holds beneficially, directly or indirectly, 5% or more of the outstanding stock or equity interests thereof or (ii) who is an officer, director, partner or trustee thereof or of any Person which controls, is controlled by, or is under common control with, such corporation, partnership, trust or other association or (iii) which controls, is controlled by, or is under common control with, such corporation, partnership, trust or other association. "Board of Trustees" means the Board of Trustees of the Trust. "Code" means the Internal Revenue Code of 1986, as amended. "Declaration" or "Declaration of Trust" means this Declaration of Trust, including any amendments or supplements hereto. "Person" means an individual, corporation, partnership, estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity, or any government and agency or political subdivision thereof. "REIT Provisions of the Code" means Section 856 through 860 of the Code and any successor or other provisions of the Code relating to real estate investment trusts (including provisions as to the attribution of ownership of beneficial interests therein) and the regulations promulgated thereunder. "Securities" means Shares (as hereinafter defined), any stock, shares or other evidences of equity, beneficial or other interests, voting trust certificates, bonds, debentures, notes or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as "securities" or any certificates of interest, shares or participations in, temporary or interim certificates for, receipts for, guarantees of, or warrants, options or rights to subscribe to, purchase or acquire, any of the foregoing. "Securities of the Trust" means any Securities issued by the Trust. "Shareholders" means holders of record of outstanding Shares. "Shares" means transferable shares of beneficial interest of the Trust of any class or series. "Title 8" means Title 8 of the Corporations and Associations Article of the Annotated Code of Maryland, as amended, or any successor statute. -2- "Trustee" means, individually, an individual, and "Trustees" means, collectively, the individuals, in each case as named in Section 2.2 of this Declaration so long as they continue in office and any and all other individuals who have been duly elected and qualify as trustees of the Trust hereunder. "Trust Property" means any and all property, real, personal or otherwise, tangible or intangible, which is transferred or conveyed to the Trust or the Trustees (including all rents, income, profits and gains therefrom), which is owned or held by, or for the account of, the Trust or the Trustees. ARTICLE II TRUSTEES SECTION 2.1 Number. The number of Trustees initially shall be two, which number may thereafter be increased or decreased by the Trustees then in office from time to time; however, the total number of Trustees shall be not less than two and not more than 15. No reduction in the number of Trustees shall cause the removal of any Trustee from office prior to the expiration of his term. SECTION 2.2 Initial Board; Term. The names and addresses of the Trustees who shall serve until the first annual meeting of Shareholders and until their successors are duly elected and qualify are: Name Address ---- ------- Samuel Zell c/o Equity Group Investments, Inc. Two North Riverside Plaza, Suite 600 Chicago, Illinois 60606 Douglas Crocker II c/o Equity Group Investments, Inc. Two North Riverside Plaza, Suite 600 Chicago, Illinois 60606 Sheli Z. Rosenberg c/o Equity Group Investments, Inc. Two North Riverside Plaza, Suite 600 Chicago, Illinois 60606 Gerald A. Spector c/o Equity Group Investments, Inc. Two North Riverside Plaza, Suite 600 -3- Chicago, Illinois 60606 James D. Harper, Jr. c/o JDH Realty Co. 104 Crandon Boulevard, Suite 324 Key Biscayne, Florida 33149 Errol R. Halperin c/o Rudnick & Wolfe 203 North LaSalle Street, Suite 1800 Chicago, Illinois 60601 Barry S. Sternlicht c/o Starwood Capital Group, L.P. Three Pickwick Place, Suite 250 Greenwich, Connecticut 06830 John W. Alexander c/o Mallard Creek Capital Partners 227 North Tryon Street, Suite 201 Charlotte, North Carolina 28202 B. Joseph White Dean School of Business Administration University of Michigan 701 Tappen Ann Arbor, Michigan 48109 Henry H. Goldberg 4733 Bethesda Avenue, Suite 400 Bethesda, Maryland 20814 Jeffrey H. Lynford [address] Edward Lowenthal [address] At the first annual meeting of Shareholders, the Trustees shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, one class to hold office initially for a term expiring at the annual meeting of Shareholders to be held in 1994, another class to hold office initially for a term expiring at the annual meeting of Shareholders to be held in 1995 and another class to hold office initially for a term expiring at the annual meeting of Shareholders to be held in 1996, with the members of each class to hold office until their successors are duly elected and qualify. At each annual meeting of the Shareholders, the successors to the class of Trustees whose term expires at such meeting shall be elected to hold office for a term expiring at the annual meeting of Shareholders held in the third year following the year of their election and the other Trustees shall continue in office. -4- SECTION 2.3 Resignation, Removal or Death. Any Trustee may resign by written notice to the remaining Trustees, effective upon execution and delivery to the Trust of such written notice or upon any future date specified in the notice. A Trustee may be removed, only with Cause (as hereinafter defined), at a meeting of the Shareholders called for that purpose, by the affirmative vote of the holders of not less than two-thirds of the Shares then outstanding and entitled to vote in the election of Trustees. As used herein, "Cause" shall mean (a) material theft, fraud or embezzlement or active and deliberate dishonesty by a Trustee; (b) habitual neglect of duty by a Trustee having a material and adverse significance to the Trust; or (c) the conviction of a Trustee of a felony or of any crime involving moral turpitude. Upon the resignation or removal of any Trustee, or his otherwise ceasing to be a Trustee, he shall automatically cease to have any right, title or interest in and to the Trust Property and shall execute and deliver such documents as the remaining Trustees require for the conveyance of any Trust Property held in his name, and shall account to the remaining Trustees as they require for all property which he holds as Trustee. Upon the incapacity or death of any Trustee, his legal representative shall perform those acts. SECTION 2.4 Legal Title. Legal title to all Trust Property shall be vested in the Trust, but it may cause legal title to any Trust Property to be held by or in the name of any or all of the Trustees or any other Person as nominee. Any right, title or interest of the Trustees in and to the Trust Property shall automatically vest in successor and additional Trustees upon their qualification and acceptance of election or appointment as Trustees, and they shall thereupon have all the rights and obligations of Trustees, whether or not conveyancing documents have been executed and delivered pursuant to Section 2.3 or otherwise. Written evidence of the qualification and acceptance of election or appointment of successor and additional Trustees may be filed with the records of the Trust and in such other offices, agencies or places as the Trust or Trustees may deem necessary or desirable. ARTICLE III POWERS OF TRUSTEES Subject to the express limitations herein or in the Bylaws, (1) the business and affairs of the Trust shall be managed under the direction of the Board of Trustees and (2) the Trustees shall have full, exclusive and absolute power, control and authority over the Trust Property and over the business of the Trust as if they, in their own right, were the sole owners thereof. The Trustees may take any actions as in their sole judgment and discretion are necessary or desirable to conduct the business of the Trust. This Declaration of Trust shall be construed with a presumption in favor of the grant of power and authority to the Trustees. Any construction of this Declaration or determination made in good faith by the Trustees concerning their powers and authority hereunder shall be conclusive. The powers of the Trustees shall in no way be limited or restricted by reference to or inference from the terms of this or any other provision of this Declaration or -5- construed or deemed by inference or otherwise in any manner to exclude or limit the powers conferred upon the Trustees under the general laws of the State of Maryland as now or hereafter in force. ARTICLE IV INVESTMENT POLICY The fundamental investment policy of the Trust is to make investments in such a manner as to comply with the REIT Provisions of the Code and with the requirements of Title 8 with respect to the composition of the Trust's investments and the derivation of its income. Subject to Section 6.7, the Trustees shall use their best efforts to carry out this fundamental investment policy and to conduct the affairs of the Trust in such a manner as to continue to qualify the Trust for the tax treatment provided in the REIT Provisions of the Code; provided, however, that no Trustee, officer, employee or agent of the Trust shall be liable for any act or omission resulting in the loss of tax benefits under the Code, except to the extent provided in Section 11.2. The Trustees may change from time to time, by resolution or in the Bylaws of the Trust, such investment policies as they determine to be in the best interest of the Trust, including prohibitions or restrictions upon certain types of investments. ARTICLE V SHARES SECTION 5.1 Authorized Shares. The total number of Shares which the Trust has authority to issue is 300,000,000 shares, of which 200,000,000 are common shares, $0.01 par value per share (individually a "Common Share" or collectively "Common Shares"), and 100,000,000 are preferred shares, $0.01 par value per share ("Preferred Shares"). SECTION 5.2 Common Shares. Subject to the provisions of Article VII regarding Excess Shares (as such term is defined therein), each Common Share shall entitle the holder thereof to one vote. Holders of Common Shares shall not be entitled to cumulative voting. SECTION 5.3 Preferred Shares. Five series of Preferred Shares have been authorized pursuant to this Declaration, with their designations, numbers, terms, preferences, conversion and other rights set out in Article XIII. Additional Preferred Shares may be issued, from time to time, in one or more additional series as authorized by the Board of Trustees. Prior to issuance of any such additional series, the Board of Trustees by resolution shall designate that series of Preferred Shares to distinguish it from all other series and classes of Preferred Shares, shall specify the -6- number of Preferred Shares to be included in the series and, subject to the provisions of Article VII regarding Excess Shares, shall set the terms, preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption. SECTION 5.4 Classification or Reclassification of Unissued Shares. Subject to the express terms of any series of Preferred Shares or any class of Common Shares outstanding at the time and notwithstanding any other provision of the Declaration of Trust, the Board of Trustees may increase or decrease the number of, alter the designation of or classify or reclassify any unissued Shares by setting or changing, in any one or more respects, from time to time before issuing the Shares, and, subject to the provisions of Article VII regarding Excess Shares, the terms, preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption of any series or class of Shares. SECTION 5.5 Declaration of Trust and Bylaws. All persons who shall acquire Shares shall acquire the same subject to the provisions of this Declaration of Trust and the Bylaws of the Trust. ARTICLE VI PROVISIONS FOR DEFINING, LIMITING AND REGULATING CERTAIN POWERS OF THE TRUST AND OF THE SHAREHOLDERS AND TRUSTEES SECTION 6.1 Authorization by Board of Share Issuance. The Board of Trustees may authorize the issuance from time to time of Shares of any class, whether now or hereafter authorized, or securities convertible into Shares of any class, whether now or hereafter authorized, for such consideration as the Board of Trustees may deem advisable, subject to such restrictions or limitations, if any, as may be set forth in this Declaration of Trust or in the Bylaws of the Trust or in the general laws of the State of Maryland. SECTION 6.2 Preemptive and Appraisal Rights. Except as may be provided by the Board of Trustees in authorizing the issuance of Preferred Shares pursuant to Section 5.3, no holder of Shares shall, as such holder, (a) have any preemptive right to purchase or subscribe for any additional Shares or any other security of the Trust which the Trust may issue or sell or (b), except as expressly required by Title 8, have any right to require the Trust to pay him the fair value of his Shares in an appraisal or similar proceeding. -7- SECTION 6.3 Advisor Agreements. Subject to such approval of the Shareholders and other conditions, if any, as may be required by any applicable statute, rule or regulation, the Board of Trustees may authorize the execution and performance by the Trust of one or more agreements with any person, corporation, association, company, trust, partnership (limited or general) or other organization whereby, subject to the supervision and control of the Board of Trustees, any such other person, corporation, association, company, trust, partnership (limited or general) or other organization (the "Advisor") shall render or make available to the Trust managerial, investment, advisory and/or related services, office space and other services and facilities (including, if deemed advisable by the Board of Trustees, the management or supervision of the investments of the Trust) upon such terms and conditions as may be provided in such agreement or agreements (including, if deemed fair and equitable by the Board of Trustees, the compensation payable thereunder by the Trust). SECTION 6.4 Related Party Transactions. --------------------------- (a) Without limiting any other procedures available by law or otherwise to the Trust, the Board of Trustees may authorize any agreement of the character described in Section 6.3 or other transaction with any person, corporation, association, company, trust, partnership (limited or general) or other organization, although one or more of the Trustees or officers of the Trust may be a party to any such agreement or an officer, director, stockholder or member of such other party, and no such agreement or transaction shall be invalidated or rendered void or voidable solely by reason of the existence of any such relationship if the existence is disclosed or known to the Board of Trustees, and the contract or transaction is approved by the Board of Trustees (including the affirmative vote of a majority of the disinterested Trustees even if they constitute less than a quorum of the Board). Any Trustee who is also a director, officer, stockholder or member of such other entity may be counted in determining the existence of a quorum at any meeting of the Board of Trustees considering such matter. (b) Subsequent to the Closing Date of the Initial Public Offering (as such term is defined in Article VII), the affirmative vote of a majority of the disinterested Trustees (even if they constitute less than a quorum of the Board) shall be required to approve the purchase by the Company or its subsidiaries of any properties under the direct or indirect control of Samuel Zell or Starwood Capital Partners, L.P., a Delaware limited partnership, or in which he or it has a direct or indirect substantial economic interest on the Closing Date of the Initial Public Offering. Those properties being transferred to the Operating Partnership (as such term is defined in Article VII) as of the Closing Date of the Initial Public Offering shall not be subject to this subparagraph (b). SECTION 6.5 Determinations by Board. The determination as to any of the following matters, made in good faith by or pursuant to the direction of the Board of Trustees consistent with this Declaration of Trust and in the absence of actual receipt of an improper benefit in money, -8- property or services or active and deliberate dishonesty established by a court, shall be final and conclusive and shall be binding upon the Trust and every holder of Shares: (a) the amount of the net income of the Trust for any period and the amount of assets at any time legally available for the payment of dividends, redemption of Shares or the payment of other distributions with respect to Shares; (b) the amount of paid-in surplus, net assets, other surplus, annual or other net profit, net assets in excess of capital, undivided profits or excess of profits over losses on sales of assets; (c) the amount, purpose, time of creation, increase or decrease, alteration or cancellation of any reserves or charges and the propriety thereof (whether or not any obligation or liability for which such reserves or charges shall have been created shall have been paid or discharged); (d) the fair value, or any sale, bid or asked price to be applied in determining the fair value, of any asset owned or held by the Trust; and (e) any matters relating to the acquisition, holding and disposition of any assets by the Trust. SECTION 6.6 Reserved Powers of Board. The enumeration and definition of powers of the Board of Trustees included in this Article VI shall in no way be limited or restricted by reference to or inference from the terms of any other clause of this or any other provision of the Declaration of Trust, or construed or deemed by inference or otherwise in any manner to exclude or limit the powers conferred upon the Board of Trustees under the general laws of the State of Maryland as now or hereafter in force. SECTION 6.7 REIT Qualification. The Board of Trustees shall use its reasonable best efforts to cause the Trust and the Shareholders to qualify for federal income tax treatment in accordance with the REIT Provisions of the Code. In furtherance of the foregoing, the Board of Trustees shall use its reasonable best efforts to take such actions as are necessary, and may take such actions as in its sole judgment and discretion are desirable, to preserve the status of the Trust as a REIT, including amending the provisions of this Declaration of Trust as provided in Article IX; provided, however, that if the Board of Trustees determines that it is no longer in the best interests of the Trust for it to continue to qualify as a REIT, the Board of Trustees may revoke or otherwise terminate the Trust's REIT election. ARTICLE VII RESTRICTION ON TRANSFER, ACQUISITION AND REDEMPTION OF EQUITY SHARES SECTION 7.1 Definitions. For the purposes of this Article VII, the following terms shall have the following meanings: "Beneficial Ownership" shall mean ownership of Equity Shares by a Person who would be treated as an owner of such Equity Shares under Section 542(a)(2) of the Code either directly -9- or constructively through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner," "Beneficially Owns," "Beneficially Own" and "Beneficially Owned" shall have the correlative meanings. "Beneficiary" shall mean the beneficiary (as determined pursuant to Section 7.19) of the Special Trust created pursuant to Section 7.15. The term "Beneficiaries" shall have the correlative meaning. "Closing Date of the Initial Public Offering" shall mean the time and date of payment for and delivery of Common Shares issued pursuant to the Initial Public Offering. "Equity Shares" shall mean either Common Shares or Preferred Shares. "Excess Shares" shall have the meaning ascribed to it in Section 7.3. "Existing Holder" shall mean (a) any Person who is or would be, upon the exchange of OP Units, the Beneficial Owner of Common Shares and/or Preferred Shares in excess of the Ownership Limit both upon and immediately after the Closing Date of the Initial Public Offering, so long as, but only so long as, such Person Beneficially Owns or would, upon the exchange of OP Units, Beneficially Own Common Shares and/or Preferred Shares in excess of the Ownership Limit and (b) any Person to whom an Existing Holder Transfers, subject to the limitations provided in this Article VII, Beneficial Ownership of Common Shares and/or Preferred Shares causing such transferee to Beneficially Own Common Shares and/or Preferred Shares in excess of the Ownership Limit. "Existing Holder Limit" (a) for any Existing Holder who is an Existing Holder by virtue of clause (a) of the definition thereof, shall mean, initially, the percentage of the outstanding Equity Shares Beneficially Owned, or which would be Beneficially Owned upon the exchange of OP Units, by such Existing Holder upon and immediately after the Closing Date of the Initial Public Offering and, after any adjustment pursuant to Section 7.9, shall mean such percentage of the outstanding Equity Shares as so adjusted; and (b) for any Existing Holder who becomes an Existing Holder by virtue of clause (b) of the definition thereof, shall mean, initially, the percentage of the outstanding Equity Shares Beneficially Owned by such Existing Holder at the time that such Existing Holder becomes an Existing Holder, but in no event shall such percentage be greater than the Existing Holder Limit for the Existing Holder who Transfers Beneficial Ownership of Common Shares and/or Preferred Shares to such transferee Existing Holder or, in the case of more than one transferor, in no event shall such percentage be greater than the smallest Existing Holder Limit of any transferring Existing Holder, and, after any adjustment pursuant to Section 7.9, shall mean such percentage of the outstanding Equity Shares as so adjusted. From the Closing Date of the Initial Public Offering and prior to the Restriction Termination Date, the -10- Secretary of the Trust shall maintain and, upon request, make available to each Existing Holder a schedule which sets forth the then current Existing Holder Limit for each Existing Holder. "Initial Public Offering" means the sale of Common Shares pursuant to the Trust's first effective registration statement for such Common Shares filed under the Securities Act of 1933, as amended. "Market Price" shall mean the last reported sales price reported on the New York Stock Exchange, Inc. (the "Exchange") of Common Shares or Preferred Shares, as the case may be, on the trading day immediately preceding the relevant date, or if not then traded on the Exchange, the last reported sales price of Common Shares or Preferred Shares, as the case may be, on the trading day immediately preceding the relevant date as reported on any exchange or quotation system over which Common Shares or Preferred Shares, as the case may be, may be traded, or if not then traded over any exchange or quotation system, then the market price of Common Shares or Preferred Shares, as the case may be, on the relevant date as determined in good faith by the Board of Trustees. "Operating Partnership" shall mean ERP Operating Limited Partnership, an Illinois limited partnership. "OP Units" shall mean units of limited partnership of the Operating Partnership. "Ownership Limit" shall initially mean that number of Shares which equals the lesser of (a) 5.0% of the number of outstanding Equity Shares and (b) 5.0% of the value of outstanding Equity Shares, and after any adjustment as set forth in Section 7.10, shall mean such greater percentage of the outstanding Equity Shares as so adjusted. The number and value of outstanding Equity Shares shall be determined by the Board of Trustees in good faith, which determination shall be conclusive for all purposes hereof. "Person" shall mean a Person as defined in Article I but solely for purposes of this Article VII shall not include an underwriter that participated in a public offering of the Common Shares and/or Preferred Shares for a period of 25 days following the purchase by such underwriter of the Common Shares and/or Preferred Shares. "Purported Beneficial Transferee" shall mean, with respect to any purported Transfer which results in Excess Shares, the purported beneficial transferee for whom the Purported Record Transferee would have acquired Equity Shares, if such Transfer had been valid under Section 7.2. "Purported Record Transferee" shall mean, with respect to any purported Transfer which results in Excess Shares, the record holder of the Equity Shares, if such Transfer had been valid under Section 7.2. -11- "Restriction Termination Date" shall mean the first day after the Closing Date of the Initial Public Offering on which the Board of Trustees determines that it is no longer in the best interests of the Trust to attempt to, or to continue to, qualify as a REIT. "Special Trust" shall mean the special trust created pursuant to Section 7.15. "Special Trustee" shall mean the Trust as trustee for the Special Trust, and any successor trustee appointed by the Trust. "Transfer" shall mean any sale, transfer, gift, assignment, devise or other disposition of Equity Shares (including (a) the granting of any option or entering into any agreement for the sale, transfer or other disposition of Equity Shares or (b) the sale, transfer, assignment or other disposition of any securities or rights convertible into or exchangeable for Equity Shares but excluding the exchange of OP Units for Equity Shares), whether voluntary or involuntary, whether of record or beneficially and whether by operation of law or otherwise. The terms "Transfers" and "Transferred" shall have the correlative meanings. SECTION 7.2 Ownership Limitation. --------------------- (a) Except as provided in Section 7.12, from and after the Closing Date of the Initial Public Offering and prior to the Restriction Termination Date, no Person (other than an Existing Holder) shall Beneficially Own Common Shares and/or Preferred Shares in excess of the Ownership Limit and no Existing Holder shall Beneficially Own Common Shares and/or Preferred Shares in excess of the Existing Holder Limit for such Existing Holder. (b) Except as provided in Section 7.12, from and after the Closing Date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer that, if effective, would result in any Person (other than an Existing Holder) Beneficially Owning Common Shares and/or Preferred Shares in excess of the Ownership Limit shall be void ab initio as to the Transfer of such Common Shares and/or Preferred Shares which would be otherwise Beneficially Owned by such Person in excess of the Ownership Limit; and the intended transferee shall acquire no rights in such Common Shares and/or Preferred Shares. (c) Except as provided in Sections 7.9 and 7.12, from and after the Closing Date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer that, if effective, would result in any Existing Holder Beneficially Owning Common Shares and/or Preferred Shares in excess of the applicable Existing Holder Limit shall be void ab initio as to the Transfer of such Common Shares and/or Preferred Shares which would be otherwise Beneficially Owned by such Existing Holder in excess of the applicable Existing Holder Limit; and such Existing Holder shall acquire no rights in such Common Shares and/or Preferred Shares. -12- (d) Except as provided in Section 7.12, from and after the Closing Date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer that, if effective, would result in Common Shares and/or Preferred Shares being owned by less than 100 Shareholders (determined without reference to any rules of attribution) shall be void ab initio as to the Transfer of such Common Shares and/or Preferred Shares which would be otherwise owned by the transferee; and the intended transferee shall acquire no rights in such Common Shares and/or Preferred Shares. (e) From and after the Closing Date of the Initial Public Offering and prior to the Restriction Termination Date, any Transfer that, if effective, would result in the Trust being "closely held" within the meaning of Section 856(h) of the Code shall be void ab initio as to the Transfer of the Common Shares and/or Preferred Shares which would cause the Trust to be "closely held" within the meaning of Section 856(h) of the Code; and the intended transferee shall acquire no rights in such Common Shares and/or Preferred Shares. SECTION 7.3 Excess Shares. -------------- (a) If, notwithstanding the other provisions contained in this Article VII but subject to the provisions of Section 7.22, at any time from and after the Closing Date of the Initial Public Offering and prior to the Restriction Termination Date, there is a purported Transfer or change in the capital structure of the Trust (except for a change resulting from the exchange of OP Units for Equity Shares) such that any Person would Beneficially Own Common Shares and/or Preferred Shares in excess of the applicable Ownership Limit or Existing Holder Limit, then, except as otherwise provided in Sections 7.9 and 7.12, such Common Shares and/or Preferred Shares in excess of such Ownership Limit or Existing Holder Limit (rounded up to the nearest whole share) shall constitute "Excess Shares" and be treated as provided in this Article VII. Such designation and treatment shall be effective as of the close of business on the business day prior to the date of the purported Transfer or change in capital structure (except for a change resulting from the exchange of OP Units for Equity Shares). (b) If, notwithstanding the other provisions contained in this Article VII but subject to the provisions of Section 7.22, at any time from and after the Closing Date of the Initial Public Offering and prior to the Restriction Termination Date, there is a purported Transfer or change in the capital structure of the Trust (except for a change resulting from the exchange of OP Units for Equity Shares) which, if effective, would cause the Trust to become "closely held" within the meaning of Section 856(h) of the Code, then the Common Shares and/or Preferred Shares being Transferred which would cause the Trust to be "closely held" within the meaning of Section 856(h) of the Code (rounded up to the nearest whole share) shall constitute Excess Shares and be treated as provided in this Article VII. Such designation and treatment shall be effective as of the close of business on the business day prior to the date of the purported Transfer or change in capital structure (except for a change resulting from the exchange of OP Units for Equity Shares). -13- SECTION 7.4 Prevention of Transfer. If the Board of Trustees or its designee shall at any time determine in good faith that a Transfer has taken place in violation of Section 7.2 or that a Person intends to acquire or has attempted to acquire beneficial ownership (determined without reference to any rules of attribution) or Beneficial Ownership of any Shares in violation of Section 7.2, the Board of Trustees or its designee shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer, including, but not limited to, refusing to give effect to such Transfer on the books of the Trust or instituting proceedings to enjoin such Transfer; provided, however, that any Transfers or attempted Transfers in violation of subparagraphs Section 7.2 (b), (c), (d) and (e) shall automatically result in the designation and treatment described in Section 7.3, irrespective of any action (or non- action) by the Board of Trustees. SECTION 7.5 Notice to Trust. Any Person who acquires or attempts to acquire Shares in violation of Section 7.2, or any Person who is a transferee such that Excess Shares result under Section 7.3, shall immediately give written notice or, in the event of a proposed or attempted Transfer, give at least 15 days prior written notice to the Trust of such event and shall provide to the Trust such other information as the Trust may request in order to determine the effect, if any, of such Transfer or attempted Transfer on the Trust's status as a REIT. SECTION 7.6 Information for Trust. From and after the Closing Date of the Initial Public Offering and prior to the Restriction Termination Date: (a) Every Beneficial Owner of more than 5.0% (or such other percentage, between 1/2 of 1% and 5%, as provided in the income tax regulations promulgated under the Code) of the number or value of outstanding Equity Shares shall, within 30 days after January 1 of each year, give written notice to the Trust stating the name and address of such Beneficial Owner, the number of Shares Beneficially Owned, and a description of how such Shares are held. Each such Beneficial Owner shall provide to the Trust such additional information as the Trust may reasonably request in order to determine the effect, if any, of such Beneficial Ownership on the Trust's status as a REIT. (b) Each Person who is a Beneficial Owner of Common Shares and/or Preferred Shares and each Person (including the Shareholder of record) who is holding Common Shares and/or Preferred Shares for a Beneficial Owner shall provide to the Trust such information as the Trust may reasonably request in order to determine the Trust's status as a REIT, to comply with the requirements of any taxing authority or governmental agency or to determine any such compliance. SECTION 7.7 Other Action by Board. Nothing contained in this Article VII shall limit the authority of the Board of Trustees to take such other action as it deems necessary or advisable to protect the Trust and the interests of the Shareholders by preservation of the Trust's status as a REIT. -14- SECTION 7.8 Ambiguities. In the case of an ambiguity in the application of any of the provisions of this Article VII, including any definition contained in Section 7.1, the Board of Trustees shall have the power to determine the application of the provisions of this Article VII with respect to any situation based on the facts known to it. SECTION 7.9 Modification of Existing Holder Limits. The Existing Holder Limits may be modified as follows: (a) Subject to the limitations provided in Section 7.11, the Board of Trustees may grant stock options which result in Beneficial Ownership of Common Shares and/or Preferred Shares by an Existing Holder pursuant to a stock option plan approved by the Board of Trustees and/or the Shareholders. Any such grant shall increase the Existing Holder Limit for the affected Existing Holder to the maximum extent possible under Section 7.11 to permit the Beneficial Ownership of the Common Shares and/or Preferred Shares issuable upon the exercise of such stock option. (b) Subject to the limitations provided in Section 7.11, an Existing Holder may elect to participate in a dividend reinvestment plan approved by the Board of Trustees which results in Beneficial Ownership of Common Shares and/or Preferred Shares by such participating Existing Holder and any comparable reinvestment plan of the Operating Partnership wherein those Existing Holders holding OP Units are entitled to purchase additional OP Units. Any such participation shall increase the Existing Holder Limit for the affected Existing Holder to the maximum extent possible under Section 7.11 to permit Beneficial Ownership of the Common Shares and/or Preferred Shares acquired or which can be acquired as a result of such participation. (c) The Board of Trustees will reduce the Existing Holder Limit for any Existing Holder after any Transfer permitted in this Article VII by such Existing Holder by the percentage of the total outstanding Equity Shares so Transferred or after the lapse (without exercise) of a stock option described in Section 7.9(a) by the percentage of the total outstanding Equity Shares that the stock option, if exercised, would have represented, but in either case no Existing Holder Limit shall be reduced to a percentage which is less than the Ownership Limit. SECTION 7.10 Increase in Ownership Limit. Subject to the limitations provided in Section 7.11, the Board of Trustees may from time to time increase the Ownership Limit. SECTION 7.11 Limitations on Changes in Existing Holder and Ownership Limits. (a) Neither the Ownership Limit nor any Existing Holder Limit may be increased (nor may any additional Existing Holder Limit be created) if, after giving effect to such increase (or creation), five Beneficial Owners of Common Shares (including all of the then Existing Holders) -15- could Beneficially Own, in the aggregate, more than 50.0% in number or value (determined as provided in the definition of "Ownership Limit" in Section 7.1) of the outstanding Equity Shares. (b) Prior to the modification of any Existing Holder Limit or Ownership Limit pursuant to Sections 7.9 or 7.10, the Board of Trustees may require such opinions of counsel, affidavits, undertakings or agreements as it may deem necessary or advisable in order to determine or ensure the Trust's status as a REIT. (c) No Existing Holder Limit shall be reduced to a percentage which is less than the Ownership Limit. SECTION 7.12 Exemptions by Board. The Board of Trustees, upon receipt of a ruling from the Internal Revenue Service or an opinion of counsel or other evidence satisfactory to the Board of Trustees and upon at least 15 days written notice from a Transferee prior to the proposed Transfer which, if consummated, would result in the intended Transferee owning Shares in excess of the Ownership Limit or Existing Holder Limit, as the case may be, and upon such other conditions as the Board of Trustees may direct, may exempt a Person from the Ownership Limit or the Existing Holder Limit, as the case may be. SECTION 7.13 Legend. Each certificate for Common Shares and for Preferred Shares shall bear substantially the following legend: The securities represented by this certificate are subject to restrictions on transfer for the purpose of the Trust's maintenance of its status as a real estate investment trust under the Internal Revenue Code of 1986, as amended. Except as otherwise provided pursuant to the Declaration of Trust of the Trust, no Person (unless such Person is an Existing Holder) may Directly or Beneficially Own Common Shares and/or Preferred Shares in excess of that number of Shares which equals the lesser of 5.0% (or such greater percentage as may be determined by the Board of Trustees of the Trust) of (a) the number of outstanding Equity Shares of the Trust and (b) the value of outstanding Equity Shares of the Trust. Any Person who attempts or proposes to Beneficially Own Common Shares and/or Preferred Shares in excess of the above limitations must notify the Trust in writing at least 15 days prior to such proposed or attempted Transfer. All italicized terms in this legend have the meanings defined in the Declaration of Trust of the Trust, a copy of which, including the restrictions on transfer, will be sent without charge to each Shareholder who so requests. If the restrictions on transfer are violated, the securities represented -16- hereby will be designated and treated as Excess Shares which will be held in a Special Trust by the Trust. SECTION 7.14 Severability. If any provision of this Article VII or any application of any such provision is determined to be void, invalid or unenforceable by any court having jurisdiction over the issue, the validity and enforceability of the remaining provisions shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court. SECTION 7.15 Special Trust for Excess Shares. Upon any purported Transfer that results in Excess Shares pursuant to Section 7.3, such Excess Shares shall be deemed to have been transferred to the Trust, as Special Trustee of a Special Trust for the benefit of such Beneficiary or Beneficiaries to whom an interest in such Excess Shares may later be transferred pursuant to Section 7.19. Excess Shares so held in trust shall be issued and outstanding Shares. The Purported Record Transferee shall have no rights in such Excess Shares except the right to designate a transferee of such Excess Shares upon the terms specified in Section 7.19. The Purported Beneficial Transferee shall have no rights in such Excess Shares except as provided in Section 7.19. SECTION 7.16 No Dividends for Excess Shares. Excess Shares shall not be entitled to any dividends or other distribution. Any dividend or other distribution paid prior to the discovery by the Trust that the Common Shares and/or Preferred Shares have been Transferred so as to be deemed Excess Shares shall be repaid to the Trust upon demand. SECTION 7.17 Liquidation Distributions for Excess Shares. Subject to the preferential rights of the Preferred Shares, if any, as may be determined by the Board of Trustees, in the event of any voluntary or involuntary liquidation, dissolution or winding up of, or any other distribution of all or substantially all of the assets of, the Trust, each holder of Excess Shares shall be entitled to receive, in the case of Excess Shares constituting Preferred Shares, ratably with each other holder of Preferred Shares and Excess Shares constituting Preferred Shares and, in the case of Excess Shares constituting Common Shares, ratably with each other holder of Common Shares and Excess Shares constituting Common Shares, that portion of the assets of the Trust available for distribution to the Shareholders as the number of Excess Shares held by such holder bears to the total number of (a) Preferred Shares and Excess Shares then outstanding in the case of Excess Shares constituting Preferred Shares and (b) Common Shares and Excess Shares then outstanding in the case of Excess Shares constituting Common Shares. The Trust, as holder of the Excess Shares in trust, or if the Trust shall have been dissolved, any trustee appointed by the Trust prior to its dissolution, shall distribute ratably to the Beneficiaries of the Trust, when determined, any such assets received in respect of the Excess Shares in any liquidation, dissolution or winding up of, or any distribution of the assets of the Trust. -17- SECTION 7.18 No Voting Rights for Excess Shares. The holders of Excess Shares shall not be entitled to vote on any matter. SECTION 7.19 Non-Transferability of Excess Shares. Excess Shares shall not be transferable. Subject to Section 7.20, the Purported Record Transferee may freely designate a Beneficiary of an interest in the Special Trust (representing the number of Excess Shares held in the Special Trust attributable to a transaction that resulted in the Excess Shares) if (a) Excess Shares held in the Special Trust would not be Excess Shares in the hands of such Beneficiary and (b) the Purported Beneficial Transferee does not receive a price for designating such Beneficiary that reflects a price per Excess Share that exceeds (i) the price per Share such Purported Beneficial Transferee paid for the Common Shares and/or Preferred Shares, as the case may be, in the purported Transfer that resulted in the Excess Shares, or (ii) if the Purported Beneficial Transferee did not give value for such Excess Shares (through a gift, devise or other transaction), a price per Share equal to the Market Price for the Excess Shares on the date of the purported Transfer that resulted in the Excess Shares. Upon such transfer of an interest in the Special Trust, the corresponding Excess Shares in the Special Trust shall be automatically exchanged for an equal number of Common Shares and/or Preferred Shares, as applicable, and such Common Shares and/or Preferred Shares, as applicable, shall be transferred of record to the transferee of the interest in the Trust if such Common Shares and/or Preferred Shares, as applicable, would not be Excess Shares in the hands of such transferee. Prior to any transfer of any interest in the Special Trust, the Purported Record Transferee must give advance notice to the Trust of the intended transfer and the Trust must have waived in writing its purchase rights under Section 7.20. Notwithstanding the foregoing, if a Purported Beneficial Transferee receives a price for designating a Beneficiary of an interest in the Special Trust that exceeds the amounts allowable under this Section 7.19, such Purported Beneficial Transferee shall pay, or cause such Beneficiary to pay, such excess to the Trust. SECTION 7.20 Call by Trust on Excess Shares. Excess Shares shall be deemed to have been offered for sale to the Trust, or its designee, at a price per Share equal to the lesser of (a) the price per Share in the transaction that created such Excess Shares (or, in the case of a devise or gift, the Market Price at the time of such devise or gift) and (b) the Market Price of Common Shares or Preferred Shares to which such Excess Shares relate on the date the Trust, or its designee, accepts such offer. The Trust shall have the right to accept such offer for a period of 90 days after the later of (a) the date of the transaction that resulted in such Excess Shares and (b) the date the Board of Trustees determines in good faith that a transaction resulting in Excess Shares has occurred, if the Trust does not receive a notice of such Transfer pursuant to Section 7.5, but in no event later than a permitted Transfer pursuant to and in compliance with the terms of Section 7.19. -18- SECTION 7.21 Trust as Agent. If any of the foregoing provisions of this Article VII are determined to be void, invalid or unenforceable by any court of competent jurisdiction, then the Purported Record Transferee may be deemed, at the option of the Trust, to have acted as an agent of the Trust in acquiring such Excess Shares and to hold such Excess Shares on behalf of the Trust and subject to its direction. SECTION 7.22 New York Stock Exchange Transactions. Notwithstanding any other provision of this Article VII, nothing in this Declaration of Trust shall impair the settlement of transactions entered into on the facilities of the New York Stock Exchange, Inc. SECTION 7.23 Special Rules for Series A Preferred Shares. A. Certain Definitions. For purposes of this section 7.23 the following terms shall have the following meanings: "Closing Date of the Series A Preferred Shares Offering" shall mean the time and date of payment for and delivery of Series A Preferred Shares issued pursuant to the Trust's effective registration statement for such Series A Preferred Shares filed under the Securities Act of 1933, as amended. "Special Triggering Event" shall mean either (i) the redemption or purchase by the Trust of all or a portion of the outstanding shares of beneficial interest in the Trust, or (ii) a change in the value of the Series A Preferred Shares relative to any other class of beneficial interest in the Trust. B. Special Triggering Event. If during the period commencing on the Closing Date of the Series A Preferred Shares Offering and prior to the Restriction Termination Date, a Special Triggering Event (if effective) or other event or occurrence (if effective) would result in any violation of section 7.2(a) of the Trust's Declaration of Trust (or would result in the Trust being "closely held" within the meaning of Section 856(h) of the Code or would otherwise cause the Trust to fail to qualify as a REIT), then (i) the number of Series A Preferred Shares (rounded up to the nearest whole share) that would (but for this section 7.23 cause any Person to Beneficially Own either Series A Preferred Shares, or to Beneficially own Series A Preferred Shares and any other shares of beneficial interest in the Trust, in violation of section 7.2(a) (or would result in the Trust being "closely held" or otherwise fail to qualify as a REIT) shall constitute "Excess Shares" and shall be treated as provided in Article VII. Such designation and treatment shall be effective as of the close of business on the Business Day prior to the date of the Special Triggering Event or other event or occurrence. -19- C. Ambiguity. In the case of an ambiguity in the application of any of the provisions of this section 7.23, including any definition contained in paragraph A, the Board of Trustees shall have the power to determine the application of this section 7.23 with respect to any situation based on the facts known to it (subject, however, to the provisions of section 7.2(a)). SECTION 7.24 Special Rules for Series B Preferred Shares. A. Certain Definitions. For purposes of this section 7.24 the following terms shall have the following meanings: "Closing Date of the Series B Preferred Shares Offering" shall mean the time and date of payment for and delivery of Series B Preferred Shares issued pursuant to the Trust's effective registration statement for such Series B Preferred Shares filed under the Securities Act of 1933, as amended. "Special Triggering Event" shall mean either (i) the redemption or purchase by the Trust of all or a portion of the outstanding shares of beneficial interest in the Trust, or (ii) a change in the value of the Series B Preferred Shares relative to any other class of beneficial interest in the Trust. B. Special Triggering Event. If during the period commencing on the Closing Date of the Series B Preferred Shares Offering and prior to the Restriction Termination Date, a Special Triggering Event (if effective) or other event or occurrence (if effective) would result in any violation of section 7.2(a) of the Trust's Declaration of Trust (or would result in the Trust being "closely held" within the meaning of Section 856(h) of the Code or would otherwise cause the Trust to fail to qualify as a REIT), then (i) the number of Series B Preferred Shares (rounded up to the nearest whole share) that would (but for this section 7.24 cause any Person to Beneficially Own either Series B Preferred Shares, or to Beneficially own Series B Preferred Shares and any other shares of beneficial interest in the Trust, in violation of section 7.2(a) (or would result in the Trust being "closely held" or otherwise fail to qualify as a REIT) shall constitute "Excess Shares" and shall be treated as provided in Article VII. Such designation and treatment shall be effective as of the close of business on the Business Day prior to the date of the Special Triggering Event or other event or occurrence. C. Ambiguity. In the case of an ambiguity in the application of any of the provisions of this section 7.24, including any definition contained in paragraph A, the Board of Trustees shall have the power to determine the application of this section 7.24 -20- with respect to any situation based on the facts known to it (subject, however, to the provisions of section 7.2(a)). SECTION 7.25 Special Rules for Series C Preferred Shares A. Certain Definitions. For purposes of this section 7.25 the following terms shall have the following meanings: "Closing Date of the Series C Preferred Shares Offering" shall mean the time and date of payment for and delivery of Series C Preferred Shares issued pursuant to the Trust's effective registration statement for such Series C Preferred Shares filed under the Securities Act of 1933, as amended. "Special Triggering Event" shall mean either (i) the redemption or purchase by the Trust of all or a portion of the outstanding shares of beneficial interest in the Trust, or (ii) a change in the value of the Series C Preferred Shares relative to any other class of beneficial interest in the Trust. B. Special Triggering Event. If during the period commencing on the Closing Date of the Series C Preferred Shares Offering and prior to the Restriction Termination Date, a Special Triggering Event (if effective) or other event or occurrence (if effective) would result in any violation of section 7.2(a) of the Trust's Declaration of Trust (or would result in the Trust being "closely held" within the meaning of Section 856(h) of the Code or would otherwise cause the Trust to fail to qualify as a REIT), then (i) the number of Series C Preferred Shares (rounded up to the nearest whole share) that would (but for this section 7.25) cause any Person to Beneficially Own either Series C Preferred Shares, or to Beneficially own Series C Preferred Shares and any other shares of beneficial interest in the Trust, in violation of section 7.2(a) (or would result in the Trust being "closely held" or otherwise fail to qualify as a REIT) shall constitute "Excess Shares" and shall be treated as provided in Article VII. Such designation and treatment shall be effective as of the close of business on the Business Day prior to the date of the Special Triggering Event or other event or occurrence. C. Ambiguity. In the case of an ambiguity in the application of any of the provisions of this section 7.25, including any definition contained in paragraph A, the Board of Trustees shall have the power to determine the application of this section 7.25 with respect to any situation based on the facts known to it (subject, however, to the provisions of Section 7.2(a)). ARTICLE VIII -21- SHAREHOLDERS SECTION 8.1. Meetings of Shareholders. There shall be an annual meeting of the Shareholders, to be held at such time and place as shall be determined by or in the manner prescribed in Article II of the Bylaws, at which Trustees shall be elected and any other proper business may be conducted. Except as otherwise provided in this Declaration of Trust, special meetings of Shareholders may be called in the manner provided in Article II of the Bylaws. If there are no Trustees, the President or any other officer of the Trust shall promptly call a special meeting of the Shareholders entitled to vote for the election of successor Trustees. Any meeting may be adjourned and reconvened as the Trustees determine or as provided in Article II of the Bylaws. SECTION 8.2. Voting Rights of Shareholders. Subject to the provisions of any class or series of Shares then outstanding, the Shareholders shall be entitled to vote only on the following matters: (a) the election or removal of Trustees; (b) the amendment of this Declaration of Trust; (c) the voluntary dissolution or termination of the Trust; and (d) the merger or consolidation of the Trust or the sale or other disposition of all or substantially all of the Trust Property. Except with respect to the foregoing matters, no action taken by the Shareholders at any meeting shall in any way bind the Trustees. ARTICLE IX AMENDMENT SECTION 9.1 By Shareholders. Except as provided in Section 9.2 hereof, this Declaration of Trust may be amended only by the affirmative vote of the holders of not less than two-thirds of all the Shares then outstanding and entitled to vote on the matter. SECTION 9.2 By Trustees. The Trustees, by a two-thirds vote, may amend provisions of this Declaration of Trust from time to time to enable the Trust to qualify as a real estate investment trust under the Code or under Title 8. SECTION 9.3 No Other Amendment. This Declaration of Trust may not be amended except as provided in this Article IX. ARTICLE X DURATION OF TRUST -22- The Trust shall continue perpetually unless terminated pursuant to any applicable provision of Title 8. The Trust may be voluntarily dissolved or its existence terminated only by the affirmative vote of the holders of not less than two-thirds of all the Shares then outstanding and entitled to vote on the matter. The Trust may sell or otherwise dispose of all or substantially all of the Trust Property only by the affirmative vote of the holders of not less than two-thirds of all the Shares then outstanding and entitled to vote on the matter. ARTICLE XI LIABILITY OF SHAREHOLDERS, TRUSTEES, OFFICERS, EMPLOYEES AND AGENTS AND TRANSACTIONS BETWEEN THEM AND THE TRUST SECTION 11.1 Limitation of Shareholder Liability. No Shareholder shall be liable for any debt, claim, demand, judgment or obligation of any kind of, against or with respect to the Trust by reason of his being a Shareholder, nor shall any Shareholder be subject to any personal liability whatsoever, in tort, contract or otherwise, to any Person in connection with the Trust Property or the affairs of the Trust. SECTION 11.2 Limitation of Trustee and Officer Liability. To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of trustees and officers of a real estate investment trust, no Trustee or officer of the Trust shall be liable to the Trust or to any Shareholder for money damages. Neither the amendment nor repeal of this Section, nor the adoption or amendment of any other provision of this Declaration of Trust inconsistent with this Section, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. In the absence of any Maryland statute limiting the liability of trustees and officers of a Maryland real estate investment trust for money damages in a suit by or on behalf of the Trust or by any Shareholder, no Trustee or officer of the Trust shall be liable to the Trust or to any Shareholder for money damages except to the extent that (a) the Trustee or officer actually received an improper benefit or profit in money, property or services, for the amount of the benefit or profit in money, property or services actually received or (b) a judgment or other final adjudication adverse to the Trustee or officer is entered in a proceeding based on a finding in the proceeding that the Trustee's or officer's action or failure to act was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. SECTION 11.3 Express Exculpatory Clauses in Instruments. Neither the Shareholders nor the Trustees, officers, employees or agents of the Trust shall be liable under any written instrument creating an obligation of the Trust, and all Persons shall look solely to the Trust Property for the payment of any claim under or for the performance of that instrument. The -23- omission of the foregoing exculpatory language from any instrument shall not affect the validity or enforceability of such instrument and shall not render any Shareholder, Trustee, officer, employee or agent liable thereunder to any third party, nor shall the Trustees or any officer, employee or agent of the Trust be liable to anyone for such omission. SECTION 11.4 Indemnification and Advance for Expenses. The Trust shall have the power, to the maximum extent permitted by Maryland law in effect from time to time, to obligate itself to indemnify, and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to, (a) any individual who is a present or former Shareholder, Trustee or officer of the Trust or (b) any individual who, while a Shareholder, Trustee or officer of the Trust and at the express request of the Trust, serves or has served another corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, Shareholder, partner or trustee of such corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, from and against all claims and liabilities to which such person may become subject by reason of his being or having been a Shareholder, Trustee or officer. The Trust shall have the power, with the approval of its Board of Trustees, to provide such indemnification and advancement of expenses to a person who served a predecessor of the Trust in any of the capacities described in (a) or (b) above and to any employee or agent of the Trust or a predecessor of the Trust. SECTION 11.5 Transactions Between the Trust and its Trustees, Officers, Employees and Agents. Subject to any express restriction in this Declaration of Trust, including (but not limited to) Section 6.4, or any restriction adopted by the Trustees in the Bylaws or by resolution, the Trust may enter into any contract or transaction of any kind (including, without limitation, for the purchase or sale of property or for any type of services, including those in connection with the underwriting or the offer or sale of Securities of the Trust) with any Person, including any Trustee, officer, employee or agent of the Trust or any Person Affiliated with a Trustee, officer, employee or agent of the Trust, whether or not any of them has a financial interest in such transaction. ARTICLE XII MISCELLANEOUS SECTION 12.1 Governing Law. This Declaration of Trust is executed by the Trustees and delivered in the State of Maryland with reference to the laws thereof, and the rights of all parties and the validity, construction and effect of every provision hereof shall be subject to and construed according to the laws of the State of Maryland without regard to conflicts of laws provisions thereof. -24- SECTION 12.2 Reliance by Third Parties. Any certificate shall be final and conclusive as to any Person dealing with the Trust if executed by an individual who, according to the records of the Trust or of any recording office in which this Declaration of Trust may be recorded, appears to be the Secretary or an Assistant Secretary of the Trust or a Trustee, and if certifying to: (a) the number or identify of Trustees, officers of the Trust or Shareholders; (b) the due authorization of the execution of any document; (c) any action or vote taken, and the existence of a quorum at a meeting of Trustees or Shareholders; (d) a copy of this Declaration or of the Bylaws as a true and complete copy as then in force; (e) an amendment to this Declaration; (f) the termination of the Trust; or (g) the existence of any fact or facts which relate to the affairs of the Trust. No purchaser, lender, transfer agent or other Person shall be bound to make any inquiry concerning the validity of any transaction purporting to be made on behalf of the Trust by the Trustees or by any officer, employee or agent of the Trust. SECTION 12.3 Provisions in Conflict with Law or Regulations. (a) The provisions of this Declaration of Trust are severable, and if the Trustees shall determine, with the advice of counsel, that any one or more of such provisions (the "Conflicting Provisions") are in conflict with the REIT Provisions of the Code, Title 8 or any other applicable federal or state law, the Conflicting Provisions shall be deemed never to have constituted a part of this Declaration of Trust, even without any amendment of this Declaration pursuant to Article IX; provided, however, that such determination by the Trustees shall not affect or impair any of the remaining provisions of this Declaration of Trust or render invalid or improper any action taken or omitted prior to such determination. No Trustee shall be liable for making or failing to make such a determination. (b) If any provision of this Declaration of Trust shall be held invalid or unenforceable in any jurisdiction, such holding shall not in any manner affect or render invalid or unenforceable such provision in any other jurisdiction or any other provision of this Declaration of Trust in any jurisdiction. SECTION 12.4 Construction. In this Declaration of Trust, unless the context otherwise requires, words used in the singular or in the plural include both the plural and singular and words denoting any gender include all genders. The title and headings of different parts of this Declaration are inserted for convenience and shall not affect the meaning, construction or effect of this Declaration. In defining or interpreting the powers and duties of the Trust and its Trustees and officers, reference may be made, to the extent appropriate and not inconsistent with the Code or Title 8, to Titles 1 through 3 of the Corporations and Associations Article of the Annotated Code of Maryland. In furtherance and not in limitation of the foregoing, in accordance with the provisions of Title 3, Subtitles 6 and 7, of the Corporations and Associations Article of the Annotated Code of Maryland, the Trust shall be included within the definition of "corporation" for purposes of such provisions. -25- SECTION 12.5 Recordation. This Declaration of Trust and any amendment or supplement hereto shall be filed for record with the State Department of Assessments and Taxation of Maryland and may also be filed or recorded in such other places as the Trustees deem appropriate, but failure to file for record this Declaration or any amendment or supplement hereto in any office other than in the State of Maryland shall not affect or impair the validity or effectiveness of this Declaration or any amendment hereto. A restated Declaration shall, upon filing, be conclusive evidence of all amendments or supplements contained therein and may thereafter be referred to in lieu of the original Declaration and the various amendments or supplements thereto. ARTICLE XIII DESIGNATION OF PREFERRED SHARES SECTION 13.1 Series A Preferred Shares. Pursuant to Section 5.3 of this Declaration, a series of preferred shares of beneficial interest designated 9 3/8% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest ($0.01 Par Value Per Share) (Liquidation Preference $25.00 Per Share) (the "Series A Preferred Shares") is hereby established on the following terms: (a) Certain Definitions. Unless the context otherwise requires, the terms defined in this Section 13.1(a) shall have, the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural). "Business Day" shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close. "Common Shares" shall mean the common shares of beneficial interest, $.01 par value per share, of the Trust. "Dividend Period" shall have the meaning set forth in Section 13.1(b)(3). "Junior Shares" shall have the meaning set forth in Section 13.1(b)(2). -26- "Person" shall mean an individual, corporation, partnership, estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity, and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended; but does not include an underwriter which participates in a public offering of the Series B Preferred Shares provided that the ownership of Series B Preferred Shares by such underwriter would not result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, or would otherwise result in the Trust failing to qualify as a REIT. "Preferred Shares" shall mean shares of beneficial interest that are either Series A Preferred Shares, Series B Preferred Shares, Series C Preferred Shares, Series D Preferred Shares, Series E Preferred Shares or Excess Preferred Shares. "Quarterly Dividend Date" shall have the meaning set forth in Section 13.1(b)(3). "Record Date" shall have the meaning set forth in Section 13.1(b)(3). "REIT" shall mean a Real Estate Investment Trust under Section 856 of the Code. "Series A Redemption Date" shall have the meaning set forth in Section 13.1(b)(5). "Series A Redemption Price" shall have the meaning st forth in Section 13.1(b)(5). (b) Series A Preferred Shares (1) Number. The number of shares of the Series A Preferred Shares shall be 6,900,000. (2) Relative Seniority. In respect of rights to receive dividends and to participate in distributions or payments in the event of any Liquidation, dissolution or winding up of the Trust, the Series A Preferred Shares shall rank senior to the Common Shares and any other class or series of shares of beneficial interest of the Trust ranking, as to dividends and upon Liquidation, junior to the Series A Preferred Shares (collectively, "Junior Shares"). (3) Dividends. The holders of the then outstanding Series A Preferred Shares shall be entitled to receive, when and as declared by the Board of Trustees out of any funds legally available therefor, cumulative dividends at the rate of $2.34375 per share per year, -27- payable in equal amounts of $.5859375 per share quarterly in cash on the fifteenth day, or the next succeeding Business Day, of January, April, July and October in each year, beginning July 17, 1995 (each such day being hereinafter called a "Quarterly Dividend Date" and each period ending on a Quarterly Dividend Date being hereinafter called a "Dividend Period"), to shareholders of record at the close of business on such date as shall be fixed by the Board of Trustees at the time of declaration of the dividend (the "Record Date"), which shall be not less than 10 nor more than 30 days preceding the Quarterly Dividend Date. The amount of any dividend payable for the initial Dividend Period and for any other Dividend Period shorter than a full Dividend Period shall be prorated and computed on the basis of a 360-day year of twelve 30-day months. Dividends on each share of Series A Preferred Shares shall accrue and be cumulative from and including the date of original issue thereof, whether or not (i) dividends on such shares are earned or declared or (ii) on any Quarterly Dividend Date there shall be funds legally available for the payment of dividends. Dividends paid on the Series A Preferred Shares in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a per share basis among all such shares at the time outstanding. The amount of any dividends accrued on any Series A Preferred Shares at any Quarterly Dividend Date shall be the amount of any unpaid dividends accumulated thereon, to and including such Quarterly Dividend Date, whether or not earned or declared, and the amount of dividends accrued on any shares of Series A Preferred Shares at any date other than a Quarterly Dividend Date shall be equal to the sum of the amount of any unpaid dividends accumulated thereon, to and including the last preceding Quarterly Dividend Date, whether or not earned or declared, plus an amount calculated on the basis of the annual dividend rate of $2.34375 for the period after such last preceding Quarterly Dividend Date to and including the date as of which the calculation is made based on a 360-day year of twelve 30-day months. Except as provided in these Articles, the Series A Preferred Shares shall not be entitled to participate in the earnings or assets of the Trust . (4) Liquidation Rights. (A) Upon the voluntary or involuntary dissolution, liquidation or winding up of the Trust, the holders of the Series A Preferred Shares then outstanding shall be entitled to receive and to be paid out of the assets of the Trust available for distribution to its shareholders, before any payment or distribution shall be made on any Junior Shares, the amount of $25.00 per share, plus accrued and unpaid dividends thereon. -28- (B) After the payment to the holders of the Series A Preferred Shares of the full preferential amounts provided for in this paragraph (b), the holders of the Series A Preferred Shares as such shall have no right or claim to any of the remaining assets of the Trust. (C) If, upon any voluntary or involuntary dissolution, liquidation, or winding up of the Trust, the amounts payable with respect to the preference value of the Series A Preferred Shares and any other shares of beneficial interest of the Trust ranking as to any such distribution on a parity with the Series A Preferred Shares are not paid in full, the holders of the Series A Preferred Shares and of such other shares will share ratably in any such distribution of assets of the Trust in proportion to the full respective preference amounts to which they are entitled. (D) Neither the sale of all or substantially all the property or business of the Trust, nor the merger or consolidation of the Trust into or with any other entity or the merger or consolidation of any other entity into or with the Trust, shall be deemed to be a dissolution, Liquidation or winding up, voluntary or involuntary, for the purposes of this paragraph (b). (5) Redemption. (A) Optional Redemption. On and after June 1, 2000, the Trust may, at its option, redeem at any time all or, from time to time, part of the Series A Preferred Shares at a price per share (the "Series A Redemption Price"), payable in cash, of $25.00, together with all accrued and unpaid dividends to and including the date fixed for redemption (the "Series A Redemption Date"). (B) Procedures for Redemption. (i) Notice of any redemption will be mailed by the Trust, postage prepaid, not less than 30 nor more than 60 days prior to the Series A Redemption Date, addressed to the holders of record of the Series A Preferred Shares to be redeemed at their addresses as they appear on the share transfer records of the Trust. No failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any Series A Preferred Shares except as to the holder to whom the Trust has failed to give notice or except as to the holder to whom notice was defective. In addition to any information required by law or by the applicable rules of any exchange upon which Series A Preferred Shares may be listed or admitted to trading, such notice shall state: (a) the Series A Redemption Date; (b) the Series A Redemption Price; (c) the number of Series A Preferred Shares to be redeemed; (d) the place or places -29- where certificates for such shares are to be surrendered for payment of the Series A Redemption Price; (e) that dividends on the shares to be redeemed will cease to accumulate on the Series A Redemption Date; and (f) the date on which conversion rights shall expire, the conversion price and the place or places where certificates for such shares are to be surrendered for conversion. (ii) If notice has been mailed in accordance with subparagraph (5)(B)(i) above and provided that on or before the Series A Redemption Date specified in such notice all funds necessary for such redemption shall have been irrevocably set aside by the Trust, separate and apart from its other funds in trust for the pro rata benefit of the holders of the Series A Preferred Shares so called for redemption, so as to be, and to continue to be available therefor, then, from and after the Series A Redemption Date, dividends on the Series A Preferred Shares so called for redemption shall cease to accumulate, and said shares shall no longer be deemed to be outstanding and shall not have the status of Series A Preferred Shares and all rights of the holders thereof as shareholders of the Trust (except the right to receive the Series A Redemption Price) shall cease. Upon surrender, in accordance with said notice, of the certificates for any Series A Preferred Shares so redeemed (properly endorsed or assigned for transfer, if the Trust shall so require and the notice shall so state), such Series A Preferred Shares shall be redeemed by the Trust at the Series A Redemption Price. In case fewer than all the Series A Preferred Shares represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the unredeemed Series A Preferred Shares without cost to the holder thereof. (iii) Any funds deposited with a bank or trust company for the purpose of redeeming Series A Preferred Shares shall be irrevocable except that: (a) the Trust shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any shares redeemed shall have no claim to such interest or other earnings; and (b) any balance of monies so deposited by the Trust and unclaimed by the holders of the Series A Preferred Shares entitled thereto at the expiration of two years from the applicable Series A Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Trust, and after any such repayment, the holders of the shares entitled to the funds so repaid to the Trust shall look only to the Trust for payment without interest or other earnings. -30- (iv) No Series A Preferred Shares may be redeemed except with funds legally available for the payment of the Series A Redemption Price. (v) Unless full accumulated dividends on all Series A Preferred Shares shall have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past Dividend Periods and the then current Dividend Period, no Series A Preferred Shares shall be redeemed (unless all outstanding Series A Preferred Shares are simultaneously redeemed) or purchased or otherwise acquired directly or indirectly (except by conversion into or exchange for capital shares of the Trust ranking junior to the Series A Preferred Shares as to dividends and upon liquidation); provided, however, that the foregoing shall not prevent the redemption of Series A Preferred Shares pursuant to Article VII of the Declaration of Trust or the purchase or acquisition of Series A Preferred Shares pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of Series A Preferred Shares. (vi) If the Series A Redemption Date is after a Record Date and before the related Quarterly Dividend Date, the dividend payable on such Quarterly Dividend Date shall be paid to the holder in whose name the Series A Preferred Shares to be redeemed are registered at the close of business on such Record Date notwithstanding the redemption thereof between such Record Date and the related Quarterly Dividend Date or the Trust's default in the payment of the dividend due. (vii) In case of redemption of less than all Series A Preferred Shares at the time outstanding, the Series A Preferred Shares to be redeemed shall be selected pro rata from the holders of record of such shares in proportion to the number of Series A Preferred Shares held by such holders (with adjustments to avoid redemption of fractional shares) or by any other equitable method determined by the Trust. (6) Voting Rights. Except as required by law, the holders of the Series A Preferred Shares shall not be entitled to vote at any meeting of the shareholders for election of trustees or for any other purpose or otherwise to participate in any action taken by the Trust or the shareholders thereof, or to receive notice of any meeting of shareholders. (A) Whenever dividends on any Series A Preferred Shares shall be in arrears for six or more quarterly periods, the holders of such Series A Preferred Shares (voting separately as a class with all other series of Preferred Shares upon which like voting rights have been conferred and are exercisable) will be entitled to vote for the election of two additional Trustees of the Trust at a special meeting -31- called by the holders of record of at least ten percent (10%) of any series of Preferred Shares so in arrears (unless such request is received less than 90 days before the date fixed for the next annual or special meeting of the shareholders) or at the next annual meeting of shareholders, and at each subsequent annual meeting until all dividends accumulated on such Series A Preferred Shares for the past dividend periods and the then current dividend period shall have been fully paid or declared and a sum sufficient for the payment thereof set aside for payment. In such case, the entire Board of Trustees of the Trust will be increased by two Trustees. (B) So long as any Series A Preferred Shares remain outstanding, the Trust will not, without the affirmative vote or consent of the holders of at least two-thirds of the Series A Preferred Shares outstanding at the time, given in person or by proxy, either in writing or at a meeting (such series voting separately as a class), (i) authorize or create, or increase the authorized or issued amount of, any class or series of shares of beneficial interest ranking prior to the Series A Preferred Shares with respect to the payment of dividends or the distribution of assets upon liquidation, dissolution or winding up or reclassify any authorized shares of beneficial interest of the Trust into such shares, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such shares; or (ii) amend, alter or repeal the provisions of the Trust's Declaration of Trust, whether by merger, consolidation or otherwise (an "Event"), so as to materially and adversely affect any right, preference, privilege or voting power of the Series A Preferred Shares or the holders thereof; provided, however, with respect to the occurrence of any of the Events set forth in (ii) above, so long as the Series A Preferred Shares remain outstanding with the terms thereof materially unchanged, taking into account that upon the occurrence of an Event, the Trust may not be the surviving entity, the occurrence of any such Event shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting power of holders of Series A Preferred Shares and provided further that (x) any increase in the amount of the authorized Preferred Shares or the creation of issuance of any other Series A Preferred Shares, or (y) any increase in the amount of authorized Series A Preferred Shares or any other Preferred Shares, in each case ranking on a parity with or junior to the Series A Preferred Shares with respect to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding Series A Preferred Shares shall have been redeemed or -32- called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. (7) Conversion. The Series A Preferred Shares are not convertible into or exchangeable for any other property or securities of the Trust. (8) Exclusion of Other Rights. Except as may otherwise be required by law, the Series A Preferred Shares shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this Declaration of Trust. The Series A Preferred Shares shall have no preemptive or subscription rights. (9) Headings of Subdivisions. The headings of the various subdivisions within this Section 13.2 are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. (10) Severability of Provisions. If any voting powers, preferences and relative, participating, optional and other special rights of the Series A Preferred Shares and qualifications, limitations and restrictions thereof set forth in this Section 13.1 is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Series A Preferred Shares and qualifications, limitations and restrictions thereof set forth in this Section 13.1 which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional or other special rights of Series A Preferred Shares and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special right of Series A Preferred Shares and qualifications, limitations and restrictions there of unless so expressed herein. SECTION 13.2 Series B Preferred Shares. Pursuant 5.3 of this Declaration, a series of preferred shares of beneficial interest designated 9 1/8% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest ($0.01 Par Value Per Share) (Liquidation Preference $250.00 Per Share) (collectively, the "Series B Preferred Shares") is hereby established on the following terms: (a) Certain Definitions. -33- Unless the context otherwise requires, the terms defined in this Section 13.2(a) shall have the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural). "Business Day" shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close. "Common Shares" shall mean the common shares of beneficial interest, $.01 par value per share, of the Trust. "Dividend Period" shall have the meaning set forth in Section 13(b)(3). "Junior Shares" shall have the meaning set forth in Section 13(b)(2). "Person" shall mean an individual, corporation, partnership, estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity, and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended; but does not include an underwriter which participates in a public offering of the Series A Preferred Shares provided that the ownership of Series A Preferred Shares by such underwriter would not result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, or would otherwise result in the Trust failing to qualify as a REIT. "Preferred Shares" shall mean preferred shares of beneficial interest, $.01 par value per share, including Series A Preferred Shares, Series B Preferred Shares, Series C Preferred Shares, Series D Preferred Shares, and Series E Preferred Shares. "Quarterly Dividend Date" shall have the meaning set forth in Section 13(b)(3) below. "Record Date" shall have the meaning set forth in Section 13(b)(3) below. "REIT" shall mean a Real Estate Investment Trust under Section 856 of the Code. "Series B Redemption Date" shall have the meaning set forth in Section 13(b)(5) below. -34- "Series B Redemption Price" shall have the meaning set forth in Section 13(b)(5) below. (b) Series B Preferred Shares (1) Number. The maximum number of shares of the Series B Preferred Shares shall be 575,000. (2) Relative Seniority. In respect of rights to receive dividends and to participate in distributions or payments in the event of any Liquidation, dissolution or winding up of the Trust, the Series B Preferred Shares shall rank pari passu with any other preferred shares of beneficial interest of the Trust, including the Series A Preferred Shares, Series C Preferred Shares, Series D Preferred Shares, and Series E Preferred Shares. The Series B Preferred Shares will rank senior to the Common Shares and any other class or series of shares of beneficial interest of the Trust ranking, as to dividends and upon Liquidation, junior to the Preferred Shares (collectively, "Junior Shares"). (3) Dividends. The holders of the then outstanding Series B Preferred Shares shall be entitled to receive, when and as declared by the Board of Trustees out of any funds legally available therefor, cumulative dividends at the rate of $22.8125 per share per year, payable in equal amounts of $5.703125 per share quarterly in cash on the fifteenth day, or if not a Business Day, the next succeeding Business Day, of January, April, July and October in each year, beginning January 15, 1996 (each such day being hereinafter called a "Quarterly Dividend Date" and each period ending on a Quarterly Dividend Date being hereinafter called a "Dividend Period"), to shareholders of record at the close of business on such date as shall be fixed by the Board of Trustees at the time of declaration of the dividend (the "Record Date"), which shall be not less than 10 nor more than 30 days preceding the Quarterly Dividend Date. The amount of any dividend payable for the initial Dividend Period and for any other Dividend Period shorter than a full Dividend Period shall be prorated and computed on the basis of a 360-day year of twelve 30-day months. Dividends on each share of Series B Preferred Shares shall accrue and be cumulative from and including the date of original issue thereof, whether or not (i) dividends on such shares are earned or declared or (ii) on any Quarterly Dividend Date there shall be funds legally available for the payment of dividends. Dividends paid on the Series B Preferred Shares in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a per share basis among all such shares at the time outstanding. The amount of any dividends accrued on any Series B Preferred Shares at any Quarterly Dividend Date shall be the amount of any unpaid dividends accumulated thereon, to and including such Quarterly Dividend Date, whether or not earned or declared, and the -35- amount of dividends accrued on any shares of Series B Preferred Shares at any date other than a Quarterly Dividend Date shall be equal to the sum of the amount of any unpaid dividends accumulated thereon, to and including the last preceding Quarterly Dividend Date, whether or not earned or declared, plus an amount calculated on the basis of the annual dividend rate of $22.8125 for the period after such last preceding Quarterly Dividend Date to and including the date as of which the calculation is made based on a 360-day year of twelve 30- day months. Except as provided in these Articles, the Series B Preferred Shares shall not be entitled to participate in the earnings or assets of the Trust. (4) Liquidation Rights. (A) Upon the voluntary or involuntary dissolution, liquidation or winding up of the Trust, the holders of the Series B Preferred Shares then outstanding shall be entitled to receive and to be paid out of the assets of the Trust available for distribution to its shareholders, before any payment or distribution shall be made on any Junior Shares, the amount of $250.00 per Series B Preferred Share, plus accrued and unpaid dividends thereon. (B) After the payment to the holders of the Series B Preferred Shares of the full preferential amounts provided for in this paragraph (b), the holders of the Series B Preferred Shares as such shall have no right or claim to any of the remaining assets of the Trust. (C) If, upon any voluntary or involuntary dissolution, liquidation, or winding up of the Trust, the amounts payable with respect to the preference value of the Series B Preferred Shares and any other shares of beneficial interest of the Trust ranking as to any such distribution on a parity with the Series B Preferred Shares are not paid in full, the holders of the Series B Preferred Shares and of such other shares will share ratably in any such distribution of assets of the Trust in proportion to the full respective preference amounts to which they are entitled. (D) Neither the sale of all or substantially all the property or business of the Trust, nor the merger or consolidation of the Trust into or with any other entity or the merger or consolidation of any other entity into or with the Trust, shall be deemed to be a dissolution, Liquidation or winding up, voluntary or involuntary, for the purposes of this paragraph (b). -36- (5) Redemption. (A) Optional Redemption. On and after October 15, 2005, the Trust may, at its option, redeem at any time all or, from time to time, part of the Series B Preferred Shares at a price per share (the "Series B Redemption Price"), payable in cash, of $250.00 per Series B Preferred Share, together with all accrued and unpaid dividends to and including the date fixed for redemption (the "Series B Redemption Date"). (B) Procedures for Redemption. (i) Notice of any redemption will be mailed by the Trust, postage prepaid, not less than 30 nor more than 60 days prior to the Series B Redemption Date, addressed to the holders of record of the Series B Preferred Shares to be redeemed at their addresses as they appear on the share transfer records of the Trust. No failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any Series B Preferred Shares except as to the holder to whom the Trust has failed to give notice or except as to the holder to whom notice was defective. In addition to any information required by law or by the applicable rules of any exchange upon which Series B Preferred Shares may be listed or admitted to trading, such notice shall state: (a) the Series B Redemption Date; (b) the Series B Redemption Price; (c) the number of Series B Preferred Shares to be redeemed; (d) the place or places where certificates for such shares are to be surrendered for payment of the Series B Redemption Price; (e) that dividends on the shares to be redeemed will cease to accumulate on the Series B Redemption Date; and (f) the date on which conversion rights shall expire, the conversion price and the place or places where certificates for such shares are to be surrendered for conversion. (ii) If notice has been mailed in accordance with Section 13.2(b)(5)(B)(i) above and provided that on or before the Series B Redemption Date specified in such notice all funds necessary for such redemption shall have been irrevocably set aside by the Trust, separate and apart from its other funds in trust for the pro rata benefit of the holders of the Series B Preferred Shares so called for redemption, so as to be, and to continue to be available therefor, then, from and after the Series B Redemption Date, dividends on the Series B Preferred Shares so called for redemption shall cease to accumulate, and said shares shall no longer be deemed to be outstanding and shall not have the status of Series B Preferred Shares and all rights of the holders thereof as shareholders of the Trust (except the right to receive the Series B Redemption Price) shall cease. Upon surrender, in accordance with said notice, of the certificates for any Series B Preferred Shares so redeemed -37- (properly endorsed or assigned for transfer, if the Trust shall so require and the notice shall so state), such Series B Preferred Shares shall be redeemed by the Trust at the Series B Redemption Price. In case fewer than all the Series B Preferred Shares represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the unredeemed Series B Preferred Shares without cost to the holder thereof. (iii) Any funds deposited with a bank or trust company for the purpose of redeeming Series B Preferred Shares shall be irrevocable except that: (a) the Trust shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any shares redeemed shall have no claim to such interest or other earnings; and (b) any balance of monies so deposited by the Trust and unclaimed by the holders of the Series B Preferred Shares entitled thereto at the expiration of two years from the applicable Series B Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Trust, and after any such repayment, the holders of the shares entitled to the funds so repaid to the Trust shall look only to the Trust for payment without interest or other earnings. (iv) No Series B Preferred Shares may be redeemed except with funds legally available for the payment of the Series B Redemption Price. (v) Unless full accumulated dividends on all Series B Preferred Shares shall have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past Dividend Periods and the then current Dividend Period, no Series B Preferred Shares shall be redeemed (unless all outstanding Series B Preferred Shares are simultaneously redeemed) or purchased or otherwise acquired directly or indirectly (except by conversion into or exchange for capital shares of the Trust ranking junior to the Series B Preferred Shares as to dividends and upon liquidation); provided, however, that the foregoing shall not prevent the redemption of Series B Preferred Shares pursuant to Article VII of the Declaration of Trust or the purchase or acquisition of Series B Preferred Shares pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of Series B Preferred Shares. -38- (vi) If the Series B Redemption Date is after a Record Date and before the related Quarterly Dividend Date, the dividend payable on such Quarterly Dividend Date shall be paid to the holder in whose name the Series B Preferred Shares to be redeemed are registered at the close of business on such Record Date notwithstanding the redemption thereof between such Record Date and the related Quarterly Dividend Date or the Trust's default in the payment of the dividend due. (vii) In case of redemption of less than all Series B Preferred Shares at the time outstanding, the Series B Preferred Shares to be redeemed shall be selected pro rata from the holders of record of such shares in proportion to the number of Series B Preferred Shares held by such holders (with adjustments to avoid redemption of fractional shares) or by any other equitable method determined by the Trust. (6) Voting Rights. Except as required by law, the holders of the Series B Preferred Shares shall not be entitled to vote at any meeting of the shareholders for election of trustees or for any other purpose or otherwise to participate in any action taken by the Trust or the shareholders thereof, or to receive notice of any meeting of shareholders. (A) In any matter in which the Series B Preferred Shares are entitled to vote (as expressly provided herein or as may be required by law), including any action by written consent, each Series B Preferred Share shall be entitled to 10 votes, each of which 10 votes may be directed separately by the holder thereof (or by any proxy or proxies of such holder). With respect to each Series B Preferred Share, the holder thereof may designate up to 10 proxies, with each such proxy having the right to vote a whole number of votes (totaling 10 votes per Series B Preferred Share). (B) Whenever dividends on any Series B Preferred Shares shall be in arrears for six or more quarterly periods, the holders of the Depositary Shares representing such Series B Preferred Shares (voting separately as a class with all other series of Preferred Shares upon which like voting rights have been conferred and are exercisable) will be entitled to vote for the election of two additional Trustees of the Trust at a special meeting called by the holders of record of at least ten percent (10%) of any series of Preferred Shares so in arrears (unless such request is received less than 90 days before the date fixed for the next annual or special meeting of the shareholders) or at the next annual meeting of shareholders, and at each subsequent annual meeting until all dividends accumulated on such Series B Preferred Shares for the past dividend periods and the then current dividend period shall have been fully paid or declared and a sum sufficient for the -39- payment thereof set aside for payment. In such case, the entire Board of Trustees of the Trust will be increased by two Trustees. (C) So long as any Series B Preferred Shares remain outstanding, the Trust will not, without the affirmative vote or consent of the holders of at least two-thirds of the Series B Preferred Shares outstanding at the time, given in person or by proxy, either in writing or at a meeting (such series voting separately as a class), (i) authorize or create, or increase the authorized or issued amount of, any class or series of shares of beneficial interest ranking prior to the Series B Preferred Shares with respect to the payment of dividends or the distribution of assets upon liquidation, dissolution or winding up or reclassify any authorized shares of beneficial interest of the Trust into such shares, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such shares; or (ii) amend, alter or repeal the provisions of the Trust's Declaration of Trust, whether by merger, consolidation or otherwise (an "Event"), so as to materially and adversely affect any right, preference, privilege or voting power of the Series B Preferred Shares or the holders thereof; provided, however, with respect to the occurrence of any of the Events set forth in (ii) above, so long as the Series B Preferred Shares remain outstanding with the terms thereof materially unchanged, taking into account that upon the occurrence of an Event, the Trust may not be the surviving entity, the occurrence of any such Event shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting power of holders of Series B Preferred Shares and provided further that (x) any increase in the amount of the authorized Preferred Shares or the creation of issuance of any other Series B Preferred Shares, or (y) any increase in the amount of authorized the Series B Preferred Shares or any other Preferred Shares, in each case ranking on a parity with or junior to the Series B Preferred Shares with respect to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding Series B Preferred Shares shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. (7) Conversion. The Series B Preferred Shares are not convertible into or exchangeable for any other property or securities of the Trust, except into Excess Shares in connection with maintaining the ability of the Trust to qualify as a REIT. -40- 8. Exclusion of Other Rights. Except as may otherwise be required by law, the Series B Preferred Shares shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this Section 13.2. The Series B Preferred Shares shall have no preemptive or subscription rights. 9. Headings of Subdivisions. The headings of the various subdivisions within this Section 13.2 are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. 10. Severability of Provisions. If any voting powers, preferences and relative, participating, optional and other special rights of the Series B Preferred Shares and qualifications, limitations and restrictions thereof set forth in this Section 13.2 is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Series B Preferred Shares and qualifications, limitations and restrictions thereof set forth in this Section 13.2 which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional or other special rights of Series B Preferred Shares and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special right of Series B Preferred Shares and qualifications, limitations and restrictions there of unless so expressed herein. SECTION 13.3 Series C Preferred Shares. Pursuant to Section 5.3 of this Declaration, a series of preferred shares of beneficial interest designated 9 1/8% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest ($0.01 Par Value Per Share) (Liquidation Preference $250.00 Per Share) (the "Series C Preferred Shares") is hereby established on the following terms: (b) Certain Definitions. Unless the context otherwise requires, the terms defined in this Section 13.3 shall have the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural). -41- "Business Day" shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close. "Common Shares" shall mean the common shares of beneficial interest, $.01 par value per share, of the Trust. "Distribution Period" shall have the meaning set forth in Section 13.3(b)(3). "Junior Shares" shall have the meaning set forth in Section 13.3(b)(2). "Person" shall mean an individual, corporation, partnership, estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity, and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended; but does not include an underwriter which participates in a public offering of the Series C Preferred Shares provided that the ownership of Series C Preferred Shares by such Underwriter would not result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, or would otherwise result in the Trust failing to qualify as a REIT. "Preferred Shares" shall mean preferred shares of beneficial interest, $.01 par value per share, including Series A Preferred Shares, Series B Preferred Shares, Series C Preferred Shares, Series D Preferred Shares, and Series E Preferred Shares. "Quarterly Distribution Date" shall have the meaning set forth in Section 13.3(b)(3) below. "Record Date" shall have the meaning set forth in Section 13.3(b)(3) below. "REIT" shall mean a Real Estate Investment Trust under Section 856 of the Code. "Series C Redemption Date" shall have the meaning set forth in Section 13.3(b)(5) below. "Series C Redemption Price" shall have the meaning set forth in Section 13.3(b)(5) below. (c) Series C Preferred Shares -42- (1) Number. The maximum number of shares of the Series C Preferred Shares shall be 460,000. (2) Relative Seniority. In respect of rights to receive distributions and to participate in distributions or payments in the event of any Liquidation, dissolution or winding up of the Trust, the Series C Preferred Shares shall rank pari passu with any other preferred shares of beneficial interest of the Trust, including the Series A Preferred Shares, Series B Preferred Shares, Series D Preferred Shares, and Series E Preferred Shares. The Series C Preferred Shares will rank senior to the Common Shares and any other class or series of shares of beneficial interest of the Trust ranking, as to distributions and upon Liquidation, junior (collectively, the "Junior Shares") to the Preferred Shares. (3) Distributions. The holders of the then outstanding Series C Preferred Shares shall be entitled to receive, when and as declared by the Board of Trustees out of any funds legally available therefor, cumulative distributions at the rate of $22.8125 per share per year, payable in equal amounts of $5.703125 per share quarterly in cash on the fifteenth day, or if not a Business Day, the next succeeding Business Day, of January, April, July and October in each year, beginning October 15, 1996 (each such day being hereinafter called a "Quarterly Distribution Date" and each period ending on a Quarterly Distribution Date being hereinafter called a "Distribution Period"), to shareholders of record at the close of business on such date as shall be fixed by the Board of Trustees at the time of declaration of the distribution (the "Record Date"), which shall not be less than 10 nor more than 30 days preceding the Quarterly Distribution Date. The amount of any distribution payable for the initial Distribution Period and for any other Distribution Period shorter than a full Distribution Period shall be prorated and computed on the basis of a 360-day year of twelve 30-day months. Distributions on each share of Series C Preferred Shares shall accrue and be cumulative from and including the date of original issue thereof, whether or not (i) distributions on such shares are earned or declared or (ii) on any Quarterly Distribution Date there shall be funds legally available for the payment of distributions. Distributions paid on the Series C Preferred Shares in an amount less than the total amount of such distributions at the time accrued and payable on such shares shall be allocated pro rata on a per share basis among all such shares at the time outstanding. The amount of any distributions accrued on any Series C Preferred Shares at any quarterly Distribution Date shall be the amount of any unpaid distributions accumulated thereon, to and including such Quarterly Distribution Date, whether or not earned or declared, and the amount of distributions accrued on any shares of Series C Preferred Shares at any date other than a Quarterly Distribution Date shall be equal to the sum of the amount of any unpaid distributions accumulated thereon, to and including the last preceding Quarterly Distribution Date, whether or not earned or declared, plus an amount calculated on the basis of the annual distribution rate of $22.8125 for the period after such last preceding Quarterly Distribution Date to and including the date as of which the calculation is made based on a 360-day year of twelve 30-day months. -43- Except as provided in these Articles, the Series C Preferred Shares shall not be entitled to participate in the earnings or assets of the Trust. (4) Liquidation Rights. (A) Upon the voluntary or involuntary dissolution, liquidation or winding up of the Trust, the holders of the Series C Preferred Shares then outstanding shall be entitled to receive and to be paid out of the assets of the Trust available for distribution to its shareholders, before any payment or distribution shall be made on any Junior Shares, the amount of $250.00 per Series C Preferred Share, plus accrued and unpaid distributions thereon. (B) After the payment to the holders of the Series C Preferred Shares of the full preferential amounts provided for in this paragraph (b), the holders of the Series C Preferred Shares as such shall have no right or claim to any of the remaining assets of the Trust. (C) If, upon any voluntary or involuntary dissolution, liquidation, or winding up of the Trust, the amounts payable with respect to the preference value of the Series C Preferred Shares and any other shares of beneficial interest of the Trust ranking as to any such distribution on a parity with the Series C Preferred Shares are not paid in full, the holders of the Series C Preferred Shares and of such other shares will share ratably in any such distribution of assets of the Trust in proportion to the full respective preference amounts to which they are entitled. (D) Neither the sale of all or substantially all the property or business of the Trust, nor the merger or consolidation of the Trust into or with any other entity or the merger or consolidation of any other entity into or with the Trust, shall be deemed to be a dissolution, Liquidation or winding up, voluntary or involuntary, for the purposes of this paragraph (b). (5) Redemption. (A) Optional Redemption. On and after September 9, 2006, the Trust may, at its option, redeem at any time all or, from time to time, part of the Series C Preferred Shares at a price per share (the "Series C Redemption Price"), payable in cash, of $250.00 per Series C Preferred Share, together with all accrued and unpaid distributions to and including the date fixed for redemption (the "Series C Redemption Date"). -44- (B) Procedures for Redemption. (i) Notice of any redemption will be mailed by the Trust, postage prepaid, not less than 30 nor more than 60 days prior to the Series C Redemption Date, addressed to the holders of record of the Series C Preferred Shares to be redeemed at their addresses as they appear on the share transfer records of the Trust. No failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any Series C Preferred Shares except as to the holder to whom the Trust has failed to give notice or except as to the holder to whom notice was defective. In addition to any information required by law or by the applicable rules of any exchange upon which Series C Preferred Shares may be listed or admitted to trading, such notice shall state: (a) the Series C Redemption Date; (b) the Series C Redemption Price; (c) the number of Series C Preferred Shares to be redeemed; (d) the place or places where certificates for such shares are to be surrendered for payment of the Series C Redemption Price; and (e) that distributions on the shares to be redeemed will cease to accumulate on the Series C Redemption Date. (ii) If notice has been mailed in accordance with Section 13.3(b)(5)(B)(i) above and provided that on or before the Series C Redemption Date specified in such notice all funds necessary for such redemption shall have been irrevocably set aside by the Trust, separate and apart from its other funds in trust for the pro rata benefit of the holders of the Series C Preferred Shares so called for redemption, so as to be, and to continue to be available therefor, then, from and after the Series C Redemption Date, distributions on the Series C Preferred Shares so called for redemption shall cease to accumulate, and said shares shall no longer be deemed to be outstanding and shall not have the status of Series C Preferred Shares and all rights of the holders thereof as shareholders of the Trust (except the right to receive the Series C Redemption Price) shall cease. Upon surrender, in accordance with said notice, of the certificates for any Series C Preferred Shares so redeemed (properly endorsed or assigned for transfer, if the Trust shall so require and the notice shall so state), such Series C Preferred Shares shall be redeemed by the Trust at the Series C Redemption Price. In case fewer than all the Series C Preferred Shares represented by any such certificate are redeemed, a new certificate or certificates shall be -45- issued representing the unredeemed Series C Preferred Shares without cost to the holder thereof. (iii) Any funds deposited with a bank or trust company for the purpose of redeeming Series C Preferred Shares shall be irrevocable except that: (a) the Trust shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any shares redeemed shall have no claim to such interest or other earnings; and (b) any balance of monies so deposited by the Trust and unclaimed by the holders of the Series C Preferred Shares entitled thereto at the expiration of two years from the applicable Series C Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Trust, and after any such repayment, the holders of the shares entitled to the funds so repaid to the Trust shall look only to the Trust for payment without interest or other earnings. (iv) No Series C Preferred Shares may be redeemed except with funds legally available for the payment of the Series C Redemption Price. (v) Unless full accumulated distributions on all Series C Preferred Shares shall have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past Distribution Periods and the then current Distribution Period, no Series C Preferred Shares shall be redeemed (unless all outstanding Series C Preferred Shares are simultaneously redeemed) or purchased or otherwise acquired directly or indirectly (except by conversion into or exchange for capital shares of the Trust ranking junior to the Series C Preferred Shares as to distributions and upon liquidation); provided, however, that the foregoing shall not prevent the redemption of Series C Preferred Shares pursuant to Article VII of the Declaration of Trust or the purchase or acquisition of Series C Preferred Shares pursuant -46- to a purchase or exchange offer made on the same terms to holders of all outstanding shares of Series C Preferred Shares. (vi) If the Series C Redemption Date is after a Record Date and before the related Quarterly Distribution Date, the distribution payable on such Quarterly Distribution Date shall be paid to the holder in whose name the Series C Preferred Shares to be redeemed are registered at the close of business on such Record Date notwithstanding the redemption thereof between such Record Date and the related Quarterly Distribution Date or the Trust's default in the payment of the distribution due. (vii) In case of redemption of less than all Series C Preferred Shares at the time outstanding, the Series C Preferred Shares to be redeemed shall be selected pro rata from the holders of record of such shares in proportion to the number of Series C Preferred Shares held by such holders (with adjustments to avoid redemption of fractional shares) or by any other equitable method determined by the Trust. (6) Voting Rights. Except as required by law, the holders of the Series C Preferred Shares shall not be entitled to vote at any meeting of the shareholders for election of trustees or for any other purposes or otherwise to participate in any action taken by the Trust or the shareholders thereof, or to receive notice of any meeting of shareholders. (A) In any matter in which the Series C Preferred Shares are entitled to vote (as expressly provided herein or as may be required by law), including any action by written consent, each Series C Preferred Share shall be entitled to 10 votes, each of which 10 votes may be directed separately by the holder thereof (or by any proxy or proxies of such holder). With respect to each Series C Preferred Share, the holder thereof may designate up to 10 proxies, with each such proxy having the right to vote a whole number of votes (totaling 10 votes per Series C Preferred Share). (B) Whenever distributions on any Series C Preferred Shares shall be in arrears for six or more quarterly periods, the holders of the Depositary Shares representing such Series C Preferred Shares, voting separately as a class with all other series of Preferred Shares upon which like voting rights have been conferred and are exercisable, will be entitled to vote for the election of two additional -47- Trustees of the Trust at a special meeting called by the holders of record of at least ten percent (10%) of any series of Preferred Shares so in arrears (unless such request is received less than 90 days before the date fixed for the next annual or special meeting of the shareholders) or at the next annual meeting of shareholders, and at each subsequent annual meeting until all distributions accumulated on such Series C Preferred Shares for the past distribution periods and the then current distribution period shall have been fully paid or declared and a sum sufficient for the payment thereof set aside for payment. In such case, the entire Board of Trustees of the Trust will be increased by two Trustees. (C) So long as any Series C Preferred Shares remain outstanding, the Trust will not, without the affirmative vote or consent of the holders of at least two-thirds of the Series C Preferred Shares outstanding at the time, given in person or by proxy, either in writing or at a meeting (such series voting separately as a class), (i) authorize or create, or increase the authorized or issued amount of, any class or series of shares of beneficial interest ranking prior to the Series C Preferred Shares with respect to the payment of distributions or the distribution of assets upon liquidation, dissolution or winding up or reclassify any authorized shares of beneficial interest of the Trust into such shares, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such shares; or (ii) amend, alter or repeal the provisions of the Trust's Declaration of Trust whether by merger, consolidation or otherwise (an "Event"), so as to materially and adversely affect any right, preference, privilege or voting power of the Series C Preferred Shares or the holders thereof; provided, however, with respect to the occurrence of any of the Events set forth in (ii) above, so long as the Series C Preferred Shares remain outstanding with the terms thereof materially unchanged, taking into account that upon the occurrence of an Event, the Trust may not be the surviving entity, the occurrence of any such Event shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting power of holders of Series C Preferred Shares and provided further that (x) any increase in the amount of the authorized Preferred Shares or the creation or issuance of any other Series C Preferred Shares, or (y) any increase in the amount of authorized Series C Preferred Shares or any other Preferred Shares, in each case ranking on a parity with or junior to the Series C -48- Preferred Shares with respect to payment of distributions or the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding Series C Preferred Shares shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. (7) Conversion. The Series C Preferred Shares are not convertible into or exchangeable for any other property or securities of the Trust, except into Excess Shares in connection with maintaining the ability of the Trust to qualify as a REIT. (8) Exclusion of Other Rights. Except as may otherwise be required by law, the Series C Preferred Shares shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this Section 13.3. The Series C Preferred Shares shall have no preemptive or subscription rights. (9) Headings of Subdivisions. The headings of the various subdivisions within this Section 13.3 are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. (10) Severability of Provisions. If any voting powers, preferences and relative, participating, optional and other special rights of the Series C Preferred Shares and qualifications, limitations and restrictions thereof set forth in this Section 13.3 is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Series C Preferred Shares and qualifications, limitations and restrictions thereof set forth in this Section 13.3 which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional or other special rights of Series C Preferred Shares and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special right of Series C Preferred Shares and qualifications, limitations and restrictions thereof unless so expressed herein. -49- SECTION 13.4. Series D Preferred Shares. Pursuant to Section 5.3 of this Declaration, a series of preferred shares of beneficial interest designated the "Series D Cumulative Convertible Preferred Shares of Beneficial Interest" (the "Series D Convertible Preferred Shares") is hereby established on the following terms: 1. Designation and Amount. The shares of the series of preferred shares established hereunder shall be designated as Series D Convertible Preferred Shares and the authorized number of shares constituting such series shall be 4,600,000. The par value of the Series D Convertible Preferred Shares shall be $.01 per share. 2. Distributions. (a) The holders of shares of the Series D Convertible Preferred Shares will be entitled to receive, when, as and if authorized by the Board of Trustees out of assets of the Trust legally available therefor (and subject to the limitation described in the last sentence of this paragraph), cumulative cash distributions on the shares of the Series D Convertible Preferred Shares at the annual rate of $1.75 per share, payable quarterly on January 1, April 1, July 1 and October 1 of each year, commencing on January 1, 1994 (which initial partial distribution shall be from the date of issuance of the Series D Convertible Preferred Shares). Such distributions shall be cumulative from the date of original issue of the Series D Convertible Preferred Shares. If permissible under applicable law and provided the distributions will qualify for the dividends paid deduction (within the meaning of Sections 561 and 562 of the Internal Revenue Code of 1986 or any successor provisions thereto), such distributions shall be paid as follows: first, from income of the Trust other than net capital gains, and the balance, if any, from net capital gains of the Trust. If the Board of Trustees determines, in its sole discretion, that distributions to be paid in accordance with the preceding sentence would not qualify for such dividends paid deduction, then such distributions shall be paid in a manner determined by the Board of Trustees. Each distribution shall be paid to the holders of record of the Series D Convertible Preferred Shares as they appear on the share register of the Trust on such record date, not more than 90 days preceding the distribution payment date thereof, as shall be fixed by the Board of Trustees or a duly authorized committee thereof. If a holder converts Series D Convertible Preferred Shares after the close of business on the record date for a distribution and before the opening of business on the payment date for such distribution, then, pursuant to Section 13.4(7) hereof, the holder will be required to pay to the Trust at the time of such conversion the amount of such distribution (unless the shares were converted after the issuance of a notice of redemption with respect to such shares, in which event the holder of such shares shall be entitled to the distribution payable thereon on such distribution payment date without making such payment). (b) If any Convertible Preferred Shares are outstanding, no full distributions shall be declared or paid or set apart for payment on any other preferred shares of beneficial interest of the Trust ranking as to distributions on a parity with or junior to the Series D -50- Convertible Preferred Shares for any period unless full cumulative distributions have been declared and paid or declared and a sum sufficient for the payment thereof has been set apart for such payment on the Series D Convertible Preferred Shares for all past distribution periods and the then current distribution period. If distributions are not paid in full, or not declared in full and a sum sufficient for such full payment is not set apart for the payment thereof, upon the Series D Convertible Preferred Shares and any other preferred shares ranking on a parity as to distributions with the Series D Convertible Preferred Shares, all distributions declared upon Series D Convertible Preferred Shares and upon any other preferred shares ranking on a parity as to distributions shall be paid or declared pro rata so that in all cases the amount of distributions paid or declared per share on the Series D Convertible Preferred Shares and such other preferred shares shall bear to each other the same ratio that accumulated distributions per share, including distributions accrued or in arrears, if any, on the Series D Convertible Preferred Shares and such other preferred shares bear to each other. Except as provided in the preceding sentence, unless full cumulative distributions on the Series D Convertible Preferred Shares have been paid or declared and a sum sufficient for such full payment set apart for payment for all past distribution periods and the then current distribution period, no distributions (other than distributions in shares of Common Shares (as hereinafter defined) or in any other shares of beneficial interest of the Trust ranking junior to the Series D Convertible Preferred Shares as to distribution rights and the liquidation preference) shall be declared or paid or set apart for payment or other distribution upon the Trust's common shares of beneficial interest, par value $.01 per share (the "Common Shares"), or, except as provided above, on any other shares of beneficial interest of the Trust ranking junior to or on a parity with the Series D Convertible Preferred Shares as to distribution rights or the liquidation preference, nor shall any Common Shares or any other shares of beneficial interest of the Trust ranking junior to or on a parity with the Series D Convertible Preferred Shares as to distribution rights or the liquidation preference be redeemed, purchased or otherwise acquired for any consideration (or any payment made to or available for a sinking fund for the redemption of any such shares) by the Trust or any subsidiary of the Trust (except by conversion into or exchange for shares of beneficial interest of the Trust ranking junior to the Series D Convertible Preferred Shares as to distribution rights and the liquidation preference). Holders of the Series D Convertible Preferred Shares shall not be entitled to any distributions, whether payable in cash, property or shares of beneficial interest, in excess of full accrued and cumulative distributions as herein provided. No interest or sum of money in lieu of interest shall be payable in respect of any distribution payment or payments on the Series D Convertible Preferred Shares that may be in arrears. The terms "accrued distributions," "distributions accrued" and "distributions in arrears," whenever used herein with reference to shares of preferred shares of beneficial interest, shall be deemed to mean an amount which shall be equal to distributions thereon at the annual distribution rates per share for the respective series thereof from the date or dates on which such distributions commence to accrue to the end of the then current quarterly distribution period for such preferred shares (or, in the case of redemption, to the date of redemption), less the amount -51- of all distributions paid, or declared in full and set aside for the payment thereof, upon such shares of preferred shares. (c) Distributions payable on the Series D Convertible Preferred Shares for any period less than a full quarterly distribution period shall be computed on the basis of a 360-day year of twelve 30-day months. Quarterly distributions payable on the Series D Convertible Preferred Shares shall be computed by dividing the annual distribution rate by four. 3. Trustees' Right to Refuse to Transfer Series D Convertible Preferred Shares; Limitation on Holdings. (a) The terms and provisions of this Section 13.4(3) shall apply in addition to, and not in limitation of, the terms and provisions of Article 7 of the Declaration of Trust. (b) Each Person (as defined in Section 1.5 of the Declaration of Trust) who owns directly or indirectly more than five percent in number or value of the total Series D Convertible Preferred Shares outstanding shall, within 30 days after January 1 of each year, give written notice to the Trust stating the Person's name and address, the number of Series D Convertible Preferred Shares directly or indirectly owned by such Person, and a description of the capacity in which such Series D Convertible Preferred Shares are held. For purposes of this Section 13.4, the number and value of the total Series D Convertible Preferred Shares outstanding shall be determined by the Board of Trustees in good faith, which determination shall be conclusive for all purposes hereunder. In addition, each direct or indirect holder of Series D Convertible Preferred Shares, irrespective of such shareholder's percentage ownership of outstanding Series D Convertible Preferred Shares, shall upon demand disclose to the Trust in writing such information with respect to the direct or indirect ownership of Series D Convertible Preferred Shares as the Board of Trustees deems necessary from time to time to enable the Board of Trustees to determine whether the Trust complies with the REIT Provisions of the Code (as defined in Section 1.5 of the Declaration of Trust), to comply with the requirements of any taxing authority or governmental agency or to determine any such compliance. (c) If, in the opinion of the Board of Trustees, which shall be binding upon any prospective acquiror of Series D Convertible Preferred Shares, any proposed transfer or issuance would jeopardize the status of the Trust as a real estate investment trust under the REIT Provisions of the Code, the Board of Trustees shall have the right, but not the duty, to refuse to permit such transfer or issuance or refuse to give effect to such transfer or issuance and to take any action to void any such issuance or cause any such transfer not to occur. (d) As a condition to any transfer and/or registration of transfer on the books of the Trust of any Series D Convertible Preferred Shares which could result in direct or -52- indirect ownership (as hereinafter defined) of Series D Convertible Preferred Shares exceeding 20% of the lesser of the number or the value of the total Series D Convertible Preferred Shares outstanding (the "Excess Preferred Shares") by a Person other than a Preferred Excepted Person (as defined in Section 3(e) below), such prospective transferee shall give written notice to the Trust of the proposed transfer and shall furnish such opinions of counsel, affidavits, undertakings, agreements and information as may be required by the Board of Trustees no later than the 15th day prior to any transfer which, if consummated, would result in such ownership. (e) Any transfer of Series D Convertible Preferred Shares that would (i) create a direct or indirect owner of Excess Preferred Shares other than a Preferred Excepted Person; or (ii) result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, shall be void ab initio and the prospective acquiror shall not be entitled to any rights afforded to owners of Series D Convertible Preferred Shares hereunder and shall be deemed never to have had an interest therein. Any issuance of Series D Convertible Preferred Shares that would (i) create a direct or indirect owner of Excess Preferred Shares other than a Preferred Excepted Person; or (ii) result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, shall be void ab initio and the prospective acquiror shall not be entitled to any rights afforded to owners of Series D Convertible Preferred Shares hereunder and shall be deemed never to have had an interest therein. "Preferred Excepted Person" shall mean any Person approved by the Board of Trustees, at their option and in their sole discretion, provided, however, that such approval shall not be granted to any Person whose ownership of in excess of 20% of the lesser of the number or the value of the total Series D Convertible Preferred Shares outstanding would result, directly, indirectly or as a result of attribution of ownership, in termination of the status of the Trust as a real estate investment trust under the REIT Provisions of the Code. (f) The Trust, by notice to the holder thereof, may purchase any or all Series D Convertible Preferred Shares that are proposed to be transferred pursuant to a transfer which, in the opinion of the Board of Trustees, which shall be binding upon any proposed transferor or transferee of Series D Convertible Preferred Shares, would result in any Person acquiring Excess Preferred Shares, or would otherwise jeopardize the status of the Trust as a real estate investment trust under the REIT Provisions of the Code. The Trust shall have the power, by lot or other means deemed equitable by the Board of Trustees in their sole discretion, to purchase such Excess Preferred Shares from the prospective transferor. The purchase price for any Excess Preferred Shares shall be equal to the fair market value of the Series D Convertible Preferred Shares on the last trading day immediately preceding the day on which notice of such proposed transfer is sent, as reflected in the closing sale price for the Series D Convertible Preferred Shares, if then listed on a national securities exchange, or such price for the Series D Convertible Preferred Shares on the principal exchange if then listed on more than one national securities exchange, or if the Series D Convertible Preferred Shares are not then listed on a -53- national securities exchange, the latest bid quotation for the Series D Convertible Preferred Shares if then traded over-the-counter, or, if no such closing sales prices or quotations are available, then the purchase price shall be equal to the fair market value of such Series D Convertible Preferred Shares as determined by the Board of Trustees in good faith. Prompt payment of the purchase price shall be made in cash by the Trust in such manner as may be determined by the Board of Trustees. From and after the date fixed for purchase by the Board of Trustees, and so long as payment of the purchase price for the Series D Convertible Preferred Shares to be so redeemed shall have been made or duly provided for, the holder of any Excess Preferred Shares so called for purchase shall cease to be entitled to dividends, distributions, voting rights and other benefits with respect to such Series D Convertible Preferred Shares, excepting only the right to payment of the purchase price fixed as aforesaid. Any dividend or distribution paid to a proposed transferee of Excess Preferred Shares prior to the discovery by the Trust that the Series D Convertible Preferred Shares have been transferred in violation of this Section 3 shall be repaid to the Trust upon demand. (g) Notwithstanding any other provision in this Declaration of Trust or the Trust's Bylaws, Sections 13.4(3)(e), (f), (g) and (h) may not be amended or repealed without the affirmative vote of the holders of not less than two-thirds of the Series D Convertible Preferred Shares then outstanding and entitled to vote. If Section 13.4(3)(e), (f), (g) or (h) is determined to be void or invalid by virtue of any legal decision, statute, rule or regulation, then the acquiror of Series D Convertible Preferred Shares in violation of such Sections shall be deemed, at the option of the Trust, to have acted as agent on behalf of the Trust in acquiring such Series D Convertible Preferred Shares on behalf of the Trust. (h) Subject to Section 13.4(3)(l), notwithstanding any other provision of this Section 13.4 to the contrary, any purported transfer, sale or acquisition of Series D Convertible Preferred Shares (whether such purported transfer, sale or acquisition results from the direct or indirect acquisition of ownership of Series D Convertible Preferred Shares) which would result in the termination of the status of the Trust as a real estate investment trust under the REIT Provisions of the Code shall be null and void ab initio. Any such Series D Convertible Preferred Shares may be treated by the Board of Trustees in the manner prescribed for Excess Preferred Shares in subsection (f) of this Section 13.4(3). (i) Subject to Section 13.4(3)(l), nothing contained in this Section 13.4(3) or in any other provision of this Section 13.4 shall limit the authority of the Board of Trustees to take such other action as they deem necessary or advisable to protect the Trust and the interests of the shareholders by preservation of the Trust's status as a real estate investment trust under the REIT Provisions of the Code. (j) If any provision of this Section 13.4(3) or any application of any such provision is determined to be invalid by any federal or state court having jurisdiction over the -54- issues, the validity of the remaining provisions shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court. To the extent this Section 13.4(3) may be inconsistent with any other provision of this Section 13.4, this Section 13.4(3) shall be controlling. (k) For purposes of this Section 13.4, Series D Convertible Preferred Shares not owned directly shall be deemed to be owned indirectly by a person if that person or a group of which he is a member would be the beneficial owner of such Series D Convertible Preferred Shares, as defined in Rule 13d-3 under the Securities Exchange Act of 1934, and/or would be considered to own such Series D Convertible Preferred Shares by reason of the REIT Provisions of the Code. (l) Notwithstanding any other provision of Section 13.4(3), nothing in this Section 13.4 shall preclude the settlement of transactions entered into through the facilities of the New York Stock Exchange, Inc. The fact that the settlement of any transaction is permitted shall not negate the effect of any other provision of this Section 13.4(3) and any transferee in such a transaction shall be subject to all of the provisions and limitations set forth in this Section 13.4(3). 4. Redemption at the Option of the Trust. (a) The Series D Convertible Preferred Shares are not redeemable prior to November 1, 1998. On and after November 1, 1998, the Series D Convertible Preferred Shares may be redeemed at the option of the Trust by resolution of its Board of Trustees, in whole or from time to time in part, subject to the limitations set forth below, at the following redemption prices per share if redeemed during the twelve-month period beginning November 1 of the year -55- indicated below (the "Call Price"), plus, in each case, all distributions accrued and unpaid on the shares of the Series D Convertible Preferred Shares up to the date of such redemption, upon giving notice as provided below:
If redeemed during the twelve-month period beginning Call November 1, Price ------------------ ------- 1998 ............................................. $25.875 1999 ............................................. $25.700 2000 ............................................. $25.525 2001 ............................................. $25.350 2002 ............................................. $25.175 2003 and thereafter .............................. $25.000
(b) If fewer than all of the outstanding Series D Convertible Preferred Shares are to be redeemed, the shares to be redeemed shall be determined pro rata or by lot or in such other manner and subject to such regulations as the Board of Trustees in its sole discretion shall prescribe. In the event that such redemption is to be by lot, if as a result of such redemption any holder of Series D Convertible Preferred Shares would become a holder of in excess of 20% of the lesser of the number or the value of the total Series D Convertible Preferred Shares outstanding because such holder's Series D Convertible Preferred Shares were not redeemed, or were only redeemed in part, then the Trust shall redeem the requisite number of Series D Convertible Preferred Shares of such shareholder such that he will not hold in excess of 20% of the lesser of the number or the value of the total Series D Convertible Preferred Shares outstanding subsequent to such redemption, unless the holder is a Preferred Excepted Person (as defined in Section 3(e) hereof), in which event the Trust shall have the option to redeem such requisite number of Series D Convertible Preferred Shares, as determined in the sole discretion of the Board of Trustees. (c) At least 30 days but not more than 60 days prior to the date fixed for the redemption of the Series D Convertible Preferred Shares, the Trust shall mail a written notice to each holder of record of the Series D Convertible Preferred Shares to be redeemed in a postage prepaid envelope addressed to such holder at his address as shown on the records of the Trust, notifying such holder of the election of the Trust to redeem such shares, stating the date fixed for redemption thereof (the "Redemption Date"), the redemption price, the number of shares to be redeemed (and, if fewer than all the Series D Convertible Preferred Shares are to be redeemed, the number of shares to be redeemed from such holder) and the place(s) where the certificate(s) representing such shares are to be surrendered for payment. On or after the Redemption Date each holder of the Series D Convertible Preferred Shares to be redeemed shall present and surrender -56- his certificate or certificates for such shares to the Trust at the place designated in such notice and thereupon the redemption price of such shares shall be paid to or on the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. In the event that fewer than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. From and after the Redemption Date (unless default shall be made by the Trust in payment of the redemption price), all distributions on the Series D Convertible Preferred Shares designated for redemption in such notice shall cease to accrue, and all rights of the holders thereof as shareholders of the Trust, except the right to receive the redemption price of such shares (including all accrued and unpaid distributions up to the Redemption Date) upon the surrender of certificates representing the same, shall cease and terminate and such shares shall not thereafter be transferred (except with the consent of the Trust) on the books of the Trust, and such shares shall not be deemed to be outstanding for any purpose whatsoever. At its election, the Trust prior to the Redemption Date may irrevocably deposit the redemption price (including all accrued and unpaid distributions up to the Redemption Date) of the Series D Convertible Preferred Shares so called for redemption in trust for the holders thereof with a bank or trust company (having a capital surplus and undivided profits aggregating not less than $50,000,000) in the Borough of Manhattan, City and State of New York, or in any other city in which the Trust at the time shall maintain a transfer agency with respect to such shares, in which case the aforesaid notice to holders of the Series D Convertible Preferred Shares to be redeemed shall state the date of such deposit, shall specify the office of such bank or trust company as the place of payment of the redemption price, and shall call upon such holders to surrender the certificates representing such shares at such place on or after the date fixed in such redemption notice (which shall not be later than the Redemption Date) against payment of the redemption price (including all accrued and unpaid distributions up to the Redemption Date). Any interest accrued on such funds shall be paid to the Trust from time to time. Any moneys so deposited which shall remain unclaimed by the holders of the Series D Convertible Preferred Shares at the end of two years after the Redemption Date shall be returned by such bank or trust company to the Trust. If a notice of redemption has been given pursuant to this Section 13.4(4) and any holder of Series D Convertible Preferred Shares shall, prior to the close of business on the last business day preceding the Redemption Date, give written notice to the Trust pursuant to Section 13.4(7) below of the conversion of any or all of the shares to be redeemed held by such holder (accompanied by a certificate or certificates for such shares, duly endorsed or assigned to the Trust, and any necessary transfer tax payment, as required by Section 13.4(7) below, then such redemption shall not become effective as to such shares to be converted, such conversion shall become effective as provided in Section 13.4(7) below and any moneys set aside by the Trust for the redemption of such shares of converted Series D Convertible Preferred Shares shall revert to the general funds of the Trust (unless such shares were converted after the close of business on the record date for a distribution and before the opening of business on the payment date for such -57- distribution, in which event the holders of such shares shall be entitled to the distribution payable thereon on such distribution payment date). Notwithstanding the foregoing, unless full cumulative distributions on all outstanding Series D Convertible Preferred Shares have been paid or declared and a sum sufficient for the payment thereof set apart for payment for all past distribution periods and the then current distribution period, no Series D Convertible Preferred Shares shall be redeemed unless all outstanding Series D Convertible Preferred Shares are simultaneously redeemed; provided, however, that the foregoing shall not prevent the purchase or acquisition of Series D Convertible Preferred Shares pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding Series D Convertible Preferred Shares, and, unless full cumulative distributions on all outstanding Series D Convertible Preferred Shares have been paid or declared and a sum sufficient for the payment thereof set apart for payment for all past distribution periods and the then current distribution period, the Trust shall not purchase or otherwise acquire directly or indirectly any Series D Convertible Preferred Shares (except by conversion into or exchange for shares of beneficial interest of the Trust ranking junior to the Series D Convertible Preferred Shares as to distribution rights and the liquidation preference). (d) The Series D Convertible Preferred Shares redeemed, repurchased or retired pursuant to the provisions of this Section 13.4(4) or surrendered to the Trust upon conversion shall thereupon be retired and may not be reissued as Series D Convertible Preferred Shares but shall thereafter have the status of authorized but unissued shares of beneficial interest. 5. Voting Rights. (a) The holders of Series D Convertible Preferred Shares shall not be entitled to vote on any matter except (i) as provided in Section 13.4(9), (ii) as provided in Section 13.4(5)(b) and (iii) as required by law. (b) In the event the Trust shall have failed to declare and pay or set apart for payment in full the distributions accumulated on the outstanding Series D Convertible Preferred Shares for any six consecutive quarterly distribution payment periods (a "Preferential Distribution Non-Payment"), the number of trustees of the Trust shall be increased by two and the holders of the outstanding Series D Convertible Preferred Shares, voting together as a class with all other classes or series of preferred shares of the Trust ranking on a parity with the Series D Convertible Preferred Shares with respect to distribution rights and then entitled to vote on the election of such additional two trustees, shall be entitled to elect such two additional trustees until the full distributions accumulated on all outstanding Series D Convertible Preferred Shares have been declared and paid or set apart for payment. Upon the occurrence of a Preferential Distribution Non-Payment or a vacancy in the office of a Preferred Shares Trustee (as defined below), the Board of Trustees shall within a reasonable period call a special meeting of the holders of the -58- Series D Convertible Preferred Shares and all holders of other classes or series of preferred shares of the Trust ranking on a parity with the Series D Convertible Preferred Shares with respect to distribution rights who are then entitled to vote on the election of such additional trustee or trustees for the purpose of electing the additional trustee or trustees. If and when all accumulated distributions on the Series D Convertible Preferred Shares have been declared and paid or set aside for payment in full, the holders of the Series D Convertible Preferred Shares shall be divested of the special voting rights provided by this Section 13.4(5)(b), subject to revesting in the event of each and every subsequent Preferential Distribution Non-Payment. Upon termination of such special voting rights attributable to all holders of the Series D Convertible Preferred Shares and shares of any other class or series of preferred shares of the Trust ranking on a parity with the Series D Convertible Preferred Shares with respect to distribution rights, the term of office of each trustee elected by the holders of the Series D Convertible Preferred Shares and such parity preferred shares (a "Preferred Shares Trustee") pursuant to such special voting rights shall forthwith terminate and the number of trustees constituting the entire Board of Trustees shall be reduced by the number of Preferred Shares Trustees. Any Preferred Shares Trustee may be removed by, and shall not be removed otherwise than by, the vote of the holders of record of a majority of the outstanding Series D Convertible Preferred Shares and all other series of preferred shares of the Trust ranking on a parity with the Series D Convertible Preferred Shares with respect to distribution rights who were entitled to vote in such Preferred Shares Trustee's election, voting as a separate class, at a meeting called for such purpose. (c) So long as any Series D Convertible Preferred Shares are outstanding, the number of trustees constituting the entire Board of Trustees of the Trust shall at all times be such that the exercise, by the holders of the Series D Convertible Preferred Shares and the holders of preferred shares of the Trust ranking on a parity with the Series D Convertible Preferred Shares with respect to distribution rights, of the right to elect trustees under the circumstances provided for in subclause (b) of this Section 13.4(5) will not contravene any other provision of this Declaration restricting the number of trustees which may constitute the entire Board of Trustees of the Trust. (d) Trustees elected pursuant to subclause (b) of this Section 13.4(5) shall serve until the earlier of (x) the next annual meeting of the shareholders of the Trust and the election (by the holders of the Series D Convertible Preferred Shares and the holders of preferred shares of the Trust ranking on a parity with the Series D Convertible Preferred Shares with respect to distribution rights) and qualification of their respective successors or (y) the termination of the term of office of each Preferred Shares Trustee upon the termination of the special voting rights as provided for in Section 13.4(5)(b). (e) So long as a Preferential Distribution Non-Payment shall continue, any vacancy in the office of a Preferred Shares Trustee may be filled by vote of the holders of record of a majority of the outstanding Series D Convertible Preferred Shares and all other series of -59- preferred shares ranking on a parity with the Series D Convertible Preferred Shares with respect to distribution rights who are then entitled to vote in the election of such Preferred Shares Trustee as provided above. As long as the Preferential Distribution Non-Payment shall continue, holders of the Series D Convertible Preferred Shares shall not, as such shareholders, be entitled to vote on the election or removal of trustees other than Preferred Shares Trustees, but shall not be divested of any other voting rights provided to such shareholders by law, this Declaration with respect to any other matter to be acted upon by the shareholders of the Trust. 6. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the affairs of the Trust, whether voluntary or otherwise, after payment or provision for payment of the debts and other liabilities of the Trust, the holders of Series D Convertible Preferred Shares shall be entitled to receive, in cash, out of the remaining assets of the Trust legally available therefor, the amount of Twenty-five Dollars ($25.00) for each Series D Convertible Preferred Share, plus an amount equal to all distributions accrued and unpaid on each such share up to the date of such distribution of assets, before any distribution shall be made to the holders of Common Shares or any other shares of beneficial interest of the Trust ranking (as to any such distribution of assets) junior to the Series D Convertible Preferred Shares. If upon any liquidation, dissolution or winding up of the Trust, the assets distributable among the holders of Series D Convertible Preferred Shares and all other classes and series of preferred shares ranking (as to any such distribution of assets) on a parity with the Series D Convertible Preferred Shares are insufficient to permit the payment in full to the holders of all such shares of all preferential amounts payable to all such holders, then the entire assets of the Trust thus distributable shall be distributed ratably among the holders of Series D Convertible Preferred Shares and such other classes and series of preferred shares ranking (as to any such distribution of assets) on a parity with the Series D Convertible Preferred Shares in proportion to the respective amounts that would be payable per share if such assets were sufficient to permit payment in full. (b) For purposes of this Section 13.4(6), a distribution of assets in any dissolution, winding up or liquidation shall not include (i) any consolidation or merger of the Trust with or into any other corporation, (ii) any dissolution, liquidation, winding up or reorganization of the Trust immediately followed by incorporation of another corporation to which such assets are distributed or (iii) a sale or other disposition of all or substantially all of the Trust's assets to another corporation; provided, however, that, in each case, effective provision is made in the charter of the resulting and surviving corporation or otherwise for the recognition, preservation and protection of the rights of the holders of Series D Convertible Preferred Shares. (c) After the payment of the full preferential amounts provided for herein to the holders of Series D Convertible Preferred Shares or funds necessary for such payment have been -60- set aside in trust for the holders thereof, such holders shall be entitled to no other or further participation in the distribution of the assets of the Trust. (d) In determining whether a distribution by dividend, redemption or other acquisition of Shares or otherwise is permitted under Maryland law, no effect shall be given to amounts that would be needed, if the Trust were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights on dissolution are superior to those receiving the distribution. 7. Conversion. (a) Holders of Series D Convertible Preferred Shares shall have the right, exercisable at any time and from time to time, except in the case of the Series D Convertible Preferred Shares called for redemption as set forth below, to convert all or any such Series D Convertible Preferred Shares into Common Shares at [the conversion price and ratio determined by the provisions of the Roger Articles Supplementary designating the Roger Series A Convertible Preferred Shares], subject to adjustment as described below. In the case of Series D Convertible Preferred Shares called for redemption, conversion rights will expire at the close of business on the last business day preceding the Redemption Date. Notice of redemption at the option of the Trust must be mailed not less than 30 days and not more than 60 days prior to the Redemption Date as provided in Section 13.4(4)(c) hereof. Upon conversion, no adjustment or payment will be made for distributions, but if any holder surrenders Series D Convertible Preferred Shares for conversion after the close of business on the record date for the payment of a distribution and prior to the opening of business on the related distribution payment date, then, notwithstanding such conversion, the distribution payable on such distribution payment date will be paid to the registered holder of such shares on such distribution record date. In such event, such shares, when surrendered for conversion during the period between the close of business on any distribution record date and the opening of business on the corresponding distribution payment date, must be accompanied by payment of an amount equal to the distribution payable on such distribution payment date on the shares so converted (unless such shares were converted after the issuance of a notice of redemption with respect to such shares, in which event such shares shall be entitled to the distribution payable thereon on such distribution payment date without making such payment). (b) Any holder of one or more Series D Convertible Preferred Shares electing to convert such share or shares shall deliver the certificate or certificates therefor to the principal office of any transfer agent for the Common Shares, with the form of notice of election to convert as the Trust shall prescribe fully completed and duly executed and (if so required by the Trust or any conversion agent) accompanied by instruments of transfer in form satisfactory to the Trust and to any conversion agent, duly executed by the registered holder or his duly authorized attorney, and transfer taxes, stamps or funds therefor or evidence of payment thereof if required pursuant -61- to Section 13.4(7)(a) or 13.4(7)(d) hereof. The conversion right with respect to any such shares shall be deemed to have been exercised at the date upon which the certificates therefor accompanied by such duly executed notice of election and instruments of transfer and such taxes, stamps, funds or evidence of payment shall have been so delivered, and the person or persons entitled to receive the shares of the Common Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of the Common Shares upon said date. (c) No fractional Common Share or scrip representing a fractional share shall be issued upon conversion of Series D Convertible Preferred Shares. If more than one Series D Convertible Preferred Share shall be surrendered for conversion at one time by the same holder, the number of full Common Shares which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate number of Series D Convertible Preferred Shares so surrendered. Instead of any fractional Common Share which would otherwise be issuable upon conversion of any Series D Convertible Preferred Shares, the Trust shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the closing price for the Common Shares on the last trading day preceding the date of conversion. The closing price for such day shall be the last reported sales price regular way or, in case no such reported sale takes place on such date, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange, or if the Common Shares are not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Shares are listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, the closing sale price of the Common Shares or in case no reported sale takes place, the average of the closing bid and asked prices, on NASDAQ or any comparable system. If the Common Shares are not quoted on NASDAQ or any comparable system, the Board of Trustees shall in good faith determine the current market price on the basis of such quotation as it considers appropriate. (d) If a holder converts Series D Convertible Preferred Shares, the Trust shall pay any documentary, stamp or similar issue or transfer tax due on the issuance of Common Shares upon the conversion. The holder, however, shall pay to the Trust the amount of any tax which is due (or shall establish to the satisfaction of the Trust payment thereof) if the shares are to be issued in a name other than the name of such holder and shall pay to the Trust any amount required by the last sentence of Section 13.4(7)(a) hereof. (e) The Trust shall reserve and shall at all times have reserved out of its authorized but unissued Common Shares a sufficient number of Common Shares to permit the conversion of the then outstanding Series D Convertible Preferred Shares. All Common Shares which may be issued upon conversion of Series D Convertible Preferred Shares shall be validly issued, fully paid and nonassessable, and not subject to preemptive or other similar rights. In order that the Trust may issue Common Shares upon conversion of Series D Convertible Preferred -62- Shares, the Trust will endeavor to comply with all applicable Federal and State securities laws and will endeavor to list such Common Shares to be issued upon conversion on each securities exchange on which the Common Shares are listed. (f) The conversion rate in effect at any time shall be subject to adjustment from time to time as follows: (i) In case the Trust shall (1) pay or make a distribution in Common Shares to holders of the Common Shares, (2) reclassify the outstanding Common Shares into shares of some other class or series of shares, (3) subdivide the outstanding Common Shares into a greater number of Common Shares or (4) combine the outstanding Common Shares into a smaller number of Common Shares, the conversion rate immediately prior to such action shall be adjusted so that the holder of any Series D Convertible Preferred Shares thereafter surrendered for conversion shall be entitled to receive the number of Common Shares which he would have owned immediately following such action had such Series D Convertible Preferred Shares been converted immediately prior thereto. An adjustment made pursuant to this Section 13.4(7)(f)(i) shall become effective immediately after the record date in the case of a distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. (ii) In case the Trust shall issue rights or warrants to all holders of the Common Shares entitling them to subscribe for or purchase Common Shares (or securities convertible into Common Shares) at a price per share less than the current market price (as determined pursuant to Section 13.4(7)(f)(iv)) of the Common Shares on such record date, the number of Common Shares into which each Series D Convertible Preferred Share shall be convertible shall be adjusted so that the same shall be equal to the number determined by multiplying the number of Common Shares into which such Series D Convertible Preferred Share was convertible immediately prior to such record date by a fraction of which the numerator shall be the number of Common Shares outstanding on such record date plus the number of additional Common Shares offered (or into which the convertible securities so offered are convertible), and of which the denominator shall be the number of Common Shares outstanding on such record date, plus the number of Common Shares which the aggregate offering price of the additional Common Shares offered (or into which the convertible securities so offered are convertible) would purchase at such current market price. Such adjustments shall become effective immediately after such record date for the determination of the holders of the Common Shares entitled to receive such distribution. For purposes of this subsection (ii), the number of Common Shares at any time outstanding shall not include Common Shares held in the treasury of the Trust. -63- (iii) In case the Trust shall distribute to all holders of the Common Shares any class of shares of beneficial interest other than the Common Shares, evidences of indebtedness or assets of the Trust (other than cash distributions out of current or retained earnings), or shall distribute to all holders of the Common Shares rights or warrants to subscribe for securities (other than those referred to in Section 13.4(7)(f)(ii)), then in each such case the number of Common Shares into which each Series D Convertible Preferred Share shall be convertible shall be adjusted so that the same shall equal the number determined by multiplying the number of Common Shares into which such Series D Convertible Preferred Share was convertible immediately prior to the date of such distribution by a fraction of which the numerator shall be the current market price (determined as provided in Section 13.4(7)(f)(iv)) of the Common Shares on the record date mentioned below, and of which the denominator shall be such current market price of the Common Shares, less the then fair market value (as determined by the Board of Trustees, whose determination shall be conclusive evidence of such fair market value) of the portion of the securities or assets so distributed or of such subscription rights or warrants applicable to one Common Share. Such adjustment shall become effective immediately after the record date for the determination of the holders of the Common Shares entitled to receive such distribution. Notwithstanding the foregoing, in the event that the Trust shall distribute rights or warrants (other than those referred to in Section 13.4(7)(f)(ii)) ("Rights") pro rata to holders of the Common Shares, the Trust may, in lieu of making any adjustment pursuant to this Section 13.4(7)(f)(iii), make proper provision so that each holder of a Series D Convertible Preferred Share who converts such share after the record date for such distribution and prior to the expiration or redemption of the Rights shall be entitled to receive upon such conversion, in addition to the Common Shares issuable upon such conversion (the "Conversion Shares"), a number of Rights to be determined as follows: (1) if such conversion occurs on or prior to the date for the distribution to the holders of Rights of separate certificates evidencing such Rights (the "Distribution Date"), the same number of Rights to which a holder of a number of Common Shares equal to the number of Conversion Shares is entitled at the time of such conversion in accordance with the terms and provisions of and applicable to the Rights; and (2) if such conversion occurs after the Distribution Date, the same number of Rights to which a holder of the number of Common Shares into which a Series D Convertible Preferred Share so converted was convertible immediately prior to the Distribution Date would have been entitled on the Distribution Date in accordance with the terms and provisions of and applicable to the Rights. (iv) The current market price per share of the Common Shares on any date shall be deemed to be the average of the daily closing prices for thirty consecutive -64- trading days commencing forty-five trading days before the date in question. The closing price for each day shall be the last reported sales price regular way or, in case no such reported sale takes place on such date, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange, or if the Common Shares are not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Shares are listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, the closing sale price of the Common Shares or, in case no reported sale takes place, the average of the closing bid and asked prices, on NASDAQ or any comparable system, or if the Common Shares are not quoted on NASDAQ or any comparable system, the closing sale price or, in case no reported sale takes place, the average of the closing bid and asked prices, as furnished by any two members of the National Association of Securities Dealers, Inc. selected from time to time by the Trust for that purpose. (v) In any case in which this Section 13.4(7) shall require that an adjustment be made immediately following a record date, the Trust may elect to defer (but only until five business days following the mailing of the notice described in Section 13.4(7)(j)) issuing to the holder of any Series D Convertible Preferred Shares converted after such record date the Common Shares and other shares of beneficial interest of the Trust issuable upon such conversion over and above the Common Shares and other shares of beneficial interest of the Trust issuable upon such conversion only on the basis of the conversion rate prior to adjustment; and, in lieu of the shares the issuance of which is so deferred, the Trust shall issue or cause its transfer agents to issue appropriate evidence of the right to receive such shares. (g) No adjustment in the conversion rate shall be required until cumulative adjustments result in a change of 1% or more of the conversion price as in effect prior to the last adjustment of the conversion rate; provided, however, that any adjustment which by reason of this Section 13.4(7)(g) is not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 13.4(7) shall be made to the nearest cent ($.01) or to the nearest one-hundredth (1/100) of a share, as the case may be. No adjustment to the conversion rate shall be made for cash dividends. (h) In the event that, as a result of an adjustment made pursuant to Section 13.4(7)(f), the holder of any Series D Convertible Preferred Shares thereafter surrendered for conversion shall become entitled to receive any shares of beneficial interest of the Trust other than Common Shares, thereafter the number of such other shares so receivable upon conversion of any Series D Convertible Preferred Shares shall be subject to adjustment from time to time in -65- a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Shares contained in this Section 13.4(7). (i) The Trust may make such increases in the conversion rate, in addition to those required by Sections 13.4(7)(f)(i), (ii) and (iii), as is considered to be advisable in order that any event treated for Federal income tax purposes as a distribution of shares or share rights shall not be taxable to the recipients thereof. (j) Whenever the conversion rate is adjusted, the Trust shall promptly mail to all holders of record of Series D Convertible Preferred Shares a notice of the adjustment and shall cause to be prepared a certificate signed by a principal financial officer of the Trust setting forth the adjusted conversion rate and a brief statement of the facts requiring such adjustment and the computation thereof; such certificate shall forthwith be filed with each transfer agent for the Series D Convertible Preferred Shares. (k) In the event that: (1) the Trust takes any action which would require an adjustment in the conversion rate, (2) the Trust consolidates or merges with, or transfers all or substantially all of its assets to, another corporation and shareholders of the Trust must approve the transaction, or (3) there is a dissolution, winding up or liquidation of the Trust, a holder of Series D Convertible Preferred Shares may wish to convert some or all of such shares into Common Shares prior to the record date for, or the effective date of, the transaction so that he may receive the rights, warrants, securities or assets which a holder of Common Shares on that date may receive. Therefore, the Trust shall mail to holders of Series D Convertible Preferred Shares a notice stating the proposed record or effective date of the transaction, as the case may be. The Trust shall mail the notice at least 10 days before such date; however, failure to mail such notice or any defect therein shall not affect the validity of any transaction referred to in clauses (1), (2) or (3) of this Section 13.4(7)(k). (l) If any of the following shall occur, namely: (i) any reclassification or change of outstanding Common Shares issuable upon conversion of Series D Convertible Preferred Shares (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), (ii) any consolidation or merger to which the Trust is a party other than a merger in which the Trust is the surviving entity and which does not result in any reclassification of, or change (other than a change in name, or par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or -66- combination) in, outstanding Common Shares or (iii) any sale, transfer or lease of all or substantially all of the property or business of the Trust as an entirety, then the Trust, or such successor or purchasing entity, as the case may be, shall, as a condition precedent to such reclassification, change, consolidation, merger, sale, transfer or lease, provide in its charter document that each Series D Convertible Preferred Share shall be convertible into the kind and amount of shares of stock or beneficial interest and other securities and property (including cash) receivable upon such reclassification, change, consolidation, merger, sale, transfer or lease by a holder of the number of Common Shares deliverable upon conversion of such Series D Convertible Preferred Share immediately prior to such reclassification, change, consolidation, merger, sale, transfer or lease. Such charter document shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 13.4(7). The foregoing, however, shall not in any way affect the right that a holder of Series D Convertible Preferred Shares may otherwise have, pursuant to clause (2) of the last sentence of Section 13.4(7)(f)(iii), to receive Rights upon conversion of Series D Convertible Preferred Shares. If, in the case of any such consolidation, merger, sale, transfer or lease, the shares of stock or beneficial interest or other securities and property (including cash) receivable thereupon by a holder of the Common Shares includes shares of stock or beneficial interest or other securities and property of a corporation other than the successor or purchasing corporation, as the case may be, in such consolidation, merger, sale, transfer or lease, then the charter document of such other corporation shall contain such additional provisions to protect the interests of the holders of Series D Convertible Preferred Shares as the Board of Trustees shall reasonably consider necessary by reason of the foregoing. The provisions of this Section 13.4(7)(l) shall similarly apply to successive consolidations, mergers, sales, transfers or leases. 8. Ranking. With regard to rights to receive distributions and amounts payable upon liquidation, dissolution or winding up of the Trust, the Series D Convertible Preferred Shares shall rank senior to the Common Shares and on a parity with any other preferred shares issued by the Trust, unless the terms of such other preferred shares provide otherwise and, if applicable, the requirements of Section 9 hereof have been complied with. However, the Trust may authorize or increase any class or series of shares of beneficial interest ranking on a parity with or junior to the Series D Convertible Preferred Shares as to distribution rights and the liquidation preference without the vote or consent of the holders of the Series D Convertible Preferred Shares. 9. Limitations. In addition to any other rights provided by applicable law, so long as any Series D Convertible Preferred Shares are outstanding, the Trust shall not, without the affirmative vote, or the written consent as provided by law, of the holders of at least two-thirds (2/3) of the total number of outstanding Series D Convertible Preferred Shares, voting as a class, (a) authorize, create or issue, or increase the authorized or issued amount of, any class or series of, or rights to subscribe to or acquire, any security -67- convertible into, any class or series of shares of beneficial interest ranking as to distribution rights or the liquidation preference, senior to the Series D Convertible Preferred Shares, or reclassify any shares of beneficial interest into any such shares; or (b) amend, alter or repeal, whether by merger, consolidation or otherwise, any of the provisions of this Declaration that would change the preferences, rights or powers with respect to the Series D Convertible Preferred Shares so as to affect the Series D Convertible Preferred Shares adversely; but (except as otherwise required by applicable law) nothing herein contained shall require such a vote or consent (i) in connection with any increase in the total number of authorized Common Shares, or (ii) in connection with the authorization or increase of any class or series of shares of beneficial interest ranking, as to distribution rights and the liquidation preference, on a parity with or junior to the Series D Convertible Preferred Shares; and provided further that no such vote or written consent of the holders of the Series D Convertible Preferred Shares shall be required if, at or prior to the time when the issuance of any such shares ranking senior to the Series D Convertible Preferred Shares is to be made or any such change is to take effect, as the case may be, proper notice has been given and sufficient funds have been irrevocably deposited in trust for the redemption of all the then outstanding Series D Convertible Preferred Shares. 10. No Preemptive Rights. No holder of Series D Convertible Preferred Shares will possess any preemptive rights to subscribe for or acquire any unissued shares of beneficial interest of the Trust (whether now or hereafter authorized) or securities of the Trust convertible into or carrying a right to subscribe to or acquire shares of beneficial interest of the Trust. Section 13.5. Series E Preferred Shares. Pursuant to Section 5.3 of this Declaration, a series of preferred shares of beneficial interest consisting of 2,300,000 shares designated as the "Series E Cumulative Redeemable Preferred Shares of Beneficial Interest" (the "Series E Preferred Shares"), and having a par value of $.01 per share, is hereby established on the following terms: A. Certain Definitions. Unless the context otherwise requires, the terms defined in this paragraph (A) shall have, for all purposes of the provisions of this Declaration in respect of the Series E Preferred Shares, the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural). -68- Business Day. The term "Business Day" shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close. Capital Stock. The term "Capital Stock" shall mean, with respect to any Person, any capital stock (including preferred stock), shares, interests, participants or other ownership interests (however designated) of such Person and any rights (other than debt securities convertible into or exchangeable for capital stock), warrants or options to purchase any thereof. Code. The term "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. Common Equity. The term "Common Equity" shall mean all shares now or hereafter authorized of any class of common shares of beneficial interest of the Trust, including the Common Shares, and any other shares of beneficial interest of the Trust, howsoever designated, which has the right (subject always to prior rights of any class or series of preferred shares of beneficial interest) to participate in the distribution of the assets and earnings of the Trust without limit as to per share amount. Common Shares. The term "Common Shares" shall mean the Common Shares of Beneficial Interest, $.01 par value per share, of the Trust. Distribution Payment Date. The term "Distribution Payment Date" shall have the meaning set forth in subparagraph (2) of paragraph (B) below. Distribution Period. The term "Distribution Period" shall mean the period from, and including, the Initial Issue Date to, but not including, the first Distribution Payment Date and thereafter, each quarterly period from, and including, the Distribution Payment Date to, but not including, the next Distribution Payment Date. Initial Issue Date. The term "Initial Issue Date" shall mean the date that Series E Preferred Shares are first issued by the Trust. Junior Shares. The term "Junior Shares" shall mean, as the case may be, (i) the Common Equity and any other class or series of shares of beneficial interest of the Trust which is not entitled to receive any distributions in any Distribution Period unless all distributions required to have been paid or declared and set apart for payment on the Series E Preferred Shares shall have been so paid or declared and set apart for payment and (ii) the Common Equity and any other class or series of shares of beneficial interest of the Trust which is not entitled to receive any assets upon liquidation, dissolution or winding up of the affairs of the Trust until the Series E Preferred -69- Shares shall have received the entire amount to which such Class B Preferred Shares is entitled upon such liquidation, dissolution or winding up. Liquidation Preference. The term "Liquidation Preference" shall mean $25.00 per share. Parity Shares. The term "Parity Shares" shall mean, as the case may be, (i) any class or series of shares of beneficial interest of the Trust which is entitled to receive payment of distributions on a parity with the Series E Preferred Shares or (ii) any class or series of shares of beneficial interest of the Trust which is entitled to receive assets upon liquidation, dissolution or winding up of the affairs of the Trust on a parity with the Series E Preferred Shares. The term "Parity Shares" shall include the Series D Convertible Preferred Shares, Series A Preferred Shares, and Series C Preferred Shares. Person. The term "Person" shall mean an individual, corporation, partnership, estate, trust (including a trust classified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity, and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, but does not include an underwriter which participates in a public offering of the Series E Preferred Shares, provided that such ownership by such underwriter would not result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, or otherwise result in the Trust failing to qualify as a REIT. Record Date. The term "Record Date" shall mean the date designated by the Board of Trustees of the Trust at the time a distribution is declared, provided, however, that such Record Date shall be the first day of the calendar month in which the applicable Distribution Payment Date falls or such other date designated by the Board of Trustees for the payment of distributions that is not more than ninety (90) days prior to such Distribution Payment Date. Redemption Date. The term "Redemption Date" shall have the meaning set forth in subparagraph (2) of paragraph (D) below. Redemption Price. The term "Redemption Price" shall mean a price per Series E Preferred Share equal to $25.00 together with accrued and unpaid distributions, if any, thereon to the Redemption Date, without interest. REIT. The term "REIT" shall mean a real estate investment trust under Section 856 of the Code. -70- Senior Shares. The term "Senior Shares" shall mean, as the case may be, (i) any class or series of shares of beneficial interest of the Trust ranking senior to the Series E Preferred Shares in respect of the right to receive distributions or (ii) any class or series of shares of beneficial interest of the Trust ranking senior to the Series E Preferred Shares in respect of the right to participate in any distribution upon liquidation, dissolution or winding up of the affairs of the Trust. B. Distributions. 1. The record holders of Series E Preferred Shares shall be entitled to receive distributions, when, as and if authorized by the Board of Trustees, out of assets legally available for payment of distributions. Such distributions shall be payable by the Trust in cash at a rate of 9.65% of the Liquidation Preference per annum (equivalent to $2.4125 per Series E Preferred Share per annum). 2. Distributions on Series E Preferred Shares shall accrue and be cumulative from the Initial Issue Date. Distributions shall be payable quarterly in arrears when, as and if authorized by the Board of Trustees of the Trust on January 15, April 15, July 15 and October 15 of each year (each, a "Distribution Payment Date"), commencing on the business day succeeding October 15, 1995. If any Distribution Payment Date occurs on a day that is not a Business Day, any accrued distributions otherwise payable on such Distribution Payment Date shall be paid on the next succeeding Business Day. The amount of distributions payable on Series E Preferred Shares for each full Distribution Period shall be computed by dividing by four (4) the annual distribution rate set forth in subparagraph (1) of this paragraph (B) above. Distributions payable in respect of any Distribution Period which is less than a full Distribution Period in length will be computed on the basis of a 360-day year consisting of twelve 30-day months. Distributions shall be paid to the holders of record of the Series E Preferred Shares as their names shall appear on the share records of the Trust at the close of business on the Record Date for such distribution. Distributions in respect of any past Distribution Periods that are in arrears may be declared and paid at any time to holders of record on the Record Date therefor. Any distribution payment made on Series E Preferred Shares shall be first credited against the earliest accrued but unpaid distribution due which remains payable. Upon issuance, the Series E Preferred Shares will rank on a parity as to distributions with the Convertible Preferred Shares, Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares. 3. If any Series E Preferred Shares are outstanding, no full distributions shall be authorized or paid or set apart for payment on any other class or series of Shares ranking junior to or on a parity with the Series E Preferred Shares as to distributions for any period unless full cumulative distributions have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for such payment on the Series E Preferred Shares for all past Distribution Periods and the then current Distribution Period. When -71- distributions are not paid in full (or a sum sufficient for such full payment is not so set apart) upon the Series E Preferred Shares and any other class or series of Preferred Shares ranking on a parity as to distributions with the Series E Preferred Shares, all distributions authorized upon the Series E Preferred Shares and any other such class or series of Shares shall be authorized pro rata so that the amount of distributions authorized per share on the Series E Preferred Shares and such class or series of Shares shall in all cases bear to each other the same ratio that accrued and unpaid distributions per share on the Series E Preferred Shares and such class or series of Shares bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any distribution payment or payments on the Series E Preferred Shares which may be in arrears. 4. Except as provided in subparagraph (3) of this paragraph (B), unless full cumulative distributions on the Series E Preferred Shares have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for payment for all past Distribution Periods and the then current Distribution Period, no distributions (other than in common shares or other shares ranking junior to the Series E Preferred Shares as to distributions and upon liquidation, dissolution and winding up of the affairs of the Trust) shall be authorized or paid or set apart for payment or other distribution shall be authorized or made upon any Junior Shares or Parity Shares nor shall any Junior Shares or Parity Shares be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any such shares) by the Trust (except by conversion into or exchange for other shares of the Trust ranking junior to the Series E Preferred Shares as to distributions and upon liquidation, dissolution or winding up of the affairs of the Trust). 5. Notwithstanding anything contained herein to the contrary, no distributions on Series E Preferred Shares shall be authorized by the Board of Trustees of the Trust or paid or set apart for payment by the Trust at such time as the terms and provisions of any agreement of the Trust, including any agreement relating to its indebtedness, prohibits such authorization, payment or setting apart for payment or provides that such authorization, payment or setting apart for payment would constitute a breach thereof or a default thereunder, or to the extent such authorization, payment or setting apart for payment shall be restricted or prohibited by law. 6. Notwithstanding anything contained herein to the contrary, distributions on the Series E Preferred Shares, if not paid on the applicable Distribution Payment Date, will accrue whether or not distributions are authorized for such Distribution Payment Date, whether or not the Trust has earnings and whether or not there are assets legally available for the payment of such distributions. 7. If the Board of Trustees determines that it is permissible under applicable law and that the distributions will qualify for the dividends paid deduction (within the meaning of Sections 561 and 562 of the Code or any successor provisions thereto), such distributions shall be paid as follows: first, from income of the Trust other than net capital gains, and the balance, if any, from -72- net capital gains of the Trust. If the Board of Trustees determines, in its sole discretion, that distributions to be paid in accordance with the preceding sentence might not qualify for such dividends paid deduction, or might not be permissible under applicable law, then such distributions shall be paid in a manner determined by the Board of Trustees. C. Distributions Upon Liquidation, Dissolution or Winding Up. 1. Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Trust, subject to the prior preferences and other rights of any Senior Shares as to liquidation preferences, but before any distribution or payment shall be made to the holders of any Junior Shares as to the distribution of assets upon any liquidation, dissolution or winding up of the affairs of the Trust, the holders of Series E Preferred Shares shall be entitled to receive out of the assets of the Trust legally available for distribution to its shareholders liquidating distributions in cash or property at its fair market value as determined by the Board of Trustees in the amount of the Liquidation Preference per share plus an amount equal to all distributions accrued and unpaid thereon to the date of such liquidation, dissolution or winding up. After payment of the full amount of the liquidating distributions to which they are entitled, the holders of Series E Preferred Shares will have no right or claim to any of the remaining assets of the Trust and shall not be entitled to any other distribution in the event of liquidation, dissolution or winding up of the affairs of the Trust. 2. In the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, the legally available assets of the Trust are insufficient to pay the amount of the Liquidation Preference per share plus an amount equal to all distributions accrued and unpaid on the Series E Preferred Shares and the corresponding amounts payable on all shares of Parity Shares as to the distribution of assets upon liquidation, dissolution or winding up, then the holders of the Series E Preferred Shares and all such Parity Shares shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they otherwise would be respectively entitled. Upon issuance, the Series E Preferred Shares will rank on parity with the Series A Convertible Preferred Shares, Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares as to the distribution of assets upon any liquidation, dissolution or winding up of the affairs of the Trust. Neither the consolidation or merger of the Trust into or with another entity nor the dissolution, liquidation, winding up or reorganization of the Trust immediately followed by incorporation of another corporation to which such assets are distributed, nor the sale, lease, transfer or conveyance of all or substantially all of the assets of the Trust to another entity shall be deemed a liquidation, dissolution or winding up of the affairs of the Trust within the meaning of this paragraph (C); provided, however, that, in each case, effective provision is made in the charter of the resulting or surviving corporation or otherwise for the recognition, preservation and protection of the rights of the holders of the Series E Preferred Shares. -73- 3. In determining whether a distribution by dividend, redemption or other acquisition of Shares or otherwise is permitted under Maryland law, no effect shall be given to amounts that would be needed, if the Trust were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights on dissolution are superior to those receiving the distribution. D. Redemption by the Trust. 1. The Series E Preferred Shares may be redeemed for cash, in whole or from time to time in part, on any date on or after August 24, 2000 at the option of the Trust at the Redemption Price. The Redemption Price of the Series E Preferred Shares (other than any portion thereof consisting of accrued and unpaid distributions) may be paid solely from the sale of proceeds of Capital Stock of the Trust. 2. Each date fixed for redemption pursuant to subparagraph (1) of this paragraph (D) is called a "Redemption Date". If the Redemption Date is after a Record Date and before the related Distribution Payment Date, the distribution payable on such Distribution Payment Date shall be paid to the holder in whose name the Series E Preferred Shares to be redeemed are registered at the close of business on such Record Date notwithstanding the redemption thereof between such Record Date and the related Distribution Payment Date or the Trust's default in the payment of the distribution. 3. In case of redemption of less than all of the Series E Preferred Shares at the time outstanding, the shares to be redeemed shall be selected by the Trust pro rata from the holders of record of such shares in proportion to the number of shares held by such holders (with adjustments to avoid redemption of fractional shares) or by any other equitable method determined by the Board of Trustees. 4. Notice of any redemption will be given by publication in a newspaper of general circulation in the City of New York, such publication to be made once a week for two successive weeks commencing not less than 30 nor more than 60 days prior to the Redemption Date. A similar notice will be mailed by the Trust, postage prepaid, not less than 30 nor more than 60 days prior to the Redemption Date, addressed to the respective holders of record of the Series E Preferred Shares to be redeemed at their respective addressees as they appear on the share transfer records of the Trust. No failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any Series E Preferred Shares except as to any holder to whom the Trust has failed to give notice or except as to any holder to whom notice was defective. In addition to any information required by law or by the applicable rules of any exchange upon which Series E Preferred Shares may be listed or admitted to trading, such notice shall state: (i) the Redemption Date; (ii) the Redemption Price; (iii) the number of Series E Preferred Shares to be redeemed and, if less than all shares held by the particular holder -74- are to be redeemed, the number of such shares to be redeemed; (iv) the place or places where certificates for such shares are to be surrendered for payment of the Redemption Price; and (v) that distributions on the shares to be redeemed will cease to accrue on the Redemption Date. 5. If notice has been mailed in accordance with subparagraph (4) of this paragraph (D), and such notice provided that on or before the Redemption Date specified therein all funds necessary for such redemption shall have been set aside by the Trust, separate and apart from its other funds in trust for the pro rata benefit of the holders of the shares so called for redemption, so as to be, and to continue to be available therefor, then, from and after the Redemption Date, distributions on the Series E Preferred Shares so called for redemption shall cease to accrue, and said shares shall no longer be deemed to be outstanding and shall not have the status of Series E Preferred Shares, and all rights of the holders thereof as shareholders of the Trust (except the right to receive from the Trust the Redemption Price) shall cease. Upon surrender, in accordance with said notice, of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Trust shall so require and the notice shall so state), such shares shall be redeemed by the Trust at the Redemption Price. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the unredeemed shares without cost to the holder thereof. 6. Any funds deposited with a bank or trust company for the purpose of redeeming Series E Preferred Shares shall be irrevocable except that: a. the Trust shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any shares redeemed shall have no claim to such interest or other earnings; and b. any balance of monies so deposited by the Trust and unclaimed by the holders of the Series E Preferred Shares entitled thereto at the expiration of two (2) years from the applicable Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Trust, and after any such repayment, the holders of the shares entitled to the funds so repaid to the Trust shall look only to the Trust for payment without interest or other earnings. 7. No Series E Preferred Shares may be redeemed except with assets legally available for the payment of the Redemption Price. 8. Unless full cumulative distributions on all Series E Preferred Shares shall have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for payment for all past Distribution Periods and the then current Distribution Period, no Series E Preferred Shares shall be redeemed unless all outstanding Series E Preferred Shares are simultaneously redeemed; provided, however, that the foregoing shall not prevent the purchase or acquisition of Series E Preferred Shares pursuant to a purchase or exchange offer -75- made on the same terms to holders of all outstanding Series E Preferred Shares, provided further, however, that the foregoing shall not prevent the purchase or acquisition of Series E Preferred Shares from persons owning in the aggregate 9.8% or more of the number or value of the total outstanding shares of beneficial interest of the Trust or 20% or more of the number or value of the total outstanding Series E Preferred Shares pursuant to provisions of the Declaration of Trust. Unless full cumulative distributions on all outstanding Series E Preferred Shares have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for payment for all past Distribution Periods and the then current Distribution Period, the Trust shall not purchase or otherwise acquire directly or indirectly any Series E Preferred Shares (except by exchange for shares of the Trust ranking junior to the Series E Preferred Shares as to distributions and upon liquidation, dissolution or winding up of the affairs of the Trust). 9. All Series E Preferred Shares redeemed pursuant to this paragraph (D) shall be retired and shall be reclassified as authorized and unissued preferred shares, without designation as to class or series, and may thereafter be reissued as any class or series of preferred shares. E. Voting Rights. 1. The holders of Series E Preferred Shares shall not be entitled to vote on any matter except (i) as provided in paragraph (K), (ii) as provided in subparagraph (2) of this paragraph (E), or (iii) as specifically required by law. 2. In the event the Trust shall have failed to authorize and pay or set apart for payment in full the distributions accumulated on the outstanding Series E Preferred Shares for any six or more quarterly Distribution Periods, regardless of whether such quarterly periods are consecutive (a "Preferential Distribution Non-Payment"), the number of trustees of the Trust shall be increased by two and the holders of the outstanding Series E Preferred Shares, voting together as a class with all other classes or series of preferred shares of the Trust ranking on a parity with the Series E Preferred Shares with respect to distribution rights and then entitled to vote on the election of such additional two trustees, shall be entitled to elect such two additional trustees until the full distributions accumulated on all outstanding Series E Preferred Shares have been authorized and paid or set apart for payment. Upon the occurrence of a Preferential Distribution Non-Payment or a vacancy in the office of a Preferred Shares Trustee (as defined below), the Board of Trustees shall within a reasonable period call a special meeting of the holders of the Series E Preferred Shares and all holders of other classes or series of preferred shares of the Trust ranking on a parity with the Series E Preferred Shares with respect to distribution rights who are then entitled to vote on the election of such additional trustee or trustees for the purpose of electing the additional trustee or trustees. If and when all accumulated distributions on the Series E Preferred Shares have been authorized and paid or set aside for payment in full, the holders of the Series E Preferred Shares shall be divested of the special voting rights provided by this -76- subparagraph (2) of paragraph (E), subject to revesting in the event of each and every subsequent Preferential Distribution Non-Payment. Upon termination of such special voting rights attributable to all holders of the Series E Preferred Shares and shares of any other class or series of preferred shares of the Trust ranking on a parity with the Series E Preferred Shares with respect to distribution rights, the term of office of each trustee elected by the holders of the Series E Preferred Shares and such parity preferred shares (a "Preferred Shares Trustee") pursuant to such special voting rights shall forthwith terminate and the number of trustees constituting the entire Board of Trustees shall be reduced by the number of Preferred Shares Trustees. In the event the holders of the outstanding Series A Convertible Preferred Shares shall become entitled to vote on the election of additional trustees because the Trust shall have failed to declare and pay or set apart for payment in full the distributions accumulated on the outstanding Convertible Preferred Shares for any six consecutive quarterly distribution payment periods, the term of office of each Preferred Shares Trustee previously elected by holders of Series E Preferred Shares shall forthwith terminate and the holders of the Series E Preferred Shares, voting together as a class with all other classes or series of preferred shares of the Trust ranking on a parity with the Series E Preferred Shares with respect to distribution rights and then entitled to vote on the election of two additional trustees, shall be entitled to elect such two additional trustees pursuant to this paragraph (E). Any Preferred Shares Trustee may be removed only by the vote of the holders of record of a majority of the outstanding Series E Preferred Shares and all other series of preferred shares of the Trust ranking on a parity with the Series E Preferred Shares with respect to distribution rights who would then be entitled to vote in such Preferred Shares Trustee's election, voting together as a separate class, at a meeting called for such purpose. 3. So long as any Series E Preferred Shares are outstanding, the number of trustees constituting the entire Board of Trustees of the Trust shall at all times be such that the exercise, by the holders of the Series E Preferred Shares and the holders of preferred shares of the Trust ranking on a parity with the Series E Preferred Shares with respect to distribution rights, of the right to elect trustees under the circumstances provided for in subparagraph (2) of this paragraph (E) will not contravene any other provision of this Declaration restricting the number of trustees which may constitute the entire Board of Trustees. 4. Trustees elected pursuant to subparagraph (2) of this paragraph (E) shall serve until the earlier of (x) the next annual meeting of the shareholders of the Trust and the election (by the holders of the Series E Preferred Shares and the holders of preferred shares of the Trust ranking on a parity with the Series E Preferred Shares with respect to distribution rights) and qualification of their respective successors or (y) the termination of the term of office of each Preferred Shares Trustee upon the termination of the special voting rights as provided for in subparagraph (2) of this paragraph (E) or as otherwise provided for in subparagraph (2) of this paragraph (E). 5. So long as a Preferential Distribution Non-Payment shall continue, any vacancy in the office of a Preferred Shares Trustee may be filled by vote of the holders of record of a majority -77- of the outstanding Series E Preferred Shares and all other series of preferred shares ranking on a parity with the Series E Preferred Shares with respect to distribution rights who are then entitled to vote in the election of such Preferred Shares Trustee as provided above. As long as the Preferential Distribution Non-Payment shall continue, holders of the Series E Preferred Shares shall not, as such shareholders, be entitled to vote on the election or removal of trustees other than Preferred Shares Trustees, but shall not be divested of any other voting rights provided to such shareholders by law or this Declaration of Trust with respect to any other matter to be acted upon by the shareholders of the Trust. F. Trustees' Right to Refuse to Transfer Series E Preferred Shares; Limitation on Holdings. 1. The terms and provisions of this paragraph (F) shall apply in addition to, and not in limitation of, the terms and provisions of Article 7. 2. Each Person who owns directly or indirectly more than five percent in number or value of the total Series E Preferred Shares outstanding shall, by January 30 of each year, give written notice to the Trust stating the Person's name and address, the number of Series E Preferred Shares directly or indirectly owned by such Person, and a description of the capacity in which such Series E Preferred Shares are held. For purposes of this Section 13.5, the number and value of the total Series E Preferred Shares outstanding shall be determined by the Board of Trustees in good faith, which determination shall be conclusive for all purposes hereunder. In addition, each direct or indirect holder of Series E Preferred Shares, irrespective of such shareholder's percentage ownership of outstanding Series E Preferred Shares, shall upon demand disclose to the Trust in writing such information with respect to the direct or indirect ownership of Series E Preferred Shares as the Board of Trustees deems necessary from time to time to enable the Board of Trustees to determine whether the Trust complies with the REIT Provisions of the Code (as defined in Section 1.5 of the Declaration of Trust), to comply with the requirements of any taxing authority or governmental agency or to determine any such compliance or to determine any such compliance with this paragraph (F). 3. If, in the opinion of the Board of Trustees, which shall be binding upon any prospective acquiror of Series E Preferred Shares, any proposed transfer or issuance would jeopardize the status of the Trust as a REIT under the REIT Provisions of the Code, the Board of Trustees shall have the right, but not the duty, to refuse to permit such transfer or issuance or refuse to give effect to such transfer or issuance and to take any action to cause any such transfer not to occur or to void any such issuance. 4. As a condition to any transfer and/or registration of transfer on the books of the Trust of any Series E Preferred Shares which could result in direct or indirect ownership (as hereinafter defined) of Series E Preferred Shares exceeding 20% of the lesser of the number or the value of the total Series E Preferred Shares outstanding (the "Series E Excess Preferred -78- Shares") by a Person other than a Series E Preferred Excepted Person (as defined in subparagraph (5) below), such prospective transferee shall give written notice to the Trust of the proposed transfer and shall furnish such opinions of counsel, affidavits, undertakings, agreements and information as may be required by the Board of Trustees no later than the 15th day prior to any transfer which, if consummated, would result in such ownership. 5. Any transfer or issuance of Series E Preferred Shares that would (i) create a direct or indirect owner of Series E Excess Preferred Shares other than a Series E Preferred Excepted Person; or (ii) result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, shall be void ab initio and the prospective acquiror shall not be entitled to any rights afforded to owners of Series E Preferred Shares hereunder and shall be deemed never to have had an interest therein. "Series E Preferred Excepted Person" shall mean any Person approved by the Board of Trustees, at their option and in their sole discretion, provided, however, that such approval shall not be granted to any Person whose ownership of in excess of 20% of the lesser of the number or the value of the total Series E Preferred Shares outstanding would result, directly, indirectly or as a result of attribution of ownership, in termination of the status of the Trust as a REIT under the REIT Provisions of the Code. 6. The Trust, by notice to the holder thereof, may purchase any or all Series E Preferred Shares that are proposed to be transferred pursuant to a transfer which, in the opinion of the Board of Trustees, which shall be binding upon any proposed transferor or transferee of Series E Preferred Shares, would result in any Person acquiring Series E Excess Preferred Shares, or would otherwise jeopardize the status of the Trust as a real estate investment trust under the REIT Provisions of the Code. The Trust shall have the power, by lot or other means deemed equitable by the Board of Trustees in their sole discretion, to purchase such Series E Excess Preferred Shares from the prospective transferor. The purchase price for any Series E Excess Preferred Shares shall be equal to the fair market value of the Series E Preferred Shares on the last trading day immediately preceding the day on which notice of such proposed transfer is sent, as reflected in the closing sale price for the Series E Preferred Shares, if then listed on a national securities exchange, or such price for the Series E Preferred Shares on the principal exchange if then listed on more than one national securities exchange, or if the Series E Preferred Shares are not then listed on a national securities exchange, the latest bid quotation for the Series E Preferred Shares if then traded over-the-counter, or, if no such closing sales prices or quotations are available, then the purchase price shall be equal to the fair market value of such Series E Preferred Shares as determined by the Board of Trustees in good faith. Prompt payment of the purchase price shall be made in cash by the Trust in such manner as may be determined by the Board of Trustees. From and after the date fixed for purchase by the Board of Trustees, and so long as payment of the purchase price for the Series E Preferred Shares to be so redeemed shall have been made or duly provided for, the holder of any Series E Excess Preferred Shares so called for -79- purchase shall cease to be entitled to dividends, distributions, voting rights and other benefits with respect to such Series E Preferred Shares, excepting only the right to payment of the purchase price fixed as aforesaid. Any dividend or distribution paid to a proposed transferee of Series E Excess Preferred Shares prior to the discovery by the Trust that the Series E Preferred Shares have been transferred in violation of this paragraph (F) shall be repaid to the Trust upon demand. 7. Notwithstanding any other provision in this Declaration or the Trust's Bylaws, subparagraphs (5), (6), (7) and (8) of this paragraph (F) may not be amended or repealed without the affirmative vote of the holders of not less than a majority of the Series E Preferred Shares then outstanding and entitled to vote. If subparagraph (5), (6), (7) or (8) of this paragraph (F) is determined to be void or invalid by virtue of any legal decision, statute, rule or regulation, then the acquiror of Series E Preferred Shares in violation of such sections shall be deemed, at the option of the Trust, to have acted as agent on behalf of the Trust in acquiring such Series E Preferred Shares on behalf of the Trust. 8. Subject to subparagraph (12), notwithstanding any other provision of this Section 13.5 to the contrary, any purported transfer, sale or acquisition of Series E Preferred Shares (whether such purported transfer, sale or acquisition results from the direct or indirect acquisition of ownership of Series E Preferred Shares) which would result in the termination of the status of the Trust as a REIT under the REIT Provisions of the Code shall be null and void ab initio. Any such Series E Preferred Shares may be treated by the Board of Trustees in the manner prescribed for Series E Excess Preferred Shares in subparagraph (6) of this paragraph (F). 9. Subject to subparagraph (12), nothing contained in this paragraph (F) or in any other provision of this Section 13.5 shall limit the authority of the Board of Trustees to take such other action as it deems necessary or advisable to protect the Trust and the interests of the shareholders by preservation of the Trust's status as a REIT under the REIT Provisions of the Code. 10. If any provision of this paragraph (F) or any application of any such provision is determined to be invalid by any federal or state court having jurisdiction over the issues, the validity of the remaining provisions shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court. To the extent this paragraph (F) may be inconsistent with any other provision of this Section 13.5, this paragraph (F) shall be controlling. 11. For purposes of this Section 13.5, Series E Preferred Shares not owned directly shall be deemed to be owned indirectly by a person if that person or a group of which he is a member would be the beneficial owner of such Series E Preferred Shares, as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended, and/or would be considered to own such Series E Preferred Shares by reason of the REIT Provisions of the Code. -80- 12. Notwithstanding any other provision of paragraph (F), nothing in this Section 13.5 shall preclude the settlement of transactions entered into through the facilities of the New York Stock Exchange, Inc. The fact that the settlement of any transaction is permitted shall not negate the effect of any other provision of this paragraph (F) and any transferee in such a transaction shall be subject to all of the provisions and limitations set forth in this paragraph (F). G. Exclusion of Other Rights. Except as may otherwise be required by law, the Series E Preferred Shares shall not have any preferences or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption other than specifically set forth in this Declaration. H. Headings of Subdivisions. The headings of the various subdivisions in this Section 13.5 are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. I. Severability of Provisions. If any preferences or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption of the Series E Preferred Shares set forth in this Declaration is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other preferences or other rights, voting powers, restrictions, limitations as to distributions, qualifications or terms or conditions of redemption of Series E Preferred Shares set forth in this Declaration which can be given effect without the invalid, unlawful or unenforceable provision thereof shall, nevertheless, remain in full force and effect and no preferences or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption of the Series E Preferred Shares herein set forth shall be deemed dependent upon any other provision thereof unless so expressed therein. J. Ranking. With regard to rights to receive distributions and amounts payable upon liquidation, dissolution or winding up of the Trust, the Series E Preferred Shares shall rank senior to the Common Shares and on a parity with any other preferred shares issued by the Trust, unless the terms of such other preferred shares provide otherwise and, if applicable, the requirements of Paragraph K hereof have been complied with. However, the Trust may authorize or increase any class or series of shares of beneficial interest ranking on a parity with or junior to the Series E -81- Preferred Shares as to distribution rights or liquidation preference without the vote or consent of the holders of the Series E Preferred Shares. K. Limitations. In addition to any other rights provided by applicable law, so long as any Series E Preferred Shares are outstanding, the Trust shall not, without the affirmative vote, or the written consent as provided by law, of the holders of at least two-thirds of the total number of outstanding Series E Preferred Shares, voting as a class, 1. authorize, create or issue, or increase the authorized or issued amount of, any class or series of, or rights to subscribe to or acquire, any security convertible into, any class or series of shares of beneficial interest ranking as to distribution rights or liquidation preference, senior to the Series E Preferred Shares, or reclassify any shares of beneficial interest into any such shares; or 2. amend, alter or repeal, whether by merger, consolidation or otherwise, any of the provisions of this Declaration that would change the preferences, rights or powers with respect to the Series E Preferred Shares so as to affect the Series E Preferred Shares materially and adversely; but (except as otherwise required by applicable law) nothing herein contained shall require such a vote or consent (i) in connection with any increase in the total number of authorized Common Shares, or (ii) in connection with the authorization or increase of any class or series of shares of beneficial interest ranking, as to distribution rights and liquidation preference, on a parity with or junior to the Series E Preferred Shares; provided, however, that no such vote or written consent of the holders of the Series E Preferred Shares shall be required if, at or prior to the time when the issuance of any such shares ranking senior to the Series E Preferred Shares is to be made or any such change is to take effect, as the case may be, proper notice has been given and sufficient funds have been irrevocably deposited in trust for the redemption of all the then outstanding Series E Preferred Shares. L. No Preemptive Rights. No holder of Series E Preferred Shares shall be entitled to any preemptive rights to subscribe for or acquire any unissued shares of beneficial interest of the Trust (whether now or hereafter authorized) or securities of the Trust convertible into or carrying a right to subscribe to or acquire shares of beneficial interest of the Trust. -82- IN WITNESS WHEREOF, this Amended and Restated Declaration of Trust has been signed on this _____ day of ________, 1997, by the undersigned Trustees, each of whom acknowledge that this document is his free act and deed, that, to the best of his knowledge, information and belief, the matters and facts set forth herein are true in all material respects and that this statement is made under the penalties for perjury. ____________________________________ ____________________________________ Samuel Zell Douglas Crocker II ____________________________________ ____________________________________ Sheli Z. Rosenberg Gerald A. Spector ____________________________________ ____________________________________ James D. Harper, Jr. Errol R. Halperin ____________________________________ ____________________________________ Barry S. Sternlicht John Alexander ____________________________________ ____________________________________ B. Joseph White Henry H. Goldberg ____________________________________ ____________________________________ Jeffrey M. Lynford Edward Lowenthal -83- EXHIBIT B --------- TRUSTEES OF SURVIVING TRUST --------------------------- Trustee Term Expires - ------- ------------ Samuel Zell Douglas Crocker II Sheli Z. Rosenberg Gerald A. Spector James D. Harper, Jr. Errol R. Halperin Barry S. Sternlicht John W. Alexander B. Joseph White Henry H. Goldberg Jeffrey H. Lynford Edward Lowenthal 96 EXHIBIT B CONTRIBUTION AND DISTRIBUTION AGREEMENT --------------------------------------- CONTRIBUTION AND DISTRIBUTION AGREEMENT, dated as of _____________, 1997, by and between WELLSFORD RESIDENTIAL PROPERTY TRUST, a Maryland real estate investment trust ("Wellsford Parent"), and WELLSFORD REAL PROPERTIES, INC., a Maryland corporation ("Newco"). RECITALS: -------- WHEREAS, Wellsford Parent and Equity Residential Properties Trust, a Maryland real estate investment trust ("EQR"), have entered into an Agreement and Plan of Merger dated as of January 16, 1997 (the "Merger Agreement"), providing for the merger of EQR with Wellsford Parent (the "Merger"), with Wellsford Parent continuing as the surviving entity of the Merger, upon the terms and subject to the conditions set forth in the Merger Agreement; WHEREAS, the Board of Trustees of Wellsford Parent has determined that Wellsford Parent can maximize the value of certain of its assets by not conveying them in the Merger, and EQR has indicated that it has no interest in acquiring such assets; WHEREAS, the Board of Trustees of Wellsford Parent has deemed it appropriate and advisable, in order to enhance value for the shareholders of Wellsford Parent, prior to the Merger and as contemplated by the Merger Agreement, to (i) contribute to Newco certain of the assets and liabilities of Wellsford Parent and (ii) distribute, immediately prior to the Merger, as a taxable distribution to the holders of Common Shares of Beneficial Interest, $.01 par value of Wellsford Parent (the "Wellsford Parent Common Shares"), all of the outstanding shares of common stock, $.01 par value, of Newco owned by Wellsford Parent (the "Newco Common Stock"); WHEREAS, following such contribution and distribution, EQR shall acquire the remaining businesses, operations, assets and liabilities of Wellsford Parent and its remaining direct and indirect subsidiaries pursuant to the Merger; and WHEREAS, Wellsford Parent and Newco have determined that it is necessary and desirable to set forth the transactions required to effect such contribution and distribution and to set forth other agreements that will govern certain other matters following such distribution. NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, the parties hereby agree as follows: ARTICLE 1 --------- DEFINITIONS ----------- As used in this Agreement, the following terms have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Action" means any action, suit, arbitration, inquiry, proceeding or investigation by or before any court, any governmental or other regulatory or administrative agency or commission or any arbitration tribunal. "Affiliate" means, when used with respect to a specified person, another person that, directly or indirectly, controls, is controlled by, or is under common control with, the person specified. "Agent" means the distribution agent to be appointed by Wellsford Parent to distribute to the Holders the shares of Newco Common Stock pursuant to the Distribution. "Assumed Liabilities" has the meaning set forth in Section 2.2. "Code" means the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder, including any successor legislation. "Commission" means the Securities and Exchange Commission. "Confidential Information" has the meaning set forth in Section 4.3. "Contributed Asset" and "Contributed Assets" have the meaning set forth in Section 2.1. "Contribution" has the meaning set forth in Section 2.4. "Credit Enhancement Agreement" means the Credit Enhancement Agreement of even date herewith between ERP Operating Partnership and Newco. "Distribution" means the distribution prior to the effective time of the Merger by Wellsford Parent to the Holders of all the outstanding shares of Newco Common Stock owned by Wellsford Parent on the Distribution Date on the basis of one share of Newco Common Stock for each outstanding Wellsford Parent Common Share. "Distribution Date" means the date determined pursuant to Section 3.1 on which the Distribution will be effected. 2 "Distribution Record Date" means the close of business on the date to be determined by the Board of Trustees of Wellsford Parent as the record date for determining the shareholders of Wellsford Parent entitled to receive Newco Common Stock in the Distribution, which will be the date on which the Merger is effected. "Effective Time" means the time on the Distribution Date when Wellsford Parent delivers to the Agent instructions directing the Agent to effect the Distribution. "ERP Operating Partnership" means ERP Operating Limited Partnership, an Illinois limited partnership, of which EQR is the general partner. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Governmental Authority" means any government or any agency, bureau, board, commission, court, department, official, political subdivision, tribunal or other instrumentality of any government, whether federal, state or local, domestic or foreign. "Headquarter Lease" has the meaning set forth in Section 2.1. "Holder" means a holder of record of Wellsford Parent Common Shares on the Distribution Record Date. "Indemnifying Party" has the meaning set forth in Section 5.3. "Indemnitee" has the meaning set forth in Section 5.3. "Indemnitee Notice" has the meaning set forth in Section 5.4. "Intellectual Property Rights" has the meaning set forth in Section 2.1. "IRS" means the Internal Revenue Service. "Liabilities" means any and all debts, liabilities and obligations, absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising, including, without limitation, Taxes and those debts, liabilities and obligations arising under any law, rule, regulation, Action, threatened Action, order or consent decree of any court, any governmental or other regulatory or administrative agency or commission or any award of any arbitration tribunal, and those arising under any contract, commitment or undertaking. "Losses" and "Loss" mean any and all losses, charges, Liabilities, claims, damages, penalties and costs or expenses (including, without limitation, reasonable attorney's fees and any 3 and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any Actions or threatened Actions). "Merger" has the meaning set forth in the recitals. "Newco Common Stock" has the meaning set forth in the recitals. "Newco Indemnitees" has the meaning set forth in Section 5.1. "Newco Liabilities" means, collectively, (i) all the Liabilities of Newco under this Agreement, (ii) all the Liabilities arising out of or in connection with or otherwise relating to (A) the Assumed Liabilities, (B) the Liabilities of Newco and the Newco Subsidiaries, whether incurred before or after the Effective Time, and (C) the assets and conduct of the business of Newco and the Newco Subsidiaries, whether incurred before or after the Effective Time, but shall exclude the liabilities and benefits of Wellsford Parent under the Tri-Party Agreement. "Newco Subsidiaries" mean all Subsidiaries of Newco after giving effect to the transactions contemplated hereby. "Note" means the Promissory Note dated June 28, 1996 by Specified Properties VIII, L.P., a Texas limited partnership. "Palomino Agreement" means the Agreement regarding Palomino Park of even date herewith between Newco and ERP Operating Partnership. "Palomino Bonds" mean the Assessment Lien Revenue Bonds, Series 1995, issued by PPPIC in the original aggregate principal amount of $14,755,000, pursuant to a Trust Indenture dated as of December 1, 1995. "Palomino Park" means the Overall Property, as defined in the Palomino Agreement. "PPPIC" means Palomino Park Public Improvement Corporation, a Colorado nonprofit corporation. "Registration Statement" means the registration statement on Form 10 (or other applicable form) to be filed with the Commission by Newco pursuant to the requirements of Section 12 of the Exchange Act, and the rules and regulations thereunder, in order to register the Newco Common Stock under Section 12(b) of the Exchange Act. "Representatives" has the meaning set forth in Section 4.3. 4 "Retained Subsidiaries" means all Subsidiaries of Wellsford Parent other than the Newco Subsidiaries. "S-4" means the registration statement on Form S-4 to be filed with the Commission relating to shares issued in connection with the Merger. "Securities Act" means the Securities Act of 1933, as amended. "Sonterra Documents" has the meaning set forth in Section 2.1. "Subsidiary" means any entity at least 51% of the total outstanding voting interests of which are owned, directly or indirectly, by another entity. "Taxes" means all taxes, charges and fees imposed by the United States or any state, county, local or foreign government or subdivision or agency thereof. "Third-Party Claim" has the meaning set forth in Section 5.4. "Transaction Costs Agreement" means the Transaction and Termination Costs Agreement of even date herewith among Wellsford Parent, EQR and Newco. "Transition Period" means the period from the Effective Time until three months following the Effective Time. "Tri-Party Agreement" means the Tri-Party Agreement executed by Wellsford Parent in favor of NationsBank, N.A., as lender under the construction loan financing for Phase I of Palomino Park. "Wellsford Parent Common Shares" has the meaning set forth in the recitals. "Wellsford Parent Indemnitees" has the meaning set forth in Section 5.2. "Wellsford Parent Liabilities" means, collectively, (i) all the Liabilities of Wellsford Parent under this Agreement, (ii) all the Liabilities of Wellsford Parent and the Retained Subsidiaries (other than the Newco Liabilities), whether arising before or after the Effective Time, and (iii) the liabilities and benefits of Wellsford Parent under the Tri-Party Agreement. "WPHC" means Wellsford Park Highlands Corp., a Colorado corporation. 5 References to a "Schedule" are, unless otherwise specified, to one of the Schedules attached to this Agreement, and references to a "Section" are, unless otherwise specified, to one of the Sections of this Agreement. ARTICLE 2 --------- CONTRIBUTION OF PROPERTIES AND ASSETS TO NEWCO ------------------------------- 2.1 Contribution. Subject to the terms and conditions of this Agreement, immediately prior to the Distribution Date, Wellsford Parent shall, without any representations or warranties, express or implied, assign, transfer, convey and deliver to Newco all of Wellsford Parent's right, title and interest in and to the following properties and assets (each a "Contributed Asset", and collectively, the "Contributed Assets"): (a) all agreements and other documents in connection with a 344-unit apartment project located in Tucson, Arizona, and commonly known as Sonterra at Williams Centre, including, without limitation, those agreements and documents (the "Sonterra Documents") which are listed on Schedule 2.1(a) attached hereto; (b) any and all funds (other than payments of principal and interest under the Note received prior to the Distribution Date), held by Wellsford Parent or its designees under the Sonterra Documents, including, without limitation, any and all tax deposits held pursuant to the Deed of Trust; (c) eighty (80) shares of Class A Common Stock of WPHC, constituting 80% of the outstanding shares of WPHC and 100% of the outstanding voting shares of WPHC; (d) cash in the amount (determined pursuant to Section 1.10 of the Merger Agreement (the "Contribution Funds")) of $_______________; (e) the split dollar life insurance agreements listed on Schedule 2.1(e) hereto; (f) the Merrill Lynch Non-Qualified Deferred Compensation Plan Trust Agreement, dated June 20, 1994, by and between Wellsford Parent and Merrill Lynch Trust Company; (g) the Merrill Lynch Special Non-Qualified Deferred Compensation Plan adopted by Wellsford Parent; 6 (h) any rights of Wellsford Parent under the Operating Agreement of Park at Highlands LLC dated as of April 27, 1995, as amended, and the Operating Agreement of Red Canyon at Palomino Park LLC, as amended; (i) any rights of Wellsford Parent under the Reimbursement Agreement dated December 1, 1995 between PPPIC and Wellsford Parent; (j) the Palomino Park Promissory Note dated December 20, 1993 from PPPIC to Roger, delivered pursuant to the Reimbursement Agreement described in clause (i) of this definition; (k) the opinion of Ballard Spahr Andrews & Ingersoll dated December 20, 1995, addressed, inter alia, to Roger, with respect to the Bonds; (l) any other agreements between PPPIC and Wellsford Parent, and any other agreements of third parties which run to the benefit of Wellsford Parent with respect to the Palomino Bonds; (m) the Letter of Credit Reimbursement Agreement dated December 1, 1995 among PPPIC, Wellsford Parent and Dresdner Bank AG, New York Branch; (n) any agreements executed by Dresdner Bank AG, New York Branch in favor of Wellsford Parent; (o) any rights of Wellsford Parent under the Bond Pledge and Security Agreement dated December 1, 1995 among PPPIC, Wellsford Parent and Dresdner Bank AG, New York Branch; (p) any other rights or interest of Wellsford Parent and any of the Retained Subsidiaries in any of the documents and agreements regarding Palomino Park (other than the rights of ERP Operating Partnership under the Credit Enhancement Agreement and the Palomino Agreement); (q) the lease described on Schedule 2.1(h) hereto (the "Headquarter Lease") [sublease of the premises subject to the Headquarter Lease] [to be revised pursuant to Section 5.23 of the Merger Agreement]; (r) furniture, fixtures, equipment and personalty located in the office premises demised pursuant to the Headquarter Lease; and (s) the name "Wellsford", the ticker symbol "WRP", and the plate used in connection with the engraving and printing of the Wellsford Parent share certificates (the "Intellectual Property Rights"). 7 Such contribution shall be effected in such a manner so that Wellsford Parent and the Retained Subsidiaries have no continuing obligation with respect to the Contributed Assets after the Effective Time, except as otherwise provided in the Credit Enhancement Agreement and the Palomino Agreement. 2.2 Assumption. ---------- (a) Subject to the terms and conditions of this Agreement, simultaneously with the contribution contemplated by Section 2.1, Newco shall assume and undertake to pay and discharge the following (the "Assumed Liabilities"): (i) All Liabilities of Wellsford Parent with respect to the Contributed Assets, including, without limitation, all liabilities and obligations of Wellsford Parent under each of the agreements giving rise to any of the Contributed Assets; (ii) the obligations arising under the option certificates listed on Schedule 2.2(a) attached hereto (the "Option Agreements"), which will be satisfied by (A) issuing Newco Common Stock pursuant to the Amended Newco Options (defined below) and (B) amending the Option Agreements, as described in Schedule 2.2(a) (as amended, the "Amended Newco Options"); (iii) the obligation to pay William Cockrum a consulting fee of $500,000, payable $250,000 in cash and $250,000 by the issuance of Newco Common Stock; and (iv) the Promissory Note dated December 20, 1995 issued by Wellsford Parent in favor of Dresdner Bank AG; (v) the Indemnification Agreement dated November 12, 1996 given by Wellsford Parent and WPHC to Donald D. MacKenzie; and (vi) any other obligation of Wellsford Parent and the Retained Subsidiaries under any other agreement relating to the Sonterra Documents, the Palomino Bonds, PPPIC or Palomino Park, except the obligations of ERP Operating Partnership under the Credit Enhancement Agreement and the Palomino Agreement. (b) Notwithstanding anything contained in Section 2.2(a), Wellsford Parent hereby retains, and Newco does not assume and will have no liability with respect to, Wellsford Parent Liabilities, except as otherwise provided in the Transaction Costs Agreement. 2.3 Agreements and Documents to be Delivered in Connection with Contribution. Wellsford Parent and Newco shall execute and deliver, or cause to be executed and delivered, all 8 agreements, documents and instruments necessary or appropriate to effect the contribution contemplated by Section 2.1 and the assumption contemplated by Section 2.2, including, without limitation, those agreements, documents and instruments described in this Section 2.3: (a) Wellsford Parent and Newco shall execute and deliver, or cause to be executed and delivered, an Assignment and Assumption Agreement for the Contributed Assets and the Assumed Liabilities. (b) Wellsford Parent shall execute and deliver or cause to be executed and delivered the following documents: (i) Assignment of the Note without recourse; (ii) Assignment of Deed of Trust (as defined on Schedule 2.1(a) hereto), in form suitable for recording; (iii) Assignment of Loan Agreement (as defined on Schedule 2.1(a) hereto); (iv) Assignment of Assignment of Leases and Rents (as defined on Schedule 2.1(a) hereto), in form suitable for recording; (v) Assignment of Security Agreement (as defined on Schedule 2.1(a) hereto), in form suitable for recording; (vi) Memorandum of Assignment of Option Agreement (as defined on Schedule 2.1(a) hereto), in form suitable for recording; (vii) UCC-3 Assignments, in form suitable for filing or recording, as the case may be; (viii) Assignment of Lender's Title Policy; (ix) Omnibus Assignment of Mortgage Documents relating to the Sonterra Documents not otherwise covered by the documents listed in this Section 2.3(b); (x) Assignment of Seller's Waiver (as defined in Schedule 2.1(a) hereto); (xi) Certificate(s) representing eighty (80) shares of Class A Common Stock of WPHC, with valid stock powers attached; and 9 (xii) Bill of Sale granting to Newco all right, title and interest of Wellsford Parent to the Intellectual Property Rights. 2.4 Contributions Not Effected Prior to the Distribution; Transfer Deemed Effective as of the Distribution Date. To the extent that any assignment, transfer, conveyance or delivery (each, a "Contribution") of any Contributed Asset contemplated by this Article II shall not have been consummated on or prior to the Distribution Date, the parties shall cooperate to effect such Contribution as promptly following the Distribution Date as shall be practicable. Nothing herein shall be deemed to require the Contribution of any Contributed Assets which by their terms or operation of law cannot be assigned, transferred, conveyed or delivered; provided, however, that Wellsford Parent and Newco shall use their reasonable best efforts to seek to obtain any necessary consents or approvals for the Contribution of all Contributed Asset contemplated to be contributed pursuant to this Article II. In the event that any Contribution of a Contributed Asset has not been consummated, from and after the Distribution Date Wellsford Parent shall hold such Contributed Asset in trust for the use and benefit of Newco, and shall take such other action as may be reasonably requested by Newco in order to place Newco, insofar as is reasonably possible, in the same position as would have existed had such Contributed Asset been contributed as contemplated by this Article II. As and when any such Contributed Asset is able to be assigned, transferred, conveyed or delivered, as the case may be, such Contribution shall be effected forthwith. The parties agree that, as of the Distribution Date, Newco shall be deemed to have acquired complete and sole beneficial ownership over all of the Contributed Assets, together with all rights, powers and privileges incident thereto and all duties, obligations and responsibilities incident thereto including, without limitation, to the Assumed Liabilities. ARTICLE 3 --------- DISTRIBUTION AND RELATED TRANSACTIONS ------------------------------------- 3.1 Actions Prior to Distribution. ----------------------------- (a) The Board of Trustees of Wellsford Parent (or a duly authorized committee thereof) shall, in its discretion, establish the Distribution Record Date and the Distribution Date and any procedures necessary or appropriate in connection with the Distribution, but in no event shall the Distribution occur prior to such time as the conditions set forth in this Agreement have been satisfied or waived. Such action shall not create any obligation on the part of Wellsford Parent to effect the Distribution or in any way limit Wellsford Parent's power of termination set forth in Section 6.1 of this Agreement. (b) Wellsford Parent and Newco shall prepare and mail, prior to the Distribution Date, to the holders of Wellsford Parent Common Shares, such information concerning Newco, its 10 business, operations and management, the Distribution and such other matters as Wellsford Parent shall reasonably determine to be necessary and as may be required by law. Wellsford Parent and Newco will prepare, and Newco will, to the extent required under applicable law, file with the Commission any such documentation which Wellsford Parent determines are necessary or desirable to effectuate the Distribution, and Wellsford Parent and Newco shall each use its reasonable best efforts to obtain all necessary approvals from the Commission with respect thereto as soon as practicable. (c) Wellsford Parent and Newco shall take all such action as may be necessary or appropriate under the securities or blue sky laws of the United States (and any comparable laws under any foreign jurisdiction) in connection with the Distribution. (d) Wellsford Parent and Newco shall take all reasonable steps necessary and appropriate to cause the conditions set forth in Section 6.1 to be satisfied and to effect the Distribution on the Distribution Date. (e) Newco shall prepare and file, and shall use its reasonable best efforts to have approved on or prior to the Distribution Date, an application for the listing of the Newco Common Stock to be distributed in the Distribution on the New York Stock Exchange, the American Stock Exchange or NASDAQ National Market System, subject to official notice of issuance. 3.2 Distribution. On or prior to the Distribution Date, subject to the conditions and rights of termination set forth in this Agreement, Wellsford Parent shall (i) deliver to the Agent for the benefit of the Holders a single stock certificate representing all the Newco Common Stock owned by Wellsford Parent, endorsed by Wellsford Parent in blank, and (ii) deliver to the Agent written instructions to distribute on the Distribution Date to each Holder or designated transferee or transferees of such Holder one Newco Common Stock for each Wellsford Parent Common Share held by such Holder. 3.3 Unclaimed Stock. Any Newco Common Stock that remain unclaimed by any Holder 180 days after the Distribution Date shall be returned to Wellsford Parent, and any such Holder shall look only to Wellsford Parent for the Newco Common Stock, subject in each case to applicable escheat or other abandoned property laws. 3.4 No Representations or Warranties. Each of the parties hereto understands and agrees that no party hereto is, in this Agreement or in any other agreement or document contemplated by this Agreement or otherwise, making any representation or warranty whatsoever, including, without limitation, as to title, value or legal sufficiency. 11 ARTICLE 4 --------- COVENANTS --------- 4.1 Undertaking by Wellsford Parent. Wellsford Parent hereby undertakes to change its name from "Wellsford Residential Property Trust" to a new name bearing no resemblance to its present name, immediately upon consummation of the Merger. Promptly, and in any event prior to the completion of the Transition Period, Wellsford Parent shall remove all references to the name "Wellsford" from the names of the Retained Subsidiaries and all of its stationery. 4.2 Corporate Records. Wellsford Parent shall use its best efforts to arrange, as soon as practicable following the Distribution Date, for the transportation and delivery to Newco of all original agreements, documents, books, records and files relating to or affecting Newco, the Contributed Assets or the Assumed Liabilities, to the extent such items are not already in the possession of Newco, provided that Wellsford Parent may retain any tax returns, reports, forms or work papers, and Newco will be provided with copies of such returns, reports, forms or work papers. 4.3 Confidentiality. Each of Wellsford Parent and Newco shall hold, and shall cause its respective trustees, directors, officers, Affiliates, employees, agents, accountants, consultants and advisors (collectively, "Representatives") to hold, in strict confidence all information concerning the other relating to the Contributed Assets and the Assumed Liabilities in its possession (except to the extent that such information has been (a) in the public domain through no fault of such party or any of its Representatives, including information contained in the Registration Statement and the S-4 and other statements and reports filed with the Commission, or (b) later lawfully acquired from other sources by such party) to the extent such information (i) relates to the period up to the Effective Time, (ii) relates to this Agreement or (iii) is obtained from the other party pursuant to this Agreement ("Confidential Information"). Each party shall not release or disclose, or permit to be released or disclosed by any of its Representatives or otherwise, any Confidential Information to any other person, except its auditors, attorneys, financial advisors, bankers and other consultants and advisors who need to know such information, unless compelled to disclose by judicial or administrative process or, as advised by its counsel, by other requirements of law. In the event that either party or its Representatives (a "Disclosing Party") is compelled to release or disclose, or permit to be released or disclosed, any Confidential Information as provided in the immediately preceding sentence, such Disclosing Party shall (i) immediately notify the other party (the "Providing Party") of the existence, terms and circumstances surrounding such a requirement, (ii) consult with the Providing Party on the advisability of taking legally available steps to resist or narrow such requirement and (iii) if disclosure of such information is nevertheless required, furnish only that portion of the Confidential Information which, in the opinion of such Disclosing Party's counsel, such Disclosing Party is legally compelled to disclose and to cooperate with any action by the Providing Party to 12 obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information (it being agreed that the Providing Party shall reimburse the Disclosing Party for all reasonable out-of-pocket expenses incurred by the Disclosing Party in connection with such cooperation). 4.4 Further Assurances. Each of the parties hereto shall use their reasonable best efforts, prior to, on and after the Distribution Date, to take or cause to be taken, all actions, and to do, or cause to be done, all things, necessary, proper or desirable under applicable laws and regulations to carry out the purposes of this Agreement and to vest Newco with full title to all Contributed Assets. Without limiting the foregoing, Wellsford Parent and Newco shall use their best efforts to obtain all consents and approvals, to enter into all amendatory agreements and to make all filings and applications and take all other actions which may be required for the consummation of the transactions contemplated by this Agreement, including, without limitation, all applicable regulatory filings. ARTICLE 5 --------- INDEMNIFICATION --------------- 5.1 Indemnification by Wellsford Parent. Except as otherwise set forth herein, Wellsford Parent, for itself and its Affiliates, and their respective successors and assigns, shall indemnify, defend and hold harmless Newco, each of its directors, officers, employees and agents, and each Affiliate of Newco, and each of the heirs, executors, successors and assigns of any of the foregoing (the "Newco Indemnitees") from and against any and all Losses of the Newco Indemnitees arising out of, by reason of or otherwise in connection with the Wellsford Parent Liabilities, except as otherwise provided in the Transaction Costs Agreement. 5.2 Indemnification by Newco. Except as otherwise set forth herein, Newco, for itself and its Affiliates and their respective successors and assigns, shall indemnify, defend and hold harmless Wellsford Parent, each of its trustees, officers, employees and agents, and each Affiliate of Wellsford Parent, and each of the heirs, executors, successors and assigns of any of the foregoing (the "Wellsford Parent Indemnitees") from and against any and all Losses of the Wellsford Parent Indemnitees arising out of, by reason of or otherwise in connection with the Newco Liabilities, except as otherwise provided in the Credit Enhancement Agreement and the Palomino Agreement. 5.3 Limitations on Indemnification Obligations. The amount which any party (an "Indemnifying Party") is or may be required to pay to any other party (an "Indemnitee") pursuant to Section 5.1 or Section 5.2 shall be reduced (retroactively or prospectively) by any insurance proceeds or other amounts actually recovered by or on behalf of such Indemnitee, in reduction of 13 the related Loss. If an Indemnitee shall have received the payment required by this Agreement from an Indemnifying Party in respect of a Loss and shall subsequently actually receive insurance proceeds or other amounts in respect of such Loss, then such Indemnitee shall pay to such Indemnifying Party a sum equal to the amount of such insurance proceeds or other amounts actually received, up to the aggregate amount of any payments received from such Indemnifying Party pursuant to this Agreement in respect of such Loss. 5.4 Procedure for Indemnification. (a) If an Indemnitee shall receive notice or otherwise learn of the assertion by a person (including, without limitation, any Governmental Authority) who is not a party to this Agreement or the Merger Agreement of any claim or of the commencement by any such person of any Action (a "Third-Party Claim") with respect to which an Indemnifying Party may be obligated to provide indemnification pursuant to this Agreement, such Indemnitee shall give such Indemnifying Party written notice (the "Indemnitee Notice") thereof promptly after becoming aware of such Third-Party Claim; provided, however, that the failure of any Indemnitee to give notice as provided in this Section 5.4 shall not relieve the applicable Indemnifying Party of its obligations under this Article V, except to the extent that such Indemnifying Party is prejudiced by such failure to give notice. Such Indemnitee Notice shall describe the Third-Party Claim in reasonable detail and shall indicate the amount (estimated if necessary) of the Loss that has been or may be sustained by such Indemnitee. (b) The Indemnitee shall provide to the Indemnifying Party on request all information and documentation reasonably necessary to support and verify any Losses which the Indemnitee believes give rise to a claim for indemnification hereunder and shall give the Indemnifying Party reasonable access to all books, records and personnel in the possession or under the control of the Indemnitee which would have bearing on such claim. (c) Upon receipt of the Indemnitee Notice required by Section 5.4(a), the Indemnifying Party shall be entitled, if it so elects, to take control of the defense and investigation with respect to such claim and to employ and engage attorneys of its own choice to handle and defend the same, at the Indemnifying Party's cost, risk and expense, upon written notice to the Indemnitee of such election within 30 days of receipt of Indemnitee's notice. The Indemnifying Party shall not settle any third-party claim that is the subject of indemnification without the written consent of the Indemnitee, which consent shall not be unreasonably withheld; provided, however, that the Indemnifying Party may settle a claim without the Indemnitee's consent if such settlement (i) includes a complete release of the Indemnitee and (ii) does not require the Indemnitee to make any payment or take any action or otherwise materially adversely affect the Indemnitee. After notice from an Indemnifying Party to an Indemnitee of its election to assume the defense of a Third-Party Claim, such Indemnifying Party will not be liable to such Indemnitee under this Article V for any legal or other expenses subsequently incurred by such Indemnitee in connection with the defense 14 thereof; provided, that, if the defendants in any such claim include both the Indemnifying Party and one or more Indemnitees and a conflict of interest between such Indemnitees and such Indemnifying Party exists in respect of such claim, such Indemnitees will have the right to employ separate counsel reasonably satisfactory to the Indemnifying Party to represent such Indemnitees, and in that event the reasonable fees and expenses of such separate counsel (but not more than one separate counsel) will be paid by such Indemnifying Party. (d) If an Indemnifying Party elects to defend or to seek to compromise any Third-Party Claim, the appropriate Indemnitee shall (x) cooperate in all reasonable respects with the Indemnifying Party in connection with such defense and (y) not admit any liability with respect to, or settle, compromise or discharge, such Third-Party Claim without the Indemnifying Party's prior written consent. (e) If the Indemnifying Party shall decline to assume the defense of any such Third-Party Claim, or shall fail to notify the Indemnitee that it will defend such claim within 30 days after receipt of the Indemnitee Notice, the Indemnitee shall defend against such claim (provided that the Indemnitee shall not settle such claim without the consent of the Indemnifying Party). The expenses of all proceedings, contests or lawsuits in respect of such claims shall be borne by the Indemnifying Party but only if the Indemnifying Party is responsible pursuant to this Article V to indemnify the Indemnitee in respect of the Third-Party Claim. (f) In the event of payment by an Indemnifying Party to any Indemnitee in connection with any Third-Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee as to any events or circumstances with respect to which such Indemnitee may have any right or claim relating to such Third-Party Claim against any claimant or plaintiff asserting such Third-Party Claim. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right or claim. (g) With respect to any Third-Party Claim for which the Indemnifying Party assumes responsibility for defense, the Indemnifying Party shall inform the Indemnitee, upon the reasonable written request of the Indemnitee, of the status of efforts to resolve such Third-Party Claim. With respect to any Third- Party Claim for which the Indemnifying Party does not assume such responsibility, the Indemnitee shall inform the Indemnifying Party, upon the reasonable written request of the Indemnifying Party, of the status of efforts to resolve such Third-Party Claim. 5.5 Survival of Indemnities. The obligations of Wellsford Parent and Newco under this Article V shall survive the sale or other transfer by it of any assets or businesses or the assignment by it of any Liabilities, with respect to any Loss of the other related to such assets, businesses or Liabilities. 15 ARTICLE 6 --------- CONDITIONS TO THE CONTRIBUTION AND THE DISTRIBUTIONS ---------------------------------------------------- 6.1 Conditions Precedent to the Distributions. The obligation of Wellsford Parent to cause the Contribution of the Contributed Assets pursuant to Article II and to cause the consummation of the Distributions pursuant to Article III shall be subject, at the option of Wellsford Parent, to the fulfillment or waiver, of each of the following conditions: (a) Effective Date of Registration Statement. Each of the Registration Statement and the S-4 shall have been declared effective by order of the Commission and shall not be the subject of any stop order or proceeding by the Commission seeking a stop order. (b) No Prohibitions. Consummation of the transactions contemplated hereby shall not be prohibited by applicable law and no Governmental Authority of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is in effect and which materially restricts, prevents or prohibits consummation of the Distribution, the Merger or any transaction contemplated by this Agreement or the Merger Agreement, it being understood that the parties hereto hereby agree to use their reasonable best efforts to cause any such decree, judgment, injunction or other order to be vacated or lifted as promptly as possible. (c) Conditions Precedent to Merger Satisfied. Each condition to the closing of the Merger set forth in Sections 6.1 and 6.3 of the Merger Agreement shall have been satisfied or waived. ARTICLE 7 --------- MISCELLANEOUS ------------- 7.1 Termination. This Agreement may be terminated and the Distribution abandoned for any or no reason at any time prior to the Distribution by and in the sole discretion of the Board of Trustees of Wellsford Parent without the approval of Newco or the shareholders of Wellsford Parent. In the event of such termination, no party will have any liability of any kind to any other party. 7.2 Complete Agreement; Construction. This Agreement, including the Schedules, constitutes the entire agreement between the parties with respect to the subject matter hereof, and 16 supersedes all previous negotiations, commitments and writings with respect to such subject matter. 7.3 Survival of Agreements. Except as otherwise contemplated by this Agreement, all covenants and agreements of the parties contained in this Agreement will survive the Distribution Date. 7.4 Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of Maryland, without regard to the principles of conflicts of laws thereof. 7.5 Notices. All notices and other communications hereunder must be in writing and must be delivered by hand, mailed by registered or certified mail (return receipt requested) or sent by facsimile transmission to the parties at the following addresses (or at such other addresses for a party as may be specified by like notice) and will be deemed given on the date on which such notice is received: To Wellsford Parent: Before the Distribution Date, to: Wellsford Residential Property Trust 610 Fifth Avenue, 7th Floor New York, NY 10020 Attn: President Fax: (212) 333-2323 After the Distribution Date, to: Equity Residential Properties Trust Two North Riverside Plaza Suite 400 Chicago, IL 60606 ATTN: President Fax: (312) 207-5243 17 To Newco: Wellsford Real Properties, Inc. 610 Fifth Avenue, 7th Floor New York, NY 10020 Attn: President Fax: (212) 333-2323 7.6 Amendments. This Agreement may not be modified or amended except by an agreement in writing signed by the parties. 7.7 Successors and Assigns. Except in connection with the Merger, this Agreement shall not be assignable, in whole or in part, directly or indirectly, by either party hereto without the prior written consent of the other, and any attempt to assign any rights or obligations arising under this Agreement without such consent shall be void; provided, however, that the provisions of this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and permitted assigns; provided, further, that the rights and obligations of Wellsford Parent under this Agreement may be assigned after the Merger to ERP Operating Partnership. 7.8 No Third-Party Beneficiaries. Except for the provisions of Article V relating to Indemnitees and as otherwise expressly provided herein, the provisions of this Agreement are solely for the benefit of the parties hereto and their respective successors and permitted assigns and should not be deemed to confer upon third parties any remedy, claim, liability, reimbursement, claim of action or other right in excess of those existing without reference to this Agreement. 7.9 Title and Headings. Titles and headings to sections herein are inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 7.10 Legal Enforceability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Without prejudice to any rights or remedies otherwise available to any party hereto, each party hereto acknowledges that damages would be an inadequate remedy for any breach of the provisions of this Agreement and agrees that the obligations of the parties hereunder are specifically enforceable. 18 7.11 Counterparts. This Agreement may be executed in one or more counterparts, each of which when executed shall be deemed an original, but all of which together shall constitute one and the same instrument. 7.12 Non-Recourse. This Agreement and all documents, agreements, understandings and arrangements relating hereto have been entered into or executed on behalf of Wellsford Parent by the undersigned in his capacity as a trustee or officer of Wellsford Parent, which has been formed as a Maryland real estate investment trust pursuant to an Amended and Restated Declaration of Trust of Wellsford Parent dated as of November 2, 1992, as amended and restated, and not individually, and neither the trustees, officers or shareholders of Wellsford Parent shall be personally bound or have any personal liability hereunder. Newco shall look solely to the assets of Wellsford Parent for satisfaction of any liability of Wellsford Parent with respect of this Agreement and all documents, agreements, understandings and arrangements relating to this Agreement and will not seek recourse or commence any action against any of the trustees or officers of Wellsford Parent or any of their personal assets for the performance or payment of any obligation of Wellsford Parent hereunder or thereunder. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. WELLSFORD RESIDENTIAL PROPERTY TRUST By: ------------------------------------- Name: Title: WELLSFORD REAL PROPERTIES, INC. By: ------------------------------------- Name: Title: 19 SCHEDULE 2.1(a) SONTERRA AGREEMENTS 1. Loan Agreement ("Loan Agreement"), dated as of June 28, 1996, by and between Wellsford Residential Property Trust and Specified Properties VIII, L.P., a Texas Limited Partnership ("Specified"). 2. Waiver of Borrower's Condition, dated as of July 11, 1996, by Specified. 3. Promissory Note, dated June 28, 1996, by Specified in favor of Wellsford Residential Property Trust in the amount of $17,800,000.00 (the "Note"). 4. Deed of Trust, Security Agreement and Fixture Filing, made as of June 28, 1996, by Specified, as Trustor, Chicago Title Insurance Company, as Trustee, and Wellsford Residential Property Trust, as Beneficiary ("Deed of Trust"). 5. Guaranty Agreement, dated as of June 28, 1996, by John R. Carmichael in favor of Wellsford Residential Property Trust. 6. Assignment of Leases and Rents, dated as of June 28, 1996, by and from Specified to and for the benefit of Wellsford Residential Property Trust ("Assignment of Leases and Rents"). 7. Assignment of Agreements, made as of June 28, 1996, by Specified to Wellsford Residential Property Trust. 8. Consent and Agreement of Manager, by Lexford Properties, Inc., dated as of July 15, 1996. 9. Hazardous Substances Remediation and Indemnification Agreement, dated as of June 28, 1996, by Specified, Westwood Residential No. 9 Limited Partnership, a Texas limited partnership, and Westwood Residential General Partner No. 9, Inc., a Texas corporation, in favor of Wellsford Residential Property Trust. 10. Security Agreement, dated as of June 28, 1996, between Specified and Wellsford Residential Property Trust ("Security Agreement"). 11. Letter Agreement, dated July 9, 1996, between Specified, Wellsford Residential Property Trust and Chicago Title Insurance Company. 12. Lender's Title Policy No. 512169 issued by Chicago Title Insurance Company, dated July 12, 1996 ("Lender's Title Policy"). 13. Option Agreement, made as of June 28, 1996, by and between Specified and Wellsford Residential Property Trust ("Option Agreement"). 14. Memorandum of Option to Purchase, made as of June 28, 1996, by Specified and Wellsford Residential Property Trust. 15. Waiver of Seller's Condition, dated as of July 11, 1996, by Specified ("Seller's Waiver"). 16. Owner's Title Policy No. 512169 issued by Chicago Title Insurance Company, dated September 20, 1996. SCHEDULE 2.1(e) --------------- SPLIT DOLLAR LIFE INSURANCE --------------------------- 1. Modification Agreement, dated as of December 11, 1995, by and between Wellsford Residential Property Trust and Edward Lowenthal. 2. Modification Agreement, dated as of December 11, 1995, by and between Wellsford Residential Property Trust and Jeffrey H. Lynford. 3. Modification Assignment, dated as of December 11, 1995, by and between Wellsford Residential Property Trust and Edward Lowenthal. 4. Modification Assignment, dated as of December 11, 1995, by and between Wellsford Residential Property Trust and Jeffrey H. Lynford. SCHEDULE 2.1(h) --------------- HEADQUARTER LEASE ----------------- Lease between Rockefeller Center Properties and Wellsford Residential Property Trust, dated June 29, 1994. SCHEDULE 2.2(a) OPTION AGREEMENTS EXHIBIT C ================================================================================ $28,500,000 COMMON STOCK AND PREFERRED STOCK PURCHASE AGREEMENT Dated as of ________________, 1997 between ERP OPERATING LIMITED PARTNERSHIP as Purchaser, and WELLSFORD REAL PROPERTIES, INC. as Company ================================================================================ TABLE OF CONTENTS -----------------
Article Page - ------- ---- 1 DEFINITIONS.......................................................... 1 1.1 Defined Terms.................................................. 1 1.2 Terms Generally................................................ 7 2 THE AGGREGATE COMMITMENTS............................................ 7 2.1 The Closing Date Purchase Commitment........................... 7 2.2 Payment of the Closing Date Purchase Commitment................ 9 2.3 Term Purchase Commitment....................................... 9 2.4 Notice of Purchase............................................. 9 2.5 Certificates................................................... 9 3 REPRESENTATIONS AND WARRANTIES....................................... 10 3.1 Organization; Powers........................................... 10 3.2 Authorization.................................................. 10 3.3 The Capital Stock.............................................. 10 3.4 Enforceability................................................. 11 3.5 Governmental Approvals......................................... 11 3.6 Financial Statements........................................... 11 3.7 Title to Properties; Default Under Agreements.................. 11 3.8 Subsidiaries................................................... 11 3.9 Litigation; Compliance with Laws............................... 12 3.10 Agreements..................................................... 12 3.11 Investment Company Act; Public Utility Holding Company Act..... 12 3.12 Tax Returns.................................................... 12 3.13 No Material Misstatements...................................... 12 3.14 Employee Benefit Plans......................................... 12 3.15 Environmental and Safety Matters............................... 13 4 CONDITIONS PRECEDENT................................................. 13 4.1 First Purchase................................................. 13 4.2 All Purchases.................................................. 14 5 AFFIRMATIVE COVENANTS................................................ 15 5.1 Existence: Businesses and Properties........................... 15 5.2 Insurance...................................................... 15 5.3 Obligations and Taxes.......................................... 15
ii
5.4 Financial Statements, Reports, etc............................. 16 5.5 Litigation and Other Notices................................... 17 5.6 ERISA.......................................................... 17 5.7 Maintaining Records; Access to Properties and Inspections...... 17 5.8 Use of Proceeds................................................ 17 5.9 Issuance of Preferred Stock and Class A Common Stock........... 17 5.10 Election as Director........................................... 17 5.11 Voting of Stock................................................ 18 5.12 Sale of Common Stock or Preferred Stock........................ 18 5.13 Confidentiality................................................ 19 6 EVENTS OF DEFAULT.................................................... 19 7 MISCELLANEOUS........................................................ 21 7.1 Termination of the Agreement................................... 21 7.2 Securities Law Matters......................................... 21 7.3 Notices........................................................ 23 7.4 Survival of Agreement.......................................... 23 7.5 Binding Effect................................................. 23 7.6 Assignment..................................................... 24 7.7 Applicable Law................................................. 24 7.8 Waivers; Amendment............................................. 24 7.9 Entire Agreement............................................... 24 7.10 Waiver of Jury Trial........................................... 24 7.11 Severability................................................... 24 7.12 Headings....................................................... 25 7.13 Jurisdiction; Consent to Service of Process.................... 25
iii INDEX OF EXHIBITS AND SCHEDULES ------------------------------- EXHIBITS -------- Exhibit A - Articles Supplementary Classifying Preferred Stock Exhibit B - Purchase Notice Exhibit C - Articles of Incorporation and Bylaws of the Company Exhibit D - Opinion of Counsel Exhibit E - Securities Information Exhibit F - Registration Rights Agreement Exhibit G - Class A Common Stock Terms SCHEDULES --------- Schedule 3.3 - Options Schedule 3.4 - Governmental Approvals Schedule 3.8 - Subsidiaries Schedule 3.9 - Litigation Schedule 3.15 - Environmental and Safety Matters iv COMMON STOCK AND PREFERRED STOCK PURCHASE AGREEMENT --------------------------------------------------- This COMMON STOCK AND PREFERRED STOCK PURCHASE AGREEMENT dated as of ___________, 1997, (this "Agreement") is entered into between ERP OPERATING LIMITED PARTNERSHIP, an Illinois limited partnership (the "Purchaser") and WELLSFORD REAL PROPERTIES, INC., a Maryland corporation (the "Company"). In accordance with the terms and subject to the conditions set forth in this Agreement, the Purchaser has agreed to purchase from the Company (i) on the Closing Date the number of shares of Class A common stock, par value $.01 per share, of the Company (the "Class A Common Stock") equal to the Closing Date Purchase Commitment divided by the Issuance Price, and (ii) at any time during the Purchase Term, the aggregate number of shares of Series A Convertible Redeemable Preferred Stock of the Company (the "Preferred Stock") having the terms set forth in Exhibit A hereto, not in excess of the Term Purchase Commitment at the Purchase Price on the date of any such purchase. Accordingly, the Company and the Purchaser agree as follows: ARTICLE 1 --------- DEFINITIONS ----------- 1.1 Defined Terms. As used in this Agreement, the following terms shall have the meanings specified below: "Affiliate" shall mean, when used with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "Aggregate Purchase Commitment" shall mean the Purchaser's Closing Date Purchase Commitment and Term Purchase Commitment. "Agreement" shall have the meaning ascribed to such term in the preamble hereto. "Business Day" shall mean any day (other than a day which is a Saturday, Sunday or legal holiday in the State of Illinois) on which banks are open for business in Chicago. "Capital Lease" shall mean any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP. "Capital Lease Obligations" of any Person shall mean the obligations of such Person to pay rent or other amounts under any Capital Lease. A "Change in Control" shall be deemed to have occurred with respect to the Company if (a) any Person or group (within the meaning of Rule 13d-5 of the Securities and Exchange Commission as in effect on the date hereof) other than the Purchaser or any of its Affiliates shall own, directly or indirectly, beneficially or of record, shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Company; or (b) a change shall occur during any period in the Board of Directors of the Company in which the individuals who constituted the Board of Directors of the Company at the beginning of such period (together with any other director whose election by the Board of Directors of the Company or whose nomination for election by the stockholders of the Company was approved by a vote of at least two- thirds of the directors then in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors of the Company then in office. "Closing Date" shall mean ______________________________________. "Closing Date Purchase Commitment" shall mean the commitment of Purchaser to purchase the number of shares of Class A Common Stock equal to $3,500,000 divided by the Issuance Price on the Closing Date. "Code" shall mean the Internal Revenue Code of 1986, as the same may be amended from time to time. "Class A Common Stock" shall have the meaning set forth in the preamble hereto. "Common Stock" shall mean shares of common stock, par value $.01 per share, of the Company. 2 "Control" including the terms "Controlling", "Controlled by" and "under common Control with", shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "ERISA" shall mean Employment Retirement Income Securities Act, 29 USC 1001, et. seq. (1974), as amended. "ERISA Affiliate" shall mean an affiliate as defined in Section 407(d)(7) of ERISA. "Event of Default" shall have the meaning given such term in Article 6. "Fiscal Year" shall mean the fiscal year of the Company as provided in the Bylaws of the Company. "GAAP" shall mean generally accepted accounting principles, applied on a consistent basis. "Governmental Authority" shall mean any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. "Gross Sales Price Per Share of Common Stock" shall mean (a) the gross proceeds from all sales of Common Stock to institutional purchasers taking place on or prior to the Closing Date and subject to written commitments to purchase from institutional purchasers received on or prior to the Closing Date, divided by (b) the aggregate number of shares so sold and subject to such commitments. "Guarantee," when used with respect to any Person, shall mean the incurrence of any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of such Person, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purpose or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness, (b) to purchase property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness or (c) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness; provided, however, that the term "Guarantee" 3 shall not include endorsements of items by any Person for collection or deposit in the ordinary course of business. "Indebtedness" as applied to any Person shall mean (without duplication) (a) any indebtedness for borrowed money which such Person has directly or indirectly created, incurred or assumed, including, without limitation, Capital Lease Obligations of such Person, (b) any indebtedness incurred other than in the ordinary course of business, whether or not for borrowed money, secured by any Lien in respect of property owned by such Person, whether or not such Person has assumed or become liable for the payment of such indebtedness, (c) any indebtedness, whether or not for borrowed money, with respect to which such Person has become directly or indirectly liable and which represents or has been incurred to finance the purchase price (or a portion thereof) of any property or services or business acquired by such Person, whether by purchase, consolidation, merger or otherwise, (d) any Indebtedness of the character referred to in clauses (a), (b) or (c) of this definition deemed to be extinguished under generally accepted accounting principles but for which such Person remains legally liable and (e) any Indebtedness of any other Person of the character referred to in subdivision (a), (b), (c) or (d) of this definition with respect to which the Person whose Indebtedness is being determined has become liable by way of a Guarantee, including, without limitation, any such Indebtedness of any partnership in which such Person is a general partner. "Issuance Price" shall mean the Gross Sales Price Per Share of Common Stock determined as of the Closing Date or, in the event no sales of Common Stock to any institutional purchaser take place on or prior to the Closing Date or are subject to a written commitment to purchase from any institutional purchaser received on or prior to the Closing Date, "Issuance Price" shall mean the Net Book Value Per Share of Common Stock determined as of the Closing Date. "Lien" shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, encumbrance, charge or security interest in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement or title retention agreement relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "Material Adverse Effect" shall mean a materially adverse effect on the business, assets, prospects, operations or financial condition of the Company and its Subsidiaries taken as a whole. 4 "Merger Agreement" shall mean that certain Agreement and Plan of Merger by and between Equity Residential Properties Trust and Wellsford Residential Property Trust ("Wellsford"), dated as of January 16, 1997. "Multiemployer Plan" shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA to which the Company or any ERISA Affiliate (other than one considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Code) is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. "Net Book Value Per Share of Common Stock" shall mean the stockholders' equity of the Company determined in accordance with GAAP as adjusted for all liabilities, including all costs related to the formation of the Company as set forth in the financial statements of the Company, less the liquidation value of all outstanding shares of preferred stock including the Preferred Stock, divided by the number of shares of Common Stock of the Company outstanding on such date, excluding the shares of Class A Common Stock being purchased by the Purchaser on the Closing Date. Net Book Value Per Share of Common Stock shall be determined in accordance with Section 2.1 of this Agreement. "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA. "Person" shall mean any natural person, corporation, business trust, joint venture, association, company, partnership or government, or any agency or political subdivision thereof. "Potential Event of Default" shall mean any event or condition which upon notice, lapse of time or both would constitute an Event of Default. "Preferred Stock" shall have the meaning set forth in the preamble hereto. "Purchase" shall have the meaning given such term in Article 4. "Purchase Notice" shall have the meaning given such term in Section 2.4. "Purchase Price" shall mean $25.00 per share of Preferred Stock. 5 "Purchase Term" shall mean the period of time beginning on the Closing Date and ending three years from the Closing Date. "Purchaser" shall have the meaning given to such term in the preamble hereto. "Purchaser Director" shall mean the director which the holders of the Class A Common Stock are entitled to elect pursuant to the Articles of Incorporation of the Company. "Registration Rights Agreement" shall mean that certain Registration Rights Agreement between the Purchaser and the Company dated as of the date hereof. "Responsible Officer" of any corporation shall mean any executive officer of such corporation, and any other officer or similar official thereof responsible for the administration of the obligations of such corporation in respect of this Agreement. "subsidiary" shall mean, with respect to any Person (herein referred to as the "parent"), any corporation, partnership, association or other business entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general partnership interests are, at the time any determination is being made, owned, controlled or held, or (b) which is, at the time any determination is made, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Subsidiary" shall mean any subsidiary of the Company. "Term Closing Date" shall have the meaning given to such term in Section 2.4. "Term Purchase Commitment" shall mean the commitment of Purchaser to purchase 1,000,000 shares of Preferred Stock at the Purchase Price per share. The Term Purchase Commitment is in addition to the Closing Date Purchase Commitment. "Warrant" shall mean any warrant issued pursuant to the Articles Supplementary classifying the Preferred Stock. 6 1.2 Terms Generally. The definitions in Section 1.1 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided, however, that, for purposes of determining compliance with any covenant set forth in Article 5, such terms shall be construed in accordance with GAAP as in effect on the date of this Agreement applied on a basis consistent with the application used in preparing the Company's audited financial statements; provided, further, that in making any calculation required by this Agreement, for the purpose of determining the net income or deficit or item of expense of or for any Subsidiary, notwithstanding any reference herein to any period, the income, deficit or expense included in such calculation with respect to such Subsidiary shall be included only from the date such Subsidiary became a Subsidiary. ARTICLE 2 --------- THE AGGREGATE COMMITMENTS ------------------------- 2.1 The Closing Date Purchase Commitment. Subject to the terms and conditions set forth in this Agreement, the Purchaser hereby agrees to purchase from the Company on the Closing Date, Class A Common Stock, having the terms set forth on Exhibit G hereto, and having an aggregate purchase price of $3,500,000 at a price per share equal to the Issuance Price. The number of shares of Class A Common Stock to be issued on the Closing Date will be $3,500,000 divided by the Issuance Price, unless the Issuance Price is the Net Book Value Per Share of Common Stock. In such event, the number of shares issued on the Closing Date will be 1,400,000, based upon an estimated Issuance Price of $2.50 per share and such number of shares shall be subject to adjustment after the Closing Date in accordance with the following procedures: (a) Within 30 days after the Closing Date, the Company shall furnish to Purchaser (a) the balance sheet of the Company as of the Closing Date ("Closing Balance Sheet"), showing in reasonable detail the assets and liabilities of the Company, accompanied by the report thereon of Ernst & Young LLP stating that the Closing Balance Sheet has been prepared in conformity with GAAP applied consistently with the principles used in preparing the pro forma financial statements of the Company included in the information furnished to the shareholders of Wellsford in connection with Roger's distribution of the capital stock of the Company to the shareholders of Wellsford, and (b) 7 the Company's determination of Net Book Value Per Share of Common Stock in accordance with this Agreement based upon the Closing Balance Sheet. (b) Purchaser shall have the right to object to the Company's determination of the Net Book Value Per Share of Common Stock as not being determined in accordance with this Agreement. If Purchaser does not object to the Company's determination of the Net Book Value Per Share of Common Stock within 15 days after delivery of the Closing Balance Sheet and such determination to Purchaser (such period being referred to as the "Contest Period"), then the Company's determination of the Net Book Value Per Share of Common Stock shall be final, binding and conclusive on the parties. If Purchaser objects to the Company's determination of Net Book Value Per Share of Common Stock, it shall do so by notifying the Company thereof within the Contest Period, which notice shall specify the grounds for such objection in reasonable detail. The parties shall endeavor in good faith to resolve promptly the matters to which Purchaser has objected. If the parties are unable to resolve Purchaser's objections within ten (10) days after Purchaser notified the Company of its objections, the Company shall engage the Chicago, Illinois offices of Ernst & Young LLP (the "Independent Accountants") to examine the calculation of the Net Book Value Per Share of Common Stock in accordance with this Agreement. The Independent Accountants' determination of the Net Book Value Per Share of Common Stock shall be final, binding and conclusive on the parties. (c) The fees of the Independent Accountants for making such determination shall be borne by the parties in the proportion that the difference between the ultimate determination of the Issuance Price by the Independent Accountants and each party's position as to the Issuance Price bears to each other. For example, if one party's position was that the Issuance Price was $2.50 and the other party's was $3.00 and the Independent Accounts' determination was $2.75, each party would bear 50% of the Independent Accountants' fees. (d) The actual number of shares of Class A Common Stock to be purchased by Purchaser shall be $3,500,000 divided by the Issuance Price as finally determined pursuant to clause (b) of this Section (the "Final Number"). If the Final Number is more than 1,400,000 shares of Class A Common Stock, within 10 days after the Issuance Price has been so finally determined, the Company shall issue to Purchaser a certificate dated the Closing Date evidencing the number of shares of Class A Common Stock equal to the difference. If the Final Number is less than 1,400,000 shares of Class A Common Stock, within 10 days after the Issuance Price has been so finally determined, Purchaser shall surrender to the Company the certificate for 1,400,000 shares of Class A Common Stock issued to the Company on the Closing Date in exchange for a new certificate, dated the Closing Date, evidencing the Final Number of shares of Class A Common Stock. 8 (e) The Purchaser and the Company hereby agree that the Net Book Value Per Share of Common Stock determined in accordance with this Section 2.1 shall be the Net Book Value Per Share of Common Stock for all purposes of the Articles Supplementary Classifying the Preferred Stock attached hereto as Exhibit A. 2.2 Payment of the Closing Date Purchase Commitment. Subject to fulfillment of the conditions precedent set forth in Section 4.1, on the Closing Date, Purchaser shall pay $3,500,000 to the Company on the Closing Date by wire transfer of immediately available funds to such account as has been designated to Purchaser by the Company prior to the Closing Date. 2.3 Term Purchase Commitment. (a) Each Purchase of Preferred Stock pursuant to the Term Purchase Commitment shall be in a minimum aggregate purchase price of $1,000,000 and in multiples of $500,000 in excess thereof. (b) Subject to the fulfillment of the conditions precedent set forth in Section 4.2, on each Term Closing Date during the Purchase Term, Purchaser shall purchase the number of shares of Preferred Stock equal to the dollar amount of the Purchase requested divided by the Purchase Price. Notwithstanding anything to the contrary in this Agreement, the aggregate dollar amount of Purchases pursuant to the Term Purchase Commitment shall not exceed $25,000,000. 2.4 Notice of Purchase. The Company shall give the Purchaser written or telecopy notice (each a "Purchase Notice") ten (10) days before a proposed Purchase pursuant to the Term Purchase Commitment in the event of a Purchase in the amount of $5,000,000 or less, and twenty (20) days before a proposed Purchase pursuant to the Term Purchase Commitment in the event of a Purchase in an amount greater than $5,000,000. Each such notice shall be in substantially the form of Exhibit B. Such notice shall be irrevocable if not revoked within five (5) days after delivery and shall in each case refer to this Agreement and specify a date (the "Term Closing Date") on which the Purchase shall occur. 2.5 Certificates. (a) The Company shall deliver to the Purchaser on the Closing Date a certificate or certificates representing 1,400,000 shares of Class A Common Stock, representing the estimated number of shares of Class A Common Stock purchased by the Purchaser on the Closing Date. 9 (b) The Company shall deliver to the Purchaser on each Term Closing Date a certificate or certificates representing the aggregate number of shares of Preferred Stock purchased by the Purchaser on such Term Closing Date. ARTICLE 3 --------- REPRESENTATIONS AND WARRANTIES ------------------------------ The Company represents and warrants to the Purchaser that: 3.1 Organization; Powers. The Company and each of the Subsidiaries (a) is a an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted by the Company and the Subsidiaries, (c) is qualified to do business in every jurisdiction where such qualification is required, except where the failure so to qualify would not result in a Material Adverse Effect, and (d) in the case of the Company, has the corporate power and authority to execute, deliver and perform its obligations under this Agreement (including, without limitation, the offering, issuance, sale and delivery to the Purchaser of the shares of Preferred Stock and the issuance of Common Stock upon conversion of any of the shares of Preferred Stock). The Articles of Incorporation and Bylaws of the Company as amended to date, which are attached as Exhibit C hereto, are complete and correct as of the date hereof and contain the provisions attached hereto as Exhibit G. 3.2 Authorization. The execution, delivery and performance by the Company of this Agreement and the transactions contemplated hereby, (including, without limitation, the offering, issuance, sale and delivery to the Purchaser of the shares of Preferred Stock, Class A Common Stock and the issuance of Common Stock upon conversion of any shares of Preferred Stock or Class A Common Stock), (a) have been duly authorized by all requisite corporate and, if required, stockholder action and (b) will not (i) violate (A) any provision of law, statute, rule or regulation to which the Company or any of its Affiliates shall be subject, or of the certificate or articles of incorporation or other constitutive documents or bylaws of the Company or any Subsidiary, (B) any order of any Governmental Authority or (C) any provision of any indenture or other material agreement or instrument to which the Company or any Subsidiary is a party or by which any of them or any of their property is or may be bound, (ii) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any such indenture, agreement or other instrument or (iii) result in the creation or imposition of any Lien upon or with respect to any property or assets now owned or hereafter acquired by the Company or any Subsidiary. 10 3.3 The Capital Stock. Pursuant to the Articles of Incorporation of the Company, the Company is authorized to issue 2,000,000 shares of Preferred Stock, _____ of which have been issued as of the date hereof, _____ shares of Class A Common Stock, _____ of which have been issued as of the date hereof, and ___ shares of Common Stock, _____ of which have been issued as of the date hereof. Except as disclosed on Schedule 3.3 hereto, there are no existing options, warrants, calls, subscriptions, convertible securities, or other rights, agreements or commitments which obligate the Company to issue, transfer or sell any shares of stock or equity interest of the Company. 3.4 Enforceability. This Agreement has been duly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally, or by general equity principles, including but not limited to principles governing the availability of the remedies of specific performance and injunctive relief. 3.5 Governmental Approvals. Except as set forth in Schedule 3.5, the Company and the Company's Affiliates are not required to obtain any consent or approval of, registration or filing with or any other action by any Governmental Authority in connection with the execution, delivery and performance of this Agreement, except such as have been made or obtained and are in full force and effect. 3.6 Financial Statements. Any financial statements delivered pursuant to Section 5.4 hereof (collectively, the "Financial Statements") have been prepared in accordance with GAAP, and fairly present the financial condition of the Company and its Subsidiaries as of the dates shown and the results of their operations for the periods indicated. 3.7 Title to Properties; Default Under Agreements. (a) Each of the Company and the Subsidiaries has good and valid title to, or valid leasehold interests in, all its material properties and assets, except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties and assets for their intended purposes. (b) Each of the Company and the Subsidiaries has complied with all material obligations under all material agreements to which it is a party and all such agreements are in full force and effect and the Company is not in default under any of such agreements, except for defaults that would not be likely, individually or in the aggregate, to result in a Material Adverse Effect. 11 3.8 Subsidiaries. All Subsidiaries as of the date of this Agreement are listed on Schedule 3.8 hereto. Except as set forth on Schedule 3.8 hereto, as of the date of this Agreement, all the issued and outstanding capital stock of each Subsidiary is owned by the Company or any other Subsidiary. There are no other Persons in which the Company has an ownership interest or a right to acquire an ownership interest as of the date of this Agreement. 3.9 Litigation; Compliance with Laws. (a) Except as set forth in Schedule 3.9, there are not any actions, suits or proceedings at law or in equity or by or before any Governmental Authority now pending or, to the actual knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any business, property or rights of any such Person (i) which involve this Agreement or (ii) as to which there is a likelihood of an adverse determination and which, if adversely determined, would be likely, individually or in the aggregate, to result in a Material Adverse Effect. (b) Neither the Company nor any of the Subsidiaries is in violation of any law, rule or regulation, or in default with respect to any judgment, writ, injunction or decree of any Governmental Authority, where such violation or default would be likely to result in a Material Adverse Effect. 3.10 Agreements. Neither the Company nor any of the Subsidiaries is in default in any manner under any provision of any indenture or other agreement or instrument evidencing Indebtedness, or any other material agreement or instrument to which it is a party or by which it or any of its properties or assets are or may be bound, where such default would be likely to result in a Material Adverse Effect. 3.11 Investment Company Act; Public Utility Holding Company Act. Neither the Company nor any Subsidiary is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. 3.12 Tax Returns. The Company and each of the Subsidiaries has filed or caused to be filed all Federal, state and local tax returns required to have been filed by it and has paid or caused to be paid all taxes shown to be due and payable on such returns or on any assessments received by it, except taxes that are being contested in good faith by appropriate proceedings and for which the Company or such Subsidiary, as the case may be, shall have set aside on its books adequate reserves. 3.13 No Material Misstatements. No representation or warranty herein or in any Exhibit or Schedule hereto contains any material misstatement of fact or omits to state any material 12 fact necessary to make the statements therein, in the light of the circumstances under which they are made not misleading. 3.14 Employee Benefit Plans. Each of the Company and each ERISA Affiliate is in compliance in all material respects with the applicable provisions of ERISA and the regulations and published interpretations thereunder. 3.15 Environmental and Safety Matters. Except as set forth in Schedule 3.15, each of the Company and the Subsidiaries has complied with all Federal, state, local and other statutes, ordinances, orders, judgments, rulings and regulations relating to environmental pollution or to environmental regulation or control or to employee health or safety, except for instances of non- compliance that, individually or in the aggregate, are not reasonably likely to result in a Material Adverse Effect. Except as set forth in Schedule 3.15, neither the Company nor any Subsidiary has received written notices of any material failure so to comply, which, if adversely determined, individually or in the aggregate, would be reasonably likely to result in a Material Adverse Effect. Except as set forth in Schedule 3.15, the Company and the Subsidiaries do not generate, treat, store, transport, dispose of or release at any facility owned or operated by any of them any hazardous wastes, hazardous substances, hazardous materials, toxic substances, toxic pollutants or substances similarly denominated, as those terms or similar terms are used in the Resource Conservation and Recovery Act, the Comprehensive Environmental Response Compensation and Liability Act, the Hazardous Materials Transportation Act, the Toxic Substance Control Act, the Clean Air Act, the Clean Water Act or any other applicable law relating to environmental pollution in violation of any law or any regulations promulgated pursuant thereto, except for violations that, individually or in the aggregate, would not be reasonably likely to result in a Material Adverse Effect. Except as set forth in Schedule 3.15, the Company is aware of no events, conditions or circumstances involving environmental pollution or contamination or employee health or safety that could reasonably be expected to result in liability on the part of the Company or any Subsidiary, except for such events, conditions or circumstances that, individually or in the aggregate, would not be reasonably likely to result in a Material Adverse Effect. ARTICLE 4 --------- CONDITIONS PRECEDENT -------------------- The obligations of the Purchaser to purchase any shares of Preferred Stock and Class A Common Stock (each of such events being called a "Purchase") on and after the Closing Date, are subject to the condition precedent that the Spin-Off and Merger (as defined in the Merger Agreement) shall have occurred and to the satisfaction of all of the applicable conditions set forth below: 13 4.1 First Purchase. On the Closing Date: (a) The Purchaser shall have received from the Company the following documents: (i) a good standing certificate of the Company issued by the Secretary of State of Maryland and the Secretary of State of each state in which the Company owns any property, except for any state in which the failure of the Company to be in good standing will not have a Material Adverse Effect; (ii) Articles of Incorporation of the Company, and all amendments and supplements thereto, certified by the Maryland Secretary of State; (iii) Bylaws of the Company, as amended, certified as true and correct by a Responsible Officer of the Company; and (iv) the resolutions adopted by the Board of Directors of the Company authorizing its execution, delivery and performance of its obligations under this Agreement, certified by the Secretary of the Company. (b) The Purchaser shall have received an opinion of Robinson Silverman Pearce Aronsohn & Berman LLP or other counsel to the Company reasonably satisfactory to Purchaser dated the Closing Date in form and substance reasonably satisfactory to Purchaser addressing the matters set forth in Exhibit D hereto. (c) The Purchaser and the Company shall have entered into the Registration Rights Agreement. 4.2 All Purchases. On the date of each Purchase: (a) Except in connection with the Purchase on the Closing Date, the Purchaser shall have received a Purchase Notice with respect to each such other Purchase as required by Section 2.4. (b) The representations and warranties set forth in Article 3 hereof shall be true and correct in all material respects on and as of the date of each Purchase with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date. (c) The Company shall be in compliance with all the terms and provisions set forth herein on its part to be observed or performed, and at the time of and as a result of 14 each Purchase no Potential Event of Default or Event of Default shall have occurred and be continuing, other than an event which can be completely cured by applying the proceeds of such Purchase, in which case the Company covenants and agrees to apply the proceeds of the requested Purchase to the extent required to effect such cure. (d) There shall not have occurred, since the date of this Agreement, any change that has resulted in or could reasonably be expected to result in a Material Adverse Effect other than an event which can be completely cured by applying the proceeds of such Purchase, in which case the Company covenants and agrees to apply the proceeds of the requested Purchase to the extent required to effect such cure. Each Purchase shall be deemed to constitute a representation and warranty by the Company on the Closing Date or applicable Term Closing Date relating to such Purchase as to the matters specified in paragraphs (b), (c) and (d) of this Section 4.2. ARTICLE 5 --------- AFFIRMATIVE COVENANTS --------------------- The Company covenants and agrees with the Purchaser that so long as this Agreement shall remain in effect, the Company will, and will cause each of the Subsidiaries to, and the Purchaser will, where applicable: 5.1 Existence: Businesses and Properties. (a) Keep in full force and effect its legal existence. (b) Do or cause to be done all things necessary to obtain, preserve, renew, extend and keep in full force and effect the rights, licenses, permits, franchises, authorizations, patents, copyrights, trademarks and trade names material to the conduct of its business; comply in all material respects with all applicable laws, rules, regulations and orders of any Governmental Authority, whether now in effect or hereafter enacted; and at all times maintain and preserve all property material to the conduct of such business and keep such property in good repair, working order and condition (reasonable wear and tear excepted) and from time to time make, or cause to be made, all needful and proper repairs thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times, except in each case described in this Section 5.1(b) where the failure to do so would not result in a Material Adverse Effect. 5.2 Insurance. Keep its material insurable real properties adequately insured at all times by financially sound and reputable insurers; maintain such other insurance, to such extent 15 and against such risks, including fire and other risks insured against by extended coverage and public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by it as is customary with companies in the same or similar businesses; and maintain such other insurance as may be required by law. 5.3 Obligations and Taxes. Pay its material Indebtedness and other obligations promptly and in accordance with their terms and pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property, before the same shall become delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise which, if unpaid, might give rise to a Lien upon such properties or any part thereof; provided, however, that such payment and discharge shall not be required with respect to any such Indebtedness, tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings and the Company or the Subsidiary, as the case may be, shall have set aside on its books adequate reserves with respect thereto. 5.4 Financial Statements, Reports, etc. Furnish to the Purchaser: (a) as soon as available, but not later than 90 days (60 days for a preliminary copy of such statements) after the end of each Fiscal Year, the consolidated and consolidating balance sheets and statements of operations, stockholders' equity and cash flows, showing the financial condition of the Company and its consolidated subsidiaries as of the close of such Fiscal Year and the results of its operations and the operations of such subsidiaries during such year, all audited by independent public accountants of recognized national standing and accompanied by an opinion of such accountants (which shall not be qualified in any material respect) to the effect that such consolidated financial statements fairly present the financial condition and results of operations of the Company on a consolidated basis in accordance with GAAP consistently applied; (b) as soon as available, but not later than 45 days (30 days for a preliminary copy of such statements) after the end of each of the first three fiscal quarters of each Fiscal Year, the consolidated and consolidating balance sheets and statements of operations, stockholders' equity and cash flows, showing the financial condition of the Company and its consolidated subsidiaries as of the close of such fiscal quarter and the results of its operations and the operations of such subsidiaries during such fiscal quarter and the then elapsed portion of the Fiscal Year, all certified by one of its Responsible Officers as fairly presenting the financial condition and results of operations of the Company on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments; 16 (c) concurrently with any delivery of financial statements under (a) or (b) above, a certificate of the accounting firm (in the case of paragraph (a) above) or Responsible Officer of the Company (in the case of paragraph (b) above) certifying that no Event of Default or Potential Event of Default has occurred or, if such an Event of Default or Potential Event of Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto; (d) within five (5) Business Days after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by the Company with the Securities and Exchange Commission, or any governmental authority succeeding to any of or all the functions of said Commission, or with any national securities exchange, or distributed to its shareholders, as the case may be; and (e) promptly, from time to time, such other information regarding the operations, business affairs and financial condition of the Company or any Subsidiary, or compliance with the terms of this Agreement, as the Purchaser may reasonably request. 5.5 Litigation and Other Notices. Furnish to the Purchaser prompt written notice of the following: (a) any Event of Default or Potential Event of Default, specifying the nature and extent thereof and the corrective action (if any) proposed to be taken with respect thereto; (b) the filing or commencement of any action, suit or proceeding, whether at law or in equity or by or before any Governmental Authority, against the Company or any Affiliate of the Company which could reasonably be anticipated to result in a Material Adverse Effect; and (c) any other development that has resulted in, or could reasonably be anticipated to result in, a Material Adverse Effect. 5.6 ERISA. Comply in all material respects with the applicable provisions of ERISA. 5.7 Maintaining Records; Access to Properties and Inspections. Maintain all financial records in accordance with GAAP and so long as Purchaser is obligated to purchase any shares of Preferred Stock pursuant to this Agreement, permit any representatives designated by any Purchaser to visit and inspect the financial records and the properties of the Company or any Subsidiary at reasonable times during business hours and as often as requested upon reasonable written notice, and permit any representatives designated by the Purchaser to discuss the affairs, finances and condition of the Company or any Subsidiary with the senior officers thereof and the 17 independent accountants therefor with prior written notice to and, if requested by Company, participation of a Responsible Officer of the Company. 5.8 Use of Proceeds. The proceeds of any Purchase hereunder shall be used by the Company for any proper corporate purpose. 5.9 Issuance of Preferred Stock and Class A Common Stock. The Company shall issue Preferred Stock and Class A Common Stock solely to the Purchaser pursuant to this Agreement and not to any other Person. 5.10 Election as Director. On the Closing Date, the Purchaser agrees to elect Douglas Crocker II to the Board of Directors of the Company as the Purchaser Director. In the event Mr. Crocker (or such other person subsequently elected by the Purchaser to the Board of Directors of the Company), is unable or unwilling to serve as a director or is no longer employed by Purchaser, the Purchaser agrees to elect such member of senior management of the Purchaser ("Senior Officer") to the Board of Directors of the Company as Purchaser and the Company shall mutually agree. If the Company and the Purchaser cannot agree on such Senior Officer to be elected within five (5) days after the date on which the office of the Purchaser Director becomes vacant, Purchaser shall provide written notice (the "Designation Notice") to the Company of Purchaser's proposed Senior Officer to be elected and three (3) alternative Senior Officers. Within three (3) days after the Company's receipt of such notice from the Purchaser, the Company shall give Purchaser written notice of which of such four Senior Officers the Company designates from the Purchaser's written list of Senior Officers to be elected to the Board of Directors of the Company (the "Designated Senior Officer") and the Purchaser shall elect such Designated Senior Officer as the Purchaser Director. If the Company does not provide the Purchaser with written notice of its Designated Senior Officer within three (3) days after the Company's receipt of the Designation Notice, the Purchaser may elect its proposed Senior Officer as the Purchaser Director. The Company agrees not to hold any meeting of the Board of Directors or take any Board of Directors' action if the Purchaser Director office is vacant; provided, however, this sentence shall not be applicable if Purchaser has failed within five (5) Business Days of written notice from the Company that it proposes to hold a Board of Directors meeting or have the Board of Directors otherwise act to provide the Company with the Designation Notice. Notwithstanding the foregoing, if an Event of Default has occurred, Purchaser may elect any person it chooses to serve as the Purchaser Director and shall not be required to comply with the procedures set forth in this Section. 5.11 Voting of Stock. So long as any shares of Preferred Stock, Class A Common Stock or Common Stock are owned by Purchaser and any of its Affiliates during the period ten (10) years from the Closing Date, the Company shall have the right to direct the voting of all of such shares held by Purchaser and any of its Affiliates, except as to the election of the Purchaser Director or any matter relating to rights, preferences and privileges of the Preferred Stock or Class 18 A Common Stock. During such ten (10) year period, Purchaser agrees to vote, and to cause its Affiliates to vote, such shares as directed by the Company, except as to the election of the Purchaser Director or any matter relating to rights, preferences and privileges of the Preferred Stock or Class A Common Stock. 5.12 Sale of Common Stock or Preferred Stock. During the period beginning on the Closing Date and ending ten (10) years from the Closing Date, Purchaser shall first offer, in writing (a "Notice of Proposed Sale") to sell any shares of Common Stock, Class A Common Stock, Preferred Stock or warrants to purchase Common Stock owned by it to the Company prior to selling such shares to any Person. The Notice of Proposed Sale shall specify the terms and conditions of any sale. If the Company has not agreed, within twenty (20) days of receipt of the Notice of Proposed Sale to purchase the shares of Common Stock, Class A Common Stock or Preferred Stock offered by Purchaser upon the terms and conditions set forth in the Notice of Proposed Sale, Purchaser shall have the right to sell such shares offered to the Company to any other Person for a period of ninety (90) days provided any sale is made on terms and conditions no more favorable to such person than specified in the Notice of Proposed Sale. If the Company agrees to purchase shares of Common Stock, Class A Common Stock or Preferred Stock from the Purchaser, unless otherwise agreed by the Company and the Purchaser, such purchase shall be consummated within twenty (20) days of such agreement. 5.13 Confidentiality. The receipt of any information which is not publicly available pursuant to Sections 5.4(e) and 5.7 shall be subject to such reasonable confidentiality provisions (in writing signed by the Purchaser and/or its representative effecting an inspection pursuant to Section 5.7 of this Agreement, as the case may be) as the Company may reasonably require. ARTICLE 6 --------- EVENTS OF DEFAULT ----------------- 6.1 Events of Default. The happening of any of the following events shall be an "Event of Default" hereunder: (a) any representation or warranty made in this Agreement, shall prove to have been false or misleading in any material respect when so made, deemed made or furnished; (b) default shall be made in the due observance or performance by the Company or any Subsidiary of any material covenant, condition or agreement contained in this Agreement, or under the terms of the Articles Supplementary Classifying the Preferred Stock attached hereto as Exhibit A, after written notice of such default is given to the Company and such default is not cured within fifteen (15) days of receipt of such notice; 19 (c) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of the Company or any Subsidiary, or of a substantial part of the property or assets of the Company or a Subsidiary, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any Subsidiary or for a substantial part of the property or assets of the Company or a Subsidiary or (iii) the winding-up or liquidation of the Company or any Subsidiary; and such proceeding or petition shall continue undismissed for 90 days or an order or decree approving or ordering any of the foregoing shall be entered; (d) the Company or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (ii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any Subsidiary or for a substantial part of the property or assets of the Company or any Subsidiary, (iii) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (iv) make a general assignment for the benefit of creditors, (v) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vi) take any action for the purpose of effecting any of the foregoing; (e) one or more judgments for the payment of money in an aggregate amount in excess of $250,000 shall be rendered against the Company, any Subsidiary or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any judgment creditor shall levy upon assets or properties of the Company or any Subsidiary to enforce any such judgment which shall not be effectively stayed within 30 days; (f) any material breach of any obligation under ERISA or any plan under ERISA or any liability under ERISA in an amount exceeding $250,000, which is not discharged within 60 days after the Company becomes aware of same; (g) there shall have occurred a Change in Control with respect to the Company; (h) there shall have occurred an Event of Default as defined in clause (i) of the definition of an "Event of Default" in the Articles Supplementary Classifying the Preferred Stock attached hereto as Exhibit A; or 20 (i) There shall have occurred a change that has resulted or could reasonably be expected to result in a Material Adverse Effect. 6.2 Remedies. Upon the occurrence of an Event of Default described in Article 6, all obligations of the Purchaser to purchase any shares of Preferred Stock hereunder shall automatically terminate unless the Purchase by the Purchaser of shares of Preferred Stock pursuant to a Purchase Notice received by Purchaser would cure such Event of Default (in which case the Company covenants to apply the proceeds of the sale of such Preferred Stock to the extent required to effect such cure), and (with respect to Events of Default described in Section 6.1(c), (d), and (h)), the Purchaser shall have the right to have the Company redeem the outstanding Preferred Stock upon the terms and conditions set forth in the Articles Supplementary Classifying the Preferred Stock attached hereto as Exhibit A. Notwithstanding the foregoing, the occurrence of an Event of Default shall not be considered an Event of Default for purposes of any Section of this Agreement if the Company, within five (5) days of the occurrence of such Event of Default, delivers to Purchaser a Purchase Notice and the proceeds of such related Purchase will completely cure such Event of Default, in which case Purchaser shall use such proceeds to the extent required to effect such cure. ARTICLE 7 --------- MISCELLANEOUS ------------- 7.1 Termination of the Agreement. Unless otherwise agreed by each of the parties to this Agreement, if the Merger Agreement shall have been terminated, all obligations of the Purchaser under this Agreement shall automatically terminate at such time without notice to the Company. The Company shall have the right at any time to terminate Purchaser's obligation to purchase any additional Preferred Stock by giving notice thereof to Purchaser. Upon the giving of such notice (which shall be irrevocable), Purchaser shall be relieved of its commitment to purchase any Preferred Stock from the Company. The termination of such commitment shall not relieve the parties of their respective obligations under Sections 5.10, 5.11 and 5.12 of this Agreement. 7.2 Securities Law Matters. The Purchaser acknowledges and understands that: (a) The Purchaser has been furnished with and has carefully reviewed the documents and information set forth on Exhibit E attached hereto (the "Information"). (b) The Purchaser has been afforded full and complete access to all information and other materials relating to the Company and its affiliates, and the properties and financial condition of the foregoing, and any other matters relating to the Preferred Stock, 21 Class A Common Stock, Common Stock and Warrants of the Company which the Purchaser has requested, or deems necessary in evaluating the merits and risks of acquiring the Preferred Stock, Class A Common Stock, Common Stock and Warrants, and has been afforded the opportunity to obtain any additional information necessary to verify the accuracy of any representations or information set forth in the Information. (c) The Purchaser has had the opportunity to have answered any questions concerning the financial condition or business or other information with respect to the Company and its affiliates and the business, properties and financial condition of the foregoing or with respect to the merits and risks of an acquisition of the Preferred Stock, Class A Common Stock, Common Stock and Warrants, and the undersigned has received complete and satisfactory answers to all such questions. (d) The Purchaser has not relied upon any information or representation not contained in the Information. Neither the Company nor any of its agents nor anyone purporting to act on their behalf have made any representation to the undersigned with respect to any tax or economic benefits to be derived from an investment in the Preferred Stock, Class A Common Stock, Common Stock and Warrants. The Purchaser is relying solely upon its own knowledge and upon the advice of its advisors with respect to the tax, economic and other aspects of an investment in the Preferred Stock, Class A Common Stock, Common Stock and Warrants. (e) The Purchaser has carefully reviewed and understands the risks of, and other considerations relating to, the acquisition of the Preferred Stock, Class A Common Stock, Common Stock and Warrants and an investment in the Company. (f) An owner of Preferred Stock, Class A Common Stock, Common Stock and Warrants must bear the economic risk of ownership thereof for an indefinite period of time since purchase of Preferred Stock, Class A Common Stock, Common Stock and Warrants involves the purchase of securities that have not been registered under the Securities Act of 1933, as amended, and therefore cannot be Transferred (as defined below) except as provided below. (g) No federal or state agency has passed upon the Preferred Stock, Class A Common Stock, Common Stock or Warrants or made any finding or determination as to the fairness of an investment in the Preferred Stock, Class A Common Stock, Common Stock or Warrants. (h) Purchaser hereby covenants and agrees that the Preferred Stock, Class A Common Stock, Common Stock and Warrants, including any Common Stock issued upon conversion of the Preferred Stock or Class A Common Stock, or any portion thereof, or 22 upon exercise of the Warrants, may not be pledged, encumbered, sold, transferred or otherwise disposed of (each a "Transfer") except (a) pursuant to an effective registration statement under the Securities Act of 1993, as amended (the "Act") or (b) pursuant to an exemption from such registration pursuant to the Act and in compliance with state securities and blue sky laws and an opinion of counsel provided to the Company to the effect of this subparagraph (b), which opinion shall be in form and substance reasonably satisfactory to the Company. The Purchaser agrees that any Transfer of the Preferred Stock, Class A Common Stock, Common Stock or Warrants in violation of this Agreement will be null and void and the certificates representing the Preferred Stock, Class A Common Stock, Common Stock and Warrants will bear an appropriate restrictive legend. (i) The Purchaser represents and warrants to the Company that: (i) It is able to bear the economic risk of the acquisition of the Preferred Stock, Class A Common Stock, Common Stock and Warrants. (ii) It is an "accredited investor" as defined in Regulation D promulgated under the Act. (iii) The representatives of the Purchaser have been furnished with and have carefully reviewed the Information. Such representatives have such knowledge and experience in financial, business, securities and real estate matters that they are capable of evaluating the merits and risks of the acquisition of the Preferred Stock, Class A Common Stock, Common Stock and Warrants and of making an informed investment decision. (iv) The Purchaser is acquiring and will acquire the Preferred Stock, Class A Common Stock, Common Stock and Warrants, including any Common Stock issuable upon conversion of the Preferred Stock or Class A Common Stock or upon exercise of the Warrants for its own account, as principal, for investment and not with a view to a Transfer thereof. 7.3 Notices. Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed or sent by telecopy, as follows: (a) if to the Company, to it at _________________________________, Attention:________________________, Telecopy No. ______________; and (b) if to the Purchaser, to it at _____________________________________, Attention: _____________________, Telecopy No. ______________. 23 Such notice will be deemed given when received. 7.4 Survival of Agreement. All covenants, agreements, representations and warranties made by the Company herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the Purchaser and shall survive the date of this Agreement, regardless of any investigation made by the Purchaser or on its behalf, and shall continue in full force and effect so long as the Aggregate Purchase Commitment has not been fulfilled or terminated. 7.5 Binding Effect. This Agreement shall become effective when it shall have been executed by the Company and the Purchaser. 7.6 Assignment. Neither the Company nor the Purchaser shall have the right to assign its rights hereunder or any interest herein; provided, however, the foregoing provision shall not limit the Purchaser's right to sell, transfer or assign any shares of Common Stock, Class A Common Stock or Preferred Stock owned by it subject to the provisions of Section 5.12 of this Agreement and applicable securities laws. 7.7 Applicable Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF MARYLAND. 7.8 Waivers; Amendment. (a) No failure or delay of the Purchaser in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Purchaser hereunder are cumulative and are not exclusive of any rights or remedies which they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Company therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Unless otherwise specifically required, no notice or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Company and the Purchaser. 24 7.9 Entire Agreement. This Agreement, including the exhibits and schedules thereto, constitute the entire contract between the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement. Nothing in this Agreement, expressed or implied, is intended to confer upon any party other than the parties hereto any rights, remedies, obligations or liabilities under or by reason of this Agreement. 7.10 Waiver of Jury Trial. Each party hereto hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any litigation directly or indirectly arising out of, under or in connection with this Agreement. 7.11 Severability. In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 7.12 Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. 7.13 Jurisdiction; Consent to Service of Process. (a) EACH OF THE PURCHASER AND THE COMPANY HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF ANY ILLINOIS OR NEW YORK STATE COURT OR FEDERAL COURT OF THE UNITED STATES OF AMERICA SITTING IN THE CITY OF CHICAGO OR NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH ILLINOIS OR NEW YORK STATE OR, TO THE EXTENT PERMITTED BY LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS AGREEMENT SHALL AFFECT ANY RIGHT THAT ANY PARTY MAY OTHERWISE HAVE TO BRING ANY ACTION OR 25 PROCEEDING RELATING TO THIS AGREEMENT IN THE COURTS OF ANY JURISDICTION. (b) EACH OF THE PURCHASER AND THE COMPANY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND EFFECTIVELY DO SO, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT IN ANY ILLINOIS OR NEW YORK STATE OR FEDERAL COURT. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT. 26 IN WITNESS WHEREOF, the Company and the Purchaser have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. ERP OPERATING LIMITED PARTNERSHIP By: EQUITY RESIDENTIAL PROPERTIES TRUST, its general partner By:______________________________________ Name:__________________________________ Title:_________________________________ WELLSFORD REAL PROPERTIES, INC. By:______________________________________ Name:__________________________________ Title:_________________________________ 27 EXHIBIT A --------- A-1 ARTICLES SUPPLEMENTARY CLASSIFYING 2,000,000 SHARES OF SERIES A 8% CONVERTIBLE REDEEMABLE PREFERRED STOCK OF WELLSFORD REAL PROPERTIES, INC. Pursuant to Section ___ of the Corporations and Associations Article of the Annotated Code of Maryland. 1. The name of the corporation (the "Corporation") is Wellsford Real Properties, Inc.. 2. Pursuant to authority granted under Section ___ of the Corporation's Articles of Incorporation , the Board of Directors of the Corporation hereby establishes a series of preferred stock designated Series A 8% Convertible Redeemable Preferred Stock ($25.00 Par Value Per Share) (Liquidation Value $25.00 Per Share) (the "Series A Preferred Stock") on the following terms: A. Certain Definitions. Unless the context otherwise requires, the terms defined in this subparagraph A of paragraph 2 shall have, for all purpose of these Articles Supplementary, the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural). "Business Day" shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close. "Closing Date" shall mean ___________________. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Common Stock" shall mean the common stock, $.01 par value per share, of the Corporation. "Class A Common Stock" shall mean the Class A common stock, $.01 par value per share, of the Corporation. "Dividend Period" shall have the meaning set forth in subparagraph (3) of paragraph B. "Event of Default" shall mean (i) the non-payment of any dividend on the Quarterly Dividend Date applicable to such dividend for three (3) Dividend Periods which need not be consecutive; or (ii) the failure to comply with any term, condition or obligation or failure to provide any right under these Articles Supplementary. "Gross Sales Price of a Share of Common Stock" shall mean (a) the gross proceeds from all sales of Common Stock to institutional purchasers taking place on or prior to the Closing Date and subject to written commitments to purchase from institutional purchasers received on or prior to the Closing Date, divided by (b) the aggregate number of shares so sold and subject to such commitments. "Junior Shares" shall have the meaning set forth in subparagraph (2) of paragraph B. "Person" shall mean any natural person, corporation, business trust, joint venture, association, company, partnership, or government, or any agency or political subdivision thereof. "Liquidation Value" shall have the meaning set forth in subparagraph (4) of paragraph B below. "Net Book Value Per Share of Common Stock" shall mean the stockholders' equity of the Corporation determined in accordance with generally accepted accounting principles as adjusted for all liabilities, including all costs related to the formation of the Corporation, as set forth in the financial statements of the Corporation, less the Liquidation Value of all outstanding Preferred Stock including Series A Preferred Stock, divided by the number of shares of Common Stock of the Corporation outstanding on such date, excluding the shares of Class A Common Stock being purchased by ERP Operating Limited Partnership on the Closing Date. Net Book Value Per Share of Common Stock shall be determined in accordance with the provisions in Section 2.1 of that certain Common Stock and Preferred Stock Purchase Agreement dated as of ______________, 1997 between ERP Operating Limited Partnership and the Corporation. "Preferred Stock" shall mean all shares of capital stock having a preference in any manner to the Common Stock or Class A Common Stock. "Quarterly Dividend Date" shall have the meaning set forth in subparagraph (3) of paragraph B below. "Record Date" shall have the meaning set forth in subparagraph (3) of paragraph B below. 2 "Redemption Date" shall have the meaning set forth in subparagraph (5) of paragraph B below. "Redemption Price" shall have the meaning set forth in subparagraph (5) of paragraph B below. "Responsible Officer" of any corporation shall mean any executive officer of such corporation, and any other officer or similar official thereof responsible for the administration of the obligations of such corporation in respect of these Articles Supplementary. "Series A Preferred Stock" shall have the meaning set forth in the preamble. B. Series A Preferred Stock (1) Number. The maximum number of shares of the Series A Preferred Stock shall be 2,000,000. (2) Relative Seniority. In respect of rights to receive dividends and to participate in distributions or payments in the event of any liquidation, dissolution or winding up of the Corporation, the Series A Preferred Stock shall rank pari passu with any other Preferred Stock of the Corporation, and will rank senior to the Common Stock and any other class or series of shares of capital stock of the Corporation ranking, as to dividends and upon liquidation, junior to the Series A Preferred Stock (collectively, "Junior Shares"). Notwithstanding the foregoing, the Corporation may make distributions or pay dividends in shares of Common Stock or in any other shares of the Corporation ranking junior to the Series A Preferred Stock as to distribution rights and liquidation preference at any time; provided, however, the Corporation may make distributions or pay dividends on the Series A Preferred Stock in shares of the Corporation only as provided herein. (3) Dividends. The holders of the then outstanding Series A Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors of the Corporation out of any funds legally available therefor, dividends at the rate of $2.00 per share per year, payable in cash, except as provided below, in equal amounts quarterly on the fifteenth day, or if not a Business Day, the next succeeding Business Day, of January, April, July and October in each year, beginning ______________, 1997 (each such day being hereinafter called a "Quarterly Dividend Date" and each period ending on a Quarterly Dividend Date being hereinafter called a "Dividend Period"), to shareholders of record at the close of business on such date as shall be fixed by the Board of Directors of the Corporation at the time of declaration of the dividend (the "Record Date"), which 3 shall be not fewer than 10 nor more than 30 days preceding the Quarterly Dividend Date. The amount of any dividend payable for the initial Dividend Period and for any other Dividend Period shorter than a full Dividend Period shall be prorated and computed on the basis of a 360-day year of twelve 30-day months. Dividends paid on the Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a per share basis among all such shares at the time outstanding. Notwithstanding the foregoing, for any twelve (12) Dividend Periods the Company shall have the right to pay the dividend in additional shares of Series A Preferred Stock determined by dividing the total amount of the dividend to be paid in shares of Series A Preferred Stock by the Liquidation Value (as defined herein) per share of Series A Preferred Stock. The issuance of additional shares of Series A Preferred Stock pursuant to this subparagraph (3) shall be evidenced by a stock certificate representing such shares issued on the related Quarterly Dividend Date and delivered on or immediately thereafter. Notwithstanding any other provision hereof, no fractional shares of the Corporation shall be issued in connection with the payment of any dividend on Series A Preferred Stock in additional shares of Series A Preferred Stock. Instead, any holder of outstanding Series A Preferred Stock having a fractional interest arising upon the payment of a dividend in additional shares of Series A Preferred Stock shall, on the related Quarterly Dividend Date, be paid an amount in cash equal to the Liquidation Value times the fraction of a share of Series A Preferred Stock to which such holder would otherwise be entitled. In the event the Company fails to pay any dividend on the Series A Preferred Stock on any Quarterly Dividend Date, the Company shall not pay any dividends on any other class of stock of the Company (other than (i) pro rata with other securities of the Company ranking pari passu with the Series A Preferred Stock or (ii) with Junior Shares) until such dividend on the Series A Preferred Stock has been paid. Except as provided in these Articles Supplementary, the Series A Preferred Stock shall not be entitled to participate in the earnings or assets of the Corporation. (4) Liquidation Rights. (a) Upon the voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the holders of the Series A Preferred Stock then outstanding shall be entitled to receive and to be paid out of the assets of the Corporation available for distribution to its shareholders, before any payment or distribution shall be made on any Junior Shares, the amount of $25.00 per share of Series A Preferred Stock ("Liquidation Value"), plus any accrued and unpaid dividends thereon. 4 (b) After the payment to the holders of the Series A Preferred Stock of the full preferential amounts provided for in this paragraph B(4), the holders of the Series A Preferred Stock as such shall have no right or claim to any of the remaining assets of the Corporation. (c) If, upon any voluntary or involuntary dissolution, liquidation, or winding up the Corporation, the amounts payable with respect to the preference value of the Series A Preferred Stock and any other shares of capital stock of the Corporation ranking as to any such distribution on a parity with the Series A Preferred Stock are not paid in full, the holders of the Series A Preferred Stock and of such other shares will share ratably in any such distribution of assets of the Corporation in proportion to the full respective preference amounts to which they are entitled. (d) Neither the sale of all or substantially all the property or business of the Corporation, nor the merger or consolidation of the Corporation into or with any other entity or the merger or consolidation of any other entity into or with the Corporation, nor any dissolution, liquidation, winding up or reorganization of the Corporation immediately followed by the incorporation of another corporation to which the Corporation's assets are distributed shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this paragraph B. (e) In determining whether a distribution by dividend, redemption or other acquisition of shares of the Corporation or otherwise is permitted under Maryland law, no effect shall be given to amounts that would be needed, if the Corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights on dissolution are superior to those receiving the distribution. (5) Redemption. (a) Optional Redemption. On and after _____________, 2002, the Corporation may, at its option, redeem at any time all of the outstanding Series A Preferred Stock or a part of the outstanding Series A Preferred Stock at a price per share (the "Redemption Price"), equal to $25.00 per share of Series A Preferred Stock, together with all accrued and unpaid dividends to and including the date fixed for redemption (the "Redemption Date"); provided, however, that no partial redemption of the Series A Preferred Stock may be effected if after giving effect thereto the aggregate Liquidation Value of the Series A Preferred Stock outstanding is less than $10,000,000. The Redemption Price and all accrued and unpaid 5 dividends shall be paid in cash; provided, however, that if (a) a holder of Series A Preferred Stock desires to convert any of its Series A Preferred Stock called for redemption but such conversion would cause any direct or indirect holder which is classified as a real estate investment trust ("REIT") under Section 856 of the Code to own , directly or indirectly, more than 9.9% of the outstanding voting capital stock of the Corporation or would otherwise cause any direct or indirect holder of such outstanding voting capital stock to lose its status as a REIT under the Code, and (b) such holder has so notified the Corporation in writing prior to the Redemption Date, stating the number of shares of Series A Preferred Stock which have been called for redemption which such holder is unable to convert for such reason (such shares being referred to as the "Unconvertible Shares"), then the Corporation shall pay, in cash, the Redemption Price plus all accrued and unpaid dividends for each Unconvertible Share and shall issue to such holder a warrant to purchase the number of shares of Common Stock equal to (i) the fair market value of a share of Common Stock on the Redemption Date over the Redemption Price, multiplied by (ii) the number of shares of Common Stock into which the Unconvertible Shares redeemed from such holder were convertible immediately prior to such redemption, and divided by (iii) the fair market value of a share of Common Stock on the Redemption Date. Such warrant shall be exercisable without cost to the holder thereof at any time and from time to time for a period of ten (10) years from the date of issuance of such warrant. The warrant shall be on such terms and conditions as are customarily contained in like warrants, including provisions to protect the holder of the warrant from dilution. The Corporation shall have the right, at any time, to redeem such warrant at a price equal to the fair market value of such warrant on the date of any such redemption. The fair market value of a share of Common Stock on the Redemption Date shall be deemed to be the average of the daily closing prices of the Common Stock for thirty (30) consecutive trading days commencing forty-five (45) trading days before the Redemption Date. The closing price for each day shall be the last reported sales price or, in case no such reported sale takes place on such date, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange, or if the Common Stock is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, the closing sale price of the Common Stock or, in case no reported sale takes place, the average of the closing bid and asked prices, on Nasdaq or any comparable system, or if the Common Stock is not quoted on Nasdaq or any comparable system, the closing sale price or, in case no reported sale takes place, the average of the closing bid and asked prices, as furnished by any two members of the National Association of Securities Dealers, Inc. selected from time to time by the Corporation for that purpose. 6 (b) Procedures for Redemption. (i) Notice of any redemption will be mailed by the Corporation, postage prepaid, not less than 30 nor more than 90 days prior to the Redemption Date, addressed to the holders of record of the Series A Preferred Stock to be redeemed at their addresses as they appear on the share transfer records of the Corporation. No failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any Series A Preferred Stock except as to the holder to whom the Corporation has failed to give notice or except as to the holder to whom notice was defective. In addition to any information required by law or by the applicable rules of any exchange upon which Series A Preferred Stock may be listed or admitted to trading, such notice shall state: (a) the Redemption Date; (b) the Redemption Price; (c) the number of shares of Series A Preferred Stock to be redeemed; (d) the place or places where certificates for such shares are to be surrendered for payment of the Redemption Price; (e) the date on which conversion rights shall expire, the conversion price and the place or places where certificates for such shares are to be surrendered for conversion; and (f) the number of shares of Common Stock of the Corporation outstanding on the date of such notice. (ii) If notice has been mailed in accordance with subparagraph (5)(b)(i) above and provided that on or before the Redemption Date specified in such notice all funds necessary for such redemption shall have been irrevocably set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the Series A Preferred Stock so called for redemption, so as to be, and to continue to be available therefor, then, from and after the Redemption Date, distributions shall no longer accrue on said shares and said shares shall no longer be deemed to be outstanding and shall not have the status of Series A Preferred Stock and all rights of the holders thereof as shareholders of the Corporation (except the right to receive the Redemption Price) shall cease. Upon surrender, in accordance with said notice, of the certificates for any shares of Series A Preferred Stock so redeemed (properly endorsed or assigned for transfer, if the Corporation shall so require and the notice shall so state), such shares of Series A Preferred Stock shall be redeemed by the Corporation at the Redemption Price. In case fewer than all the Series A Preferred Stock represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the unredeemed Series A Preferred Stock without cost to the holder thereof. (iii) Any funds deposited with a bank or trust company for the purpose of redeeming shares of Series A Preferred Stock shall be irrevocable except that: 7 (A) the Corporation shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any shares redeemed shall have no claim to such interest or other earnings; (B) any balance of monies so deposited by the Corporation and unclaimed by the holders of the Series A Preferred Stock entitled thereto at the expiration of one year from the applicable Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Corporation, and after any such repayment, the holders of the shares entitled to the funds so repaid to the Corporation shall look only to the Corporation for payment without interest or other earnings; and (C) any funds set aside to redeem Series A Preferred Stock that is converted into Common Stock prior to the Redemption Date shall be immediately delivered to the Corporation. (iv) No Series A Preferred Stock may be redeemed except with funds legally available for the payment of the Redemption Price. (v) Unless a sum sufficient for the payment of the then current dividend due for the then current Dividend Period is set apart, no shares of Series A Preferred Stock shall be redeemed (unless all outstanding shares of Series A Preferred Stock are simultaneously redeemed) or purchased or otherwise acquired directly or indirectly (except by conversion into or exchange for capital shares of the Corporation ranking junior to the shares of Series A Preferred Stock as to dividends and upon liquidation); provided, however, that the foregoing shall not prevent the purchase or acquisition of Series A Preferred Stock pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of Series A Preferred Stock. (vi) If the Redemption Date is after a Record Date and before the related Quarterly Dividend Date, the dividend payable on such Quarterly Dividend Date shall be paid to the holder in whose name the Series A Preferred Stock to be redeemed are registered at the close of business on such Record Date notwithstanding the redemption thereof between such Record Date and the related Quarterly Dividend Date or the Corporation's default in the payment of the dividend due. (vii) In case of redemption of less than all of the shares of Series A Preferred Stock at the time outstanding, the shares of Series A Preferred Stock to 8 be redeemed shall be selected pro rata from the holders of record of such shares in proportion to the number of shares of Series A Preferred Stock held by such holders (with adjustments to avoid redemption of fractional shares) or by any other equitable method determined by the Corporation. (c) Required Redemption. Upon the occurrence of an Event of Default or on and after _____________, 2012, whichever comes first, the holder of any shares of Series A Preferred Stock may, at its option, cause the Corporation to redeem at any time all of the Series A Preferred Stock held by such holder at the Redemption Price, payable in cash, together with all accrued and unpaid dividends to and including the Redemption Date. Notwithstanding the provisions of this subsection (c), provided an Event of Default has not occurred, the Corporation shall have the right to extend the date during which a required redemption is not permitted under this subsection (c) for three separate additional five (5) year periods if the dividend rate on the Series A Preferred Stock is changed to the then market rate of comparable preferred stock (the "Market Rate") on the first day of each such additional five year period; provided, however, in no event shall the dividend be reduced to less than $2.00 per share of Series A Preferred Stock. The Market Rate shall be determined ten (10) days prior to the first Business Day of each such additional five (5) year period by mutual agreement of the holders of Series A Preferred Stock and the Corporation. In the event the holders of Series A Preferred Stock and the Corporation cannot agree on such determination prior to the first Business Day of such additional five (5) year period, the Market Rate shall be determined as of the first Business Day of each such additional five (5) year period as follows: (i) a majority of the holders of the Series A Preferred Stock then outstanding shall choose an investment banking firm of nationally recognized status and the Corporation shall choose an investment banking firm of nationally recognized status; (ii) the investment banking firms chosen by a majority of the holders of the Series A Preferred Stock then outstanding and the Corporation shall mutually choose a third investment banking firm of nationally recognized status (the "Independent Investment Banker"); (iii) the Independent Investment Banker shall then determine, in its sole discretion, the Market Rate and shall advise the holders of Series A Preferred Stock and the Corporation of its determination; and (iv) the fees of the Independent Investment Banker for making such determination shall be borne fifty percent (50%) by the holders of Series A Preferred Stock and fifty percent (50%) by the Corporation. (d) Procedures for Required Redemption. (i) Notice of any required redemption shall be mailed by the holder of the Series A Preferred Stock requesting redemption, postage prepaid, not less than 9 30 nor more than 90 days prior to the Redemption Date, addressed to the Corporation. In addition to any information required by law or by the applicable rules of any exchange upon which Series A Preferred Stock may be listed or admitted to trading, such notice shall state: (a) the Redemption Date; (b) the Redemption Price; and (c) the number of shares of Series A Preferred Stock to be redeemed. (ii) If notice has been mailed in accordance with subparagraph (5)(d)(i) above on or before the Redemption Date specified in such notice all funds necessary for such redemption shall have been irrevocably set aside by the Corporation, separate and apart from its other funds in trust for the pro rata benefit of the holders of the Series A Preferred Stock requesting redemption, so as to be, and to continue to be available therefor, then, from and after the Redemption Date, said shares shall no longer be deemed to be outstanding and shall not have the status of Series A Preferred Stock and all rights of the holders thereof as shareholders of the Corporation (except the right to receive the Redemption Price) shall cease. Upon surrender, in accordance with said notice, of the certificates for any shares of Series A Preferred Stock so redeemed, such shares of Series A Preferred Stock shall be redeemed by the Corporation at the Redemption Price. In case fewer than all the Series A Preferred Stock represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the unredeemed Series A Preferred Stock without cost to the holder thereof. (iii) Any funds deposited with a bank or trust company for the purpose of redeeming shares of Series A Preferred Stock shall be irrevocable except that: (A) the Corporation shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any shares redeemed shall have no claim to such interest or other earnings; and (B) any balance of monies so deposited by the Corporation and unclaimed by the holders of the Series A Preferred Stock entitled thereto at the expiration of one year from the applicable Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Corporation, and after any such repayment, the holders of the shares entitled to the funds so repaid to the Corporation shall look only to the Corporation for payment without interest or other earnings. (iv) No Series A Preferred Stock may be redeemed except with funds legally available for the payment of the Redemption Price. 10 (v) If the Redemption Date is after a Record Date and before the related Quarterly Dividend Date, the dividend payable on such Quarterly Dividend Date shall be paid to the holder in whose name the Series A Preferred Stock to be redeemed are registered at the close of business on such Record Date notwithstanding the redemption thereof between such Record Date and the related Quarterly Dividend Date or the Corporation's default in the payment of the dividend due. (e) The Series A Preferred Stock redeemed, repurchased or retired pursuant to the provisions of this Subparagraph 5(b) or surrendered to the Corporation upon conversion shall thereupon be retired and may not be reissued as Series A Preferred Stock but shall thereafter have the status of authorized but unissued shares of the Corporation. (6) Voting Rights. The holders of Series A Preferred Stock shall not be entitled to vote on any matter except as provided below; provided, however, the holders of Series A Preferred Stock shall not have any voting rights to the extent such rights will cause any holder of a Series A Preferred Stock to own more than 9.9% of the outstanding voting capital stock of the Corporation or otherwise cause any holder of Series A Preferred Stock that is classified as a REIT under Section 856 of the Code to lose its status as a REIT under the Code. (a) So long as any shares of Series A Preferred Stock remain outstanding, the Corporation will not, without the affirmative vote or consent of the holders of at least two-thirds of the shares of Series A Preferred Stock outstanding at the time, given in person or by proxy, either in writing or at a meeting (such series voting separately as a class), (i) authorize, create or issue, or increase the authorized or issued amount of, any class or series of shares of capital stock ranking prior to the Series A Preferred Stock with respect to the payment of dividends or the distribution of assets upon liquidation, dissolution or winding up or reclassify any authorized shares of capital stock of the Corporation into such shares, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such shares; or (ii) amend, alter or repeal the provisions of the Corporation's Certificate of Incorporation or the Articles Supplementary classifying the Series A Preferred Stock, whether by merger, consolidation or otherwise (an "Event"), so as to materially and adversely affect any right, preference, privilege or voting power of the Series A Preferred Stock or the holders thereof; provided, however, with respect to the occurrence of any of the Events set forth in (ii) above, so long as the shares of Series A Preferred Stock remain outstanding with the terms thereof materially unchanged, taking into account that upon the occurrence of an Event, the Corporation may not be the 11 surviving entity, the occurrence of any such Event shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting power of holders of Series A Preferred Stock and provided further that (x) any increase in the amount of the authorized or issued shares of Preferred Stock or the creation or issuance of any other Preferred Stock, or (y) any increase in the amount of authorized or issued Series A Preferred Stock or any other Preferred Stock, in each case ranking on a parity with or junior to the Series A Preferred Stock with respect to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. Nothing herein contained shall require such a vote or consent (i) in connection with any increase in the total number of authorized or issued shares of Common Stock, or (ii) in connection with the authorization or issuance of any class or series of shares of stock ranking, as to distribution rights and the liquidation preference, on a parity with or junior to the Series A Preferred Stock. The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of Series A Preferred Stock shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. (7) Conversion. (a) Holders of Series A Preferred Stock shall have the right, exercisable at any time and from time to time, except in the case of Series A Preferred Stock called for redemption as set forth in subparagraph (5) hereof, to convert all or any of such Series A Preferred Stock into Common Stock at a conversion price per share of Common Stock equal to (i) the Net Book Value Per Share of Common Stock on the Closing Date or (ii) in the event any sales of Common Stock to any institutional purchasers have taken place on or prior to the Closing Date or are subject to a commitment to purchase from an institutional purchaser made on or prior to the Closing Date, the Gross Sales Price of a Share of Common Stock; multiplied by 1.08 (the "Conversion Price"). In the case of Series A Preferred Stock called for redemption, conversion rights will expire at the close of business on the last Business Day preceding the Redemption Date. Notice of redemption at the option of the Corporation must be mailed not less than 60 days and not more than 90 days prior to the Redemption Date as provided in subparagraph (5)(b) hereof. Upon conversion, no adjustment or payment will be made for distributions, but if any holder surrenders Class A Preferred Stock for conversion after the close 12 of business on the Record Date for the payment of a distribution and prior to the opening of business on the related Quarterly Dividend Date, then, notwithstanding such conversion, the distribution payable on such Quarterly Dividend Date will be paid to the registered holder of such shares on such Record Date. In such event, such shares, when surrendered for conversion during the period between the close of business on any Record Date and the opening of business on the corresponding Quarterly Dividend Date, must be accompanied by payment of an amount equal to the distribution payable on such Quarterly Dividend Date on the shares so converted (unless such shares were converted after the issuance of a notice of redemption with respect to such shares, in which event such shares shall be entitled to the distribution payable thereon on such Quarterly Dividend Date without making such payment). (b) Any holder of one or more shares of Series A Preferred Stock electing to convert such share or shares shall deliver the certificate or certificates therefor to the principal office of any transfer agent for the Common Stock, with the form of notice of election to convert as the Corporation shall prescribe fully completed and duly executed and (if so required by the Corporation or any conversion agent) accompanied by instruments of transfer in form satisfactory to the Corporation and to any conversion agent, duly executed by the registered holder or his duly authorized attorney, and transfer taxes, stamps or funds therefor or evidence of payment thereof. The conversion right with respect to any such shares shall be deemed to have been exercised at the date upon which the certificates therefor accompanied by such duly executed notice of election and instruments of transfer and such taxes, stamps, funds or evidence of payment shall have been so delivered, and the person or persons entitled to receive the shares of the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of the Common Stock upon said date. (c) No fractional shares of Common Stock or scrip representing a fractional share shall be issued upon conversion of Series A Preferred Stock. If more than one share of Series A Preferred Stock shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series A Preferred Stock so surrendered. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of any shares of Series A Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the closing price for the Common Stock on the last trading day preceding the date of conversion. The closing price for such day shall be the last reported sales price regular way or, in case no such reported sale takes 13 place on such date, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange, or if the Common Stock is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, the closing sale price of the Common Stock or in case no reported sale takes place, the average of the closing bid and asked prices, on Nasdaq or any comparable system. If the Common Stock is not quoted on Nasdaq or any comparable system, the Board of Directors shall in good faith determine the current market price on the basis of such quotation as it considers appropriate. (d) If a holder converts shares of Series A Preferred Stock, the Corporation shall pay any documentary, stamp or similar issue or transfer tax due on the issuance of shares of Common Stock upon the conversion. The holder, however, shall pay to the Corporation the amount of any tax which is due (or shall establish to the satisfaction of the Corporation payment thereof) if the shares are to be issued in a name other than the name of such holder and shall pay to the Corporation any amount required by the last sentence of subparagraph (7)(a) hereof. (e) The Corporation shall reserve and shall at all times have reserved out of its authorized but unissued Common Stock a sufficient number of shares of Common Stock to permit the conversion of the then outstanding Series A Preferred Stock. All Common Stock which may be issued upon conversion of Series A Preferred Stock shall be validly issued, fully paid and nonassessable, and not subject to preemptive or other similar rights. In order that the Corporation may issue Common Stock upon conversion of Series A Preferred Stock, the Corporation will endeavor to comply with all applicable federal and state securities laws and will endeavor to list such Common Stock to be issued upon conversion on each securities exchange on which the Common Stock is listed. (f) The conversion rate in effect at any time shall be subject to adjustment from time to time as follows: (i) In case the Corporation shall (1) pay or make a distribution in shares of Common Stock to holders of the Common Stock, (2) reclassify the outstanding Common Stock into shares of some other class or series of shares, (3) subdivide the outstanding Common Stock into a greater number of shares of Common Stock or (4) combine the outstanding Common Stock into a smaller number of shares of Common Stock, the conversion rate immediately prior to such action shall be adjusted so that the holder of any 14 shares of Series A Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock which he would have owned immediately following such action had such Series A Preferred Stock been converted immediately prior thereto. An adjustment made pursuant to this subparagraph (7)(f)(i) shall become effective immediately after the record date in the case of a distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. (ii) In case the Corporation shall issue rights, options or warrants to all holders of the Common Stock entitling them to subscribe for or purchase Common Stock (or securities convertible into Common Stock) at a price per share less than the current market price (as determined pursuant to subparagraph (7)(f)(iv)) of the Common Stock on such record date, the number of shares of Common Stock into which each share of Series A Preferred Stock shall be convertible shall be adjusted so that the same shall be equal to the number determined by multiplying the number of shares of Common Stock into which such share of Series A Preferred Stock was convertible immediately prior to such record date by a fraction of which the numerator shall be the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock offered (or into which the convertible securities so offered are convertible), and of which the denominator shall be the number of shares of Common Stock outstanding on such record date, plus the number of shares of Common Stock which the aggregate offering price of the additional shares of Common Stock offered (or into which the convertible securities so offered are convertible) would purchase at such current market price. Such adjustments shall become effective immediately after such record date for the determination of the holders of the Common Stock entitled to receive such distribution. For purposes of this subsection (ii), the number of shares of Common Stock at any time outstanding shall not include shares of Common Stock held in the treasury of the Corporation. (iii) In case the Corporation shall distribute to all holders of the Common Stock any class of shares of capital stock other than Common Stock, evidences of indebtedness or assets of the Corporation (other than cash distributions out of current or retained earnings), or shall distribute to all holders of the Common Stock rights or warrants to subscribe for securities (other than those referred to in subparagraph (7)(f)(ii), then in each such case the number of Common Stock into which each share of Series A Preferred Stock shall be convertible shall be adjusted so that the 15 same shall equal the number determined by multiplying the number of shares of Common Stock into which such share of Series A Preferred Stock was convertible immediately prior to the date of such distribution by a fraction of which the numerator shall be the current market price (determined as provided in subparagraph (7)(f)(iv) of the Common Stock on the record date mentioned below, and of which the denominator shall be such current market price of the Common Stock, less the then fair market value (as determined by the Board of Directors, whose determination shall be conclusive evidence of such fair market value) of the portion of the securities or assets so distributed or of such subscription rights or warrants applicable to one share of Common Stock. Such adjustment shall become effective immediately after the record date for the determination of the holders of the Common Stock entitled to receive such distribution. Notwithstanding the foregoing, in the event that the Corporation shall distribute rights or warrants (other than those referred to in subparagraph (7)(f)(ii)) ("Rights") pro rata to holders of the Common Stock, the Corporation may, in lieu of making any adjustment pursuant to this subparagraph (7)(f)(iii), make proper provision so that each holder of a share of Series A Preferred Stock who converts such share after the record date for such distribution and prior to the expiration or redemption of the Rights shall be entitled to receive upon such conversion, in addition to the Common Stock issuable upon such conversion (the "Conversion Shares"), a number of Rights to be determined as follows: (1) if such conversion occurs on or prior to the date for the distribution to the holders of Rights of separate certificates evidencing such Rights (the "Distribution Date"), the same number of Rights to which a holder of a number of shares of Common Stock equal to the number of Conversion Shares is entitled at the time of such conversion in accordance with the terms and provisions of and applicable to the Rights; and (2) if such conversion occurs after the Distribution Date, the same number of Rights to which a holder of the number of shares of Common Stock into which a share of Series A Preferred Stock so converted was convertible immediately prior to the Distribution Date would have been entitled on the Distribution Date in accordance with the terms and provisions of and applicable to the Rights. (iv) The current market price per share of the Common Stock on any date shall be deemed to be the average of the daily closing prices for thirty consecutive trading days commencing forty-five (45) trading days before the date in question. The closing price for each day shall be the last reported sales price or, in case no such reported sale takes place on such date, the average of the reported closing bid and asked prices regular way, 16 in either case on the New York Stock Exchange, or if the Common Stock is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, the closing sale price of the Common Stock or, in case no reported sale takes place, the average of the closing bid and asked prices, on Nasdaq or any comparable system, or if the Common Stock is not quoted on Nasdaq or any comparable system, the closing sale price or, in case no reported sale takes place, the average of the closing bid and asked prices, as furnished by any two members of the National Association of Securities Dealers, Inc. selected from time to time by the Corporation for that purpose. (v) In any case in which this subparagraph (7) shall require that an adjustment be made immediately following a record date, the Corporation may elect to defer (but only until five Business Days following the mailing of the notice described in subparagraph (7)(j)) issuing to the holder of any Series A Preferred Stock converted after such record date the Common Stock and other shares of capital stock of the Corporation issuable upon such conversion over and above the Common Stock and other shares of capital stock of the Corporation issuable upon such conversion only on the basis of the conversion rate prior to adjustment; and, in lieu of the shares the issuance of which is so deferred, the Corporation shall issue or cause its transfer agents to issue appropriate evidence of the right to receive such shares. (g) No adjustment in the conversion rate shall be required until cumulative adjustments result in a change of 1% or more of the conversion price as in effect prior to the last adjustment of the conversion rate; provided, however, that any adjustment which by reason of this subparagraph (7)(g) is not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this subparagraph (7) shall be made to the nearest cent ($.01) or the nearest one-hundredth (1/100) of a share, as the case may be. No adjustment to the conversion rate shall be made for cash dividends. (h) In the event that, as a result of an adjustment made pursuant to subparagraph (7)(f), the holder of any Series A Preferred Stock thereafter surrendered for conversion shall become entitled to receive any shares of capital stock of the Corporation other than Common Stock, thereafter the number of such other shares so receivable upon conversion of any Series A Preferred Stock shall be subject to adjustment from time to time in a manner and on terms as nearly 17 equivalent as practicable to the provisions with respect to the Common Stock contained in this subparagraph (7). (i) The Corporation may make such increases in the conversion rate, in addition to those required by subparagraphs (7)(f)(i), (ii) and (iii), as is considered to be advisable in order that any event treated for federal income tax purposes as a distribution of shares or share rights shall not be taxable to the recipients thereof. (j) Whenever the conversion rate is adjusted, the Corporation shall promptly mail to all holders of record of Series A Preferred Stock a notice of the adjustment and shall cause to be prepared a certificate signed by a principal financial officer of the Corporation setting forth the adjusted conversion rate and a brief statement of the facts requiring such adjustment and the computation thereof; such certificate shall forthwith be filed with each transfer agent for the Series A Preferred Stock. (k) In the event that: (i) the Corporation takes any action which would require an adjustment in the conversion rate, (ii) the Corporation consolidates or merges with, or transfers all or substantially all of its assets to, another corporation and shareholders of the Corporation must approve the transaction, or (iii) there is a dissolution, winding up or liquidation of the Corporation, a holder of Series A Preferred Stock may wish to convert some or all of such shares into Common Stock prior to the record date for, or the effective date of, the transaction so that he may receive the rights, warrants, securities or assets which a holder of Common Stock on that date may receive. Therefore, the Corporation shall mail to holders of Series A Preferred Stock a notice stating the proposed record or effective date of the transaction, as the case may be. The Corporation shall mail the notice at least 10 days before such date; however, failure to mail such notice or any defect therein shall not affect the validity of any transaction referred to in clauses (i), (ii) or (iii) of this subparagraph (7)(k). 18 (l) If any of the following shall occur, namely: (i) any reclassification or change of outstanding Common Stock issuable upon conversion of Series A Preferred Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), (ii) any consolidation or merger to which the Corporation is a party other than a consolidation or merger in which the Corporation is the continuing corporation and which does not result in any reclassification of, or change (other than a change in name, or par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination) in, outstanding Common Stock or (iii) any sale, transfer or lease of all or substantially all of the property or business of the Corporation as an entirety, then the Corporation, or such successor or purchasing corporation, as the case may be, shall, as a condition precedent to such reclassification, change, consolidation, merger, sale, transfer or lease, provide in its charter document that each share of Series A Preferred Stock shall be convertible into the kind and amount of shares of stock and other securities and property (including cash) receivable upon such reclassification, change, consolidation, merger, sale, transfer or lease by a holder of the number of shares of Common Stock deliverable upon conversion of such shares of Series A Preferred Stock immediately prior to such reclassification, change, consolidation, merger, sale, transfer or lease. Such charter document shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this subparagraph (7). The foregoing, however, shall not in any way affect the right that a holder of Series A Preferred Stock may otherwise have, pursuant to clause (2) of the last sentence of subparagraph (7)(f)(iii), to receive Rights upon conversion of Series A Preferred Stock. If, in the case of any such reclassification, change, consolidation, merger, sale, transfer or lease, the shares of stock or other securities and property (including cash) receivable thereupon by a holder of the Common Stock includes shares of stock or beneficial interest or other securities and property of a corporation or other entity other than the successor or purchasing corporation, as the case may be, in such reclassification, change, consolidation, merger, sale, transfer or lease, then the charter document of such other corporation shall contain such additional provisions to protect the interests of the holders of Series A Preferred Stock as the Board of Directors shall reasonably consider necessary by reason of the foregoing. The provisions of this subparagraph (7)(1) shall similarly apply to successive consolidations, mergers, sales, transfers or leases. No holder of Series A Convertible Preferred Stock will possess any preemptive rights to subscribe for or acquire any unissued shares of the Corporation (whether now or hereafter authorized) or securities of the Corporation 19 convertible into or carrying a right to subscribe to or acquire shares of the Corporation. (8) So long as any Series A Preferred Stock is outstanding, the Corporation shall not issue any options to purchase shares of the Corporation ("Employee Stock Options") to officers, directors or employees of, or consultants to, the Corporation, whether pursuant to employee stock option or purchase plans of the Corporation or employment or consulting agreements or otherwise for an exercise price which is less than the fair market value of such shares on the date of grant. In the event the number of shares of Common Stock subject to Employee Stock Options excluding, any Employee Stock Options [reload/rollover], at any time exceeds, in the aggregate, 10% of the Common Stock outstanding at such time, all Employee Stock Options outstanding at such time in excess of such 10%, shall be deemed for purposes of subparagraph (7) hereof to have an exercise price per share equal to 20% of the average fair market value of a share of Common Stock on the date of grant of those shares subject to Employee Stock Options most recently granted in excess of such 10%. 3. Exclusion of Other Rights. ------------------------- Except as may otherwise be required by law, the Series A Preferred Stock shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in these Articles Supplementary (as such Articles Supplementary may be amended from time to time) and in the Articles of Incorporation. The Series A Preferred Stock shall have no preemptive or subscription rights. 4. Headings of Subdivisions. ------------------------ The headings of the various subdivisions hereof are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. 5. Severability of Provisions. -------------------------- If any voting powers, preferences and relative, participating, optional and other special rights of the Series A Preferred Stock and qualifications, limitations and restrictions thereof set forth in these Articles Supplementary (as such Articles Supplementary may be amended from time to time) is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Series A Preferred Stock and qualifications, limitations and restrictions thereof set forth in these Articles Supplementary (as so amended) which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional or other special rights of Series A Preferred Stock and qualifications, limitations and restrictions thereof 20 herein set forth shall not be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special right of Series A Preferred Stock and qualifications, limitations and restrictions thereof unless so expressed herein. 6. These Articles Supplementary were duly adopted by the Board of Directors of the Corporation on _________________. Stockholder action is not required. 21 EXHIBIT B --------- FORM OF NOTICE OF DRAW ---------------------- TO: ERP OPERATING LIMITED PARTNERSHIP _____________________________ _____________________________ Attention: _________________ Telephone: (___) ___________ Telecopy: (___) ___________ Pursuant to Section 4.2 of that certain Common Stock and Preferred Stock Purchase Agreement (the "Agreement") dated as of ___________, 1997 by and among WELLSFORD REAL PROPERTIES, INC., a Maryland corporation (the "Company") and ERP OPERATING LIMITED PARTNERSHIP, an Illinois limited partnership ("Purchaser"), this notice represents the Company's notice to Purchaser to cause Purchaser to purchase _________ shares of Preferred Stock pursuant to the Purchaser's Term Purchase Commitment on ______________, 199__ (the "Term Closing Date"). The aggregate purchase price of such Purchase shall be $______________. The Company hereby certifies as follows: (i) the representations and warranties as set forth in Article 3 (except to the extent that such statements expressly are made only as of an earlier date) of the Agreement are and shall be true and correct in all material respects on and as of the date hereof and the Term Closing Date specified herein; and (ii) the Company has and shall have performed, or shall have caused to be performed, in all material respects all agreements and satisfied all conditions set forth in Section 4.2 of the Agreement. B-1 Unless otherwise defined herein, terms used herein shall have the meanings in the Agreement. Dated: ______________, 199____ WELLSFORD REAL PROPERTIES, INC. By:_____________________________ Name:_________________________ Title:________________________ B-2 EXHIBIT C --------- C-1 EXHIBIT D --------- 1. The Company is a corporation duly organized and existing and in good standing under the laws of the State of Maryland and has the corporate power to own its properties and to carry on its business as presently conducted by it. 2. The Company has the requisite corporate power and authority to execute, deliver and perform the obligations set forth in the Agreement and the Registration Rights Agreement, each of which has been duly authorized by all necessary corporate action, and the execution and performance of which will not conflict with, or result in a breach of the Company's Articles of Incorporation or Bylaws or, to the best of our knowledge and belief without any duty of inquiry, any order, writ, injunction or decree of any court or governmental authority, or any of the material terms, conditions or provisions of any agreement or instrument to which the Company is a party or by which the Company is bound. 3. The Agreement and the Registration Rights Agreement have been duly executed and delivered by a duly authorized officer of the Company and constitute the valid and binding obligations of the Company, enforceable in accordance with their respective terms. [BANKRUPTCY EXCEPTION] 4. The Class A Common Stock issued to Purchaser on the date of this opinion pursuant to the terms of the Agreement shall be duly and validly issued, fully paid and nonassessable. 5. The Preferred Stock issuable pursuant to the terms of the Agreement has been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Agreement, shall be duly and validly issued, fully paid and nonassessable. 6. The Common Stock issuable upon conversion of the Class A Common Stock and Preferred Stock and upon exercise of the Warrants has been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Company's Articles of Incorporation and the Articles Supplementary, shall be duly and validly issued, fully paid and nonassessable. D-1 EXHIBIT E --------- To be completed upon filing of the Company's Registration Statement E-1 EXHIBIT F --------- F-1 REGISTRATION RIGHTS AGREEMENT ----------------------------- THIS REGISTRATION RIGHTS AGREEMENT is made as of the ____ day of ____________, 1997, by and among WELLSFORD REAL PROPERTIES, INC., a Maryland corporation (the "Company"), and ERP OPERATING LIMITED PARTNERSHIP, an Illinois limited partnership, and its successors, assigns and transferees (herein referred to collectively as the "Holders" and individually as a "Holder"). W I T N E S S E T H: ------------------- WHEREAS, on the date hereof, Holder and the Company have entered into that certain Common Stock and Preferred Stock Purchase Agreement (the "Stock Purchase Agreement"); WHEREAS, pursuant to the terms of the Stock Purchase Agreement, Holder is obligated to purchase shares of Class A common stock, par value $.01 per share, of the Company ("Class A Common Stock") and Series A 8% Convertible Redeemable Preferred Stock of the Company (the "Preferred Stock"); WHEREAS, pursuant to the Articles Supplementary classifying the Preferred Stock attached as Exhibit A to the Stock Purchase Agreement ("Articles Supplementary"), the Holder shall have the right to convert all or any of the outstanding shares of Preferred Stock into shares of common stock, par value $.01 per share, of the Company (the "Common Stock"); WHEREAS, pursuant to the Articles of Incorporation of the Company, the Holder shall have the right to convert all or any of the outstanding shares of Class A Common Stock into shares of Common Stock; and WHEREAS, the Company has agreed to provide the Holders with certain registration rights as set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and undertakings contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and subject to and on the terms and conditions herein set forth, the parties hereto agree as follows: 1. Definitions. ----------- As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Company" shall have the meaning set forth in the preamble and shall also include the Company's successors. "Demand Notice" shall have the meaning set forth in Section 2 hereof. "Effective Date" shall mean the date of this Agreement. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Holder" or "Holders" shall have the meaning set forth in the preamble. "Person" shall mean an individual, partnership, corporation, trust, or unincorporated organization, or a government or agency or political subdivision thereof. "Prospectus" shall mean the prospectus included in a Registration Statement, and any such prospectus as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Registration Statement, and by all other amendments and supplements to such prospectus, including post-effective amendments, and in each case including all material incorporated by reference therein. "Public Sale" shall mean a public sale or distribution of Registrable Securities, including a sale pursuant to Rule 144 (or any similar provision then in effect) under the Securities Act. "Registrable Securities" shall mean the Shares, excluding (i) Shares for which a Registration Statement relating to the sale thereof by the Holder shall have become effective under the Securities Act and which have been disposed of by the Holder under such Registration Statement, and (ii) Shares sold or otherwise distributed pursuant to Rule 144 under the Securities Act. "Registration Expenses" shall mean any and all expenses incident to performance of or compliance with this Agreement, including, without limitation: (i) all SEC or National Association of Securities Dealers, Inc. ("NASD") registration and filing fees, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualification of any of the Registrable Securities and the preparation of a Blue Sky Memorandum) and compliance with 2 the rules of the NASD, (iii) all expenses of any Persons engaged by the Company in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any Prospectus, certificates and other documents relating to the performance of and compliance with this Agreement, (iv) all fees and expenses incurred in connection with the listing, if any, of any of the Registrable Securities on any securities exchange or exchanges pursuant to Section 4(a)(viii) hereof, (v) the fees and disbursements of counsel for the Company and of the independent public accountants of the Company, including the expenses of any special audits or "cold comfort" letters, if any, required by or incident to such performance and compliance, and (vi) the fees and disbursements of counsel representing a selling Holder. Registration Expenses shall specifically exclude underwriting discounts and commissions, and transfer taxes, if any, relating to the sale or disposition of Registrable Securities by a selling Holder, all of which shall be borne by such Holder in all cases. "Registration Notice" shall have the meaning set forth in Section 3 hereof. "Registration Statement" shall mean a registration statement of the Company and any other entity required to be a registrant with respect to such registration statement pursuant to the requirements of the Securities Act which covers the Registrable Securities requested by Holders to be covered by such registration statement, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all materials incorporated by reference therein. "Requesting Holder" shall mean each Holder who requests to participate in an underwritten public offering of Company Common Stock. "SEC" shall mean the Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended from time to time. "Shares" shall mean Preferred Stock issuable or issued, Common Stock issuable or issued upon conversion of all or any portion of the shares of Preferred Stock or Class A Common Stock and Common Stock issuable or issued upon the exercise of warrants issued pursuant to the Articles Supplementary. 2. Registration Under the Securities Act. ------------------------------------- (a) Filing of Registration Statement. After one (1) year from the Effective Date hereof, as promptly as practicable after written notice (a "Demand Notice") from the Holder requesting that the Company effect the registration under the Securities Act of Registrable Securities having an aggregate fair market value of $5,000,000 during the period three (3) years from the Effective Date hereof ("Initial Period") or $7,500,000 at any time after the Initial Period, 3 the Company shall cause to be filed promptly a Registration Statement or an amendment to a Registration Statement as determined by the Company providing for the resale by the Holder of Registrable Securities in accordance with the terms hereof and will use its best efforts to cause any such Registration Statement to be declared effective by the SEC as soon as reasonably practicable. Notwithstanding the foregoing, Holder shall only have the right to deliver one Demand Notice during any calendar year; provided, however, that during the period five (5) years from the Effective Date hereof Holder shall not deliver more than four (4) Demand Notices in the aggregate. Any such registration request by Holder shall include all Shares which may be included in such Registration Statement at such time. The Company agrees to use its best efforts to keep any such Registration Statement continuously effective under the Securities Act until such Shares covered thereby are no longer Registrable Securities and further agrees to supplement or amend the Registration Statement, if and as required by the rules, regulations or instructions applicable to the registration form used by the Company for such Registration Statement or by the Securities Act or by any other rules and regulations thereunder for such Registration Statement. The Company may elect to register all Shares at any time. (b) Expenses. The Company shall pay all Registration Expenses in connection with any Registration Statement filed pursuant to this Section 2. (c) Inclusion in Registration Statement. The Company may require each Holder of Registrable Securities to furnish to the Company in writing such information regarding the proposed offer or sale by such Holder of such Registrable Securities as the Company may from time to time reasonably request in writing. Any Holder who does not provide the information reasonably requested by the Company in connection with the Registration Statement as promptly as practicable after receipt of such request, but in no event later than ten (10) days thereafter, shall not be entitled to have its Registrable Securities included in the Registration Statement. 3. Incidental Registration. ----------------------- If the Company proposes to register any shares of Common Stock for Public Sale pursuant to an underwritten offering under the Securities Act (whether proposed to be offered for sale by the Company or by any other Person) it will give prompt written notice (a "Registration Notice") to the Holders of its intention to do so. Upon the written request of any Holder (a "Requesting Holder") delivered to the Company within fifteen (15) Business Days after the receipt of a Registration Notice, which request shall specify the number of Registrable Securities intended to be disposed of by such Requesting Holder, the Company shall include the Shares specified in the request of such Requesting Holder in the registration statement; provided, however, the Registrable Securities requested by such Requesting Holder to be included in the Registration Statement shall have an aggregate fair market value of $5,000,000 during the Initial Period or $7,500,000 thereafter. The Company will not be required to effect any registration pursuant to this Section 3 if the Company shall have been advised in writing (with a copy to each Requesting 4 Holder) by a nationally recognized independent investment banking firm selected by the Company to act as lead underwriter in connection with the public offering of securities that, in such firm's opinion, a registration at that time of additional securities would materially and adversely affect the offering, in which case in the discretion of the Company, either: (i) the Registrable Securities of the Requesting Holders shall nevertheless be included in such Registration Statement subject to the condition that the Requesting Holders may not offer or sell their Registrable Securities included therein for a period of at least 90 days after the initial effective date of such Registration Statement, or (ii) if the Company should reasonably determine that the inclusion of such Registrable Securities, notwithstanding the provisions of the preceding clause (i), would materially adversely affect the offering contemplated in such Registration Statement, and based on such determination recommends inclusion in such Registration Statement of fewer or none of the Registrable Securities of the Requesting Holders, then (x) the number of Registrable Securities of the Requesting Holders included in such Registration Statement shall be reduced, if the Company recommends the inclusion of fewer Registrable Securities, or (y) none of the Registrable Securities of the Requesting Holders shall be included in such Registration Statement, if the Company recommends the inclusion of none of such Registrable Securities; provided, however, that if Registrable Securities are being offered for the account of other persons or entities as well as the Company, such reduction shall not represent a greater fraction of the number of securities intended to be offered by the Requesting Holders than the fraction of similar reductions imposed on such other persons or entities (other than the Company). Notwithstanding the foregoing, Holder shall only have the right to deliver one Registration Notice during any calendar year; provided, however, that during the period five (5) years from the Effective Date hereof Holder shall not deliver more than four (4) Registration Notices in the aggregate. With respect to any proposed sale by the Holder of Registrable Securities pursuant to this Section 3 the Company shall pay all Registration Expenses. No registration of Registrable Securities effected under this Section 3 shall relieve the Company of its obligation to effect registrations of Registrable Securities pursuant to Section 2. 5 The rights of the Holder under this Section 3 are solely incidental in nature, and nothing in this Section 3 shall prevent the Company from reversing a decision to file a Registration Statement pursuant to this Section 3 or from withdrawing any such Registration Statement before it has become effective. The incidental registration rights granted pursuant to this Section 3 shall not apply to (a) a registration relating to employee or director stock option, purchase or other employee benefit plans, (b) a registration related to a dividend reinvestment or share purchase plan or (c) a registration on Form S-4 or Form S-8. 4. Registration Procedures. ----------------------- (a) Obligations of the Company. In connection with any Registration Statement pursuant to Sections 2 or 3 hereof, the Company shall: (i) cause the Registration Statement to be available for the sale of the Registrable Securities by Holders in one or more transactions, in negotiated transactions, through the writing of options on the Registrable Securities, or a combination of such methods of sale, and to comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the SEC to be filed therewith, and in the event the Company is listed on the Nasdaq National Market System ("NMS"), in one or more transactions on NMS or otherwise in special offerings, exchange distributions or secondary distribution pursuant to and in accordance with the rules of the NMS, in the over-the-counter market; (ii) (A) prepare and file with the SEC such amendments and post-effective amendments to any Registration Statement as may be necessary to keep each such Registration Statement effective for the applicable period; (B) cause the Prospectus included in each such Registration Statement to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 or any similar rule that may be adopted under the Securities Act; (C) respond promptly to any comments received from the SEC with respect to each Registration Statement, or any amendment, post-effective amendment or supplement relating thereto; and (D) comply with the provisions of the Securities Act applicable to issuers registering securities under the circumstances 6 provided herein with respect to the disposition of securities covered by each Registration Statement, except as otherwise provided in Section 3 hereof; (iii) furnish to each Holder of Registrable Securities, without charge, as many copies of each Prospectus, and any amendment or supplement thereto and such other documents as they may reasonably request, in order to facilitate the public sale or other disposition of the Registrable Securities; the Company consents to the use of the Prospectus, by each such Holder of Registrable Securities, in connection with the offering and sale of the Registrable Securities covered by the Prospectus; (iv) notify promptly each Holder of Registrable Securities and confirm such advice in writing (A) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (B) if the Company receives any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation of any proceeding for such purpose, and (C) of the happening of any event during the period a Registration Statement is effective as a result of which such Registration Statement or the related Prospectus contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made (in the case of the Prospectus), not misleading; (v) use its best effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest possible moment; (vi) use its best efforts to register or qualify the Registrable Securities by the time the applicable Registration Statement is declared effective by the SEC under all applicable state securities or "blue sky" laws of such jurisdictions as any Holder of Registrable Securities covered by a Registration Statement shall reasonably request in writing, keep each such registration or qualification effective during the period such Registration Statement is required to be kept effective and do any and all other acts and things which may be reasonably necessary or advisable to enable such Holder to 7 consummate the disposition in each such jurisdiction of such Registrable Securities owned by such Holder; provided, however, that the Company shall not be required to (A) qualify generally to do business in any jurisdiction or to register as a broker or dealer in such jurisdiction where it would not otherwise be required to qualify but for this Section 4(a)(vi), (B) subject itself to taxation in any such jurisdiction, or (C) submit to the general service of process in any such jurisdiction; (vii) upon the occurrence of any event contemplated by Section 4(a)(iv)(C) hereof, use its best efforts promptly to prepare and file a supplement or prepare, file and obtain effectiveness of a post-effective amendment to a Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, such Prospectus will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (viii) use its best efforts to cause all Registrable Securities to be listed on any securities exchange on which similar securities issued by the Company are then listed; (ix) provide a CUSIP number for all Registrable Securities, not later than the effective date of the Registration Statement or amendment thereto relating to such Registrable Securities; (x) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC and make available to its security holders, as soon as reasonably practicable, an earning statement covering at least twelve (12) months which shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; and (xi) use its best efforts to cause the Registrable Securities covered by a Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company to enable Holders to consummate the disposition of such Registrable Securities. 8 (b) Obligations of Holders. In connection with and as a condition to the Company's obligations with respect to a Registration Statement pursuant to Sections 2 and 3 hereof and this Section 4, each Holder agrees that (i) it will not offer or sell its Registrable Securities under the Registration Statement until it has received copies of the supplemental or amended Prospectus contemplated by Section 4(a)(ii) hereof and receives notice that any post- effective amendment has become effective; and (ii) upon receipt of any notice from the Company of the happening of any event of the kind described in Section 4(a)(iv)(C) hereof, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to a Registration Statement until such Holder receives copies of the supplemented or amended Prospectus contemplated by Section 4(a)(vii) hereof and receives notice that any post-effective amendment has become effective, and, if so directed by the Company, such Holder will deliver to the Company (at the expense of the Company) all copies in its possession, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. Each Holder will furnish to the Company all information relating to the Holder required by the Securities Act to be included in the Registration Statement. The Company may require, as a condition to fulfilling its obligations to register the Registrable Securities under Sections 2 or 3 hereof, that the Holders execute reasonable and customary indemnification agreements for the benefit of the underwriters of the registration; provided, however, that the Holders may not be required to indemnify the Company's underwriters except with respect to information relating to the Holders furnished by the Holders for use in such Registration Statement. (c) Lockup. In the event the Company proposes to effect the distribution of its securities through an underwritten public offering, each Holder who then beneficially owns in excess of 100,000 shares agrees for a period of time, beginning seven (7) days prior to the pricing of such offering and ending thirty (30) days after such pricing that such Holder will forthwith cease any sale or other disposition of any of the Registrable Securities during such period of time, if requested in writing by the Company or representatives of the underwriters for any such underwritten public offering; provided, however, that Holders shall not be subject to more than one Lockup Period during any twelve (12) month period. (d) Postponement. The Company shall be entitled to postpone for a reasonable period of time (but not in excess of 60 days) the filing of any Registration Statement otherwise required to be prepared and filed by it pursuant to Section 2 hereof, if the Board of Directors of the Company determines, in its reasonable judgment, that such registration and offering would materially interfere with any proposed financing, acquisition, corporate reorganization or other material transaction involving the Company, and the Company gives the Holders written notice of such determination within fourteen (14) days of its receipt of a Demand Notice. 9 5. Indemnification; Contribution. ----------------------------- (a) Indemnification by the Company. The Company agrees to indemnify and hold harmless each Holder, each officer and director of such Holder, and each Person, if any, who controls any Holder within the meaning of Section 15 of the Securities Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment thereto) pursuant to which Registrable Securities were registered under the Securities Act, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, if such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including reasonable fees and disbursements of counsel), reasonably incurred in investigating, preparing or defending against any litigation, or investigation or proceeding by any governmental agency or body, commenced or threatened, in each case whether or not a party, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) above; provided, however, that the indemnity provided pursuant to this Section 5(a) does not apply to any Holder with respect to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by such Holder expressly for use in a Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto). 10 (b) Indemnification by the Holders. Each Holder severally agrees to indemnify and hold harmless the Company and the other selling Holders, and each of their respective directors and officers (including each director and officer of the Company who signed the Registration Statement), and each Person, if any, who controls the Company or any other selling Holder within the meaning of Section 15 of the Securities Act, to the same extent as the indemnity contained in Section 5(a) hereof (except that any settlement described in Section 5(a)(ii) shall be effected only with the written consent of such Holder), but only insofar as such loss, liability, claim, damage or expense arises out of or is based upon (i) any untrue statement or omission, or alleged untrue statements or omissions, made in a Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such selling Holder expressly for use in such Registration Statement (or any amendment thereto) or such Prospectus (or any amendment or supplement thereto), or (ii) such Holder's failure to deliver a Prospectus to any purchaser of Registrable Securities where such a delivery obligation was applicable to such Holder's sale of Registrable Securities and such Holder had been provided with a reasonable number of copies of such Prospectus for the relevant deliveries thereof. In no event shall the liability of any Holder under this Section 5(b) be greater in amount than the dollar amount of the proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. (c) Conduct of Indemnification Proceedings. Each indemnified party shall give reasonably prompt notice to each indemnifying party of any action or proceeding commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party (i) shall not relieve it from any liability which it may have under the indemnity agreement provided in Section 5(a) or (b) above, unless and to the extent it did not otherwise learn of such action and the lack of notice by the indemnified party results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) shall not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided under Section 5(a) or (b) above. If the indemnifying party so elects within a reasonable time after receipt of such notice, the indemnifying party may assume the defense of such action or proceeding at such indemnifying party's own expense with counsel chosen by the indemnifying party and approved by the indemnified parties defendant in such action or proceeding, which approval shall not be unreasonably withheld; provided, however, that, if such indemnified party or parties reasonably determine that a conflict of interest exists where it is advisable for such indemnified party or parties to be represented by separate counsel or that, upon advice of counsel, there may be legal defenses available to them which are different from or in addition to those available to the indemnifying party, then the indemnifying party shall not be entitled to assume such defense and the indemnified party or parties shall be entitled to one separate counsel at the indemnifying party's expense. If an indemnifying party is not entitled to assume the defense of such action or proceeding as a result of the proviso to the preceding sentence, such indemnifying party's counsel shall be entitled to conduct the defense of such 11 indemnified party or parties, it being understood that both such counsel will cooperate with each other to conduct the defense of such action or proceeding as efficiently as possible. If an indemnifying party is not so entitled to assume the defense of such action or does not assume such defense, after having received the notice referred to in the first sentence of this paragraph, the indemnifying party or parties will pay the reasonable fees and expenses of counsel for the indemnified party or parties. In such event, however, no indemnifying party will be liable for any settlement effected without the written consent of such indemnifying party. If an indemnifying party is entitled to assume, and assumes, the defense of such action or proceeding in accordance with this paragraph, such indemnifying party shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action or proceeding. The indemnification obligations provided pursuant to Sections 5(a) and (b) hereof survive, with respect to a Holder, the transfer of Registrable Securities by such Holder, and with respect to a Holder or the Company, shall remain in full force and effect regardless of any investigation made by or on behalf of any indemnified party. (d) Contribution. (i) In order to provide for just and equitable contribution in circumstances in which the indemnity agreement provided for in this Section 5 is for any reason held to be unenforceable although applicable in accordance with its terms, the Company and the selling Holders shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement incurred by the Company and the selling Holders, in such proportion as is appropriate to reflect the relative fault of and benefits to the Company on the one hand and the selling Holders on the other (in such proportions that the selling Holders are severally, not jointly, responsible for the balance), in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits to the indemnifying party and indemnified parties shall be determined by reference to, among other things, the total proceeds received by the indemnified party and indemnified parties in connection with the offering to which such losses, claims, damages, liabilities or expenses relate. The relative fault of the indemnifying party and indemnified parties shall be determined by reference to, among other things, whether the action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or the indemnified parties, and the 12 parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. (ii) The Company and the Holders agree that it would not be just or equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 5(d), no selling Holder shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities of such selling Holder were offered to the public exceeds the amount of any damages which such selling Holder would otherwise have been required to pay by reason of such untrue statement or omission. (iii) Notwithstanding the foregoing, no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 5(d), each Person, if any, who controls a Holder within the meaning of Section 15 of the Securities Act and directors and officers of a Holder shall have the same rights to contribution as such Holder, and each director of the Company, each officer of the Company who signed the Registration Statement and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act shall have the same rights to contribution as the Company. (iv) The contribution provided for in this Section 5(d) shall survive, with respect to a Holder, the transfer of Registrable Securities by such Holder, and with respect to a Holder or the Company, shall remain in full force and effect regardless of any investigation made by or on behalf of any indemnified party. 6. Rule 144 Sales. -------------- (a) Reports. The Company covenants that it will file the reports required to be filed by the Company under the Securities Act and the Securities Exchange Act of 1934, as amended, and will take such further action as any Holder of Registrable Securities may reasonably 13 request, all to the extent required to enable such Holder to sell Registrable Securities pursuant to Rule 144 under the Securities Act. (b) Certificates. In connection with any sale, transfer or other disposition by any Holder of any Registrable Securities pursuant to Rule 144 under the Securities Act, the Company shall cooperate with such Holder to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any Securities Act legend, and enable certificates for such Registrable Securities to be for such number of shares and registered in such names as the selling Holders may reasonably request at least two (2) business days prior to any sale of Registrable Securities. (c) Opinion That Shares Not Required to be Registered. The Company shall not be required to fulfill any registration obligations under this Agreement if the Company provides the Holder who desires to sell Registrable Securities with an opinion, satisfactory to Holder in its reasonable discretion, of counsel, satisfactory to Holder in its reasonable discretion, stating that (i) the Holder is free to sell the Registrable Securities that they desired to register in the manner proposed by such Holder (including but, not limited to, an underwritten offering), without registering such Registrable Securities, or (ii) such Registrable Securities can be sold under Rule 144 of the Securities Act or otherwise without registration in the open market in compliance with the Securities Act. 7. Miscellaneous. ------------- (a) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given without the written consent of the Company and the Holders of a majority in amount of the outstanding Registrable Securities; provided, however, that no amendment, modification or supplement or waiver or consent to the departure with respect to the provisions of Sections 2, 3, 4, 5, 6 or 7 hereof shall be effective as against any Holder of Registrable Securities unless consented to in writing by such Holder of Registrable Securities, as the case may be. Notice of any amendment, modification or supplement to this Agreement adopted in accordance with this Section 7(a) shall be provided by the Company to each Holder of Registrable Securities at least fifteen (15) days prior to the effective date of such amendment, modification or supplement. (b) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first- class mail, telex, telecopier, or any courier guaranteeing overnight delivery, (i) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 7(b), which address initially is, with respect to each Holder, the address set forth next to such Holder's name on the books and records of the Company, or (ii) if to the Company, at: 14 Wellsford Real Properties, Inc., 610 Fifth Avenue, 7th Floor, New York, New York 10020, Attention: President, Fax No. (212) 333-2323. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; three (3) business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; or at the time delivered if delivered by an air courier guaranteeing overnight delivery. (c) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the Company and the Holder, including without limitation and without the need for an express assignment, subsequent Holders. If any successor, assignee or transferee of any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities, as the case may be, shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities such Person shall be entitled to receive the benefits hereof and shall be conclusively deemed to have agreed to be bound by all of the terms and provisions hereof. (d) Headings. The headings in this Agreement are for the convenience of reference only and shall not limit or otherwise affect the meaning hereof. (e) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW PROVISIONS THEREOF. (f) Specific Performance. The Company and the Holders hereto acknowledge that there would be no adequate remedy at law if any party fails to perform any of its obligations hereunder, and accordingly agree that each party, in addition to any other remedy to which it may be entitled at law or in equity, shall be entitled to compel specific performance of the obligations of any other party under this Agreement in accordance with the terms and conditions of this Agreement in any court of the United States or any State thereof having jurisdiction. (g) Entire Agreement. This Agreement is intended by the Company and the Holder as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the Company and the Holder in respect of the subject matter contained herein. This Agreement supersedes all prior agreements and understandings of the Company and the Holder with respect to such subject matter. 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. WELLSFORD REAL PROPERTIES, INC. By:_____________________________ Name:___________________________ Title:__________________________ ERP OPERATING LIMITED PARTNERSHIP By:_____________________________ Name:___________________________ Title:__________________________ 16 EXHIBIT G A. Certain Definitions. ------------------- "Affiliate" shall mean, when used with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "Beneficial Ownership" shall mean ownership of stock by a REIT who would be treated as an owner of such shares of stock under Section 856(c)(5) of the Code. The terms "Beneficial Owner," "Beneficially Owns" and "Beneficially Owned" shall have correlative meanings. "Business Day" shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Common Stock" shall mean the common stock, $.01 par value per share, of the Corporation. "Class A Common Stock" shall mean the Class A common stock, $.01 par value per share, of the Corporation. "Closing Date" shall mean ____________. "Control" including the terms "Controlling", "Controlled by" and "under common Control with", shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Corporation" shall mean Wellsford Real Properties, Inc. "Liquidation Value," when used in connection with Series A 8% Convertible Redeemable Preferred Stock, shall mean $25.00 per share. "Person" shall mean any natural person, corporation, business trust, joint venture, association, company, partnership, or government, or any agency or political subdivision thereof. "Preferred Stock" shall mean all shares of capital stock having a preference in any manner to the Common Stock or Class A Common Stock. G-1 "REIT" shall mean a Real Estate Investment Trust under Section 856 of the Code. "REIT Ownership Limit" shall initially mean nine and nine-tenths percent (9.9%) of the value of the outstanding Voting Stock of the Corporation. "Responsible Officer" of any corporation shall mean any executive officer of such corporation, and any other officer or similar official thereof responsible for the administration of the obligations of such corporation in respect of these Articles. "Transfer" shall mean any sale, transfer, redemption, gift, hypothecation, pledge, assignment, devise or other disposition of Voting Stock, whether voluntary or involuntary, whether of record, constructively or beneficially and whether by operation of law or otherwise. "Triggering Event" shall mean any event undertaken or caused by the Corporation, which would result in ERP Operating Limited Partnership ("ERP Operating Partnership"), Equity Residential Properties Trust or any Affiliate of either of them collectively to Beneficially Own shares of the outstanding Class A Common Stock in excess of the REIT Ownership Limit. "Voting Stock" shall mean the Class A Common Stock and any other outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors. B. Terms. ----- (1) Rights. The holders of Class A Common Stock shall have all rights, including, but not limited to, voting, dividend, distribution, liquidation and other rights of holders of shares of Common Stock; provided, however, holders of Class A Common Stock shall have such additional rights as provided herein. (2) Voting Rights. The holders of the Class A Common Stock, as a class, shall be entitled to elect one (1) member (the "Class A Director") of the Board of Directors of the Corporation so long as (i) ERP Operating Partnership is obligated to purchase Preferred Stock pursuant to that certain Common Stock and Preferred Stock Purchase Agreement dated as of _____________, 1997 between ERP Operating Partnership and the Corporation; (ii) ERP Operating Partnership has obligations pursuant to that certain Agreement Regarding Palomino Park dated as of __________, 1997 between ERP Operating Partnership and the Corporation; (iii) ERP Operating Partnership has obligations pursuant to that certain Credit Enhancement Agreement dated as of ____________, 1997 between ERP Operating Partnership and G-2 the Corporation; or (iv) the aggregate Liquidation Value of the shares of Series A 8% Convertible Redeemable Preferred Stock of the Corporation owned by ERP Operating Partnership is greater than $10,000,000; provided, however, in no event shall the period during which the holders of the Class A Common Stock are entitled to elect the Class A Director be less than two (2) years from the Closing Date. The Class A Director may be removed without cause, only by the affirmative vote of a majority of the Class A Common Stock electing such director and with "cause" (as defined herein) only by the vote of 75% of the Directors (including the Class A Director) then in office. For purposes of these Articles, "cause" shall mean (i) the conviction of the Class A Director of any felony involving moral turpitude, fraud or misrepresentation or (ii) a material fraud by the Class A Director or a material breach of fiduciary duty by the Class A Director in the performance of his duties as a director of the Corporation. (3) Optional Conversion. ------------------- (a) Holders of Class A Common Stock shall have the right, exercisable at any time and from time to time to convert all or any of such Class A Common Stock into Common Stock at a conversion rate of one share of Common Stock for each share of Class A Common Stock so converted, subject to adjustment (the "Conversion Rate"). Upon conversion, no adjustment or payment will be made for distributions, but if any holder surrenders Class A Common Stock for conversion after the close of business on the record date for the payment of a dividend or distribution and prior to the opening of business on the related payment date of such dividend or distribution then, notwithstanding such conversion, the dividend or distribution payable on such payment date will be paid to the registered holder of such shares on such record date. (b) Any holder of one or more shares of Class A Common Stock electing to convert such share or shares shall deliver the certificate or certificates therefor to the principal office of any transfer agent for the Common Stock, with the form of notice of election to convert as the Corporation shall prescribe fully completed and duly executed and (if so required by the Corporation or any conversion agent) accompanied by instruments of transfer in form satisfactory to the Corporation and to any conversion agent, duly executed by the registered holder or his duly authorized attorney, and transfer taxes, stamps or funds therefor or evidence of payment thereof. The conversion right with respect to any such shares shall be deemed to have been exercised at the date upon which the certificates therefor accompanied by such duly executed notice of election and instruments of transfer and such taxes, stamps, funds or evidence of G-3 payment shall have been so delivered, and the person or persons entitled to receive the shares of the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of the Common Stock upon said date. (c) If a holder converts shares of Class A Common Stock, the Corporation shall pay any documentary, stamp or similar issue or transfer tax due on the issuance of shares of Common Stock upon the conversion. The holder, however, shall pay to the Corporation the amount of any tax which is due (or shall establish to the satisfaction of the Corporation payment thereof) if the shares are to be issued in a name other than the name of such holder and shall pay to the Corporation any amount required by the last sentence of subparagraph (3)(a) hereof. (d) The Corporation shall reserve and shall at all times have reserved out of its authorized but unissued Common Stock a sufficient number of shares of Common Stock to permit the conversion of the then outstanding Class A Common Stock. All Common Stock which may be issued upon conversion of Class A Common Stock shall be validly issued, fully paid and nonassessable, and not subject to preemptive or other similar rights. In order that the Corporation may issue Common Stock upon conversion of Class A Common Stock, the Corporation will endeavor to comply with all applicable federal and state securities laws and will endeavor to list such Common Stock to be issued upon conversion on each securities exchange on which the Common Stock is listed. (e) The Conversion Rate in effect at any time shall be subject to adjustment from time to time as follows: (i) In case the Corporation shall (1) reclassify the outstanding Common Stock into shares of some other class or series of shares, (2) subdivide the outstanding Common Stock into a greater number of shares of Common Stock or (3) combine the outstanding Common Stock into a smaller number of shares of Common Stock, the conversion rate immediately prior to such action shall be adjusted so that the holder of any shares of Class A Common Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock which he would have owned immediately following such action had such Class A Common Stock been converted immediately prior thereto. An adjustment made pursuant to this subparagraph (3)(e)(i) shall become effective immediately after the effective date in the case of a subdivision, combination or G-4 reclassification. (ii) The Market Price per share of the Common Stock on any date shall be deemed to be the average of the daily closing prices for thirty consecutive trading days commencing forty-five (45) trading days before the date in question. The closing price for each day shall be the last reported sales price or, in case no such reported sale takes place on such date, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange, or if the Common Stock is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, the closing sale price of the Common Stock or, in case no reported sale takes place, the average of the closing bid and asked prices, on Nasdaq or any comparable system, or if the Common Stock is not quoted on Nasdaq or any comparable system, the closing sale price or, in case no reported sale takes place, the average of the closing bid and asked prices, as furnished by any two members of the National Association of Securities Dealers, Inc. selected from time to time by the Corporation for that purpose. (iii) In any case in which this subparagraph (3) shall require that an adjustment be made immediately following a record date, the Corporation may elect to defer (but only until five Business Days following the mailing of the notice described in subparagraph (3)(j)) issuing to the holder of any Class A Common Stock converted after such record date the Common Stock and other shares of capital stock of the Corporation issuable upon such conversion over and above the Common Stock and other shares of capital stock of the Corporation issuable upon such conversion only on the basis of the conversion rate prior to adjustment; and, in lieu of the shares the issuance of which is so deferred, the Corporation shall issue or cause its transfer agents to issue appropriate evidence of the right to receive such shares. (f) No adjustment in the Conversion Rate shall be required until cumulative adjustments result in a change of 1% or more of the conversion price as in effect prior to the last adjustment of the Conversion Rate; provided, however, that any adjustment which by reason of this subparagraph (3)(f) is not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this subparagraph (3) shall be made to the nearest cent ($.01) or the nearest one- G-5 hundredth (1/100) of a share, as the case may be. (g) In the event that, as a result of an adjustment made pursuant to subparagraph (3)(e), the holder of any Class A Common Stock thereafter surrendered for conversion shall become entitled to receive any shares of capital stock of the Corporation other than Common Stock, thereafter the number of such other shares so receivable upon conversion of any Class A Common Stock shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in this subparagraph (3). (h) The Corporation may make such increases in the Conversion Rate, in addition to those required by subparagraphs (3)(e), as is considered to be advisable in order that any event treated for federal income tax purposes as a distribution of shares or share rights shall not be taxable to the recipients thereof. (i) Whenever the Conversion Rate is adjusted, the Corporation shall promptly mail to all holders of record of Class A Common Stock a notice of the adjustment and shall cause to be prepared a certificate signed by a principal financial officer of the Corporation setting forth the adjusted Conversion Rate and a brief statement of the facts requiring such adjustment and the computation thereof; such certificate shall forthwith be filed with each transfer agent for the Class A Common Stock. (j) In the event that: (i) the Corporation takes any action which would require an adjustment in the Conversion Rate, or (ii) the Corporation consolidates or merges with, or transfers all or substantially all of its assets to, another corporation and shareholders of the Corporation must approve the transaction, a holder of Class A Common Stock may wish to convert some or all of such shares into Common Stock prior to the record date for, or the effective date of, the transaction so that he may receive the rights, warrants, securities or assets which a holder of Common Stock on that date may receive. Therefore, the Corporation shall mail to holders of Class A Common Stock a notice stating the proposed record or effective date of the transaction, as the case may be. The Corporation shall mail the notice at least 10 days before such G-6 date; however, failure to mail such notice or any defect therein shall not affect the validity of any transaction referred to in clauses (i) or (ii) of this subparagraph (3)(j). (k) If any of the following shall occur, namely: (i) any reclassification or change of outstanding Common Stock issuable upon conversion of Class A Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), (ii) any consolidation or merger to which the Corporation is a party other than a consolidation or merger in which the Corporation is the continuing corporation and which does not result in any reclassification of, or change (other than a change in name, or par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination) in, outstanding Common Stock or (iii) any sale, transfer or lease of all or substantially all of the property or business of the Corporation as an entirety, then the Corporation, or such successor or purchasing corporation, as the case may be, shall, as a condition precedent to such reclassification, change, consolidation, merger, sale, transfer or lease, provide in its charter document that each share of Class A Common Stock shall be convertible into the kind and amount of shares of stock and other securities and property (including cash) receivable upon such reclassification, change, consolidation, merger, sale, transfer or lease by a holder of the number of shares of Common Stock deliverable upon conversion of such shares of Class A Common Stock immediately prior to such reclassification, change, consolidation, merger, sale, transfer or lease. Such charter document shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this subparagraph (3). If, in the case of any such reclassification, change, consolidation, merger, sale, transfer or lease, the shares of stock or other securities and property (including cash) receivable thereupon by a holder of the Common Stock includes shares of stock or beneficial interest or other securities and property of a corporation or other entity other than the successor or purchasing corporation, as the case may be, in such reclassification, change, consolidation, merger, sale, transfer or lease, then the charter document of such other corporation shall contain such additional provisions to protect the interests of the holders of Class A Common Stock as the Board of Directors shall reasonably consider necessary by reason of the foregoing. The provisions of this subparagraph (3)(k) shall similarly apply to successive consolidations, mergers, sales, transfers or leases. No holder of Class A Common Stock will possess any preemptive rights to subscribe for or acquire any unissued shares of the Corporation G-7 (whether now or hereafter authorized) or securities of the Corporation convertible into or carrying a right to subscribe to or acquire shares of the Corporation. (4) Automatic Conversion. Any outstanding shares of Class A Common Stock shall automatically convert, at the Conversion Rate, into shares of Common Stock upon the Transfer of such shares of Class A Common Stock to any Person other than an Affiliate of Equity Residential Properties Trust or ERP Operating Partnership. Such automatic conversion shall be deemed to have occurred on the date of such Transfer. (5) Purchase of Shares of Voting Stock in Excess of REIT Ownership Limit. If, notwithstanding the other provisions contained in these Articles, a Triggering Event shall occur, then the Corporation shall (i) immediately deliver written notice of such Triggering Event to each of Equity Residential Properties Trust and ERP Operating Partnership and (ii) purchase such shares of Class A Common Stock in excess of the REIT Ownership Limit at a price per share equal to the Market Price per share of the Common Stock no later than 25 days following the date of the Triggering Event which resulted in the REIT Beneficially Owning Class A Common Stock in excess of the REIT Ownership Limit. G-8 EXHIBIT D ================================================================================ Agreement Regarding Palomino Park between ERP OPERATING LIMITED PARTNERSHIP and WELLSFORD REAL PROPERTIES, INC. Dated as of ___, 1997 ================================================================================ AGREEMENT REGARDING PALOMINO PARK --------------------------------- THIS AGREEMENT REGARDING PALOMINO PARK (this "Agreement") is made and entered into as of __________, 1997 by and between ERP OPERATING LIMITED PARTNERSHIP, an Illinois limited partnership ("ERP Operating Partnership"), and WELLSFORD REAL PROPERTIES, a Maryland corporation ("Newco"). A. Newco has been formed as a wholly-owned subsidiary of Wellsford Residential Property Trust, a Maryland real estate investment trust ("Wellsford Parent"), pursuant to the Contribution Agreement ("Contribution Agreement") referred to in that certain Agreement and Plan of Merger dated as of _________, 1997 (the "Merger Agreement") by and between Equity Residential Properties Trust, a Maryland real estate investment trust that is the general partner of ERP Operating Partnership ("EQR") and Wellsford Parent. Pursuant to the Merger Agreement, Wellsford Parent has contributed to Newco, among other things, one hundred percent (100%) of the issued and outstanding Class A Common Stock (the "Class A Stock") of Wellsford Park Highlands Corp., a Colorado corporation ("WPHC"). Wellsford Parent retained one hundred percent (100%) of the issued and outstanding Class B Common Stock of WPHC (the "Class B Stock"). Following the merger of Wellsford Parent and EQR in accordance with the Merger Agreement, the Class B Stock continued to be held by the Surviving Trust (as defined in the Merger Agreement). Pursuant to that certain Contribution Agreement dated as of ________________, 1997 by and between the Surviving Trust and ERP Operating Partnership, the Surviving Trust has contributed the Class B Stock to ERP Operating Partnership. B. Reference is hereby made to a certain Second Amended and Restated Vacant Land Purchase and Sale Agreement (the "Original Land Contract"), made and entered into as of March 23, 1995 by and between Mission Viejo Company, a California corporation ("Mission"), and The Feld Company, a Colorado corporation ("Feld Company"), relative to the purchase and sale of certain property (the "Overall Property") containing approximately 181.803 acres located in Douglas County, Colorado and legally described as Lots 1, 2, 3, 4 and 5, Highlands Ranch Filing 126-A. Feld Company assigned its rights with respect to the Original Land Contract to WPHC pursuant to a certain Assignment and Assumption-Purchase Agreement dated as of May 2, 1995, by and between Feld Company and WPHC. The Original Land Contract has been amended pursuant to a certain First Amendment to Second Amended and Restated Vacant Land Purchase and Sale Agreement, made and entered into as of May 1, 1996, by and between Mission and WPHC. The Original Land Contract, as so amended, is referred to herein as the "Land Contract." C. It is presently contemplated that the Overall Property will be developed in five phases (each, a "Phase") together as an integrated project (the "Project") consisting of a 1,880-unit gated apartment community constructed around a centrally located 30-acre park (the "Park"), roads and a centrally located clubhouse, swimming pool and health club (the "Recreation Center"). The anticipated number of apartment units in each Phase is as follows: Phase I - 456 units; Phase II - 316 units; Phase III - 304 units; Phase IV - 316 units; and Phase V - 452 units. D. Park at Highlands LLC, a Colorado limited liability company ("Park at Highlands"), has been formed and continued as a limited liability company under the laws of the State of Colorado pursuant to a certain Operating Agreement of Park at Highlands LLC dated as of April 27, 1995 by and between WPHC and Al Feld, an individual ("Al Feld"), as amended by First Amendment to Operating Agreement of Park at Highlands LLC dated as of December 29, 1995 by and between WPHC and Al Feld (collectively, the "Park at Highlands Operating Agreement"). E. Pursuant to a certain Assignment and Assumption Agreement-Phase I dated as of May 2, 1995, by and between WPHC and Park at Highlands, WPHC assigned to Park at Highlands, and Park at Highlands assumed, all of WPHC's rights to acquire certain land known as Lot 1 ("Lot 1"), Highlands Ranch Filing 126-A. Park at Highlands subsequently acquired Lot 1 and Park at Highlands is constructing on a portion of Lot 1, known as Lot 1A, Highlands Park Filing No. 126-A, First Amendment ("Lot 1A"), a certain multi-family rental apartment complex, consisting of approximately 456 apartment units with related facilities ("Phase I") (also known as Blue Ridge). F. After acquiring Lot 1 from Mission, Park at Highlands transferred certain property known as Lot 1B, Highlands Ranch Filing No. 126-A, First Amendment ("Lot 1B") to WPHC. WPHC has constructed the Recreation Center on Lot 1B. In addition, Park at Highlands transferred to Palomino Park Public Improvements Corporation, a Colorado nonprofit corporation ("PPPIC"), legal title to certain property known as Tracts A and B, Highlands Ranch Filing No. 126-A, First Amendment, on which land PPPIC has developed or is expected to develop the Park, roads and certain infrastructure improvements. G. Park at Highlands and WPHC have entered into a certain Rec Center Use Agreement dated as of December 29, 1995, as amended, relating to the development, operation and use of the Recreation Center constructed or to be constructed by WPHC on Lot 1B. H. Red Canyon at Palomino Park LLC, a Colorado limited liability company ("Red Canyon"), has been formed and continued as a limited liability company under the laws of the State of Colorado pursuant to a certain Operating Agreement of Red Canyon at Palomino Park LLC, dated as of ______, 1996 by and between WPHC and Al Feld (the "Red Canyon Operating Agreement"). The Red Canyon Operating Agreement and the Park at Highlands Operating Agreement are sometimes referred to herein collectively as the "Operating Agreements." 2 I. Pursuant to a certain Assignment and Assumption Agreement-Parcel 2, made and entered into as of May 1, 1996, by and between WPHC and Red Canyon, WPHC assigned to Red Canyon and Red Canyon assumed, all of WPHC's rights to acquire certain land known as Lot 2A, Highlands Ranch Filing No. 126-A, Douglas County, Colorado ("Lot 2A"). Red Canyon subsequently acquired Lot 2A and Red Canyon anticipates constructing on Lot 2A a certain multi-family rental apartment complex, consisting of approximately 304 apartment units with related facilities ("Phase II"). J. Red Canyon and WPHC have entered into a certain Rec Center Use Agreement dated as of May 2, 1996, relating to the development, operation and use of the Recreation Center constructed or to be constructed by WPHC on Lot 1B. K. The portions of the Overall Property other than Lots 1A, 1B, and 2A and Tracts A and B are sometimes referred to herein collectively as the "Remaining Overall Property". L. Palomino Park Public Improvements Corporation, a Colorado nonprofit corporation ("PPPIC"), has issued $14,750,000 in bonds to finance the construction of the roads and the Park and, in connection therewith, has been empowered to impose certain revenue assessment liens against the Phases owned by WPHC or a permitted assignee of WPHC to finance the payments due under the bonds. M. ERP Operating Partnership and Newco are entering into this Agreement pursuant to the Merger Agreement. NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements contained herein, the parties hereto hereby agree as follows: ARTICLE 1 --------- COVENANTS RELATING TO WPHC -------------------------- ERP Operating Partnership and Newco, as the legal and beneficial owners of all of the issued and outstanding capital stock of WPHC, agree to, and Newco agrees to cause WPHC to (i) enter into a Shareholders' Agreement, which shall be prepared by counsel to ERP Operating Partnership and shall be in form and substance satisfactory to ERP Operating Partnership in the exercise of ERP Operating Partnership's commercially reasonable judgment, which agreement shall incorporate the following terms, and (ii) amend the Articles of Incorporation of WPHC, to the extent permitted by Colorado law, which amendment shall be prepared by counsel to ERP Operating Partnership and shall be in form and substance satisfactory to Newco and ERP 3 Operating Partnership in the exercise of ERP Operating Partnership's commercially reasonable judgment, which amendment shall incorporate the following terms: 1.1 ERP Operating Partnership shall have no obligation to contribute funds or capital to WPHC, Red Canyon, Park at Highlands or any future Palomino Park LLC (as hereinafter defined in Section 1.13) by virtue of its ownership of the Class B Stock. Nothing in the preceding sentence or elsewhere in this Agreement shall vitiate the obligation of ERP Operating Partnership to make any payments to third parties pursuant to agreements entered into by ERP Operating Partnership with respect to Phase I, Phase II and any Future Palomino Park Phases including, without limitation, the Tri-Party Agreement and the Credit Enhancement Agreement. 1.2 With respect to each Phase, to the extent that said amount is required to be contributed by WPHC to Park at Highlands or Red Canyon, Newco shall be required to contribute to the capital of WPHC (each such contribution being referred to herein as a "Phase Contribution") an amount not to exceed the amount (the "Phase Contribution Limit") budgeted to be contributed by WPHC to the Palomino Park LLC developing such Phase in accordance with the terms of the Operating Agreement for such Palomino Park LLC, pursuant to the budget in effect for such Phase as of (a) the date hereof (in the case of Park at Highlands), or (b) the date of the Merger Agreement (in the case of Red Canyon); said budget of Red Canyon shall be subject to ERP Operating Partnership's review and approval prior to the applicable dates set forth in the preceding clause (b) of this Section 1.2 Under no circumstances shall Newco be entitled to receive additional shares of the capital stock of WPHC solely by virtue of its contribution of the relevant Phase Contribution to the respective Phase of the Project. 1.3 WPHC shall not issue any additional capital stock except pursuant to the anti-dilution provisions of Section 1.4 hereof. WPHC shall not issue any additional capital stock for the purpose of raising the funds for any Phase Contribution required to be made by Newco pursuant to Section 1.2 hereof. 1.4 (a) Subject to subparagraph (b) following, in the event any additional shares of stock of WPHC are to be issued by WPHC, ERP Operating Partnership, if a shareholder at the time of such issuance, shall have the right to purchase a sufficient number of newly issued shares of stock of WPHC at the then-established purchase price and terms to enable it to retain its then- current percentage of ownership interest in WPHC. (b) Notwithstanding the preceding subparagraph (a), ERP Operating Partnership shall not have the preemptive right described above in connection with the issuance by WPHC of additional shares of WPHC stock to a party other than Newco or an Affiliate (as hereinafter defined) of Newco. The right of WPHC to raise capital through the sale of additional WPHC stock to non-Affiliates of Newco shall in no way detract from or otherwise affect Newco's obligations under Section 1.2 to contribute capital to WPHC up to the Phase Contribution Limit. 4 1.5 If ERP Operating Partnership or Newco (the "Selling Shareholder") shall receive an offer from a bona fide prospective purchaser (the "Offer") to purchase all (but not less than all, with respect to ERP Operating Partnership) or any part or all (with respect to Newco) of its shares of the capital stock of WPHC and the Selling Shareholder desires to sell such shares in accordance with such Offer, the Selling Shareholder shall first offer in writing (a "Notice of Proposed Sale") to sell such shares owned by it to the other party (the "Non- Selling Shareholder"). Any such sale to the Non-Selling Shareholder shall be on the same terms and conditions as the Offer, which terms and conditions shall be specified in the Notice of Proposed Sale; provided, however, that (i) if ERP Operating Partnership exercises its right of first refusal to purchase all of the capital stock of WPHC owned by Newco in connection with an Offer made to Newco with respect to which Newco had exercised a Drag Along Right (as hereinafter defined) (a "Drag Along Transaction"), then the per share price to ERP Operating Partnership for each share of WPHC stock owned by Newco shall be equal to the per share price which would have been paid in connection with the Drag Along Transaction had all shares subject to sale in the Drag Along Transaction been sold pursuant to the terms of the Drag Along Transaction offer, and (ii) any Notice of Proposed Sale to ERP Operating Partnership relating to an offer by Newco to sell its shares of Class A Stock shall include a provision obligating Newco to first convert such Class A Stock to Class B Stock if deemed necessary by ERP Operating Partnership. If the Non-Selling Shareholder has not provided the Selling Shareholder with written notice of its intention to purchase all of such shares in accordance with the terms of the Notice of Proposed Sale within thirty (30) days of the Non-Selling Shareholder's receipt of the Notice of Proposed Sale, then, subject to Sections 1.5 and 1.6 hereof, the Selling Shareholder shall have the right to sell its shares to such bona fide prospective purchaser in accordance with the terms of the Offer; provided, however, that in connection with any such sale by ERP Operating Partnership of its Class B Stock, WPHC shall agree to convert such Class B Stock into Class A Stock if deemed necessary by ERP Operating Partnership. If the Selling Shareholder fails to consummate such sale within one hundred fifty (150) days following the Non-Selling Shareholder's rejection of the offer in the Notice of Proposed Sale, then the Selling Shareholder's shares shall again be subject to all the restrictions of this section. Notwithstanding the foregoing, Newco shall not have the right to sell or transfer all or any of its shares of capital stock of WPHC during the period of time (the "Lock-Up Period") in which ERP Operating Partnership shall retain any actual or contingent liability under any or all of the Tri-Party Agreements described in Section 3.1 hereof. At no time shall ERP Operating Partnership have the right to sell less than all of its shares of the capital stock of WPHC, except with respect to a Tag Along Transaction under Section 1.6. 1.6 If (after the expiration of the Lock-Up Period) Newco shall desire to sell or transfer to a bona fide prospective purchaser any part or all of its shares of the capital stock of WPHC and provides ERP Operating Partnership with a right of first refusal in accordance with Section 1.5 hereof which ERP Operating Partnership rejects in accordance therewith, then Newco shall provide ERP Operating Partnership with written notice of the pending sale (a "Tag Along Notice"). ERP Operating Partnership may elect to participate in such transaction (a "Tag Along 5 Transaction") as an additional selling or transferring party by delivering a written notice thereof (a "Tag Along Election Notice") to Newco within thirty (30) days after delivery of such Tag Along Notice. A Tag Along Election Notice shall specify the number of shares which ERP Operating Partnership wishes to sell or transfer in such transaction, which number shall be less than or equal to (i) the aggregate number of shares of the capital stock of WPHC which Newco proposed to sell or transfer in such transaction (i.e., all of Newco's shares of the capital stock of WPHC), multiplied by (ii) a fraction, the numerator of which is the number of shares of WPHC capital stock owned by ERP Operating Partnership, and the denominator of which is the aggregate number of shares of the capital stock of WPHC owned by ERP Operating Partnership and Newco. If ERP Operating Partnership shall elect to sell or transfer shares in such transaction, the aggregate number of shares of the capital stock of Newco to be sold or transferred by Newco shall be reduced, so that the aggregate number of shares of the capital stock of WPHC to be sold or transferred to such third party by ERP Operating Partnership and Newco shall remain equal to the aggregate number of shares of the capital stock of WPHC which Newco originally proposed to sell or transfer in such transaction. Except as specifically provided below, participation by ERP Operating Partnership in the offering of shares pursuant to this Section 1.6 shall be at a price per share equal to the price being offered to Newco and on terms identical to those terms being offered to Newco. In the event that neither ERP Operating Partnership nor Newco has exercised its put/call rights under Section 1.8 hereof on or before the closing of any Tag Along Transaction, then fifty percent (50%) of the shares of WPHC stock to be sold by ERP Operating Partnership in connection with the Tag Along Transaction shall be deemed to be Put/Call Stock (the "P/C Tag Along Stock"). The per share purchase price for such P/C Tag Along Stock shall be equal to the greater of (a) the Put Price (as hereinafter defined) which would be applicable as of the date of the closing of the Tag Along Transaction divided by the total number of shares of Put/Call Stock as of such date, or (b) the per share purchase price being offered to Newco for the sale of its WPHC shares in connection with the Tag Along Transaction. The aggregate purchase price for all P/C Tag Along Stock sold in connection with a Tag Along Transaction is hereinafter referred to as the "P/C Tag Along Price." The per share purchase price for all shares sold by ERP Operating Partnership pursuant to this Section 1.6 other than the P/C Tag Along Stock shall be equal to the per share purchase price being offered to Newco for its WPHC shares. Newco shall not sell or transfer all or any portion of its shares of the capital stock of WPHC other than in accordance with Sections 1.5 and 1.6 hereof. 1.7 If (after the expiration of the Lock-Up Period and after affording ERP Operating Partnership its right of first refusal in accordance with Section 1.5 above) Newco shall receive a written offer from a bona fide purchaser that is not an Affiliate of Newco to purchase all of the shares of capital stock of WPHC owned by Newco and all of the capital stock of WPHC owned by ERP Operating Partnership, then Newco shall promptly give ERP Operating Partnership written notice thereof. If Newco elects, ERP Operating Partnership agrees to sell or transfer all of the shares of WPHC stock owned by ERP Operating Partnership in accordance with the terms of such written offer, provided that, except as specifically provided below, the sale of shares by 6 ERP Operating Partnership pursuant to this Section 1.7 shall be on terms identical to those being offered to Newco (a "Drag Along Right"). To the extent that the shares of WPHC stock owned by ERP Operating Partnership and sold pursuant to this Section 1.7 include the shares of Put/Call Stock, the aggregate purchase price for the Put/Call Stock being sold pursuant to this Section 1.7 shall be the applicable Call Price (as hereinafter defined) which would be applicable as of the date of the closing of such Drag Along Transaction. The per share purchase price for all shares, other than Put/Call Shares, of WPHC stock sold by ERP Operating Partnership as part of a Drag Along Transaction shall be equal to the per share purchase price offered to Newco. 1.8 Subject to Section 1.8(iv) hereof, fifty percent (50%) of the Class B Stock owned by ERP Operating Partnership as of the date hereof (the "Put/Call Stock") shall be subject to the following: (i) At any time from and after the fifth (5th) anniversary of the date hereof, ERP Operating Partnership shall have the right to "put" all (but not less than all) of the Put/Call Stock to Newco for a sales price (the "Put Price") equal to $1,900,000 less the amount of any "Sales or Refinancing Proceeds" (as such term is defined in the applicable Operating Agreements) received by ERP Operating Partnership (by reason of WPHC's interests in the Palomino Park LLCs) to the extent allocable to the Put/Call Stock. The Put Price shall not be subject to dilution based upon any underlying dilution in the Put/Call Stock; (ii) At any time from and after the date hereof, Newco shall have the right to "call" all (but not less than all) of the Put/Call Stock. If Newco calls the Put/Call Stock prior to the fifth (5th) anniversary of the date hereof, then the purchase price (the "Call Price") shall be an amount equal to $1,900,000 less the amount of any Sales or Refinancing Proceeds received by ERP Operating Partnership to the extent allocable to the Put/Call Stock. If Newco calls the Put/Call Stock on or after the fifth (5th) anniversary of the date hereof, then the Call Price shall be an amount equal to $1,900,000 (in 2002 Equivalent Dollars, as such term is hereinafter defined) less the amount of any Sales or Refinancing Proceeds received by ERP Operating Partnership with respect to ERP Operating Partnership's interest in the Palomino Park LLCs which is allocable to the Put/Call Stock. The Call Price shall not be subject to dilution based upon any underlying dilution in the Put/Call Stock. (iii) The mechanics of the exercise of the put/call shall be substantially as follows: (a) At any time after the fifth (5th) anniversary of the date hereof, provided that Newco shall not have previously furnished the Call Notice (as hereinafter defined), ERP Operating Partnership shall have the right to furnish a 7 notice (a "Put Notice") to Newco informing Newco that ERP Operating Partnership has elected to sell all (but not less than all) of the Put/Call Stock to Newco for a price equal to the Put Price, plus or minus the adjustments set forth below; (b) At any time from and after the date hereof, provided that ERP Operating Partnership shall not have previously furnished the Put Notice, Newco shall have the right to furnish a notice (the "Call Notice") to ERP Operating Partnership informing ERP Operating Partnership that Newco has elected to purchase all (but not less than all) of the Put/Call Stock for a price equal to the applicable Call Price, plus or minus the adjustments set forth below; (c) The closing of the transactions described in clause (a) or clause (b) above, as the case may be, shall occur on a date (the "Option Closing Date") and at a place and time mutually agreed to by ERP Operating Partnership and Newco, which date shall be not more than thirty (30) days after the furnishing of the Put Notice or the Call Notice, as the case may be. The transaction shall be closed in the following manner: (1) ERP Operating Partnership shall deliver to Newco an Assignment of Stock pursuant to which ERP Operating Partnership shall assign the Put/Call Stock to Newco without recourse, representation or warranty, other than representations relating to authorization, execution and delivery of the instrument of assignment and a representation that ERP Operating Partnership has not created or suffered the creation of any liens, claims or encumbrances on or prior assignments of the Put/Call Stock; (2) The purchase price shall be increased by an amount equal to the Put/Call Stock's ratable share of any undistributed cash held by WPHC and/or the Palomino Park LLCs after the establishment of a reasonable reserves for operating expenses and reasonably projected capital replacements, subject to the provisions of Section 10.1 of the Operating Agreements for the Park at Highlands and Red Canyon and any comparable provision of the Operating Agreement for future Palomino Park LLCs; (3) Newco shall pay the applicable purchase price (i.e., the Put Price or the Call Price, as the case may be) in cash in full to ERP Operating Partnership at closing, subject to the adjustments described in subsection (2) above. (d) Notwithstanding anything to the contrary contained in this Section 1.8, in the event that ERP Operating Partnership and Newco have entered into a Tag Along 8 Transaction prior to either party's election to exercise its put or call rights under this Section 1.8, then (a) the number of shares of Put/Call Stock thereafter subject to the put/call shall be reduced by the number of shares of P/C Tag Along Stock sold in connection with such Tag Along Transaction and (b) the applicable Put Price or Call Price thereafter payable pursuant to this Section 1.8 shall be reduced by the amount of the P/C Tag Along Price received by ERP Operating Partnership in connection with such Tag Along Transaction. (e) Notwithstanding anything to the contrary contained in this Section 1.8, at such time, if any, as ERP Operating Partnership shall have received an aggregate of $1,900,000 (if said threshold amount has not been received by the fifth anniversary of the date hereof, then the balance remaining of said threshold amount shall thereafter be expressed in terms of 2002 Equivalent Dollars) in Sales or Refinancing Proceeds to the extent allocable to the Put/Call Stock, Newco shall have the right to acquire all (but not less than all) of the Put/Call Stock for a purchase price equal to One Dollar ($1.00). (f) As employed herein, the term "2002 Equivalent Dollars" means the equivalent purchasing power at any time of the value of One Dollar ($1.00) as of the date hereof. The 2002 Equivalent Dollars of any amount shall be determined by multiplying said amount by one (1) plus a fraction, the numerator of which is the difference between (x) the Consumer Price Index (as hereinafter defined) for the calendar month last published prior to the date of such determination and (y) the Consumer Price Index for the calendar month last published as of the fifth (5th) anniversary of the date of this Agreement and the denominator of which is the Consumer Price Index for the calendar month last published as of the fifth (5th) anniversary of the date of this Agreement. As used herein, the term "Consumer Price Index" shall mean the Consumer Price Index for Urban Wage Earners and Clerical Workers, US Cities Average, all Items (Base Year 1982-1984=100) for the applicable month published by the Bureau of Labor Statistics of the United States Department of Labor or similar index agreed to by the parties if such index is changed or is no longer available. 1.9 To the extent that WPHC receives any distributions of any nature from any of the Palomino Park LLCs, WPHC shall promptly pass such distributions through to the shareholders of WPHC in the form of dividends. WPHC shall cause the Palomino Park LLCs to promptly distribute to WPHC all cash received by said entity, after paying current expenses and establishing reasonable reserves for operating expenses and reasonably projected capital replacements, subject to the provisions of Section 10.1 of the Operating Agreements for the Park at Highlands and Red Canyon and any comparable provision of the Operating Agreement for future Palomino Park LLCs. 9 1.10 WPHC shall not authorize or effect any stock split or reverse stock split which would have the effect of diluting or otherwise eliminating ERP Operating Partnership's then-current ownership interest in WPHC. 1.11 Neither WPHC nor any of the Palomino Park LLCs shall engage in any business other than that associated with the real estate development, management, operation, leasing, financing, refinancing and disposition of the Overall Property and the Project. 1.12 Neither WPHC nor any Subsidiary of WPHC shall engage any Affiliate of WPHC or any Subsidiary of WPHC to provide any goods or perform any services on other than an arm's-length basis or otherwise reasonably competitive basis. 1.13 All portions of the Remaining Overall Property that are acquired or owned by WPHC or by any Subsidiary, shall be acquired or owned by Colorado limited liability companies formed and continued pursuant to Operating Agreements in substantially the form of the Red Canyon Operating Agreement (Park at Highlands, Red Canyon and any such entity that is so formed in the future being referred to herein as a "Palomino Park LLC"). WPHC shall not assign WPHC's rights to acquire all or any portion of the Remaining Overall Property to any party that is not a Subsidiary of WPHC, without first (i) affording ERP Operating Partnership a right of first offer with respect to the sale or assignment of said rights, in accordance with procedures substantially similar in nature to the procedures set forth in Section 2.3(a) hereof and (ii) causing the acquiring party to subject the property in question to all assessment liens arising from or in connection with the Assessment Lien Revenue Bonds, Series 1995, issued by PPPIC in the aggregate principal amount of $14,755,000. 1.14 Newco and WPHC shall take all actions necessary to ensure that each of the Palomino Park LLC's will be classified for federal tax purposes as a partnership and not as an association taxable as corporation. 1.15 WPHC may transfer, convey or assign, directly or indirectly, any of WPHC's legal or beneficial ownership interest in Red Canyon or Park at Highlands, provided that (i) such transfer, conveyance, or assignment is not to an Affiliate of WPHC or Newco and (ii) WPHC at all times retains at least a twenty-one percent (21%) ownership interest in the entity in question. There are no restrictions on the transfer, conveyance or assignment of any of WPHC's legal or beneficial ownership interest in the Recreation Center or any future Palomino Park Phases, provided that such transfer, conveyance or assignment is not to an Affiliate of WPHC or Newco. ARTICLE 2 --------- RIGHTS OF FIRST/LAST OFFER -------------------------- 10 2.1 Concurrently herewith, WPHC shall enter into an agreement with ERP Operating Partnership, in which Newco shall join for the purpose of guarantying WPHC's obligations, pursuant to which WPHC shall agree that: (i) with the exception of the possible conversion of one or more of Phase I and Phase II for condominium purposes (the term "condominium" shall include townhome conversion) and the retail sale of condominium units by WPHC or the applicable Palomino Park LLC, (A) WPHC shall not transfer, convey or assign, directly or indirectly, any legal or beneficial ownership interest in Phase I or Phase II and (B) WPHC shall cause each of Park at Highlands and Red Canyon not to transfer, convey or assign, directly or indirectly, any legal or beneficial ownership interest in either of such Phases, until after such time (as to each such Phase) as the documents described in clause (ii) below shall have been entered into; and (ii) within six (6) months following the substantial completion of each of Phase I and Phase II, respectively, WPHC shall cause Park at Highlands and Red Canyon, as the case may be, to enter into the following documents with ERP Operating Partnership and to record memoranda thereof against title to the applicable portion of the Overall Property owned by said entity: A. A Right of First/Last Offer Agreement, by and between ERP Operating Partnership and Park at Highlands with respect to Phase I; and B. A Right of First/Last Offer Agreement, by and between ERP Operating Partnership and Red Canyon with respect to Phase II. 2.2 Each of the documents described in Section 2.1 hereinabove shall be prepared by counsel to ERP Operating Partnership and shall be in form and substance satisfactory to ERP Operating Partnership in ERP Operating Partnership's commercially reasonable judgment, and shall incorporate substantially the terms set forth in subsections (a), (b), (c) and (d) of this Section 2.2. For the purposes of this Section 2.2, the owner of the subject portion of the Overall Property (i.e., Park at Highlands with respect to Lot 1A and Red Canyon with respect to Lot 2A are referred to herein as the "Owner," and the property owned by said Owner is referred to hereinbelow as the "Subject Property" it being understood and agreed that the Subject Property shall not consist of any property not owned directly or indirectly by WPHC and shall not include any property other than portions or all of the Overall Property and shall not be part of a transaction or series of transactions involving any property other than the foregoing: (a) Owner shall have the right to sell (or enter into an option or other agreement for sale of) the Subject Property solely in accordance with the terms set forth below in this Section 2.3. If Owner desires to sell or grant an option to sell the Subject Property or any portion thereof 11 or to cause the Subject Property or any portion thereof to be marketed for sale, or to enter into any contract, agreement or other arrangement for the future sale thereof, Owner shall first furnish a written notice (a "Marketing Election Notice") accompanied by a reasonably detailed term sheet (the "Term Sheet") identifying all of the material economic terms of the proposed transaction. Regardless of whether the transaction is structured as a purchase and sale agreement or an option, the closing of the sale pursuant thereto shall be scheduled to occur no later than nine (9) months after the date of the Marketing Election Notice. ERP Operating Partnership shall have a period of thirty (30) days from the date on which the Marketing Election Notice is furnished (the "Marketing Election Response Period") in which to furnish a written notice (a "Marketing Election Response Notice") to Owner, advising Owner of ERP Operating Partnership's election to either: (i) Consent to Owner's entering into the proposed transaction with a third party upon economic terms not more favorable to the purchaser or optionee than the terms set forth in the Term Sheet; or (ii) Elect to enter into the proposed transaction as purchaser or optionee, in accordance with the business and economic terms set forth in the Term Sheet, subject to the negotiation of mutually agreeable documentation (as provided in subsection (b) below) within a period of thirty (30) days. (b) If ERP Operating Partnership shall have made the election described in clause (ii) of Section 2.3(a) above (an "Affirmative Election"), Owner shall furnish ERP Operating Partnership with a draft of the proposed agreement governing the proposed transaction (together with the principal ancillary documents) within ten (10) days following the date on which the Affirmative Election was furnished to Owner. If for any reason whatsoever Owner and ERP Operating Partnership do not enter into a binding written contract governing the transaction on or before the thirtieth (30th) day following the furnishing of the Affirmative Election, then subsection (e) hereof shall apply. (c) Owner and ERP Operating Partnership agree that each shall act in good faith and shall be reasonable and cooperate with the other including, without limitation, executing any documents that may reasonably be required in order to consummate the transactions contemplated by the provisions set forth in this Section 2.3. (d) If, within the Marketing Election Response Period, ERP Operating Partnership shall not have made the Affirmative Election, Owner shall have the right to effectuate a sale or option of the Subject Property to a third party purchaser that is not an Affiliate of Owner if such sale is made within a period (the "Marketing Period") of nine (9) months following the expiration of the Marketing Election Response Period, pursuant to business and economic terms that are not more favorable to the purchaser or optionee than as set forth in the Term Sheet. 12 (e) If ERP Operating Partnership made the Affirmative Election but a binding written contract or option was not entered into during the period contemplated in clause (ii) of subsection (a) above, then Owner shall have the right to consummate the transaction in question during the Marketing Period, provided that if during the Marketing Period, a bona fide offer is received from a party that is not an Affiliate of Owner for the purchase of the Subject Property upon economic terms that are more favorable to the purchaser or optionee than as set forth on the Term Sheet, or if a bona fide offer is received from a party that is not an Affiliate of Owner to purchase the Subject Property pursuant to the terms of a proposed purchase and sale or option documentation (the "Proposed Agreement") which imposes materially fewer non- economic burdens or confers materially greater non-economic benefits upon the purchaser or optionee than the final drafts (the "Final Drafts") of the documentation submitted to ERP Operating Partnership by Owner pursuant to subsection (b) above, then in either case, if Owner desires to accept such an offer, Owner shall communicate said offer to ERP Operating Partnership and ERP Operating Partnership shall have a period of ten (10) business days following ERP Operating Partnership's receipt of such notice from the Owner to notify Owner as to whether ERP Operating Partnership desires to purchase the Subject Property on the same terms. If ERP Operating Partnership elects to purchase the Subject Property on the same terms, the closing shall take place at a date mutually agreed upon by ERP Operating Partnership and Owner, no later than the later of (x) the scheduled closing date under the Proposed Agreement and (y) sixty (60) days after ERP Operating Partnership's election to accept such offer, the only variations in the Proposed Agreement being de minimis changes made to reflect, for example, the date of said closing and the name of the purchaser or optionee. The closing of said purchase will occur in accordance with the terms of the offer and the modifications proposed by said non-Affiliated party with respect to the Form Agreement. (f) If Owner is authorized to proceed with the sale or option transaction pursuant to this Section 2.3, then, at the closing of said transaction, ERP Operating Partnership shall execute and deliver an instrument, in recordable form, extinguishing all of ERP Operating Partnership's rights of first offer, rights of first refusal and rights with respect to Subject Property, sufficient to enable the purchaser's or optionee's title insurer to omit same as an exception to this coverage. (g) Owner shall deliver to ERP Operating Partnership a copy of all Proposed Agreements prior to the execution and delivery thereof. Any such Proposed Agreement shall be marked so as to identify all variations from the Final Drafts. If required, the terms of such Proposed Agreements shall be held in confidence by ERP Operating Partnership. (h) Nothing herein shall prohibit Owner from mortgaging the Subject Property as security for a loan made at arm's length to said Owner by a lender that is not an Affiliate of Owner, even though said financing may confer upon the lender a right to share in the cash flow or appreciation in the Subject Property, provided however that said lender is not granted an option to purchase the Subject Property, in connection with said loan. 13 (i) The rights conferred upon ERP Operating Partnership under this Article 2 are subject and subordinate to any and all rights and interests which may now or at any time hereafter be granted in the Subject Property including, without limitation, the several assessment liens imposed in connection with the PPPIC bonds, easements, rights of way, restrictions, encumbrances, and mortgages (complying with subsection (h) above) and options and contracts (if Owner shall have complied with the provisions of this Article). ERP Operating Partnership shall execute any instrument reasonably required by Owner or the holder of such interest or appropriate title insurer to evidence such subordination. (j) Time shall be deemed of the essence with respect to all of the time periods with which ERP Operating Partnership is obligated to comply under this Article. (k) Owner reserves the right to withdraw from the market an offer at any time for any or no reason. Owner may restart ERP Operating Partnership's rights under this Article at any time by submitting the terms of any revised offer to ERP Operating Partnership, whereupon the process shall repeat itself ab initio. ARTICLE 3 --------- TRI-PARTY AGREEMENTS AND STANDBY AGREEMENTS ------------------------------------------- 3.1 (a) Reference is hereby made to a certain Tri-Party Agreement dated December 29, 1995 (the "Phase I Tri-Party Agreement"), by and among Nationsbank of Texas, N.A. ("Nationsbank"), Park at Highlands, WPHC, Wellsford Parent, Al Feld and Feld Company. Newco acknowledges that, pursuant to the Merger Agreement, the Surviving Trust has succeeded to Wellsford Parent's rights, interests and obligations under the Tri-Party Agreement, and that the Surviving Trust has caused said rights, interests and obligations to be assigned to (and assumed by) ERP Operating Partnership. Newco, however, covenants and agrees as follows with respect to the Phase I Tri-Party Agreement: (i) Provided that ERP Operating Partnership makes the Loan Payoff payment therein required, Newco shall cause WPHC to assign to ERP Operating Partnership (or, if not assignable, to enforce for the benefit of ERP Operating Partnership) all certifications that are required by the terms of the Phase I Tri-Party Agreement, to be certified to WPHC; (ii) Newco shall cause WPHC not to exercise, waive or modify any rights, or grant any approvals, under the Tri-Party Agreement without ERP Operating Partnership's prior written consent, which shall not be unreasonably withheld or delayed; 14 (iii) The "Final Project Budget" (as such term is referred to in the Phase I Tri-Party Agreement) shall not be increased without ERP Operating Partnership's prior written consent. The parties acknowledge that the Final Project Budget under the Phase I Tri-Party Agreement constitutes a limit on ERP Operating Partnership's financial obligations under the Tri- Party Agreement and, in order to avoid any confusion with the development budgets adopted by the Palomino Park LLC's, the term Final Project Budget will not be employed hereinafter in this Agreement and the term "Tri-Party Agreement Ceiling" will be employed in this Agreement in lieu thereof. (b) With respect to Phase II, ERP Operating Partnership understands that (i) Red Canyon and/or WPHC are currently negotiating the terms of the proposed construction loan (the "Phase II Loan"), and the related loan documentation (the "Phase II Loan Documentation"), with Nationsbank or other prospective lenders, and (ii) the plans and specifications for Phase II (the "Phase II Plans") have not yet been finalized, and (iii) the exhibits to the operating agreement for Red Canyon have not yet been finalized. Newco acknowledges that ERP Operating Partnership shall have only the following rights of review and approval in connection therewith: (i) ERP Operating Partnership acknowledges having reviewed and approved certain non-dimension elevations and floor plans for Phase II (collectively, the "Preliminary Plans"), copies of which are attached hereto as Schedule I. Newco shall cause WPHC to furnish the final proposed plans and specifications to ERP Operating Partnership for ERP Operating Partnership's review and approval, which shall not be withheld or delayed if said plans and specifications constitute a logical progression from, and are not inconsistent with, the Preliminary Plans; (ii) ERP Operating Partnership has reviewed and approved a preliminary total budget of $30,000,000 for Phase II, with an anticipated construction loan in the face principal amount of $29,300,000 (collectively, the "Preliminary Budget"). Newco shall cause WPHC to furnish to ERP Operating Partnership the final proposed budget (the loan budget and the total budget) for Phase II for ERP Operating Partnership's review and approval, which shall not be withheld or delayed if the total budget for Phase II (including land, valued at cost, and all other items) (the "Total Phase II Budget") is not greater than $33,000,000 and ERP Operating Partnership does not have a commercially reasonable basis to doubt the accuracy of the budget; and (iii) The exhibits to the Operating Agreements shall be subject to ERP Operating Partnership's review and approval not to be unreasonably withheld. ERP Operating Partnership further understands that Newco is attempting to structure the Phase II Loan Documentation so that the forms of the documents themselves will be essentially identical to the "Loan Documents" (as such term is defined in the Tri-Party Agreement) for Phase I and 15 such that the overall structure of the Phase II Loan shall be not less favorable to Red Canyon and WPHC than were the Loan Documents for Phase I as they related to Park at Highlands and WPHC. In particular, ERP Operating Partnership understands that Newco will request that ERP Operating Partnership enter into a Tri-Party Agreement for Phase II (the "Phase II Tri-Party Agreement") that is structured in the same manner as the Tri-Party Agreement for Phase I. ERP Operating Partnership hereby agrees to do so, provided that (i) the Tri-Party Agreement Ceiling (determined at the time the Phase II Tri-Party Agreement is entered into and not subject to subsequent increase without ERP Operating Partnership's prior written consent) applicable to the Phase II Tri-Party Agreement shall be less than or equal to $29,300,000, adjusted downward on a dollar for dollar basis to the extent that the Total Phase II Budget is less than $30,000,000, and adjusted upward on a dollar for dollar basis to the extent that the Total Phase II Budget is greater than $30,000,000 but less than or equal to $31,500,000; (ii) the maturity date under the Phase II Loan is no later than the third anniversary of the date hereof; (iii) ERP Operating Partnership shall have no obligations to the lender with respect to the Phase II Loan, other than as set forth in the Phase II Tri-Party Agreement; and (iv) the form of the Phase II Tri-Party Agreement shall have been modified from the form of the Phase I Tri-Party Agreement so as to be consistent with clauses (i) through (iii) of Section 3.1(a) hereof and provided further that ERP Operating Partnership shall not be required to make any representations or warranties regarding Phase II. In no event shall the Tri-Party Agreement Ceiling for the Phase II Tri-Party Agreement be greater than $30,800,000. 3.2 (a) Concurrently herewith, WPHC shall enter into a Standby Purchase and Sale Agreement with ERP Operating Partnership (the "Standby Agreement") pursuant to which WPHC shall agree to cause the applicable Palomino Park LLC to grant ERP Operating Partnership an option to purchase only Phase I or Phase II, as the case may be, upon and subject to the satisfaction of the conditions set forth herein. (b) ERP Operating Partnership shall have the right to exercise its option to purchase Phase I from and after the date, if any, on which ERP Operating Partnership shall make the "Loan Payoff" (as such term is employed in Section 1 of the Phase I Tri-Party Agreement) pursuant to Section 1 of the Phase I Tri- Party Agreement. Said option must be exercised, if at all, within thirty (30) days following the making of said Loan Payoff and ERP Operating Partnership shall not have the right to exercise said option unless ERP Operating Partnership has made the Loan Payoff. (c) ERP Operating Partnership shall have the right to exercise its option to purchase Phase II from and after the date, if any, on which ERP Operating Partnership shall make the "Loan Payoff" (as such term shall be employed in Section 1 of the Phase II Tri-Party Agreement) pursuant to Section 1 of the Phase II Tri-Party Agreement. Said option must be exercised, if at all, within thirty (30) days following the making of said Loan Payoff and ERP Operating 16 Partnership shall not have the right to exercise said option unless ERP Operating Partnership has made the Loan Payoff. (d) The Purchase Price for Phase I, pursuant to the Standby Agreement shall be One Hundred Dollars ($100); the Purchase Price for Phase II, pursuant to the Standby Agreement, shall be One Hundred Dollars ($100). (e) No fee shall be payable to ERP Operating Partnership in connection with the Phase I Tri-Party Agreement. In consideration of ERP Operating Partnership's undertakings pursuant to the Phase II Tri-Party Agreement, however, Newco shall pay to ERP Operating Partnership a fee (the "Tri-Party Fee"), with respect to each of the first three (3) "Annual Periods" (as such term is hereinafter defined) from and after the date hereof, in the respective amount set forth below with respect to each such Annual Period; (i) The fee for the first Annual Period shall be an amount equal to one percent (1%) of the face principal amount of the construction loan for Phase II; (ii) The fee for the second Annual Period shall be an amount equal to one percent (1%) of the face principal amount of the construction loan for Phase II; and (iii) The fee for the third Annual Period shall be one and one-half percent (1 1/2%) of the face principal amount of the construction loan for Phase II. As employed herein, the term "Annual Period" shall mean a period commencing on the date on which ERP Operating Partnership enters into the Phase II Tri- Party Agreement or on any anniversary of said date and ending on the immediately preceding day of the same month in the next calendar year. The Tri-Party Fee for any given Annual Period shall be payable quarterly in advance (in equal fourths of the Tri-Party Fee for the entire Annual Period in which said quarter falls) on the first day of each quarter of said Annual Period, shall be earned in full for said quarter as of the first day of said quarter and shall not be refundable for any reason whatsoever, including without limitation the termination of the Phase II Tri-Party Agreement prior to the expiration of the quarter for which said Standby Fee has been paid. With respect to each Annual Period, a "quarter" shall be any of the four periods commencing on the first day of said Annual Period or on the dates that are three, six or nine months thereafter, respectively, and ending on the day prior to the commencement of the next quarter. (f) ERP Operating Partnership shall not be responsible for the payment of any transfer or transaction taxes, the purchase of documentary stamps or other transaction costs of any kind whatsoever (other than the payment of ERP Operating Partnership's own attorneys' fees) in connection with the closing. All other costs and expenses (including title, escrow and survey costs 17 and the fees and expenses of any professionals providing inspections or certifications as provided hereinbelow) shall be borne solely by Park at Highlands or Red Canyon, as the case may be. (g) ERP Operating Partnership's obligations under the Phase I Tri-Party Agreement and the Phase II Tri-Party Agreement shall be unsecured. 3.3 In connection with ERP Operating Partnership's purchase of Phase I or the Phase II, as the case may be, pursuant to the Standby Agreement, WPHC shall cause the following conditions to be satisfied at closing: (a) A title insurance company satisfactory to ERP Operating Partnership in the exercise of ERP Operating Partnership's commercially reasonable judgment shall have issued to ERP Operating Partnership an Owner's policy of title insurance, in the amount of the purchase price, in such form and with such endorsements as shall be reasonably requested by ERP Operating Partnership, showing ERP Operating Partnership in title to the subject property subject to no title exceptions other than matters not materially interfering with the use, operation and maintenance of the property in question for its intended purpose as a multifamily development within Highlands Ranch. The title policy shall contain full extended coverage over mechanic's lien claims or rights to liens in connection with all work performed before the date of closing. The title policy shall reflect that all financing and liens of a definite or ascertainable amount have been released from the subject property, other than liens for taxes and assessments not yet due and payable, and all assessment liens including, without limitation, the Indemnification Assessment Lien and all other liens arising from or in connection with the Assessment Lien Revenue Bonds, Series 1995, issued by PPPIC in the aggregate principal amount of $14,755,000. At a minimum, the endorsements to be contained in said title policy shall include the following; (i) 103.1 and 103.2 (encroachments); (ii) 103.7 (property abuts or has insurable access to open and dedicated street); (iii) 110.1 (deleting standard exceptions); (iv) 110.2 (special exceptions) if any new exceptions appear that are not listed as permitted exceptions identified above; (v) 115.2 (PUD); (vi) 116.1 (survey); and 18 (vii) 123.2 (zoning). (b) ERP Operating Partnership shall have received reasonably satisfactory evidence (which may be included in the title policy described in Subsection (a) above) that all real property taxes and assessments for the Phase that are due and payable through the date of closing have been timely and fully paid. (c) If so requested by ERP Operating Partnership, Red Canyon or Park at Highlands, as the case may be, shall have furnished ERP Operating Partnership with evidence of the termination of all contracts and service agreements between said Palomino Park LLC and any Affiliate controlled by WPHC thereof, and the waiver of any and all claims against ERP Operating Partnership with respect to said contracts or agreements. (d) Red Canyon or Park at Highlands, as the case may be, shall represent and warrant to ERP Operating Partnership that, to their best knowledge, no hazardous substances or other materials regulated by environmental laws have been introduced to the Subject Property from and after __ [the date of the most recent environmental report with respect to each phase, as delivered to ERP Operating Partnership prior to the execution of the Merger Agreement] in excess of amounts permitted by applicable environmental laws, and that, to the best knowledge of Red Canyon or Park at Highlands, as the case may be, the Phase has been completed in accordance with all applicable laws, codes and ordinances. 3.4 WPHC's obligations under the Standby Agreement shall be guaranteed by Newco. Nothing in this Agreement or in any other instrument, agreement or document, however characterized, including without limitation the Operating Agreements for Park at Highlands and Red Canyon (in particular, Section 4.1.2 thereof) shall obligate Newco to pay the construction loan for the Phase, and ERP Operating Partnership shall have no recourse whatsoever to seek recourse to any extent against Newco for the payment of any part of said loan, irrespective of whether ERP Operating Partnership pays any sums under the Tri-Party Agreement for the Phase. Consistent with the foregoing, ERP Operating Partnership shall have no right of enforcement, whether by subrogation or direct action, or otherwise, of the capital contribution requirements of Newco set forth in the Operating Agreement. 3.5 The Standby Agreement (and the guaranty referred to in Section 3.4 hereof) shall be prepared by counsel to ERP Operating Partnership, shall incorporate the terms set forth above in this Article 3 and shall otherwise be in form and substance satisfactory to ERP Operating Partnership in ERP Operating Partnership's commercially reasonable judgment. 3.6 The rights of ERP Operating Partnership under the Standby Agreement are and shall at all times be subject to any and all liens, restrictions, covenants and encumbrances, now existing and hereafter arising, affecting the Subject Property and ERP Operating Partnership shall furnish any instrument reasonably required by Newco, Park at Highlands, Red Canyon or any title 19 insurer sufficient to enable the title insurer to omit same as an exception to title insurance coverage. ARTICLE 4 --------- CONDITIONS PRECEDENT -------------------- 4.1 The execution and delivery of all of the documents and instruments described in Articles 1, 2 and 3 above shall be mutually necessary conditions precedent. In addition, the satisfaction of the following shall constitute additional conditions precedent to the consummation of the transactions contemplated under this Agreement: (i) the approval of all third parties whose consent or approvals may be required for the consummation of said transactions; (ii) an acknowledgment by Nationsbank, WPHC and Park at Highlands that the Phase I Tri-Party Agreement is in full force and effect and has not been modified, that no notice of default has been given thereunder by Nationsbank with respect to Wellsford Parent that has not been cured, and that the Tri-Party Agreement Ceiling as it relates to Phase I has not been modified, and Wellsford Parent's obligations under the Phase I Tri-Party Agreement have been assigned to ERP Operating Partnership by the Surviving Trust and that said parties will look solely to ERP Operating Partnership for the performance of said obligations; an acknowledgment by Nationsbank that ERP Operating Partnership's obligations to Nationsbank with respect to Phase I are as set forth in the Phase I Tri-Party Agreement; (iii) a release executed by Al Feld, of any and all obligations of Wellsford Parent in connection with the Palomino Park LLCs (other than the Phase I Tri-Party Agreement), including, without limitation, the obligations to make capital contributions to Park at Highlands and Red Canyon; (iv) evidence, reasonably satisfactory to ERP Operating Partnership, of the due and valid authorization, execution and delivery of the documents and instruments contemplated to be entered into pursuant to this Agreement by Newco, WPHC, Park at Highlands, Red Canyon, or any Affiliate of any of the foregoing; (v) the delivery to ERP Operating Partnership of copies of the Operating Agreements, as amended pursuant hereto, certified as true, correct and complete by WPHC; 20 (vi) the delivery to ERP Operating Partnership of copies of the corporate organizational documents for WPHC, certified as true, correct and complete by an officer of WPHC; (vii) certificates, in form and substance and executed by such parties as ERP Operating Partnership may reasonably require, evidencing that all documents and materials submitted to ERP Operating Partnership prior to the execution and delivery of the Merger Agreement and relating to the Overall Property, the Project or any portion thereof, shall not have been materially modified, supplemented or amended without ERP Operating Partnership's prior written consent and, to the best knowledge of the undersigned, are free from default; (viii) the consummation of the transactions contemplated under the Merger Agreement and the Contribution Agreement. 4.2 It shall be a condition precedent to ERP Operating Partnership's obligations to enter into the Phase II Tri-Party Agreement that no Event of Default beyond all applicable cure periods shall have occurred under this Agreement. 4.3 Newco shall use its best efforts to ensure that all conditions precedent to ERP Operating Partnership's obligations which are set forth in clauses (i)-(viii) inclusive of Section 4.1 shall be satisfied as of the date of the consummation of the transactions contemplated by the Merger Agreement. In the event that Newco is unable to satisfy any condition precedent set forth in clauses (i)-(viii) inclusive of Section 4.1 hereof by the date of the consummation of the transactions contemplated by the Merger Agreement, after the exercise of its best efforts to satisfy such condition, ERP Operating Partnership shall have the right, in its sole and absolute discretion, (i) to satisfy such condition precedent, at its cost and expense, or (ii) to waive compliance with any such condition precedent. ARTICLE 5 --------- REPRESENTATIONS AND WARRANTIES ------------------------------ 5.1 Representations and Warranties of Newco. Newco hereby represents and warrants to ERP Operating Partnership as follows: (a) Newco (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (ii) has all requisite corporate power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted by Newco, (iii) is qualified to do 21 business in every jurisdiction where such qualification is required, except where the failure so to qualify would not result in a "Material Adverse Effect on Newco" (as such term is hereinafter defined), and (iv) has the corporate power and authority to execute, deliver and perform its obligations under this Agreement. As employed herein, the term "Material Adverse Effect on Newco" shall mean (i) a materially adverse effect on the financial condition of Newco, or (ii) material impairment of the ability of Newco to pay any amount due, or to perform any other material obligation, under any Letter of Credit Document or Alternate Reimbursement Document, as those terms are defined in that certain Credit Enhancement Agreement dated ______________ by and between ERP Operating Partnership and Newco (the "Credit Enhancement Agreement"). (b) The execution, delivery and performance by Newco of this Agreement and the transactions contemplated hereby (i) have been duly authorized by all requisite corporate and, if required, stockholder action and (ii) will not (A) violate (x) any provision of law, statute, rule or regulation to which Newco or any of its "Affiliates" (as such term is defined in Section 6.2) shall be subject, or of the certificate or articles of incorporation or other constitutive documents or by-laws of Newco, (y) any order of any governmental authority or quasi-governmental authority, or (z) any provision of any indenture or other material agreement or instrument to which Newco is a party or by which it or any of its property is or may be bound, (B) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any such indenture, agreement or other instrument, or (C) result in the creation or imposition of any lien upon or with respect to any property or assets now owned or hereafter acquired by Newco, except for the lien, if any, created pursuant to the terms of this Agreement. (c) This Agreement has been duly executed and delivered by Newco and constitutes a legal, valid and binding obligation of Newco enforceable against Newco in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally, or by general equity principles, including but not limited to principles governing the availability of the remedies of specific performance and injunctive relief. (d) Each of the Palomino Park LLCs is classified for federal tax purposes as a partnership and not as an association taxable as a corporation. (e) There have been no modifications to the Final Project Budget attached to the Phase I Tri-Party Agreement, other than change orders funded by WPHC. The total value of all negative change orders in connection with Phase I is less than $500,000. 5.2 Representations and Warranties of ERP Operating Partnership. ERP Operating Partnership hereby represents and warrants to Newco as follows: 22 (a) ERP Operating Partnership (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (ii) has all requisite corporate power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted by ERP Operating Partnership, (iii) is qualified to do business in every jurisdiction where such qualification is required, except where the failure so to qualify would not result in a "Material Adverse Effect on ERP Operating Partnership" (as such term is hereinafter defined), and (iv) has the corporate power and authority to execute, deliver and perform its obligations under this Agreement. As employed herein, the term "Material Adverse Effect on ERP Operating Partnership" shall mean a materially adverse effect on the financial condition of ERP Operating Partnership. (b) The execution, delivery and performance by ERP Operating Partnership of this Agreement and the transactions contemplated hereby (i) have been duly authorized by all requisite corporate and, if required, stockholder action, and (ii) will not (A) violate (x) any provision of law, statute, rule or regulation to which ERP Operating Partnership or any of its "Affiliates" (as such term is defined in Section 6.2) shall be subject, or of the certificate or articles of incorporation or other constitutive documents or by-laws of ERP Operating Partnership, (y) any order of any governmental authority or quasi-governmental authority, or (z) any provision of any indenture or other material agreement or instrument to which ERP Operating Partnership is a party or by which it or any of its property is or may be bound, (B) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any such indenture, agreement or other instrument, or (C) result in the creation or imposition of any lien upon or with respect to any property or assets now owned or hereafter acquired by ERP Operating Partnership. (c) This Agreement has been duly executed and delivered by ERP Operating Partnership and constitutes a legal, valid and binding obligation of ERP Operating Partnership enforceable against ERP Operating Partnership in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally, or by general equity principles, including but not limited to principles governing the availability of the remedies of specific performance and injunctive relief. ARTICLE 6 --------- EVENTS OF DEFAULT ----------------- 6.1 Events of Default. The happening of any of the following events shall be an "Event of Default" hereunder: 23 (a) any representation or warranty made or deemed made in or in connection with this Agreement by Newco shall prove to have been false or misleading in any material respect when so made, deemed made or furnished; (b) default shall be made in the payment of any amounts due under this Agreement and such default is not cured within five (5) business days of written notice from ERP Operating Partnership of such default; (c) material default shall be made in the due observance or performance by Newco of any covenant, condition or agreement contained in (i) this Agreement and any documents or instruments entered into pursuant to this Agreement, other than a default in the payment of any amount due under this Agreement, and such material default shall not be cured within fifteen (15) business days of written notice from ERP Operating Partnership of such default; (d) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of Newco or any Subsidiary (as hereinafter defined), or of a substantial part of the property or assets of Newco or any Subsidiary, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Newco or any Subsidiary or for a substantial part of the property or assets of Newco or any Subsidiary or (iii) the winding-up or liquidation of Newco or any Subsidiary; and such proceeding or petition shall continue undismissed for 90 days or an order or decree approving or ordering any of the foregoing shall be entered; (e) Newco or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (h) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Newco or any Subsidiary or for a substantial part of the property or assets of Newco or any Subsidiary, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take any action for the purpose of effecting any of the foregoing; (f) one or more judgments for the payment of money in an aggregate amount in excess of $250,000 shall be rendered against Newco, and the same shall remain 24 undischarged or unbonded for a period of thirty (30) consecutive days during which execution shall not be effectively stayed, or any judgment creditor shall levy upon assets or properties of Newco or any Subsidiary to enforce any such judgment; or (g) there shall have occurred a Change in Control with respect to Newco. 6.2 Definitions. As employed herein, the following terms shall have the following meanings: "Affiliate" shall mean, when used with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. A "Change in Control" shall be deemed to have occurred with respect to Newco or PPPIC, as the case may be, if (a) any Person or group (within the meaning of Rule 13d-5 of the Securities and Exchange Commission as in effect on the date hereof) shall own, directly or indirectly, beneficially or of record, shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of Newco; or (b) a change shall occur during any period in the Board of Directors of Newco in which the individuals who constituted the Board of Directors of Newco at the beginning of such period (together with any other director whose election by the Board of Directors of Newco or whose nomination for election by the stockholders of Newco was approved by a vote of at least two-thirds of the directors then in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors of Newco then in office. "Control", when used with respect to any specified Person, means the power to direct the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. The term "controlled" has a meaning correlative to the foregoing. "Person" shall mean any natural person, corporation, business trust, joint venture, association, company, partnership or government, or any agency or political subdivision thereof. "Subsidiary" of Newco shall mean WPHC, Park at Highlands or Red Canyon. 6.3 Remedies. 25 (a) Upon the occurrence of an Event of Default described in Section 6.1 hereof, ERP Operating Partnership shall have any and all remedies available to it at law, in equity or pursuant to statute. Nothing in this section shall entitle ERP Operating Partnership to disaffirm to any extent and in any manner its obligations under the Phase I Tri-Party Agreement or (if ERP Operating Partnership has previously executed and delivered the Phase II Tri-Party Agreement) the Phase II Tri-Party Agreement; provided, however, that ERP Operating Partnership shall have no obligation to enter into the Phase II Tri-Party Agreement if an Event of Default shall have occurred. (b) Upon the failure of ERP Operating Partnership to perform any of its obligations under this Agreement, Newco shall have any and all remedies available to it at law, in equity or pursuant to statute. ARTICLE 7 --------- TAX SHARING AGREEMENT --------------------- Notwithstanding anything to the contrary contained in this Agreement, Newco shall not cause or permit to occur any transactions or series of transactions as a result of which Newco will cease to own a controlling interest in WPHC or WPHC will cease to own a controlling interest in the Palomino Park LLCs without first causing ERP Operating Partnership to be fully released from the Credit Enhancement Agreement of even date herewith between ERP Operating Partnership and Newco (the "Credit Enhancement Agreement"), the "Initial ERP Operating Partnership Guaranty" (as such term is defined in the Credit Enhancement Agreement) and any "Alternate ERP Operating Partnership Guaranties" (as such term is defined in the Credit Enhancement Agreement). ARTICLE 8 --------- TAX SHARING AGREEMENT --------------------- Concurrently herewith, the parties hereto shall enter into a Tax Sharing Agreement in the form attached hereto as Exhibit A. 26 ARTICLE 9 --------- MISCELLANEOUS ------------- 9.1 Notices. Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed or sent by telecopy, as follows: (a) if to Newco, to it at _________________________________, Attention:________________________, Telecopy No. _____________, with a copy concurrently sent to: Brownstein Hyatt, Attn: Wayne Hykan, Esq.; and (b) if to ERP Operating Partnership, to it at _____________________________________, Attention: _____________________, Telecopy No. ______________. 9.2 Survival of Agreement. All covenants, agreements, representations and warranties made by Newco herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by ERP Operating Partnership and shall survive the date of this Agreement, regardless of any investigation made by ERP Operating Partnership or on its behalf, and shall continue in full force and effect so long as ERP Operating Partnership retains any obligations or liability under this Agreement, or any document or instrument entered into pursuant hereto. 9.3 Binding Effect. This Agreement shall become effective when it shall have been executed by Newco and ERP Operating Partnership, and thereafter shall be binding upon and inure to the benefit of Newco, ERP Operating Partnership and their respective successors and assigns, except that Newco shall not have the right to assign its rights hereunder or any interest herein without the prior consent of ERP Operating Partnership. 9.4 Applicable Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS. 9.5 Waivers; Amendment. (a) No failure or delay of Newco or ERP Operating Partnership in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of each party hereunder are cumulative and are not exclusive of any rights or remedies which they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by either 27 party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the other party in any case shall entitle the other party to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by Newco and ERP Operating Partnership. 9.6 Entire Agreement. This Agreement, including any exhibits and schedules hereto, constitutes the entire contract between the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement. Nothing in this Agreement, expressed or implied, is intended to confer upon any party other than the parties hereto and thereto any rights, remedies, obligations or liabilities under or by reason of this Agreement. 9.7 Waiver of Jury Trial. Each party hereto hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any litigation directly or indirectly arising out of, under or in connection with this Agreement. 9.8 Severability. In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 9.9 Headings. Article and Section headings used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. 9.10 Jurisdiction; Consent to Service of Process. (a) NEWCO HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF ANY ILLINOIS STATE COURT OR FEDERAL COURT OF THE UNITED STATES OF AMERICA SITTING IN THE CITY OF CHICAGO OR THE CITY OF NEW YORK, AND ANY APPELLATE COURT THEREFROM, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, 28 AND EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH ILLINOIS OR NEW YORK STATE COURT OR, TO THE EXTENT PERMITTED BY LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS AGREEMENT SHALL AFFECT ANY RIGHT THAT ANY PARTY MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT IN THE COURTS OF ANY JURISDICTION. (b) NEWCO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND EFFECTIVELY DO SO, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT IN ANY ILLINOIS OR NEW YORK STATE OR FEDERAL COURT. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT. IN WITNESS WHEREOF, ERP Operating Partnership and Newco have caused this Agreement to be signed by their respective officers hereunto duly authorized all as of the date first written above. ERP OPERATING LIMITED PARTNERSHIP BY: EQUITY RESIDENTIAL PROPERTIES TRUST, its general partner By:_________________________________ Name:_______________________________ 29 Title:______________________________ WELLSFORD REAL PROPERTIES, INC. By:_________________________________ Name:_______________________________ Title:______________________________ 30 EXHIBIT A --------- FORM OF TAX SHARING AGREEMENT ----------------------------- A-1 TAX SHARING AGREEMENT --------------------- THIS TAX SHARING AGREEMENT is made as of the ____ day of ________, 1997, by and between Wellsford Real Properties, Inc., a Maryland corporation ("Newco"), Wellsford Park Highlands Corp., a Colorado corporation ("Sub"), and ERP Operating Limited Partnership, an Illinois limited partnership ("ERP"). W I T N E S S E T H: ------------------- WHEREAS, Newco is the common parent corporation of an affiliated group of corporations (within the meaning of Section 1504(a) of the Internal Revenue Code of 1986, as amended), including Sub (the "Affiliated Group"); WHEREAS, ERP owns 100% of the outstanding nonvoting stock of Sub, and Newco owns 100% of the outstanding voting stock of Sub; WHEREAS, Newco, ERP and Sub have agreed that the Affiliated Group will file a consolidated federal income tax return for the taxable year ended December 31, 1997, and will continue filing such consolidated returns for all taxable periods thereafter unless otherwise required by law; and WHEREAS, it is the intent of the parties hereto that a method be established for allocating the consolidated "federal income tax liability" (as determined under Treasury Regulation Section 1.1502-2) of the Affiliated Group and any similar consolidated or unitary state income tax among the members of the Affiliated Group. NOW, THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter set forth, the parties agree as follows: 1. Definitions. For purposes of this Agreement, the terms set forth below shall be defined as follows: (a) "Affiliated Group" shall mean Newco, Sub and all corporations (whether now existing or hereafter formed or acquired) that at the time would be entitled to or required to join with Newco in filing a consolidated federal income tax return. (b) "Member" shall mean any corporation that is included in the Affiliated Group, whether for all or only a part of the taxable year in question. (c) "Group Tax Liability" means the consolidated federal income tax liability reported on the consolidated federal income tax return filed for the taxable year. (d) "Separate Tax Amount" means the federal income tax liability or refund, as the case may be, of each Member determined at the end of the taxable year, computed as if the Member was filing separate federal and state returns on an unconsolidated or nonunitary basis without regard to the income or loss of any other Member. 2. Consolidated Federal Income Tax Return. Newco and Sub agree to join in the filing of a consolidated federal income tax return with respect to the Affiliated Group for the taxable year ended December 31, 1997 and all subsequent taxable periods. Newco and Sub shall file such consents, elections and other documents as may be necessary or appropriate for the filing of such return. 3. Payment of Consolidated Federal Income Tax Liability. The Group Tax Liability for the taxable year beginning December 31, 1997 and all periods thereafter shall be paid, in full, by Newco. 4. Allocation of Consolidated Federal Income Tax Liability. In lieu of making tax payments, the Members shall make payments to and receive payments from Newco as follows: (a) Each Member whose Separate Tax Amount would have resulted in a Federal income tax liability shall pay to Newco its Separate Tax Amount no later than five (5) days before the Affiliated Group's consolidated federal income tax return is required to be filed (including any period for extension). (b) In the event that the Group Tax liability is reduced as a result of the carryforward of a net operating loss or capital loss or a credit attributable to a Member, Newco shall pay to such Member the amount, if any, by which the Group Tax Liability is decreased by reason of the inclusion of that Member in the Affiliated Group. Such payment shall be made on the date the Affiliated Group's consolidated federal income tax return is required to be filed (including any period for extension). Newco shall also pay each Member whose Separate Tax Amount would have resulted in a refund of federal income taxes previously paid the amount of such refund no later than five (5) days after receipt of the refund. 5. Estimated Federal Income Tax Payments. If the Affiliated Group is required to make estimated Federal income tax payments on a consolidated basis, each Member shall pay to Newco, not later than five (5) days before the date such estimated payment is required to be made by Newco, that percentage of the payment that equals the percentage which its allocated share of the Group Tax Liability for the preceding taxable year bears to the Group Tax Liability for that 2 year. Any estimated tax payments made by a Member to Newco under this Paragraph 5 for any taxable year shall be applied to reduce the amounts, if any, owing by the member under Paragraph 4(a) above for such year. Any excess of such estimated tax payments over the amounts determined under Paragraph 4(a) above for such year shall be repaid to the Member by Newco not later than the date that the Affiliated group's federal income tax return is filed. 6. Changes in Tax Liability. If (i) the Group Tax Liability is changed and either of such changes is part of a settlement agreement with the Internal Revenue Service or a final "determination" (as that term is defined in Section 1313(a) of the Code), or (ii) the Affiliated Group otherwise pays tax in excess of the Group Tax Liability, then the amount of the payments that each Member shall make to Newco under paragraph 4(a) or the amount of the payment required from Newco to the Member under paragraph 4(b), as the case may be, shall be recomputed by substituting in place of the Group Tax Liability and each Member's Separate Tax Amount the amount of the Group's recomputed tax liability ("Group's Recomputed Tax Liability") or the Member's recomputed tax liability ("Member's Recomputed Tax Liability") after making the adjustments described above. Not later than (i) five (5) days before the due date for any additional payment of tax by the Affiliated Group, or (ii) five (5) days after the receipt of a refund or (iii) five (5) days after the event giving rise to the recomputation if such event will not result in the payment of additional tax or the receipt of a refund, each Member shall pay to Newco, or Newco shall pay to the Member, as the case may be, the difference between the Member's Recomputed Tax Liability and the amount previously paid. 7. Termination of Affiliation. (a) The parties recognize that at some future date a Member may cease to be included in the Group, but continue to be a corporation subject to federal income tax ("Former Member"). In such event, Newco and Former Member shall consult and furnish each other with information required to prepare accurately the consolidated federal income tax return of the Group for the last taxable year in which the Former Member was included in the Group, and the federal income tax returns for all taxable years thereafter of the Former Member and the Newco, respectively, in which the tax liability of either may be affected by their former affiliation (including, for example, the apportionment of any consolidated net operating loss, capital loss, or investment or foreign tax credit carryover to the Former Member). In addition, the Former Member shall furnish Newco with information and assistance required to apply for and obtain the benefit of any carryback of a net operating loss, capital loss or any investment, foreign tax or other credit of the Former Member to a taxable year in which the Former Member was included in the Group and a consolidated federal income tax return was filed. (b) Newco and Former Member shall consult and furnish each other with information concerning the status of any tax audit or tax refund claim relating to a taxable 3 year in which the Former Member was included in the Group and a consolidated federal income tax return was filed. (c) Any payments which would have been required under paragraph 3, 4, 5 or 6 to or by a Former Member, if the Former Member were still a Member, and with respect to any taxable year in which the Former Member was a Member, shall be so made in accordance with principles analogous to those set forth in such paragraphs and at the times set forth therein. 8. State and Local Taxes. Newco and Sub agree that Newco shall cause the Group to file combined or consolidated income or franchise tax returns or reports in any state or local jurisdiction which permits such returns or reports. The provisions of Section 1 through 7 shall apply, with respect to income or franchise taxes imposed by any such jurisdiction. 9. Determinations. All determinations required hereunder for each taxable year shall be made by the independent public accountants regularly employed by the Affiliated Group at the time the return is filed for such year. If any dispute, controversy or claim between the parties hereto arises, then the dispute shall be settled by arbitration at a mutually acceptable location in Chicago, Illinois in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. The award of the arbitrator shall be binding upon the parties and each party hereby consents to the entry of judgment by any court of competent jurisdiction in accordance with the decision of the arbitrator. The arbitrator shall be a certified public accountant. Such determination shall be binding and conclusive upon the parties for the purposes hereof. 10. New Members. If sufficient stock of any corporation is acquired hereafter by Newco or any Member so that the acquired corporation becomes a Member of the Group ("New Member"), Newco shall cause the New Member to execute and deliver Form 1122, Authorization and Consent of Subsidiary Corporation to be Included in a Consolidated Income Tax Return, and to make any payments required under paragraph 3, 4, 5 or 6. 11. Miscellaneous Provisions. (a) This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter contained herein. No alteration, amendment or modification of any of the terms of this Agreement shall be valid unless made by an instrument signed in writing by an authorized officer of each party hereto. (b) This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. 4 (c) This Agreement shall be binding upon and inure to the benefit of each party hereto and its respective successors and assigns. (d) All notices and other communications required or permitted to be given if delivered in person or by United States mail, certified or registered, with postage prepaid, to the party at the following addresses: Wellsford Real Properties, Inc. 610 Fifth Avenue, 7th Floor New York, New York 10020 Wellsford Park Highland Corp. c/o Wellsford Real Properties, Inc. 610 Fifth Avenue, 7th Floor New York, New York 10020 ERP Operating Limited Partnership Two North Riverside Plaza, Suite 400 Chicago, Illinois 60606 or such other address as the parties may furnish to each other from time to time in writing. (e) Paragraphs, titles or captions contained in this Agreement have been included only for reference and convenience and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof. Whenever the context so requires, the singular tense shall be deemed to include the plural, the masculine gender shall be deemed to include the feminine and neuter, and vice versa. (f) In the event that any provision of this Agreement shall be held invalid or unenforceable, the remainder of this Agreement, or the application of such provision in circumstances other than those as to which it is held invalid or unenforceable, shall remain in full force and effect. (g) This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 5 12. Termination. This agreement shall apply to the taxable year ending December 31, 1997, and all subsequent years unless the parties hereto agree, in writing, to terminate this Agreement. 6 IN WITNESS WHEREOF, the parties have executed this agreement with shareholder approval on the dates stated below their signatures. WELLSFORD REAL PROPERTIES, INC. By: --------------------------------- Its President Attest: By: --------------------------------- Its Secretary WELLSFORD PARK HIGHLAND CORP., a Colorado corporation By: --------------------------------- Its President Attest: By: --------------------------------- Its Secretary ERP OPERATING LIMITED PARTNERSHIP, an Illinois limited partnership By: Equity Residential Properties Trust, a Maryland real estate investment trust By: --------------------------------- Its --------------------------- Attest: By: --------------------------------- Its Secretary 7 SCHEDULE I ---------- PRELIMINARY PLANS ----------------- [ARCHITECTUAL FLOOR PLANS] Schedule I-1 EXHIBIT E ================================================================================ Credit Enhancement Agreement between ERP OPERATING LIMITED PARTNERSHIP and WELLSFORD REAL PROPERTIES, INC. Dated as of ________________________, 1997 ================================================================================ CREDIT ENHANCEMENT AGREEMENT ---------------------------- THIS CREDIT ENHANCEMENT AGREEMENT (this "Agreement") is made and entered into as of _____________, 1997 by and between ERP OPERATING LIMITED PARTNERSHIP, an Illinois limited partnership ("ERP Operating Partnership"), and WELLSFORD REAL PROPERTIES, INC., a Maryland corporation ("Newco"). A. Pursuant to a certain Trust Indenture dated as of December 1, 1995 (the "Indenture"), between Palomino Park Public Improvements Corporation, a Colorado nonprofit corporation ("PPPIC"), and United States Trust Company of New York, as trustee (the "Trustee"), PPPIC has issued, sold and delivered its Assessment Lien Revenue Bonds, Series 1995 (the "Bonds"), in the aggregate principal amount of Fourteen Million Seven Hundred Fifty-Five Thousand and 00/100 Dollars ($14,755,000.00). The Bonds are payable as to principal and interest in the manner provided in the Indenture. Proceeds of the Bonds are intended to be applied for the purpose of financing certain public facilities located within Highlands Ranch Metropolitan District No. 2, Douglas County, Colorado, a quasi- municipal corporation organized under the laws of the State of Colorado. The Indenture, and the other documents and instruments to which PPPIC is a party, evidencing or securing PPPIC's obligations in connection with the Bonds (with the exception of the "Letter of Credit Documents" described below) are referred to herein collectively as the "Bond Documents." All capitalized terms not otherwise defined herein shall have the meanings set forth in the Indenture. B. Pursuant to the Indenture, PPPIC is required to furnish a Letter of Credit or Alternate Credit Facility satisfying the conditions set forth in the Indenture, to secure the payment of Bonds that are in the Weekly Mode or the Term Mode, but not Bonds that are in the Fixed Mode. Pursuant to the terms of a Letter of Credit Reimbursement Agreement dated as of December 1, 1995 (said agreement, as the same may be modified pursuant to Section 3.1(h) hereof, the "Bank Reimbursement Agreement") by and among PPPIC, Wellsford Residential Property Trust, a Maryland real estate investment trust ("Wellsford Parent"), and Dresdner Bank, AG, New York Branch (the "Bank"), the Bank has issued to the Trustee, acting on behalf of the holders of the Bonds, a certain letter of credit (the "Dresdner L.C.") in the face principal amount of $15,773,702, for the purpose of securing the payment of the Bonds. All documents entered into by PPPIC or Wellsford Parent pursuant to the Bank Reimbursement Agreement are referred to herein collectively as the "Letter of Credit Documents." C. PPPIC and Wellsford Parent have entered into a Reimbursement Agreement dated as of December 1, 1995 (the "Wellsford Parent Reimbursement Agreement") pursuant to which PPPIC has undertaken certain obligations and provided certain security for the benefit of Wellsford Parent in consideration of Wellsford Parent's obligations under the Bank Reimbursement Agreement. Among other things, pursuant to the Wellsford Parent Reimbursement Agreement, PPPIC agreed that PPPIC would not convert the Rate Mode of the Bonds without the express written consent of Wellsford Parent and would, at the request of Wellsford Parent, convert the Rate Mode of the Bonds. PPPIC has executed and delivered to Wellsford Parent a certain Palomino Park Promissory Note dated December 20, 1995 (the "PPPIC Note to Wellsford Parent"), evidencing PPPIC's payment obligations to Wellsford Parent pursuant to the Wellsford Parent Reimbursement Agreement. D. Newco has been formed as a wholly-owned subsidiary of Wellsford Parent pursuant to the Contribution Agreement ("Contribution Agreement") referred to in that certain Agreement and Plan of Merger dated as of January __, 1997 (the "Merger Agreement") by and between Equity Residential Properties Trust, a Maryland real estate investment trust that is the general partner of ERP Operating Partnership ("EQR"), and Wellsford Parent. Pursuant to the Contribution Agreement, Wellsford Parent has assigned to Newco and Newco has assumed, or is assuming concurrently herewith, Wellsford Parent's rights and obligations under the Bank Reimbursement Agreement, the Letter of Credit Documents, the Wellsford Parent Reimbursement Agreement and the PPPIC Note to Wellsford Parent. E. ERP Operating Partnership and Newco are entering into this Agreement pursuant to the Merger Agreement. NOW, THEREFORE, in consideration of the premises, and the mutual representations, warranties, covenants and agreements contained herein, the parties hereto hereby agree as follows: ARTICLE 1 --------- CREDIT ENHANCEMENT ------------------ 1.1 (a) Upon and subject to the satisfaction of the conditions precedent set forth in Article 3 hereof, ERP Operating Partnership shall execute and deliver to the Bank a guaranty (the "Initial ERP Operating Partnership Guaranty") pursuant to which ERP Operating Partnership shall guarantee to the Bank the payment by Newco of any and all "Overdue Reimbursement Amounts" (as such term is hereinafter defined). As employed herein, the term "Overdue Reimbursement Amounts" shall mean any and all sums due and owing from time to time by Newco to the Bank pursuant to the Bank Reimbursement Agreement that are not paid to the Bank by Newco when due (after the expiration of any cure periods under the Bank Reimbursement Agreement) pursuant to the Bank Reimbursement Agreement. The Initial ERP Operating Partnership Guaranty: (i) shall not require security for ERP Operating Partnership's obligations pursuant to the Initial ERP Operating Partnership Guaranty; 2 (ii) shall obligate ERP Operating Partnership to pay all Overdue Reimbursement Amounts to the Bank upon demand or, if the Bank shall agree, in its sole and absolute discretion, then within a period of up to three (3) business days following the making of a written demand upon ERP Operating Partnership by the Bank and shall provide that the payment by ERP Operating Partnership to the Bank within said period of time shall, at ERP Operating Partnership's election, constitute a cure with respect to Newco's obligations to the Bank under the Bank Reimbursement Agreement; (iii) shall not impose upon ERP Operating Partnership any financial covenants (collectively, "financial covenants") consisting of net worth requirements, financial tests, financial reporting requirements (other than customary quarterly and annual statements) or covenants generally recognized as financial covenants with respect to ERP Operating Partnership, or any other covenants regarding the nature or manner of operation of ERP Operating Partnership's businesses; provided, however, that the Initial ERP Operating Partnership Guaranty may be cross- defaulted to such corporate-level financial covenants, if any, as ERP Operating Partnership may be subject to from time to time under any of ERP Operating Partnership's corporate-level unsecured debt instruments, to the extent that the enforcement of said covenants is not waived or released by the financial institutions in whose favor said covenants primarily run (upon request from the Bank, ERP Operating Partnership shall furnish the Bank with evidence satisfactory to the Bank of such financial covenants to which ERP Operating Partnership may from time to time be subject); (iv) shall not contain a waiver of any rights of subrogation that ERP Operating Partnership may otherwise have by reason of making payment to the Bank under the Initial ERP Operating Partnership Guaranty, shall grant ERP Operating Partnership full rights of subrogation with respect thereto upon the payment in full to the Bank by ERP Operating Partnership of Newco's obligations under the Letter of Credit Documents, and shall contain the Bank's agreement to assign to ERP Operating Partnership (without warranty, representation or recourse, and without releasing Newco from any obligations or defaults thereunder) the Bank's rights and remedies under the Letter of Credit Documents following the 3 payment in full by ERP Operating Partnership of Newco's obligations under the Letter of Credit Documents; (v) shall provide for an absolute and unconditional guaranty of payment by ERP Operating Partnership containing such terms and conditions as are usual and customary for the Bank to impose in transactions of the type herein contemplated with third party guarantors of comparable net worth which are unaffiliated with the party whose obligations they are guaranteeing, which guaranty may include an express statement to the effect of any one or more of the following: ERP Operating Partnership shall not be released by any bankruptcy (voluntary or involuntary) of any obligor with respect to the Letter of Credit Documents, any fact, matter or circumstance, whether or not denominated in the Letter of Credit Documents; and that ERP Operating Partnership shall expressly waive or be deemed to have waived any suretyship defenses; and may permit the Bank to seek sole and immediate enforcement of the Initial ERP Operating Partnership Guaranty without first proceeding against Newco, PPPIC or any obligor or collateral; provided, however, that the Initial ERP Operating Partnership Guaranty shall provide that ERP Operating Partnership shall be released fully and absolutely from liability under the Initial ERP Operating Partnership Guaranty in the event that the Bank Reimbursement Agreement or the other Letter of Credit Documents or any of Newco's obligations in connection therewith shall be modified without the prior written consent of ERP Operating Partnership, which shall not be unreasonably withheld, provided that such modification shall not increase the amount of the Letter of Credit or otherwise increase ERP Operating Partnership's obligations under the Initial ERP Operating Partnership Guaranty, increase the likelihood that ERP Operating Partnership will be required to make a payment pursuant to the Initial ERP Operating Partnership Guaranty, or diminish the remedies or collateral to which ERP Operating Partnership will become subrogated upon payment as contemplated under Section 1.1(a)(iv) hereinabove; and (vi) shall provide that the term of the Initial ERP Operating Partnership Guaranty or any Alternate Credit Facility shall not extend beyond the eighth (8th) anniversary of the date of this Agreement (the "Expiration Date") or, if the term of the Initial ERP Operating Partnership Guaranty or any Alternate Credit Facility shall extend beyond the Expiration Date, then such guaranty document shall 4 make it clear that the guaranty afforded under this Agreement shall expire on the Expiration Date. (b) The form of the Initial ERP Operating Partnership Guaranty shall be subject to ERP Operating Partnership's review and approval, which shall not be unreasonably withheld or delayed if the terms and conditions thereof conform to the parameters set forth in Section 1.1(a) hereof. 1.2 For so long as a Letter of Credit or Alternate Credit Facility is required to be furnished to the Trustee pursuant to the terms of the Indenture, Newco shall cause PPPIC to do so and, in particular, shall cause PPPIC to furnish to the Trustee a Letter of Credit or Alternate Credit Facility in accordance with Section 5.15(b) of the Indenture prior to the expiration of any then-existing Letter of Credit so as to cause the Trustee to surrender for cancellation the previously held Letter of Credit to the issuer thereof, not less than thirty (30) days prior to the expiry of said existing Letter of Credit. 1.3 In connection with any Alternate Letter of Credit or Alternate Credit Facility that may be furnished to the Trustee from time to time pursuant to the Indenture, ERP Operating Partnership acknowledges that PPPIC or Newco may desire or be required to undertake certain obligations or provide certain financial accommodations (collectively the "Alternate Reimbursement Obligations") to the issuer of said Alternate Letter of Credit or Alternate Credit Facility. The documents evidencing or securing Newco's Alternate Reimbursement Obligations are referred to herein collectively as the "Alternate Reimbursement Documents". The parties acknowledge that the issuer of the Alternate Letter of Credit or the Alternate Credit Facility may be one or more institutions, selected by Newco, meeting the requirements of the Indenture. If Newco undertakes any Alternate Reimbursement Obligations, then ERP Operating Partnership shall enter into a guaranty of the payment of Newco's Alternate Reimbursement Obligations by executing and delivering to the issuer of said Alternate Letter of Credit or Alternate Credit Facility a guaranty in favor of said issuer (the "Alternate ERP Operating Partnership Guaranty"), upon and subject to the satisfaction of the conditions precedent set forth in Sections 3.1(d), 3.1(f), 3.1(i), 3.1(k) and 3.2 hereof, and subject also to the satisfaction of the following additional conditions precedent: (a) The terms and conditions of said Alternate Letter of Credit or Alternate Credit Facility shall be subject to ERP Operating Partnership's review and approval in ERP Operating Partnership's sole and absolute discretion; provided, however, that ERP Operating Partnership shall not unreasonably withhold or delay its approval with respect thereto if the terms and conditions thereof shall not be materially less favorable to Newco than the terms and conditions of the Letter of Credit Documents, as the same have been modified pursuant to this Agreement, and are otherwise commercially reasonable in the circumstances; 5 (b) The terms and conditions of the Alternate ERP Operating Partnership Guaranty shall be subject to ERP Operating Partnership's review and approval in ERP Operating Partnership's sole and absolute discretion; provided, however, that ERP Operating Partnership shall not unreasonably withhold or delay its approval with respect thereto if the scope and nature thereof is limited in substantially the same manner as the Initial ERP Operating Partnership Guaranty and if the Alternate ERP Operating Partnership Guaranty is not otherwise on terms materially less favorable than the Initial ERP Operating Partnership Guaranty; (c) The Initial ERP Operating Partnership Guaranty (or, as the case may be, any pre-existing Alternate ERP Operating Partnership Guaranty) shall be returned to ERP Operating Partnership, and ERP Operating Partnership shall be released fully and absolutely from all liability thereunder, prior to or concurrently with the execution and delivery of the Alternate ERP Operating Partnership Guaranty; (d) The Alternate Letter of Credit or Alternate Credit Facility shall satisfy the requirements of the Indenture; and (e) Newco and PPPIC shall have executed and delivered documents relating to the Alternate Credit Facility or Alternate Letter of Credit, as the case may be, which are in substantially the same form as the Wellsford Parent Reimbursement Agreement and the PPPIC Note to Wellsford Parent, respectively, and PPPIC and Newco shall have executed and delivered to ERP Operating Partnership an instrument or agreement with respect thereto in substantially the same form as the Collateral Assignment and Consent described in Section 4.6 hereof. 1.4 Newco shall furnish drafts of all Alternate Reimbursement Documents to ERP Operating Partnership not less than sixty (60) days prior to the date on which any Alternate Letter of Credit or Alternate Credit Facility is required or proposed to be furnished to the Trustee. If ERP Operating Partnership is not satisfied with the terms of the proposed Alternate Reimbursement Documents for any reason whatsoever, or if ERP Operating Partnership, in its sole discretion, shall otherwise prefer to do so, ERP Operating Partnership may itself arrange for an Alternate Letter of Credit or Alternate Credit Facility in lieu of the one proposed by Newco or PPPIC; provided, however, that if the terms of the proposed documents are such that ERP Operating Partnership would otherwise be obligated to execute and deliver an Alternate ERP Operating Partnership Guaranty pursuant to Section 1.3 of this Agreement in connection with an Alternate Letter of Credit or Alternate Credit Facility proposed by Newco or PPPIC, and ERP Operating Partnership nevertheless desires not to do so, then (i) ERP Operating Partnership shall be obligated to arrange for an Alternate Letter of Credit or Alternate Credit Facility in lieu of the one proposed by Newco or PPPIC, and (ii) under such circumstances, ERP Operating Partnership shall bear all costs and expenses arising in connection with such Alternate Letter of Credit or 6 Alternate Credit Facility including, without limitation, any fees, costs, attorneys' fees or charges imposed or incurred by the Bank, the Trustee, or the Rating Service (as defined in _______________). If ERP Operating Partnership arranges for such an Alternate Letter of Credit or Alternate Credit Facility, then Newco covenants and agrees that PPPIC and Newco shall be the parties primarily liable on a joint and several basis with respect to the Alternate Reimbursement Documents arranged by ERP Operating Partnership, and ERP Operating Partnership agrees, subject to the satisfaction of the conditions set forth in this Agreement, to execute and deliver an Alternate ERP Operating Partnership Guaranty with respect to Newco's payment obligations under said Alternate Reimbursement Documents. Any Alternate Reimbursement Documents proposed by ERP Operating Partnership shall be on terms that are not materially less favorable to Newco or PPPIC than the Alternate Reimbursement Documents proposed by Newco or PPPIC. 1.5 ERP Operating Partnership shall have no liability to Newco or any other party to maintain any given rating with respect to the Bonds, it being acknowledged and agreed that (i) ERP Operating Partnership has no obligation whatsoever to PPPIC, the Trustee, the holders of the Bonds or any party paying assessments to PPPIC, and (ii) ERP Operating Partnership's sole obligation in connection with the Bonds is to provide certain financial accommodations to the issuer of a Letter of Credit or Alternate Credit Facility, as the case may be, solely in accordance with the terms of this Agreement. 1.6 For informational purposes, from time to time upon reasonable prior notice, ERP Operating Partnership shall cooperate reasonably in furnishing information concerning itself to the Bank or the issuer of any Alternate Letter of Credit or Alternate Credit Facility whether prior or subsequent to entering into the Initial ERP Operating Partnership Guaranty or any Alternate ERP Operating Partnership Guaranty, as the case may be. 1.7 Newco shall have the right at any time prior to the Expiration Date to obtain a full release of the Initial ERP Operating Partnership Guaranty or the Alternate ERP Operating Partnership Guaranty, as the case may be, and terminate this Agreement. ARTICLE 2 --------- FEES AND EXPENSES ----------------- 2.1 With respect to each period (each, an "Annual Period") commencing on the date hereof or on any anniversary of the date hereof and ending on the immediately preceding day of the same month in the next calendar year, Newco shall pay to ERP Operating Partnership a fee (the "Credit Enhancement Fee"), in an amount equal to one-half of one percent (0.5%) of the face amount of any Letter of Credit (or the maximum principal amount of any Alternate Credit Facility) in existence on the first day of said Annual Period. The Credit Enhancement Fee for any given Annual Period shall be payable quarterly in advance (in equal fourths of the Credit Enhancement 7 Fee for the entire Annual Period in which said quarter falls) on the first day of each quarter of said Annual Period, shall be earned in full for said quarter as of the first day of said quarter and shall not be refundable for any reason whatsoever, including, without limitation, the occurrence of any of the following prior to the end of the said quarter: (i) the repayment in full of the Bonds; (ii) the termination or expiration of this Agreement; (iii) the release of the Initial ERP Operating Partnership Guaranty or any Alternate ERP Operating Partnership Guaranty; or (iv) the conversion of the Bonds to the Fixed Mode. With respect to each Annual Period, a "quarter" shall be any of the four periods commencing on the first day of said Annual Period or on the dates that are three, six or nine months thereafter, respectively, and ending on the day prior to the commencement of the next quarter. 2.2 Newco shall be solely responsible for paying (i) all costs, fees, charges, penalties and other expenses charged by the Bank or the issuer of any Alternate Letter of Credit or Alternate Credit Facility, and (ii) to the extent the same are reasonable in the circumstances, all costs, fees and expenses, including without limitation attorneys' fees and expenses, incurred by ERP Operating Partnership in connection with the Letter of Credit, any Alternate Letter of Credit or Alternate Credit Facility, the Initial ERP Operating Partnership Guaranty or any Alternate ERP Operating Partnership Guaranty. ARTICLE 3 --------- CONDITIONS PRECEDENT -------------------- 3.1 As conditions precedent to ERP Operating Partnership's obligations pursuant to Article 1 of this Agreement, Newco shall furnish to ERP Operating Partnership: (a) evidence, satisfactory to ERP Operating Partnership in the exercise of ERP Operating Partnership's commercially reasonable judgment, of the consent of PPPIC, the Bank, the Trustee and all other parties having a right of consent in connection with the Bonds or the Letter of Credit with respect to the assumption by Newco of Wellsford Parent's obligations pursuant to the Bank Reimbursement Agreement and the Letter of Credit Documents, and the release of Wellsford Parent therefrom. (b) an instrument in form and substance satisfactory to ERP Operating Partnership in the exercise of ERP Operating Partnership's commercially reasonable judgment, executed by the Bank, releasing ERP Operating Partnership and Wellsford Parent from any and all obligations in connection with the Bank Reimbursement Agreement and the Letter of Credit Documents, other than those obligations expressly undertaken by ERP Operating Partnership pursuant to the Initial ERP Operating Partnership Guaranty. 8 (c) an instrument, in form and substance satisfactory to ERP Operating Partnership in the exercise of ERP Operating Partnership's commercially reasonable judgment, releasing ERP Operating Partnership and Wellsford Parent from any and all obligations under (i) that certain Second Amended and Restated Revolving Credit Agreement date as of June 30, 1995, as amended, with the First National Bank of Boston and the other parties listed therein, and (ii) that certain Intercreditor Agreement dated as of June 30, 1995, as amended, by and among said parties (collectively, the documents described in this Section 3.1(c) are referred to herein as the "Bank of Boston Documents"); (d) a current certificate from the Trustee that, to the knowledge of Trustee, there has not occurred and shall not be continuing any default or event of default beyond any applicable grace period under the Indenture or the Bond Documents; (e) a current certificate, in form and substance satisfactory to ERP Operating Partnership in the exercise of ERP Operating Partnership's commercially reasonable judgment, executed by an officer of the Bank, to the effect that, to the knowledge of the Bank, there is no continuing default or event of default beyond any applicable grace period under the Bank Reimbursement Agreement or the Letter of Credit Documents; (f) a certificate, in form and substance satisfactory to ERP Operating Partnership, executed by an officer or director of PPPIC, to the effect that the Bond Documents shall not have been modified in any respect, from the forms submitted to ERP Operating Partnership prior to the execution of the Merger Agreement, without ERP Operating Partnership's written consent, which shall not be unreasonably withheld; (g) a certificate, in form and substance satisfactory to ERP Operating Partnership, executed by an officer or director of PPPIC, to the effect that the Letter of Credit Documents have not been modified in any respect from the forms submitted to ERP Operating Partnership prior to the execution of the Merger Agreement, without ERP Operating Partnership's written consent (which shall not be unreasonably withheld), except as provided in Section 3.1(h) hereinbelow; (h) the Bank Reimbursement Agreement and the Letter of Credit Documents shall have been amended so that (x) all covenants relating to the financial status and operations and personnel of Wellsford Parent have either been deleted or have been modified so as to reflect the status and business operations of Newco, as Wellsford Parent's assignee thereunder, (y) all references to the Bank of Boston Documents (including cross- defaults thereto and all references to any line or lines of credit available to Wellsford Parent pursuant thereto) shall have been deleted, and (z) such other provisions as Newco and the Bank may agree upon shall have been modified without the prior written consent of ERP Operating Partnership, which shall not be unreasonably withheld; provided 9 that no such modification shall alter the basic business terms and procedures set forth in Articles 1, 2, 6.15, 6.19, 6.20, 6.21, 7.2, 8 and 9 of the Bank Reimbursement Agreement, relieve Newco and PPPIC of their obligations as the sole "Account Parties" (as such term is defined in the Bank Reimbursement Agreement) or increase the amount of the Letter of Credit or otherwise increase ERP Operating Partnership's obligations under the Initial ERP Operating Partnership Guaranty, increase the likelihood that ERP Operating Partnership will be required to make a payment pursuant to the Initial ERP Operating Partnership Guaranty, or diminish the remedies or collateral to which ERP Operating Partnership will become subrogated upon payment as contemplated under Section 1.1(a)(iv) hereinabove; (i) a Reimbursement and Indemnification Agreement, executed by Newco, described in Section 4.3 hereof; (j) the acknowledgement and agreement of PPPIC described in Section 5.1(b) hereof, the irrevocable power of attorney from PPPIC described in Section 5.1(c) hereof, and the Trustee's consent and acknowledgement described in Section 5.1(c) hereof; (k) the covenant and agreement of PPPIC described in Section 4.5 hereof; (l) evidence, satisfactory to ERP Operating Partnership in the exercise of ERP Operating Partnership's commercially reasonable judgment, of the consent of PPPIC with respect to the assumption by Newco of Wellsford Parent's rights and obligations under the Wellsford Parent Reimbursement Agreement and the release of Wellsford Parent therefrom and the assignment to Newco of the PPPIC Note to Wellsford Parent; (m) the Collateral Assignment and Consent described in Section 4.6 hereof; and (n) evidence, satisfactory to ERP Operating Partnership in the exercise of ERP Operating Partnership's commercially reasonable judgment, that Newco was formed, established and capitalized in accordance with the terms of the Contribution Agreement. 3.2 It shall be a condition precedent to ERP Operating Partnership's obligations pursuant to Article 1 of this Agreement that no Event of Default beyond all applicable cure periods shall have occurred under this Agreement. 3.3 The consummation of the transactions contemplated under the Merger Agreement shall be a condition precedent to ERP Operating Partnership's obligations pursuant to Article 1 of this Agreement. 3.4 Newco shall use its best efforts to ensure that all conditions precedent to ERP Operating Partnership's obligations pursuant to Article 1 of this Agreement shall be satisfied as 10 of the date of the consummation of the transactions contemplated by the Merger Agreement. In the event that Newco is unable to satisfy any condition precedent to ERP Operating Partnership's obligations pursuant to Article 1 of this Agreement by the date of the consummation of the transactions contemplated by the Merger Agreement, after the exercise of its best efforts to satisfy such condition, ERP Operating Partnership shall have the right, in its sole and absolute discretion, (i) to satisfy such condition precedent, at its cost and expense, or (ii) to waive compliance with any such condition precedent. ARTICLE 4 --------- OTHER OBLIGATIONS OF NEWCO -------------------------- 4.1 On the same day, if any, as ERP Operating Partnership is required to make any payment from time to time under the Initial ERP Operating Partnership Guaranty or any Alternate ERP Operating Partnership Guaranty, Newco shall repay said amounts to ERP Operating Partnership in full. All amounts required to be reimbursed to ERP Operating Partnership pursuant to the foregoing sentence shall be interest at the rate of the "Prime Rate" (as such term is hereinafter defined) plus three percent (3%) per annum until paid in full, which interest shall be due and payable to ERP Operating Partnership on demand. Said interest shall be in the nature of default rate interest and the payment of said interest shall not excuse Newco from the obligation of repaying the amounts due and payable to ERP Operating Partnership pursuant to the first sentence of this Section 4.1 when said amounts are due pursuant to said sentence. As employed herein, the term "Prime Rate" shall mean, from time to time, the rate of interest per annum then most recently announced by The First National Bank of Chicago in Chicago, Illinois as its corporate base rate. If The First National Bank of Chicago shall not announce such a rate, then the term "Prime Rate" shall mean the prime rate or base rate from time to time announced by an American money center bank designated by ERP Operating Partnership. 4.2 (a) Newco shall indemnify and hold harmless ERP Operating Partnership, its general and limited partners, and the officers, directors, trustees, agents and employees of any of the foregoing (each, a "ERP Operating Partnership Indemnified Party") from and against any and all claims, demands, damages, losses, liabilities, and costs or expenses whatsoever (including reasonable attorneys' fees) which the ERP Operating Partnership Indemnified Party may incur (or which may be claimed against the ERP Operating Partnership Indemnified Party by any person or entity whatsoever) by reason of or in connection with the execution, delivery and performance of this Agreement, the Initial ERP Operating Partnership Guaranty or any Alternate ERP Operating Partnership Guaranty, except to the extent of claims, demands, damages, losses, liabilities and costs and expenses arising by reason of ERP Operating Partnership's breach of its obligations under this Agreement or by reason of the gross negligence or willful misconduct of the Indemnified Party. 11 (b) ERP Operating Partnership shall indemnify and hold harmless Newco and its officers, directors, agents and employees (each, a "Newco Indemnified Party") from and against any and all claims, demands, damages, losses, liabilities, and costs or expenses whatsoever (including reasonable attorneys' fees) to the extent they arise from ERP Operating Partnership's breach of its obligations under this Agreement or by reason of the gross negligence or willful misconduct of ERP Operating Partnership. 4.3 The rights and obligations of ERP Operating Partnership and Newco with respect to the matters set forth in Sections 4.1 and 4.2 shall be set forth in a Reimbursement and Indemnification Agreement to be prepared by ERP Operating Partnership and to be entered into concurrently with the execution and delivery of the Initial ERP Operating Partnership Guaranty and any Alternate ERP Operating Partnership Guaranty, which shall be in form and substance satisfactory to ERP Operating Partnership in the exercise of its commercially reasonable judgment. 4.4 Newco covenants and agrees to comply in all material respects, and to cause PPPIC to comply in all material respects, with all terms and conditions of (i) the Indenture and the other Bond Documents, (ii) the Bank Reimbursement Agreement and the other Letter of Credit Documents, and (iii) any Alternate Reimbursement Documents. 4.5 Newco shall cause PPPIC to covenant and agree (i) to furnish ERP Operating Partnership concurrently with copies of all documentation furnished to the Trustee or its agents by PPPIC in connection with the draw-down of any Bond proceeds to fund the construction of the Public Improvements or other expenses and (ii) except as may be required by or in order to comply with existing law, that the Public Improvements that are constructed from time to time shall be only those Public Improvements reasonably required from time to time to service the improvements existing or under development on the Property. 4.6 As security for Newco's obligations under this Agreement, Newco shall collaterally assign to ERP Operating Partnership all of Newco's rights, title and interest under the Wellsford Parent Reimbursement Agreement, and shall pledge to ERP Operating Partnership the PPPIC Note to Wellsford Parent. Said collateral assignment and pledge shall be evidenced by an instrument (the "Collateral Assignment") in form and substance satisfactory to ERP Operating Partnership in the exercise of its commercially reasonable judgment. The Collateral Assignment shall include a provision pursuant to which Newco agrees: (i) not to consent to any modification of the Bank Reimbursement Agreement, the Indenture, or any documents executed by PPPIC in connection therewith which would have the effect of increasing the amount of the Letter of Credit or otherwise increasing ERP Operating Partnership's obligations under the Initial ERP Operating Partnership Guaranty, increasing the likelihood that ERP Operating Partnership will be required to make a payment pursuant to the Initial ERP Operating Partnership Guaranty, or diminishing the remedies or collateral to which ERP Operating Partnership will become subrogated upon payment as contemplated under Section 1.1(a)(iv) hereinabove; (ii) not to consent to the exercise by PPPIC 12 of any rights of optional redemption under the Indenture without the prior written consent of ERP Operating Partnership, which consent shall not be unreasonably withheld; (iii) not to direct or consent to any conversion of the Rate Mode of the Bonds that is inconsistent with ERP Operating Partnership's rights under Section 5.1 of this Agreement; and (iv) that all rights of consent, and all rights to direct the actions of PPPIC which Newco has pursuant to the Wellsford Parent Reimbursement Agreement, shall be exercisable solely by ERP Operating Partnership solely upon the occurrence of an Event of Default described in Sections __ and __. Newco shall cause PPPIC to execute a consent and acknowledgment (the "Consent"), pursuant to which PPPIC consents to the Collateral Assignment and agrees that all rights of consent, and all rights to direct the actions of PPPIC, which Newco has pursuant to the Wellsford Parent Reimbursement Agreement, shall be exercisable solely by ERP Operating Partnership solely upon the occurrence of an Event of Default described in Sections __ and __ unless and until written notice of the release of said right is received from ERP Operating Partnership. ARTICLE 5 --------- RATE MODE OF BONDS; EXPIRATION OF ERP OPERATING PARTNERSHIP'S OBLIGATIONS ----------------------------------------------------- 5.1 Newco acknowledges that, pursuant to the Collateral Assignment and the Consent, ERP Operating Partnership shall have the exclusive right, subject to the rights of the Bank under the Bank Reimbursement Agreement, upon and following the occurrence of an Event of Default beyond all applicable cure periods or at any time after the Expiration Date (provided that ERP Operating Partnership shall not have previously been released from all of its obligations under the Initial ERP Operating Partnership Guaranty by the Alternate ERP Operating Partnership Guaranty, as the case may be), to direct PPPIC with respect to establishing the Rate Modes from time to time of the Bonds. ERP Operating Partnership hereby agrees to permit the Bonds to remain in the Weekly Mode; provided that, at any time on or after the Expiration Date (provided that ERP Operating Partnership shall not have previously been released from all of its obligations under the Initial ERP Operating Partnership Guaranty or the Alternate ERP Operating Partnership Guaranty, as the case may be) or at any time after the occurrence of an Event of Default under this Agreement beyond all applicable cure periods, ERP Operating Partnership shall have the right to direct PPPIC to exercise its option (the "Rate Conversion Option"), at the earliest possible time thereafter pursuant to the Indenture, to convert all the Bonds to the Fixed Mode. ERP Operating Partnership shall not cause the Bonds to be converted to the Term Mode without the approval of Newco and ERP Operating Partnership shall have no obligation at any time to cause or permit a conversion of the Bonds to a Term Mode with a duration of longer than two hundred and ten (210) days or which ends after the Expiration Date or the expiration date or maturity date of the Letter of Credit, any Alternate Letter of Credit or any Alternate Credit Facility. 13 5.2 On and as of the Expiration Date, Newco shall cause ERP Operating Partnership to be released from the Initial ERP Operating Partnership Guaranty and any Alternate ERP Operating Partnership Guaranty then in effect as of the Expiration Date, and ERP Operating Partnership shall have no further obligations pursuant to this Agreement from and after the Expiration Date. ARTICLE 6 --------- REPRESENTATIONS AND WARRANTIES ------------------------------ 6.1 Representations and Warranties of Newco. Newco hereby represents and warrants to ERP Operating Partnership as follows: (a) Newco (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (ii) has all requisite corporate power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted by Newco, (iii) is qualified to do business in every jurisdiction where such qualification is required, except where the failure so to qualify would not result in a "Material Adverse Effect on Newco" (as such term is hereinafter defined), and (iv) has the corporate power and authority to execute, deliver and perform its obligations under this Agreement. As employed herein, the term "Material Adverse Effect on Newco" shall mean (i) a materially adverse effect on the financial condition of Newco, or (ii) material impairment of the ability of Newco to pay any amount due, or to perform any other material obligation, under any Letter of Credit Document or Alternate Reimbursement Document. (b) The execution, delivery and performance by Newco of this Agreement and the transactions contemplated hereby (i) have been duly authorized by all requisite corporate and, if required, stockholder action and (ii) will not (A) violate (x) any provision of law, statute, rule or regulation to which Newco or any of its "Affiliates" (as such term is defined in Section 7.2) shall be subject, or of the certificate or articles of incorporation or other constitutive documents or by-laws of Newco, (y) any order of any governmental authority or quasi-governmental authority, or (z) any provision of any indenture or other material agreement or instrument to which Newco is a party or by which it or any of its property is or may be bound, (B) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any such indenture, agreement or other instrument, or (C) result in the creation or imposition of any lien upon or with respect to any property or assets now owned or hereafter acquired by Newco, except for the lien, if any, created pursuant to the terms of this Agreement. 14 (c) This Agreement has been duly executed and delivered by Newco and constitutes a legal, valid and binding obligation of Newco enforceable against Newco in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally, or by general equity principles, including but not limited to principles governing the availability of the remedies of specific performance and injunctive relief. (d) All of the Bonds are in the Weekly Mode. 6.2 Representations and Warranties of ERP Operating Partnership. ERP Operating Partnership hereby represents and warrants to Newco as follows: (a) ERP Operating Partnership (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (ii) has all requisite corporate power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted by ERP Operating Partnership, (iii) is qualified to do business in every jurisdiction where such qualification is required, except where the failure so to qualify would not result in a "Material Adverse Effect on ERP Operating Partnership" (as such term is hereinafter defined), and (iv) has the corporate power and authority to execute, deliver and perform its obligations under this Agreement. As employed herein, the term "Material Adverse Effect on ERP Operating Partnership" shall mean a materially adverse effect on the financial condition of ERP Operating Partnership. (b) The execution, delivery and performance by ERP Operating Partnership of this Agreement and the transactions contemplated hereby (i) have been duly authorized by all requisite corporate and, if required, stockholder action, and (ii) will not (A) violate (x) any provision of law, statute, rule or regulation to which ERP Operating Partnership or any of its "Affiliates" (as such term is defined in Section 7.2) shall be subject, or of the certificate or articles of incorporation or other constitutive documents or by-laws of ERP Operating Partnership, (y) any order of any governmental authority or quasi-governmental authority, or (z) any provision of any indenture or other material agreement or instrument to which ERP Operating Partnership is a party or by which it or any of its property is or may be bound, (B) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any such indenture, agreement or other instrument, or (C) result in the creation or imposition of any lien upon or with respect to any property or assets now owned or hereafter acquired by ERP Operating Partnership. (c) This Agreement has been duly executed and delivered by ERP Operating Partnership and constitutes a legal, valid and binding obligation of ERP Operating Partnership enforceable against ERP Operating Partnership in accordance with its terms, 15 except as such enforceability may be limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally, or by general equity principles, including but not limited to principles governing the availability of the remedies of specific performance and injunctive relief. ARTICLE 7 --------- EVENTS OF DEFAULT ----------------- 7.1 Events of Default. The happening of any of the following events shall be an "Event of Default" hereunder: (a) any representation or warranty made or deemed made in this Agreement by Newco shall prove to have been false or misleading in any material respect when so made, deemed made or furnished; (b) default shall be made in the payment of any amounts due under this Agreement and such default is not cured within five (5) business days of written notice from ERP Operating Partnership of such default; (c) material default shall be made in the due observance or performance by Newco or PPPIC of any covenant, condition or agreement contained in this Agreement, the Bond Documents, the Letter of Credit Documents, any Alternate Reimbursement Documents and any Reimbursement and Indemnification Agreement entered into pursuant to Section 4.3 hereof, other than a default in the payment of any amount due under this Agreement, and such material default shall not be cured within fifteen (15) business days of written notice from ERP Operating Partnership of such default; (d) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of Newco or PPPIC, or of a substantial part of the property or assets of Newco or PPPIC under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Newco or PPPIC or for a substantial part of the property or assets of Newco or PPPIC, or (iii) the winding-up or liquidation of Newco or PPPIC; and such proceeding or petition shall continue undismissed for 90 days or an order or decree approving or ordering any of the foregoing shall be entered; (e) Newco or PPPIC shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or 16 hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (d) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Newco or PPPIC or for a substantial part of the property or assets of Newco or PPPIC, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, or (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due; (f) one or more judgments for the payment of money in an aggregate amount in excess of $250,000 shall be rendered against Newco or PPPIC and the same shall remain unbonded or undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any judgment creditor shall levy upon assets or properties of Newco or PPPIC to enforce any such judgment; or (g) there shall have occurred a Change in Control with respect to Newco or PPPIC. 7.2 Definitions. As employed herein, the following terms shall have the following meanings: "Affiliate" shall mean, when used with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. A "Change in Control" shall be deemed to have occurred with respect to Newco, as the case may be, if (a) any Person or group (within the meaning of Rule 13d-5 of the Securities and Exchange Commission as in effect on the date hereof other than ERP Operating Partnership or ERP Operating Partnership's Affiliate) shall own, directly or indirectly, beneficially or of record, shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of Newco; or (b) a change shall occur during any period in the Board of Directors of Newco in which the individuals who constituted the Board of Directors of Newco at the beginning of such period (together with any other director whose election by the Board of Directors of Newco or whose nomination for election by the stockholders of Newco was approved by a vote of at least two-thirds of the directors then in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors of Newco then in office. With respect to PPPIC, a "Change in 17 Control" shall mean that the members of the Board of Directors of PPPIC are no longer the nominees of Newco. "Control", when used with respect to any specified Person, means the power to direct the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. The term "controlled" has a meaning correlative to the foregoing. "Person" shall mean any natural person, corporation, business trust, joint venture, association, company, partnership or government, or any agency or political subdivision thereof. 7.3 Remedies. Upon the occurrence of an Event of Default described in Section 7.1 hereof, ERP Operating Partnership shall have any and all remedies available to it at law, in equity or pursuant to statute. Without limitation of the foregoing,the occurrence of an Event of Default shall have the consequences set forth in Sections 3.2 and 5.1 of this Agreement. ARTICLE 8 --------- AGREEMENT REGARDING PALOMINO PARK --------------------------------- Notwithstanding anything to the contrary contained herein, if at any time Newco shall breach the terms of Article 7 of that certain Agreement Regarding Palomino Park of even date herewith by and between ERP Operating Partnership and Newco, then ERP Operating Partnership shall have no further obligations under this Agreement. ARTICLE 9 --------- MISCELLANEOUS ------------- 9.1 Notices. Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed or sent by telecopy, as follows: (a) if to Newco, to it at _________________________________, Attention:________________________, Telecopy No. ______________, with a copy concurrently sent to: Brownstein, Hyatt, Farber & Strichland P.C., 410 Seventeenth St., Suite 2200, Denver, Colorado 80202; (b) if to ERP Operating Partnership, to it at _____________________________________, Attention: _____________________, Telecopy No. ______________. 18 Such notice will be deemed given when received. 9.2 Survival of Agreement. All covenants, agreements, representations and warranties made by Newco herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by ERP Operating Partnership and shall survive the date of this Agreement, regardless of any investigation made by ERP Operating Partnership or on its behalf, and shall continue in full force and effect so long as ERP Operating Partnership retains any obligations or liability under this Agreement, the Initial ERP Operating Partnership Guaranty or any Alternate ERP Operating Partnership Guaranty. 9.3 Binding Effect. This Agreement shall become effective when it shall have been executed by Newco and ERP Operating Partnership, and thereafter shall be binding upon and inure to the benefit of Newco, ERP Operating Partnership and their respective successors and assigns, except that neither Newco nor ERP Operating Partnership shall have the right to assign its rights hereunder or any interest herein without the prior consent of the other. 9.4 Applicable Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS. 9.5 Waivers; Amendment. (a) No failure or delay of ERP Operating Partnership or Newco in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of ERP Operating Partnership and Newco hereunder are cumulative and are not exclusive of any rights or remedies which they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by either party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on either party in any case shall entitle such party to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by Newco and ERP Operating Partnership. 9.6 Entire Agreement. This Agreement, including any exhibits and schedules hereto, constitutes the entire contract between the parties relative to the subject matter hereof. Any 19 previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement. Nothing in this Agreement, expressed or implied, is intended to confer upon any party other than the parties hereto and thereto any rights, remedies, obligations or liabilities under or by reason of this Agreement. 9.7 Waiver of Jury Trial. Each party hereto hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any litigation directly or indirectly arising out of, under or in connection with this Agreement. 9.8 Severability. In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 9.9 Headings. Article and Section headings used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. 9.10 Jurisdiction; Consent to Service of Process. (a) NEWCO HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF ANY ILLINOIS OR NEW YORK STATE COURT OR FEDERAL COURT OF THE UNITED STATES OF AMERICA SITTING IN THE CITY OF CHICAGO OR THE CITY OF NEW YORK, AND ANY APPELLATE COURT THEREFROM, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH ILLINOIS OR NEW YORK STATE COURT OR, TO THE EXTENT PERMITTED BY LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS AGREEMENT SHALL AFFECT ANY RIGHT THAT ANY PARTY MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT IN THE COURTS OF ANY JURISDICTION. 20 (b) NEWCO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND EFFECTIVELY DO SO, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT IN ANY ILLINOIS OR NEW YORK STATE COURT OR FEDERAL COURT SITTING IN THE CITY OF NEW YORK. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT. IN WITNESS WHEREOF, ERP Operating Partnership and Newco have caused this Agreement to be signed by their respective officers hereunto duly authorized all as of the date first written above. ERP OPERATING LIMITED PARTNERSHIP BY: EQUITY RESIDENTIAL PROPERTIES TRUST, its general partner By:__________________________________ Name:________________________________ Title:_______________________________ WELLSFORD REAL PROPERTIES, INC. By:__________________________________ Name:________________________________ Title:_______________________________ 21 EXHIBIT F ================================================================================ Sonterra Agreement between ERP OPERATING LIMITED PARTNERSHIP and WELLSFORD REAL PROPERTIES, INC. Dated as of ___, 1997 ================================================================================ SONTERRA AGREEMENT ------------------ THIS AGREEMENT (this "Agreement") is made and entered into as of __________, 1997 by and between ERP OPERATING LIMITED PARTNERSHIP, an Illinois limited partnership ("ERQ OP"), and WELLSFORD REAL PROPERTIES, INC., a Maryland corporation ("Newco"). A. Newco has been formed as a wholly owned subsidiary of Wellsford Residential Property Trust, a Maryland real estate investment trust ("WRPT"), pursuant to the Contribution Agreement dated as of _____________________, 1997 (the "Contribution Agreement") referred to in that certain Agreement and Plan of Merger dated as of January __, 1997 (the "Merger Agreement") by and between Equity Residential Properties Trust, a Maryland real estate investment trust that is the general partner of EQR OP ("EQR"), and WRPT. B. Pursuant to that certain Option Agreement dated as of June 28, 1996 (the "Option Agreement") by and between Specified Properties VIII, L.P., a Texas limited partnership ("Specified"), and WRPT, a copy of which Option Agreement is attached hereto as Exhibit A and made a part hereof, Specified granted WRPT an option to purchase the land (the "Land") which is more fully described on Exhibit B attached hereto and made a part hereof, together with the buildings and improvements thereon erected, known as Sonterra at Williams Centre, an apartment property located in the City of Tucson, County of Pima, State of Arizona (the "Improvements") (the Land and the Improvements are collectively referred to herein as the "Premises"), upon the terms and conditions described in the Option Agreement. C. Concurrently with the execution of the Option Agreement, WRPT and Specified entered into that certain Loan Agreement dated as of June 28, 1996 (the "Loan Agreement") pursuant to which WRPT made a loan to Specified in the original principal amount of $17,800,000.00, which loan is secured by the Premises. D. Pursuant to the Contribution Agreement, WRPT has assigned to Newco, among other things, all of WRPT's rights and obligations under the Option Agreement. E. EQR OP and Newco are entering this Agreement pursuant to the Merger Agreement. NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements contained herein, the parties hereto hereby agree as follows: 1. Assignment of Option. In the event that Newco has decided not to exercise its option under the Option Agreement to purchase the Premises and Newco has received an offer (an "Offer") from a prospective assignee, other than Newco or the Surviving Trust (as defined in the Merger Agreement) or any affiliate of either of such parties (each, an "Acceptable Assignee"), to purchase all of Newco's rights and obligations under the Option Agreement, Newco shall first offer in writing (a "Notice of Proposed Assignment") to assign the Option Agreement to EQR OP. Any such assignment of the Option Agreement to EQR OP shall be on the same terms and conditions as the Offer, which terms and conditions shall be set forth in the Notice of Proposed Assignment. If EQR OP does not provide Newco with written notice of its intention to purchase Newco's rights and obligations under the Option Agreement on or before the earlier of the date when notice of exercise of the option must be given within thirty (30) days after the Notice of Proposed Assignment, then Newco shall have the right to assign all of its rights and obligations under the Option Agreement to such prospective assignee in accordance with the terms of the Offer. If Newco fails to consummate such assignment within one hundred fifty (150) days following EQR OP's rejection of the offer in the Notice of Proposed Assignment, then the Option Agreement shall again be subject to the restrictions of this Paragraph 1. 2. Lapse of Option. In the event that Newco has decided not to exercise its option to the purchase the Premises under the Option Agreement and Newco has not received an offer to purchase all of Newco's rights and obligations under the Option Agreement within thirty (30) days prior to the last day for giving notice of exercise of the expiration of the option, then Newco shall give EQR OP thirty (30) days written notice of such expiration of the option. Upon timely giving such notice, EQR OP shall have the right to require Newco to immediately assign all of its rights and obligations under the Option Agreement to ERQ OP for One Hundred and 00/100 Dollars ($100.00). 3. Exercise of Option. In the event that Newco, or the Acceptable Assignee then holding the option under the Option Agreement, shall elect to exercise its right under the Option Agreement to purchase the Premises, Newco (i) as the exercising party, shall cause title to the Premises to be acquired by Newco or a subsidiary or affiliate of Newco only or (ii) shall cause the Acceptable Assignee exercising such option to cause the Premises to be so titled. Newco shall give EQR OP written notice of the acquisition of the Premises pursuant to the terms of the Option Agreement within ten (10) days after acquisition. For the purposes hereof, an "affiliate" of Newco shall be any entity controlled by, controlling or under common control with Newco. 4. Right of First Offer Agreement. Promptly following (a) the acquisition of the Premises by Newco or a subsidiary of Newco in accordance with Paragraph 3 hereof or (b) the taking of title to the Premises by Newco or a subsidiary or affiliate of Newco by virtue of a foreclosure on the Premises, or the taking of a deed in lieu of foreclosure on the Premises, based upon a default under the Loan Agreement, Newco shall enter, or shall cause such subsidiary, as titleholder to the Premises, to enter into, without further consideration, a Right of First/Last Offer Agreement (the "Right of First/Last Offer Agreement"), which shall be prepared by counsel to EQR OP and shall be in form and substance satisfactory to EQR OP in the exercise of EQR OP's 2 commercially reasonable judgment, which agreement shall be in substantially the same form as the Right of First/Last Offer Agreements entered into or required to be entered into pursuant to Article 2 of that certain Agreement Regarding Palomino Park of even date herewith. 5. Memorandum. Upon execution of the Right of First/Last Offer Agreement, Newco shall record, or shall cause the subsidiary of Newco holding title to the Premises to record, a memorandum thereof against title to the Premises. 6. Notices. Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed or sent by telecopy, as follows: (1) if to Newco, to it at _________________________________, Attention:________________________, Telecopy No. ______________; and (2) if to EQR OP, to it at _____________________________________, Attention: _____________________, Telecopy No. ______________. 7. Binding Effect. This Agreement shall become effective when it shall have been executed by Newco and EQR OP, and thereafter shall be binding upon and inure to the benefit of Newco, EQR OP and their respective successors and assigns, except that Newco shall not have the right to assign its rights hereunder or any interest herein without the prior consent of EQR OP. 8. Applicable Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS. 9. Waivers; Amendment. (1) No failure or delay of EQR OP in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of EQR OP for a breach hereof are cumulative and are not exclusive of any rights or remedies which they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by Newco therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on Newco in any case shall entitle Newco to any other or further notice or demand in similar or other circumstances. 3 (2) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by Newco and EQR OP. 10. Entire Agreement. This Agreement, including any exhibits and schedules hereto, constitutes the entire contract between the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement. Nothing in this Agreement, expressed or implied, is intended to confer upon any party other than the parties hereto and thereto any rights, remedies, obligations or liabilities under or by reason of this Agreement. 11. Waiver of Jury Trial. Each party hereto hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any litigation directly or indirectly arising out of, under or in connection with this Agreement. 12. Severability. In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 13. Headings. Article and Section headings used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. 14. Time is of the essence of this Agreement. 15. Nothing in this Agreement shall require Newco to take any action that would create any default under, or breach of any representations or covenants under, the Option Agreement or the Loan Agreement or any documents relating to either of the same. 16. Jurisdiction; Consent to Service of Process. (1) NEWCO HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF ANY ILLINOIS STATE COURT OR FEDERAL COURT OF THE UNITED STATES OF AMERICA SITTING IN THE CITY OF CHICAGO OR THE CITY OF NEW YORK, AND ANY APPELLATE COURT THEREFROM, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, 4 AND EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH ILLINOIS OR NEW YORK STATE COURT OR, TO THE EXTENT PERMITTED BY LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS AGREEMENT SHALL AFFECT ANY RIGHT THAT ANY PARTY MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT IN THE COURTS OF ANY JURISDICTION. (2) NEWCO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND EFFECTIVELY DO SO, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT IN ANY ILLINOIS OR NEW YORK STATE OR FEDERAL COURT. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT. IN WITNESS WHEREOF, EQR OP and Newco have caused this Agreement to be signed by their respective officers hereunto duly authorized all as of the date first written above. ERQ OP: ERP OPERATING LIMITED PARTNERSHIP, an Illinois limited partnership By: Equity Residential Properties Trust, a Maryland real estate investment trust and its general partner By:__________________________________ Name:________________________________ 5 Title:_______________________________ NEWCO: WELLSFORD REAL PROPERTIES, INC., a Maryland corporation By:__________________________________ Name:________________________________ Title:_______________________________ 6 EXHIBIT A --------- OPTION AGREEMENT ---------------- EXHIBIT B --------- DESCRIPTION OF THE LAND ----------------------- BLOCKS 19, 21, 22, 23 OF THE RESUBDIVISION OF WILLIAMS CENTRE, PIMA COUNTY, ARIZONA ACCORDING TO THE PLAT OF RECORD IN THE OFFICE OF THE PIMA COUNTY RECORDER IN BOOK 39 OF MAPS AT PAGE 28. EXHIBIT G --------- ADJUSTMENT TO EXCHANGE RATIO ----------------------------
If Average Price Is: Exchange Ratio Is: ---------------------- ------------------ $40.000 0.625 $39.875 0.627 $39.750 0.629 $39.625 0.631 $39.500 0.633 $39.375 0.635 $39.250 0.637 $39.125 0.639 $39.000 0.641 $38.875 0.643 $38.750 0.645 $38.625 0.647 $38.500 0.649 $38.375 0.651 $38.250 0.654 $38.125 0.656 $38.000 0.658 $37.875 0.659 $37.750 0.660 $37.625 0.661 $37.500 0.662 $37.375 0.663 $37.250 0.664 $37.125 0.665 $37.000 0.666 G-1
EXHIBIT H TRANSACTION AND TERMINATION COSTS AGREEMENT ------------------------------------------- THIS TRANSACTION AND TERMINATION COSTS AGREEMENT dated ____________, 1997 by and between EQUITY RESIDENTIAL PROPERTIES TRUST, a real estate investment trust organized and existing under the laws of the State of Maryland ("EQR"), WELLSFORD RESIDENTIAL PROPERTY TRUST, a real estate investment trust organized and existing under the laws of the State of Maryland ("Wellsford"), and WELLSFORD REAL PROPERTIES, INC., a Maryland corporation ("Newco"). Recitals: -------- A. EQR and Wellsford have entered into an Agreement and Plan of Merger dated January __, 1997 (the "Merger Agreement"), pursuant to which EQR shall acquire the assets and business of Wellsford through the merger of EQR and Wellsford (the "Merger") constituting a tax-free reorganization under the Internal Revenue Code of 1986, as amended. B. It is currently contemplated that Wellsford will be the real estate investment trust surviving the merger; however, EQR may be the surviving real estate investment trust under certain circumstances described in the Merger Agreement (the real estate investment trust which survives the Merger being referred to as the "Surviving Trust"). C. Immediately prior to the Merger, it is contemplated that Wellsford shall contribute certain of its assets to Newco, and that Newco shall assume certain obligations of Wellsford, all as provided in the Contribution Agreement (as defined in the Merger Agreement). D. Immediately prior to the Merger, it is contemplated that Wellsford shall distribute to its common shareholders all the outstanding shares of Newco owned by it. E. The parties desire to set forth their agreement as to the manner of sharing the Transaction Costs (as hereinafter defined). Agreements: ---------- In consideration of the premises and the mutual covenants hereinafter set forth, the parties agree as follows: 1. Closing Payments by Newco to Surviving Trust. (a) On the Closing Date, the parties shall jointly determine the amount of the estimated Surviving Trust Transaction Costs (the "Estimated Surviving Trust Transaction Costs"), using good faith estimates where actual amounts are not known or provided for in this Agreement. If the Estimated Surviving Trust Transaction Costs exceed the Gross Overall Cap, on the Closing Date Newco shall pay to the Surviving Trust cash in an amount equal to such difference. (b) The amount of the Contribution Funds payable to Newco at the Closing, as determined pursuant to Section 1.10 of the Merger Agreement, shall be increased by the amount of the excess, if any, of the Net Overall Cap over the amount of the Estimated Surviving Trust Transaction Costs (the "Newco Payment"). 2. Joint Expenses. For purposes of determining EQR Expenses and Surviving Trust Transaction Expenses, all printing and mailing expenses which are incurred jointly by Wellsford and EQR shall be allocated 50% as Surviving Trust Transaction Costs and 50% as EQR Expenses. However, if a document is sent to the holders of Wellsford Common Shares with respect to the distribution of the shares of Newco to the holders of Wellsford Common Shares which is separate from the proxy statement sent to such holders with respect to the Merger ("Newco Information Statement"), the fees for printing any Proxy Statement and Newco Information Statement sent to holders of Wellsford Common Shares and EQR Common Shares will be allocated 60% as Surviving Trust Transaction Expense and 40% as EQR Expenses, and 100% of the costs of mailing the Proxy Statement and information statements or other documents with respect to the distribution of the shares of common stock of Newco to the holders of Wellsford Common Shares shall be a Surviving Trust Transaction Cost, and 100% of the costs of mailing the Proxy Statement to the holders of EQR Common Shares shall be an EQR Expense. 3. Reimbursement Obligations. (a) From and after the Closing Date, Newco shall have a continuing obligation to reimburse the Surviving Trust for (a) any Surviving Trust Transaction Costs which exceed the Estimated Surviving Trust Transaction Costs, but only to the extent the sum of the aggregate Surviving Trust Transaction Costs paid or deemed to have been paid by EQR, Wellsford and the Surviving Trust plus the Newco Payment, if any, exceeds the Gross Overall Cap, and (b) any costs and expenses related to the Excluded Activities. (b) If, after all the Surviving Trust Transaction Costs have been paid, either (i) the actual Surviving Trust Transaction Costs plus the Newco Payment are less than the Net Overall Cap, or (ii) the actual Surviving Trust Transaction Costs, less the amount paid by Newco to the Surviving Trust on the Closing Date pursuant to Section 1(a), are less than the Net Overall Cap, then the Surviving Trust shall promptly pay such difference to Newco, together with interest thereon at the Interest Rate from the Closing Date to the date of such payment to Newco. 4. Procedure. If the Surviving Trust receives a bill or otherwise becomes responsible for any Surviving Trust Transaction Costs in excess of the Gross Overall Cap and for which Newco has not previously reimbursed the Surviving Trust pursuant to this Agreement (the "Excess Costs"), the Surviving Trust shall invoice Newco therefor. Such invoice shall be accompanied by a copy of the bill giving rise to such Excess Costs. Newco shall pay the amount of such Excess Costs to the Surviving Trust within ten (10) days after the date it receives such invoice. If Newco 2 fails to pay such Excess Costs when due, then such Excess Costs shall thereafter bear interest at the Interest Rate until paid in full. Such interest shall be in addition to all other rights and remedies to which the Surviving Trust may be entitled at law or in equity. 5. Definitions. For purposes of this Agreement, the following terms shall have the following meaning (with terms defined in the singular having comparable meanings when used in the plural): "Closing Date" shall have the meaning set forth in the Merger Agreement. "Contribution Agreement" shall have the meaning set forth in the Merger Agreement. "Dividend Spread Accrual" shall mean an amount equal to Dividend Spread multiplied by a fraction, the numerator of which is the number of days in the calendar quarter in which the Merger occurs prior to the Closing Date and the denominator of which is the total number of days in such calendar quarter; provided, however, that the amount of the Dividend Spread Accrual shall be zero (0) if Wellsford has declared a dividend in the quarter in which the Closing Date occurs. "Dividend Spread" shall mean an amount equal to (a) the excess, if any, of $0.485 over the product of the Exchange Ratio multiplied by EQR's existing dividend of $0.625, (b) multiplied by the number of Wellsford Common Shares outstanding immediately prior to the Effective Time. "Effective Time" shall have the meaning set forth in the Merger Agreement. "EQR Expenses" shall mean: (a) any filing fees paid to the Securities and Exchange Commission with respect to the shares of beneficial interest of the Surviving Trust to be issued in the Merger; (b) 50% of the legal fees and expenses of Ballard Spahr Andrew & Ingersoll with respect to the Merger and the Spin-Off (but not the Excluded Activities) (whether incurred on behalf of EQR or Wellsford); (c) all legal and accounting fees and costs incurred by EQR, other than the fees of Ballard Spahr Andrew & Ingersoll described in clause (b) of this definition; 3 (d) costs in excess of $100,000 for environmental reports and title insurance requested by EQR on the properties of Wellsford and the Wellsford Subsidiaries; (e) the charges of J. P. Morgan Securities, Inc. for rendering its fairness opinion to the Board of Directors of EQR; (f) EQR's share of the joint expenses provided for in Section 2; (g) the cost of applying for the private letter ruling from the Internal Revenue Service to change the Merger so that EQR will be the survivor of the Merger; (h) any transfer taxes payable as a result of the transactions contemplated by the Merger; and (i) any other costs and expenses incurred by EQR before the Effective Time which are not specifically enumerated as Surviving Trust Transaction Costs. "Exchange Ratio" shall have the meaning set forth in the Merger Agreement. "Excluded Activities" shall mean (i) all activities, operations, acquisitions, dispositions and business of Newco and the Newco Subsidiaries, including, without limitation those assets acquired and liabilities assumed pursuant to the Contribution Agreement, (ii) all indebtedness and other obligations incurred by Newco and the Newco Subsidiaries, (iii) all sales of equity interests in and indebtedness of Newco and the Newco Subsidiaries, other than the distribution by Wellsford of the common shares of Newco owned by Wellsford to the common shareholders of Wellsford in the Spin-Off, and (iv) any amount payable to William Cockrum, whether payable in cash or shares of Newco capital stock, or both. "Gross Overall Cap" shall mean $27,110,636, plus the Dividend Spread Accrual. "Interest Rate" shall mean a rate per annum equal to the prime rate of interest charged from time to time under EQR's principal bank unsecured line of credit. "Net Overall Cap" shall mean the Gross Overall Cap less the Dividend Accrual. "Newco Subsidiaries" shall mean the Subsidiaries of Newco. "Retention Program" shall have the meaning set forth in the Merger Agreement. 4 "Wellsford Common Shares" shall have the meaning set forth in the Merger Agreement. "Subsidiaries" shall have the meaning set forth in the Merger Agreement. "Surviving Trust Transaction Costs" shall mean the following Transaction Costs: (a) $5,781,443, constituting the amount equal to the difference between $27.50 and the exercise price of each option to purchase Wellsford Common Shares outstanding on the date of the Merger Agreement multiplied by the number of Wellsford Common Shares subject to such option; (b) the obligation of Wellsford to issue any options to purchase Wellsford Common Shares as a result of the use by an optionee of Wellsford Common Shares to pay the exercise price under any option exercised by such optionee prior to the Effective Time, which obligation is satisfied through the issuance of options to purchase Wellsford Common Shares ("Reload Options"), which Reload Options shall be deemed to have a cost equal to the value of such options determined pursuant to the Merrill Lynch trading desk formula; (c) the cost to Wellsford of the use by optionees of Wellsford Common Shares to pay the exercise price under options exercised by them after the date of the Merger Agreement, such cost to be deemed to be the excess, if any, of the value of each Wellsford Common Share credited to the payment of such exercise price over $27.50; (d) the Retention Program (which shall be deemed to have a cost of $544,575 as of the Effective Time); (e) all severance payments payable under any employment agreements between Wellsford and its employees; (f) all income tax payments and excise tax payments, as grossed up, payable to Key Executives (as defined in the Merger Agreement) pursuant to the existing agreements with employees of Wellsford; (g) the issuance of 67,308 "Springing Shares" to executives of Wellsford prior to the Spin-Off, which shall be deemed to have a cost of $1,850,970 determined by multiplying $27.50 times 67,308; 5 (h) the forgiveness of loans made to employees of Wellsford to finance the purchase of Wellsford Common shares, which for purposes of this Agreement shall be deemed to have a cost of zero (0); (i) the rental payments remaining unpaid under the lease of office spaces in New York, New York and Denver, Colorado, which for this purpose shall be deemed to have a cost of $1,665,184 as of the Closing Date, reduced by the net present value of base rental payments payable after the Closing Date under any sublease of the Denver, Colorado office space entered into by Wellsford prior to the Closing, determined using a rate of 8% per annum; (j) all fees and penalties payable as a result of any of the transactions contemplated by the Merger Agreement (including the transfers to ERP Operating Limited Partnership) under any loan agreement or mortgage to which Wellsford or any of the Wellsford Subsidiaries (other than Newco) is a party; (k) the investment banking fees and expenses payable to Merrill Lynch & Co. in connection with its fairness opinions regarding the Merger and its services as investment bankers with respect to the Merger, estimated to be $1,750,000 as of the date of the Merger Agreement plus expenses; (l) the cost of the premium for extending the existing directors' and officers' liability insurance policy of Wellsford after the Effective Time; (m) up to $100,000 of costs with respect to title insurance and environmental reports requested by EQR on the properties of Wellsford and the Wellsford Subsidiaries; (n) 50% of the legal fees and expenses of Ballard Spahr Andrew & Ingersoll with respect to the Merger and the Spin-Off (but not the Excluded Activities), whether incurred on behalf of Wellsford or EQR); (o) all legal and accounting fees and expenses incurred by Wellsford with respect to the Merger and the Spin-Off (and not with respect to any of the Excluded Activities), other than the fees of Ballard Spahr Andrew & Ingersoll described in clause (n) of this definition; (p) Wellsford's and Newco's portion of the joint expenses provided for in Section 2; 6 (q) the assignment of the split dollar life insurance policies assigned to Newco pursuant to the Contribution Agreement, which shall be deemed to have a cost to the Surviving Trust of $200,000 as of the Closing Date; and (r) any other transaction costs incurred by Wellsford with respect to the Merger and the Spin-Off; provided, however, that Surviving Trust Transaction Costs shall exclude (i) any EQR Expenses, (ii) any liabilities and expenses related to the Excluded Activities and (iii) any payments under the Consulting Agreements (as defined in the Merger Agreement). 6. General. (a) Notices. All notices, requests, claims, demands and other communications under this Agreement shall be in writing and shall be delivered personally, sent by overnight courier (providing proof of delivery) to the parties or sent by telecopy (providing confirmation of transmission) at the following addresses or telecopy numbers (or at such other address or telecopy number for a party as shall be specified by like notice): if to EQR, Wellsford or the Surviving Trust, to: Equity Residential Properties Trust Two North Riverside Plaza, Suite 400 Chicago, Illinois 60606 Attention: President Fax No. (312) 207-5243 with a copy to: Equity Residential Properties Trust Two North Riverside Plaza, Suite 400 Chicago, Illinois 60606 Attention: Bruce C. Strohm, Esq. Fax No. (312) 454-0039 Rudnick & Wolfe 203 N. LaSalle St., Suite 1800 Chicago, Illinois 60601 Attention: Errol R. Halperin, Esq. Fax No. (312) 236-7516 7 if to Newco, to: Wellsford Real Properties, Inc. 610 Fifth Avenue, 7th Floor New York, New York 10020 Attention: President Fax No. (212) 333-2323 with a copy to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, New York 10104-0053 Attention: Alan S. Pearce, Esq. Fax No. (212) 541-1411 All notices shall be deemed given only when actually received. (b) Interpretation. When a reference is made in this Agreement to a Section, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." (c) Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. (d) Entire Agreement; No Third-Party Beneficiaries. This Agreement (i) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter of this Agreement and (ii) is not intended to confer upon any person other than the parties hereto any rights or remedies. (e) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF MARYLAND, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICT OF LAWS THEREOF. (f) Assignment. Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned or delegated, in whole or in part, by 8 operation of law or otherwise by any of the parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective successors and assigns. (g) Enforcement. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any court of the United States located in the State of Illinois or New York or in any Illinois or New York State court located in Illinois or New York, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (i) consents to submit itself (without making such submission exclusive) to the personal jurisdiction of any federal court located in the State of Illinois or New York or any Illinois or New York State court in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement and (ii) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court. (h) Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. (i) Non-Recourse. (1) This Agreement and all documents, agreements, understandings and arrangements relating hereto have been entered into or executed on behalf of Wellsford by the undersigned in his capacity as a trustee or officer of Wellsford, which has been formed as a Maryland real estate investment trust pursuant to an Amended and Restated Declaration of Trust of Wellsford dated as of November 2, 1992, as amended and restated, and not individually, and neither the trustees, officers nor shareholders of Wellsford shall be personally bound or have any personal liability hereunder. EQR and Newco shall look solely to the assets of Wellsford for satisfaction of any liability of Wellsford with respect to this Agreement and any other agreements to which it is a party. EQR and Newco will not seek recourse or commence any action against any of the shareholders of Wellsford 9 or any of their personal assets, and will not commence any action for money judgments against any of the trustees or officers of Wellsford or seek recourse against any of their personal assets, for the performance or payment of any obligation of Wellsford hereunder or thereunder. (2) This Agreement and all documents, agreements, understandings and arrangements relating hereto have been entered into or executed on behalf of EQR by the undersigned in his capacity as a trustee or officer of EQR, which has been formed as a Maryland real estate investment trust pursuant to an Amended and Restated Declaration of Trust of EQR dated as of August 10, 1993, as amended and restated, and not individually, and neither the trustees, officers nor shareholders of EQR shall be personally bound or have any personal liability hereunder. Wellsford and Newco shall look solely to the assets of EQR for satisfaction of any liability of EQR with respect to this Agreement and any other agreements to which it is a party. Wellsford and Newco will not seek recourse or commence any action against any of the shareholders of EQR or any of their personal assets, and will not commence any action for money judgments against any of the trustees or officers of EQR or seek recourse against any of their personal assets, for the performance or payment of any obligation of EQR hereunder or thereunder. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed this _____ day of ________. 1997. WELLSFORD RESIDENTIAL PROPERTY TRUST By:_________________________________ Its:________________________________ EQUITY RESIDENTIAL PROPERTIES TRUST 10 By:_________________________________ Its:________________________________ WELLSFORD REAL PROPERTIES, INC. By:_________________________________ Its:________________________________ 11 EXHIBIT I RETENTION PROGRAM ----------------- ________________________ ________________________ ________________________ Dear ________________: As you know, Equity Residential Properties Trust ("Equity") has acquired the assets and business of Wellsford Residential Properties Trust ("Wellsford"). The acquisition of the assets and business of Wellsford has been effected by the merger (the "Merger") of Equity and Wellsford with Wellsford as the surviving real estate investment trust (the "Surviving Trust"). You have previously been employed as the _______________________ of Wellsford. The purpose of this letter is to confirm our agreement that if you continue to be employed by the Surviving Trust on an at-will basis, upon the involuntary termination of your employment by the Surviving Trust for any reason (other than the involuntary termination for cause), or upon the date six months from the effective date of the Merger, which ever shall occur first, the Surviving Trust shall pay to you $___________, payable in a lump sum within five (5) business days after such termination or such date. Such payment shall not be paid if you voluntarily terminate your employment with the Surviving Trust. Such payment will also not be made to you if the Surviving Trust terminates your employment because you engaged in any act of dishonesty, including, but not limited to, an act which directly or indirectly results in your gain or personal enrichment at the expense of the Surviving Trust, or because you willfully substantially failed to perform the services requested of you by the Surviving Trust despite at least two notices of such failure or because you willfully substantially violated the Surviving Trust's company policies (referred to in this letter as "cause"). This letter supersedes all previous communications with respect to your employment by the Surviving Trust. This letter does not constitute a contract for employment. If this letter is accepted by you, it shall constitute the entire understanding between us with respect to your employment by the Surviving Trust. If you are in agreement with the foregoing, please so indicate by signing the copy of this letter in the space provided below and returning it to the undersigned. Very truly yours, [The Surviving Trust] By:_____________________________ Its:____________________________ Accepted and agreement to as of this ___ day of ___________, 1997 ____________________________________ I-1 EXHIBIT J PAYMENTS TO KEY EXECUTIVES/1/ This Exhibit J, together with the Exhibits A(1)-A(5) of the Wellsford Disclosure Letter (the "Exhibits"), describe all payments to be made in connection with the Spin-off and the Merger to the individuals named in this Exhibit J (the "Executives"), and the trustees of Wellsford. The information provided in the Exhibits sets forth: (1) the amount of each severance payment payable to certain of the Executives, as described in Exhibit A(1); (2) all information concerning existing share loans and the amount of loan forgiveness upon a change in control, as described in Exhibit A(2); (3) all information with respect to the number of restricted Wellsford Common Shares, both vested and nonvested, which Executives will receive upon a change in control, as described in Exhibit A(3); (4) all information describing Wellsford Common Shares to be issued immediately prior to the Spin-off and the Merger, as described in Exhibit A(4); (5) information concerning existing options to purchase Wellsford Common Shares, as described in Exhibit A(5); and (6) information concerning the form of each option to purchase Newco common shares, as described in Exhibit A(5). In the event of a discrepancy between the information in Exhibit J and the Exhibits, with respect to the information listed in clauses (1) through (6) of this paragraph, the Exhibits shall control. With respect to all other matters, the language of Exhibit J shall control. 1. Payments To J. Lynford, E. Lowenthal and Daniel Kelley ("Key Executives"). ------------------------------------------------------------------------- A. Payments Under Employment Agreements. (1) Income Tax Payment. J. Lynford and E. Lowenthal will be entitled to an income tax payment equal to all federal, local, and state income taxes payable with respect to all noncash compensation, including without limitation shares described in paragraph 1.E. below and loan forgiveness described in paragraph 1.C below, received in connection with a "change in control" in accordance with the provisions of their respective employment agreements in effect as of the date of this Agreement. The estimated amount of the income tax payment for each executive, and the underlying payments upon which such payment is based, are set forth in Exhibit A(1) of the Wellsford Disclosure Letter. (2) Excise Tax Payment. Pursuant to Section 10 of their respective employment agreements, each of J. Lynford and E. Lowenthal will be entitled to receive an "Additional Amount" equal to: (a) all taxes payable by the executive under section 4999 of the Internal Revenue Code of 1986, as amended ("Code") with respect to any "excess parachute payment" as defined in section 280G (b)(1) of the Code (or otherwise) and the Additional Amount, plus (b) all federal, state, and local income taxes payable with respect to the Additional Amount. The estimated amount of such payment, and the underlying payments upon which such payment is based, are set forth in Exhibit A(1) of the Wellsford Disclosure Letter. - --------------------- /1/ Except as specifically set forth in Exhibit J, all capitalized terms shall have the meaning provided in the Merger Agreement. (3) Time of Payment. The cash payments described in paragraphs 1.A.(1) and (2) above shall be paid to the Executives by the Surviving Trust on the date of the Merger. B. Split Dollar Life Insurance. The split dollar life insurance arrangements between Wellsford and J. Lynford and E. Lowenthal respectively shall be assumed by Newco pursuant to the terms of the Contribution Agreement, and Newco shall be responsible for any and all obligations arising pursuant to both arrangements. C. Share Loan and Acquisition Agreements. As set forth in Exhibit A(2) of the Wellsford Disclosure Letter, the entire outstanding loan balance of all notes relating to the Share Loan and Acquisition Agreements for each Key Executive shall be forgiven as a result of the change in control effectuated by the Merger. D. Restricted Share Grants. As set forth in Exhibit A(3) of the Wellsford Disclosure Letter, the Restricted Share Grants issued to J. Lynford and E. Lowenthal shall continue in effect and the nonvested portion of such grants shall remain subject to a risk of forfeiture in accordance with the terms of Exhibit A(3). All shares issued pursuant to a Restricted Share Grant, whether or not subject to a risk of forfeiture, shall participate pro rata in the Spin-off and the Merger. E. Change In Control Share Grants. In accordance with the terms of the Amendment To Change In Control Share Grant Letter Agreements in effect as of the date of this Agreement executed by each Key Executive, each Change In Control Share Grant shall be effective immediately prior to the occurrence of a change in control of Wellsford (and immediately prior to the occurrence of a spin-off that is effected in connection with a change in control of Wellsford) and will be made pursuant to Wellsford's Long-Term Management Incentive Plan. Accordingly, all such shares shall participate in both the Spin-off and the Merger as set forth in Exhibit A(4) of the Wellsford Disclosure Letter. F. Wellsford Options. Wellsford and the Key Executives shall enter into such exchange agreements and amendments to options as is necessary to obtain each Key Executive's agreement to the provisions of this paragraph 1.F. to the extent the provisions of this paragraph are inconsistent with the existing arrangements between Wellsford and each Key Executive. (1) Nonqualified Options. -------------------- (a) Conversion of Nonvested Options. For each Key Executive, the nonvested portion of each option identified as a non-qualified Share Option Grant in Exhibit A(5) of the Wellsford Disclosure Letter shall be converted into an option to purchase Newco common shares upon a change in control effected by the Merger. The number of options to purchase Newco common shares issued in the conversion will be calculated by dividing the value of the nonvested options being converted by the value of an option to purchase one Newco common share. The method used to calculate the number of options to be received by each Key Executive upon conversion, together with the number of options to be received and the terms thereof, are 2 set forth in Exhibit A(5). The exercise price specified in each such option shall be the Issuance Price (as defined in the Newco Stock Purchase Agreement). (b) Exercise of Vested Options. For each Key Executive, all vested options shall be exercised prior to the Merger by tendering existing Wellsford Common Shares in payment of the exercise price. The tendered shares shall be valued at $27.50 per share for purposes of payment of the exercise price, regardless of their actual value. (c) Reload Options. For each Key Executive, all vested options exercised by tendering shares as described in paragraph 1.F(1)(b) above shall be granted Reload Options which shall be converted into options to purchase Newco common shares by valuing the Reload Options and then dividing such value by the value of an option to purchase one Newco common share. The exercise price of each Reload Option shall be $27.50 per share for each option, and the term of each Reload Option shall equal the remaining term of the underlying option being exercised. The number and terms of each Newco option shall be in accordance with Exhibit A(5). (2) Incentive Share Options. (a) Conversion of Nonvested Options. For each Key Executive, the value of the nonvested portion of each option listed in Exhibit A(5) of the Wellsford Disclosure Letter as an incentive share option shall be converted into an incentive share option to purchase Newco common shares. As set forth in Exhibit A(5), the exercise price of the options to purchase Newco common shares received in the conversion shall reflect the inherent value of these options prior to conversion, and shall have a term equal to the remaining term of the incentive share option to be converted, as required by Treasury Regulation Section 1.425-1(a). (b) Exercise of Vested Options. For each Key Executive, all vested options shall be exercised prior to the Merger by tendering existing Wellsford Common Shares in payment of the exercise price. The value of the tendered shares shall be $27.50 per share for purposes of the payment of the exercise price, regardless of their actual value. (c) Reload Options. For each Key Executive, all vested options exercised by tendering shares as described in paragraph 1.F(2)(b) above shall be granted Reload Options which shall be converted into options to purchase Newco common shares by valuing the Reload Options and then dividing such value by the value of an option to purchase one Newco common share. The exercise price of each Reload Option shall be $27.50 per share for each option, and the term of each Reload Option shall equal the remaining term of the underlying option being exercised. The number and terms of each Newco option shall be in accordance with Exhibit A(5). 3 2. Payments to D. MacKenzie, G. Hughes, and D. Strong ("Other Executives"). ----------------------------------------------------------------------- Except to the extent one or more of the Other Executives agree to convert Wellsford options into Newco options, or to defer or waive other payments or benefits arising under existing agreements between Wellsford and the Other Executive, in which event such Other Executives shall be eligible to convert the nonvested portion of existing options to purchase Wellsford Common Shares into options to purchase Newco common shares, convert Reload Options into options to purchase Newco common shares, and continue their Restricted Share Grants set forth on Exhibit A(3) in the same manner as the Key Executives, the following describes all payments to be made to the Other Executives. A. Payments Under Employment Agreements. (1) Cash Severance Payment. Each Other Executive shall be entitled to a cash severance payment in the amount required under each Other Executive's respective employment agreement in effect as of the date of this Agreement. The amount of the payment to be made to each Other Executive is set forth in Exhibit A(1) of the Wellsford Disclosure Letter. (2) Excise Tax Payment. Pursuant to Section 10 of their respective employment agreements, each Other Executive will be entitled to receive an "Additional Amount" equal to: (a) all taxes payable by the executive under section 4999 of the Internal Revenue Code of 1986, as amended ("Code") (or otherwise) with respect to any "excess parachute payment" as defined in section 280G (b)(1) of the Code and the Additional Amount, plus (b) all federal, state, and local income taxes payable with respect to the Additional Amount. The estimated amount of such payments, and the underlying payments upon which each such payment is based, are set forth in Exhibit A(1) of the Wellsford Disclosure Letter. (3) Time of Payment. The cash payments described in paragraphs 2.A.(1) and (2) above shall be paid to the Other Executives by the Surviving Trust on the date of the Merger. B. Share Loan and Acquisition Agreements. As set forth in Exhibit A(2) of the Wellsford Disclosure Letter, the entire outstanding loan balance of all notes relating to the Share Loan and Acquisition Agreements for each Other Executive shall be forgiven as a result of the change in control effectuated by the Merger. C. Restricted Share Grants. As set forth in Exhibit A(3) of the Wellsford Disclosure Letter, the Restricted Share Grants issued to D. MacKenzie and G. Hughes shall be fully vested upon the change in control effected by the Merger. D. MacKenzie and G. Hughes shall receive EQR Common Shares in the Merger and Newco common shares in the Spin-off for the restricted Wellsford Common Shares as set forth in Exhibit A(3). 4 D. Wellsford Options. (1) Nonvested Options. For each Other Executive, the nonvested portion of every outstanding option to purchase Wellsford Common Shares set forth in Exhibit A(5) of the Wellsford Disclosure Letter shall become vested upon a change in control effected by the Merger pursuant to the terms of the underlying agreement under which the option was granted. (2) Wellsford To Use Best Efforts in seeking Exercise of Appreciation Rights. Prior to the Merger, Wellsford shall use its best efforts to obtain the consent of each Other Executive to relinquish all option rights in exchange for the cash payment of $27.50 per share for each option relinquished less the exercise price per share. (3) Vested Options. For each Other Executive who does not consent to the payment described in subsection (2) above, all existing options shall either be exercised prior to the Merger in accordance with the terms of the Plans, as applicable, or, if not exercised prior to the Merger, shall be converted in the Merger into options to purchase common shares in the Surviving Trust as adjusted pursuant to the dilution and adjustment provisions of the Plans for the Exchange Ratio. Wellsford shall use its best efforts to ensure that the Committee will make such adjustments in accordance with the provisions of the Plans. All adjustments shall be made subject to the commercially reasonable approval of the Surviving Trust. (4) Reload Options. For each existing share tendered in exercise of an existing option, the right to the issuance, exercise price, and term of any Reload Option shall be governed by the terms of the existing Plans, as applicable, including the adjustment for the Exchange Ratio. 3. Options of Trustees. All existing options to purchase Wellsford Common Shares granted to the trustees of Wellsford shall be converted into options to purchase Newco common shares. The number of options to purchase Newco common shares granted upon conversion shall be calculated by dividing the value of each trustee's existing options to purchase Wellsford Common Shares by the value of an option to purchase one Newco common share to be received in the exchange. The option to purchase Newco common shares shall be exercisable immediately, and shall have an initial term of six years, (regardless of whether or not the optionee remains a trustee or director of Newco) with a four-year extension if the optionee is a trustee or director of Newco at the end of four years. The exercise price of the option to purchase Newco common shares shall be the Issuance Price. The method used to calculate the number of options to be received by each trustee of Wellsford, together with the number of options to be received, are set forth in Exhibit A(5) of the Wellsford Disclosure Letter. 4. Option Grant To David Kelley. Prior to the Merger, Wellsford shall use its best efforts to enter into an agreement with David Kelley pursuant to which David Kelley's existing options to purchase Wellsford Common Shares will be relinquished in exchange for a cash payment of $27.50 per share for each option less the exercise price per share. If Wellsford does not obtain David Kelley's consent to such an exchange, David Kelley's options shall either be exercised prior 5 to the Merger in accordance with the terms of the share option agreement between Wellsford and David Kelley dated December 13, 1994, pursuant to which the options were issued, or, if not exercised prior to the Merger, shall be converted into options to purchase common shares in the Surviving Trust as adjusted by Wellsford for the Exchange Ratio under the dilution and adjustment provisions of such share option agreement. All adjustments shall be made subject to the commercially reasonable approval of the Surviving Trust. 6 EXHIBIT K FORM OF CONSULTING AGREEMENT ---------------------------- THIS CONSULTING AGREEMENT (the "Agreement") is made and entered into as of the ____ day of _____________, 1997, by and between ERP OPERATING LIMITED PARTNERSHIP, an Illinois limited partnership ("ERP"), and __________________ ("Consultant"). Recitals -------- A. ERP's general partner intends to merge (the "Merger") with Roger, a Maryland real estate investment trust ("Roger"), pursuant to that certain Agreement and Plan of Merger dated January __, 1997 between ERP's general partner and Roger ("Merger Agreement"). B. Immediately following the Merger, the assets of Roger will be transferred to ERP. C. Prior to the Merger, Consultant was employed by Roger. D. ERP recognizes that the knowledge of Consultant will be beneficial in maintaining and improving the profitability of the assets of Roger transferred to ERP and that Consultant has significant real estate and business expertise that will be beneficial to ERP. Accordingly, ERP desires to retain Consultant to provide consulting services to ERP as provided herein, and Consultant desires to be so retained. E. Consultant may, as a consultant to ERP, have access to confidential information with respect to ERP and its affiliates, and has, as an employee of Roger, had access to confidential information of Roger and its subsidiaries. NOW, THEREFORE, for and in consideration of the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Duties. Consultant is hereby retained to serve as a senior management consultant to ERP, to answer questions and address issues concerning the operations, business strategies and marketing plans of ERP as may from time to time during the Term (as hereinafter defined) be reasonably requested by ERP. Such services shall be provided by Consultant solely to the senior executive officers of ERP at such times as shall be mutually convenient to Consultant and ERP; it being the parties' intention that Consultant be available to provide services regarding policies K-1 and strategy without becoming involved in the day-to-day operations of ERP. In no event will Consultant be required to perform services hereunder during any period while he is on vacation or is ill, or at times which conflict with other business commitments of Consultant. 2. Term. The term for providing consulting services hereunder shall commence on the date the Effective Time (as defined in the Merger Agreement) occurs and shall continue, unless earlier terminated pursuant to Section 6 below, for five (5) years thereafter (the "Term"). 3. Compensation. As compensation for Consultant's services rendered under this Agreement, ERP shall pay Consultant at the rate of $200,000 per annum, payable monthly in arrears. The compensation set forth in Section 3 will be the sole compensation payable to Consultant for consulting services and no additional compensation or fee will be payable by ERP to Consultant by reason of any benefit gained by ERP directly or indirectly through Consultant's consulting efforts hereunder, nor shall ERP be liable in any way for any additional compensation or fee for consulting services unless ERP shall have expressly agreed thereto in writing. The foregoing shall not prohibit Consultant from receiving a director's fee for acting as a director of ERP if such fee would otherwise be payable to him. 4. Reimbursement of Expenses. ERP shall reimburse Consultant for all reasonable out-of-pocket travel and other expenses incurred by Consultant at the request of ERP in rendering services required under the terms of this Agreement, such reimbursement to be on a monthly basis upon submission of a detailed monthly statement and reasonable documentation. 5. Independent Contractor Status. Consultant is an independent contractor under this Agreement and shall in no way be considered to be an agent or employee of ERP and, accordingly, Consultant shall not be entitled to any benefits, coverages or privileges made available to employees of ERP, including without limitation, social security, unemployment or pension payments or contributions. Consultant shall only consult and render advice, and shall not undertake to commit ERP to any course of action in relation to third persons, except as requested by ERP. ERP shall not deduct any social security or income taxes from Consultant's payments set forth in Section 3. 6. Confidentiality. (a) Acknowledgement of Proprietary Interest. Consultant recognizes the proprietary interest of ERP in Confidential and Proprietary Information (as hereinafter defined) of ERP and its affiliates. Consultant acknowledges and agrees that any and all Confidential and Proprietary Information communicated to, learned of, developed or otherwise acquired by Consultant in performing his duties hereunder and during the time he was an employee of Roger shall be and is the property of ERP and its affiliates. Consultant further acknowledges and understands that his disclosure of any Confidential and Proprietary Information could result in K-2 irreparable injury and damage to ERP. As used herein, "Confidential and Proprietary Information" means, but is not limited to, research, marketing and sales programs, pricing formula, contracts analyses, and all other concepts, ideas, materials or information prepared or performed for, by or on behalf of Roger, ERP or any of its affiliates by the employees, officers, directors, agents, representatives or consultants of Roger, ERP or any affiliate thereof. "Confidential and Proprietary Information" shall exclude information that is available generally to the public or which is disclosed to Consultant by any person who is not an employee of ERP or any of its affiliates and who did not breach any obligations of confidentiality by disclosing such information to Consultant. (b) Covenant Not-To-Divulge Confidential and Proprietary Information. Consultant acknowledges and agrees that ERP is entitled to prevent the disclosure of Confidential and Proprietary Information. As a portion of the consideration for the retention of Consultant and for the compensation being paid to Consultant by ERP, Consultant agrees at all times to hold in strictest confidence and not to disclose to any person, firm or corporation, other than to persons engaged by ERP to further the business of ERP, and not to use except in the pursuit of the business of ERP, Confidential and Proprietary Information, without the prior written consent of ERP; provided, however, that notwithstanding the foregoing, Consultant shall not be obligated to keep secret and not to disclose Confidential and Proprietary Information generally known to the public through no wrongful act of Consultant. The foregoing shall not be deemed to include general know-how and business experience of the Consultant which apply to businesses generally. Notwithstanding the foregoing, any disclosure of Confidential and Proprietary Information may be made to the extent required by applicable law or regulation or judicial or regulatory process provided the Consultant gives ERP notice thereof and an opportunity to seek a protective order with respect to the information so required to be disclosed. (c) Return of Materials. In the event of any termination of this Agreement for any reason whatsoever, or at any time upon the request of ERP, Consultant will promptly deliver to ERP all documents, data and other information pertaining to Confidential and Proprietary Information. 7. Termination. This Agreement and the consulting relationship created hereby shall terminate upon the earlier to occur of any of the following events: (a) the expiration of the Term; (b) the death of Consultant; (c) the disability of Consultant ("disability"), meaning Consultant's inability, because of mental or physical illness or incapacity, to perform his duties K-3 under this Agreement for a continuous period of 120 days, or for 120 days out of any 150-day period; or (d) the written agreement of Consultant and ERP. Notwithstanding anything to the contrary in this Agreement, the provisions of Sections 3 and 6 shall survive any termination, for whatever reason, of Consultant's engagement under this Agreement. In addition, in the event of the termination of Consultant's engagement for any reason, Consultant shall be entitled to any unpaid expenses payable as provided in Section 4 above. 8. Remedies. Consultant and ERP recognize and acknowledge that in the event of any default in, or breach of any of, the terms, conditions or provisions of this Agreement (either actual or threatened) by Consultant, ERP's remedies at law shall be inadequate. Accordingly, Consultant agrees that in such event, ERP shall have the right of specific performance and/or injunctive relief, without bond but upon due notice, in addition to all other remedies available to ERP at law or in equity. 9. Notices. Any notices, consents, demands, requests, approvals and other communications to be given under this Agreement by either party to the other shall be deemed to have been duly given in writing and personally delivered or sent by facsimile, overnight air courier, mail, registered or certified, postage prepaid with return receipt requested, as follows: If to ERP: ___________________________ ___________________________ ___________________________ Fax No.: __________________ If to Consultant: ___________________________ ___________________________ ___________________________ Fax No.: __________________ or to such other or additional address as either party may designate by giving written notice to the other party in accordance with this Agreement. Notices delivered personally shall be deemed communicated as of actual receipt; air couriered notices shall be deemed communicated on the next business day after delivery to such courier; faxed notices shall be deemed communicated when sent by facsimile with confirmed receipt (provided that a copy thereof is sent by mail or overnight air courier); and mailed notices shall be deemed communicated as of three days after mailing. K-4 10. Entire Agreement. This Agreement contains the entire agreement of the parties hereto with respect to the subject matter contained herein and supersedes all prior agreements and understandings, oral or written, between the parties hereto with respect to the subject matter hereof. No modification or amendment of any of the terms, conditions or provisions herein may be made otherwise than by written agreement signed by the parties hereto. 11. Governing Law. This Agreement and the rights and obligations of the parties hereto shall be governed, construed and enforced in accordance with the laws of the State of Illinois (except the choice of law rules). 12. Dispute Resolution. Any issue relating to the rights, duties, obligations and interpretations of this Agreement shall be resolved in accordance with the rules of the American Arbitration Association then in effect by a panel consisting of three individual members experienced in these matters, one member of which shall be selected by ERP and the remaining two members of which shall be selected by Consultant. 13. Parties Bound. This Agreement and the rights and obligations of the parties hereto hereunder shall be binding upon and inure to the benefit of ERP and Consultant and their respective heirs, personal representatives, successors and assigns. ERP shall have the right to assign this Agreement to any of its affiliates or to its successor, except in no event shall such assignment terminate the obligations of ERP to pay to Consultant the compensation set forth in Section 3 above. The duties of Consultant hereunder are personal to him, and no such duties may be assigned by him. Consultant may not assign any of his rights and benefits hereunder, except the right to receive payment pursuant to Section 3 may be assigned in whole (but not in part), to any entity owned solely by, or solely for the benefit of one or more of Consultant, the members of his immediate family, and [for Jeffrey Lynford's Agreement, insert Edward Lowenthal] [for Edward Lowenthal's Agreement, insert Jeffrey Lynford]; provided that no such assignment shall be effective until ten (10) days after written notice of such assignment has been delivered to ERP. In the event of an assignment pursuant to the preceding sentence, amounts otherwise payable to Consultant pursuant to Section 3 hereunder shall instead be payable to the permitted assignee. 14. Estate. If Consultant dies prior to the payment of all sums owed, or to be owed, to Consultant pursuant to Section 3, then such sums, as they become due, shall be paid to Consultant's estate. 15. Enforceability. If, for any reason, any provision in this Agreement should be held invalid in part by a court of competent jurisdiction, then it is the intent of each of the parties hereto that the balance of this Agreement be enforced to the fullest extent permitted by applicable law. K-5 16. Waiver of Breach. The waiver by either party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by any party. 17. Captions. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. 18. Costs. If it is necessary to enforce or interpret the terms of this Agreement by action at law or in equity, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which he or it may be entitled. 19. Affiliate. As used herein, an "affiliate" of either party means any person, corporation, partnership or other entity controlling, controlled by or under common control with such party; provided, however, that for purposes of this Agreement, Newco and its subsidiaries shall not be deemed to be affiliates of ERP. 20. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument, but only one of which need be produced. 21. Attorneys' Fees. Notwithstanding anything to the contrary set forth in Section 18 hereof, if ERP fails to make the payments required pursuant to Section 3 and such failure continues unremedied for a period of 30 days after written notice of such failure was delivered to ERP, then ERP shall reimburse Consultant for reasonable attorneys' fees incurred by Consultant in connection with an arbitration proceeding commenced by Consultant to collect such amount, such reimbursement to be made on a monthly basis within 15 days after receipt of a copy of a detailed bill for such legal services for such month. K-6 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. ERP OPERATING LIMITED PARTNERSHIP, an Illinois limited partnership By: EQUITY RESIDENTIAL PROPERTIES TRUST, a Maryland real estate investment trust, its general partner By:______________________________________ Its:____________________________________ ______________________________________________ K-7 EXHIBIT L --------- Equity Residential Properties Trust Two North Riverside Plaza, Suite 400 Chicago, Illinois 60606 Rudnick & Wolfe Robinson, Silverman, Pearce, 203 North LaSalle Street Aronsohn & Berman, LLP Suite 1800 1290 Avenue of the Americas Chicago, Illinois 60601 New York, N.Y. 10104 Re: Tax Opinion for Merger - Officer Certificate -------------------------------------------- Ladies and Gentlemen: In connection with the merger of Equity Residential Properties Trust, a Maryland real estate investment trust ("EQR"), with and into Wellsford Residential Properties Trust, a Maryland real estate investment trust ("Wellsford"), which shall thereafter be named Equity Residential Properties Trust, pursuant to the Registration Statement on Form S-4 (File No. ________), filed with the Securities and Exchange Commission (the "Registration Statement"), and certain related transactions, Rudnick & Wolfe, as counsel for EQR, and Robinson, Silverman, Pearce, Aronsohn & Berman, LLP, as counsel for Wellsford, have each been requested to render an opinion concerning certain federal income tax consequences of the proposed merger (the "Merger") of EQR with and into Wellsford. Unless otherwise specifically defined herein, all capitalized terms have the meaning assigned to them in the Registration Statement. Prior to the consummation of the Merger, and pursuant to that certain Contribution, Distribution and Assumption Agreement, by and between Wellsford and Wellsford Realty Properties, Inc., a Maryland corporation which is a wholly- owned subsidiary of Wellsford ("Newco") (the "Contribution Agreement"), Wellsford shall contribute certain of its assets to Newco in exchange for common stock of Newco (the "Newco Common Stock"). Immediately prior to the consummation of the Merger, Wellsford shall distribute such Newco Common Stock to the holders of the Wellsford Common Shares, pro-rata, as a distribution taxable under Section 301 of the Code (collectively, the "Spin-Off"). Immediately after the consummation of the Spin-Off, the Merger will be consummated pursuant to (i) an Agreement of Merger, by and between Wellsford and EQR, dated as of January 16, 1997 (the "Merger Agreement"), and (ii) the Articles of Merger, by and between Wellsford and EQR (the "Plan of Merger"), dated as of __________, 1997. In connection with the issuance of your legal opinion as described above, EQR hereby makes the following representations (intending that Rudnick & Wolfe and Robinson, Silverman, Pearce, Aronsohn & Berman, LLP will rely on such representations in rendering its opinion): 1. The Merger and Spin-Off are being effected for bona fide business reasons as described in the Joint Proxy Statement/Prospectus. 2. The fair market value of the Surviving Trust Common Shares and other consideration received by each holder of EQR Common Shares will be approximately equal to the fair market value of the EQR Common Shares surrendered in the exchange. 3. The fair market value of the Surviving Trust Preferred Shares and other consideration received by each holder of EQR Preferred Shares will be approximately equal to the fair market value of the EQR Preferred Shares surrendered in the exchange. 4. There is no plan or intention by the shareholders of EQR who own one percent or more of the EQR Common Shares, and to the best of the knowledge of the management of EQR, there is no plan or intention on the part of the remaining shareholders to sell, exchange or otherwise dispose of a number of Surviving Trust Common Shares received in the Merger that would reduce the EQR shareholders' ownership of Surviving Trust Common Shares to a number of shares having an aggregate value, as of the Effective Date, of less than 50 percent of the value of all of the formerly outstanding EQR Common Shares as of the same date. For purposes of this paragraph, Surviving Trust Common Shares exchanged for cash in lieu of fractional Surviving Trust Common Shares will be treated as outstanding EQR Common Shares at the Effective Time. Moreover, EQR Common Shares and Surviving Trust Common Shares held by their respective shareholders and otherwise sold, redeemed, or disposed of prior or subsequent to the Merger are taken into account for purposes of the calculations described in this paragraph. 5. There is no plan or intention by the shareholders of EQR who own one percent or more of any class of EQR Preferred Shares and to the best of the knowledge of the management of EQR, there is no plan or intention on the part of the remaining holders of any class of EQR Preferred Shares to sell, exchange or otherwise dispose of a number of Surviving Trust Preferred Shares received in the Merger that would reduce the EQR shareholders' ownership of any class of Surviving Trust Preferred Shares to a number of shares having an aggregate value, as of the Effective Date, of less than 50 percent of the value of all of the outstanding EQR Preferred Shares of such class as of the same date. For purposes of this paragraph, Surviving Trust Preferred Shares exchanged for cash in lieu of fractional Surviving Trust Preferred Shares will be treated as outstanding EQR Preferred Shares at the Effective Time. Moreover, EQR Preferred Shares and Surviving Trust Preferred Shares held by their respective shareholders and otherwise sold, redeemed, or disposed of prior or subsequent to the Merger are taken into account for purposes of the calculations described in this paragraph. 6. Surviving Trust has no plan or intention to reacquire any of the Surviving Trust Common Shares or Surviving Trust Preferred Shares to be issued in the Merger. 7. Surviving Trust has no plan or intention to sell or otherwise dispose of any of the assets of EQR acquired in the Merger, except for dispositions made in the ordinary course of business or transfers described in Section 368(a)(2)(C)./1/ 8. The liabilities of EQR assumed by Surviving Trust and the liabilities to which the transferred assets of EQR are subject were incurred by EQR in the ordinary course of its business. 9. Following the Merger, Surviving Trust will continue the historic business of EQR and will use a significant portion of EQR's historic business assets in a business. 10. Surviving Trust, EQR, and the shareholders of EQR will pay their respective expenses, if any, incurred in connection with the Merger. 11. There is no intercorporate indebtedness existing between EQR and Wellsford that was issued, acquired or will be settled at a discount. 12. Although EQR is an "investment company," as defined in Sections 368(a)(2)(F)(iii) and (iv), EQR is also a real estate investment trust, as defined in Section 856(a). 13. EQR is not under the jurisdiction of a court in a title 11 or similar case within the meaning of Section 368(a)(3)(A). 14. The fair market value of the assets of EQR transferred to Surviving Trust will equal or exceed the sum of the liabilities of EQR assumed by Surviving Trust plus the amount of liabilities, if any, to which the transferred assets are subject. 15. None of the compensation received by any shareholder-employee of EQR will be separate consideration for, or allocable to, any of his or her EQR Common Shares or EQR Preferred Shares. The compensation paid to any shareholder- employee of EQR will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services. None of the Surviving Trust Common Shares or Surviving Trust Preferred Shares received by any shareholder-employee of EQR will be in exchange for, or in consideration of, services rendered to Surviving Trust, EQR or any other entity by such shareholder-employee. 16. The payment of cash in lieu of fractional Surviving Trust Common Shares is solely for the purpose of avoiding the expense and inconvenience to Surviving Trust of issuing fractional shares and does not represent separately bargained-for consideration. The total cash consideration that will be paid in the Merger to EQR shareholders in lieu of issuing fractional Surviving Trust Common Shares will not exceed one percent of the total consideration that will be issued in the Merger to the EQR shareholders in exchange for their EQR Common Shares. The fractional share - ---------------- /1/ Unless otherwise specifically indicated, all Section references are to the Internal Revenue Code of 1986, as amended (the "Code"). interests of each EQR shareholder will be aggregated, and no EQR shareholder will receive cash in an amount equal to or greater than the value of one full Surviving Trust Common Share. 17. EQR has the corporate power and authority to make all of the representations contained herein. EQUITY RESIDENTIAL PROPERTIES TRUST, a Maryland real estate investment trust By: --------------------------------- Its: -------------------------------- EXHIBIT M --------- MATTERS TO BE ADDRESSED IN WELLSFORD AND NEWCO OPINION OF COUNSEL 1. Wellsford is a real estate investment trust duly organized, validly existing under the laws of the State of Maryland and is in good standing with the State Department of Assessment and Taxation in Maryland. 2. Newco is a corporation duly incorporated, validly existing under the laws of the State of Maryland and is in good standing with the State Department of Assessment and Taxation in Maryland. 3. The execution, delivery and performance of the Agreement and the Contribution Agreement have been duly and validly authorized by all necessary trust action on the part of Wellsford. 4. The execution, delivery and performance of the Contribution Agreement, the Newco Stock Purchase Agreement, the Palomino Agreement, the Palomino Credit Enhancement Agreement and the Sonterra Right of First Offer Agreement have been duly and validly authorized by all necessary corporate action on the part of Newco. 5. The Agreement and the Contribution Agreement have been duly executed and delivered and constitute the valid and legally binding obligations of Wellsford enforceable against Wellsford in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity and commercial reasonableness. 6. The Contribution Agreement, the Newco Stock Purchase Agreement, the Palomino Agreement, the Palomino Credit Enhancement Agreement and the Sonterra Right of First Offer Agreement have been duly executed and delivered and constitute the valid and legally binding obligations of Newco enforceable against Newco in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity and commercial reasonableness. 7. To our knowledge and belief without due inquiry, there are no existing options, warrants, calls, subscriptions, convertible securities, or other rights, agreements or commitments which obligate Wellsford to issue, transfer or sell any shares of stock or equity interest of Wellsford except as disclosed in the Agreement, the Wellsford Disclosure Letter or which are immaterial in amount. 8. To our knowledge and belief without due inquiry, there are no existing options, warrants, calls, subscriptions, convertible securities, or other rights, agreements or commitments which obligate Wellsford to issue, transfer or sell any shares of stock or equity interest of Newco except as disclosed in Schedule 3.3 of the Newco Stock Purchase Agreement or which are immaterial in amount. 9. Neither the execution and delivery by Wellsford of the Agreement or the Contribution Agreement nor the consummation by Wellsford of the transactions contemplated thereby in accordance with the terms thereof, will conflict with or result in a breach of any provision of the Declaration of Trust or By-laws of Wellsford and to our knowledge and belief without due inquiry, will not violate, result in a breach of, or constitute a default under any contract, agreement or instrument to which Wellsford is a party or by which Wellsford or its properties is bound, which violation, breach or default individually or in the aggregate, should reasonably be expected to have a Material Adverse Effect. 10. Neither the execution and delivery by Newco of the Newco Stock Purchase Agreement, the Palomino Agreement, the Palomino Credit Enhancement Agreement or the Sonterra Right of First Offer Agreement nor the consummation by Newco of the transactions contemplated thereby in accordance with the terms thereof, will conflict with or result in a breach of any provision of the Articles of Incorporation or By-laws of Newco and to our knowledge and belief without due inquiry, will not violate, result in a breach of, or constitute a default under any contract, agreement or instrument to which Newco is a party or by which Newco or its properties is bound, which violation, breach or default individually or in the aggregate, should reasonably be expected to have a Material Adverse Effect. 11. To our knowledge and belief without due inquiry, and except as disclosed in the Wellsford SEC Documents or in Schedule 2.7 to the Wellsford Disclosure Letter, and other than personal injury and other routine tort litigation arising from the ordinary course of operations of Wellsford and the Wellsford Subsidiaries which are covered by adequate insurance, there is no suit, action or proceeding pending or threatened in writing against or affecting Wellsford or any Wellsford Subsidiary that, individually or in the aggregate, could reasonably be expected to (i) have a Wellsford Material Adverse Effect or (ii) prevent the consummation of any of the transactions contemplated by this Agreement, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against Wellsford or any Wellsford Subsidiary having, or which, insofar as reasonably can be foreseen, in the future would have, any such effect. Such counsel shall also state the following: In the course of serving as special counsel to Wellsford, we have participated in discussions with representatives of Wellsford during which the contents of drafts of the Form S-4 and the Proxy Statement/Prospectus were discussed and revised. Although we have made no independent investigation or verification of the correctness and completeness of the information included in the Form S-4 or the Proxy Statement/Prospectus, in the course of our participation in the preparation of the Form S-4, nothing has come to our attention that has caused us to believe that the Form S-4 and the prospectus included therein (except for the financial statements, supporting schedules and other financial, statistical and market data included therein, the section captioned "Management's Discussion and Analysis of Results of Operations and Financial Condition" relating to Wellsford and the information relating to and supplied by EQR, as to which we do not express any belief), at the time the Form S-4 became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Proxy Statement/Prospectus (except for the financial statements, supporting schedules and other financial, statistical and market data included therein, and the information relating to and supplied by EQR, as to which we do not express any belief), in each case at the time it was mailed to the respective shareholders of EQR and Wellsford, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. EXHIBIT N --------- Wellsford Residential Properties Trust 610 Fifth Avenue Seventh Floor New York, N.Y. 10020 Robinson, Silverman, Pearce, Rudnick & Wolfe Aronsohn & Berman, LLP 203 North LaSalle Street 1290 Avenue of the Americas Suite 1800 New York, N.Y. 10104 Chicago, Illinois 60601 Re: Tax Opinion for Merger - Officer Certificate -------------------------------------------- Ladies and Gentlemen: In connection with the merger of Equity Residential Properties Trust, a Maryland real estate investment trust ("EQR"), with and into Wellsford Residential Properties Trust, a Maryland real estate investment trust ("Wellsford" or the "Surviving Trust"), which shall thereafter be named Equity Residential Properties Trust, pursuant to the Registration Statement on Form S-4 (File No. ________), filed with the Securities and Exchange Commission (the "Registration Statement"), and certain related transactions, Robinson, Silverman, Pearce, Aronsohn & Berman, LLP, as counsel to Wellsford, and Rudnick & Wolfe, as counsel to EQR, have each been requested to render an opinion concerning certain federal income tax consequences of the proposed merger (the "Merger") of EQR with and into Wellsford. Unless otherwise specifically defined herein, all capitalized terms have the meaning assigned to them in the Registration Statement. Prior to the consummation of the Merger, and pursuant to that certain Contribution, Distribution and Assumption Agreement, by and between Wellsford and Wellsford Realty Properties, Inc., a Maryland corporation which is a wholly- owned subsidiary of Wellsford ("Newco"), (the "Contribution Agreement"), Wellsford shall contribute certain of its assets to Newco in exchange for common stock of Newco (the "Newco Common Stock"). Immediately prior to the consummation of the Merger, Wellsford shall distribute such Newco Common Stock to the holders of the Wellsford Common Shares, pro-rata, as a distribution taxable under Section 301 of the Code (collectively, the "Spin-Off"). Immediately after the consummation of the Spin-Off, the Merger will be consummated pursuant to (i) an Agreement of Merger, by and between Wellsford and EQR, dated as of January 16, 1997 (the "Merger Agreement"), and (ii) the Articles of Merger, by and between Wellsford and EQR (the "Plan of Merger"), dated as of __________, 1997. In connection with the issuance of your legal opinion as described above, Wellsford hereby makes the following representations (intending that Robinson, Silverman, Pearce, Aronsohn & Berman, LLP and Rudnick & Wolfe will rely on such representations in rendering its opinion): 1. The Merger and Spin-Off are being effected for bona fide business reasons as described in the Joint Proxy Statement/Prospectus. 2. The fair market value of the Surviving Trust Common Shares and other consideration received by each holder of EQR Common Shares will be approximately equal to the fair market value of the EQR Common Shares surrendered in the exchange. 3. The fair market value of the Surviving Trust Preferred Shares and other consideration received by each holder of EQR Preferred Shares will be approximately equal to the fair market value of the EQR Preferred Shares surrendered in the exchange. 4. To the knowledge of Wellsford, Surviving Trust has no plan or intention to reacquire any of the Surviving Trust Common Shares or Surviving Trust Preferred Shares to be issued in the Merger. 5. To the knowledge of Wellsford, Surviving Trust has no plan or intention to sell or otherwise dispose of any of the assets of EQR acquired in the Merger, except for dispositions made in the ordinary course of business or transfers described in Section 368(a)(2)(C)./1/ 6. To the knowledge of Wellsford, following the Merger, Surviving Trust will continue the historic business of EQR and will use a significant portion of EQR's historic business assets in a business. 7. Wellsford will pay separately its own expenses, if any, incurred in connection with the Merger. 8. There is no intercorporate indebtedness existing between EQR and Wellsford that was issued, acquired or will be settled at a discount. 9. Although Wellsford is an "investment company," as defined in Sections 368(a)(2)(F)(iii) and (iv), Wellsford is also a real estate investment trust, as defined in Section 856(a). 10. Wellsford is not under the jurisdiction of a court in a title 11 or similar case within the meaning of Section 368(a)(3)(A). 11. The fair market value of the assets of EQR transferred to Surviving Trust will equal or exceed the sum of the liabilities of EQR assumed by Surviving Trust plus the amount of liabilities, if any, to which the transferred assets are subject. - ------------------- /1/ Unless otherwise specifically indicated, all Section references are to the Internal Revenue Code of 1986, as amended (the "Code"). 12. To the knowledge of Wellsford: (1) None of the compensation received by any shareholder-employee of EQR will be separate consideration for, or allocable to, any of his or her EQR Common Shares or EQR Preferred Shares, (2) the compensation paid to any shareholder-employee of EQR will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's length for similar services, and (3) none of the Surviving Trust Common Shares or Surviving Trust Preferred Shares received by any shareholder-employee of EQR will be in exchange for, or in consideration of, services rendered to Surviving Trust, EQR or any other entity by such shareholder-employee. 13. The payment of cash in lieu of fractional Surviving Trust Common Shares is solely for the purpose of avoiding the expense and inconvenience to Surviving Trust of issuing fractional shares and does not represent separately bargained-for consideration. The total cash consideration that will be paid in the Merger to Wellsford shareholders in lieu of issuing fractional Surviving Trust Common Shares will not exceed one percent of the total consideration that will be issued in the Merger to the Wellsford shareholders in exchange for their Wellsford Common Shares. The fractional share interests of each Wellsford shareholder will be aggregated, and no Wellsford shareholder will receive cash in an amount equal to or greater than the value of one full Surviving Trust Common Share. 14. Wellsford has the corporate power and authority to make all of the representations contained herein. WELLSFORD RESIDENTIAL PROPERTIES TRUST, a Maryland real estate investment trust By: ----------------------------- Its: ---------------------------- EXHIBIT O MATTERS TO BE ADDRESSED IN EQR OPINION OF COUNSEL 1. EQR is a real estate investment trust duly organized, validly existing under the laws of the State of Maryland and is in good standing with the State Department of Assessments and Taxation in Maryland. 2. ERP Operating Partnership is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Illinois. 3. The execution, delivery and performance of the Agreement has been duly and validly authorized by all necessary trust action on the part of EQR. 4. The execution, delivery and performance of the Newco Stock Purchase Agreement, the Palomino Agreement, the Palomino Credit Enhancement Agreement and the Sonterra Right of First Offer Agreement have been duly and validly authorized by all necessary partnership action on the part of ERP Operating Partnership. 5. The Agreement has been duly executed and delivered and constitutes the valid and legally binding obligations of EQR enforceable against EQR in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity and commercial reasonableness. 6. The Newco Stock Purchase Agreement, the Palomino Agreement, the Palomino Credit Enhancement Agreement and the Sonterra Right of First Offer Agreement have been duly executed and delivered and constitute the valid and legally binding obligations of ERP Operating Partnership enforceable against ERP Operating Partnership in accordance with its terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity and commercial reasonableness. 7. To our knowledge and belief without due inquiry, there are no existing options, warrants, calls, subscriptions, convertible securities, or other rights, agreements or commitments which obligate EQR to issue, transfer or sell any shares of stock or equity interest of EQR except as disclosed in the Agreement, the EQR Disclosure Letter or which are immaterial in amount. 8. Neither the execution and delivery by EQR of the Agreement nor the consummation by EQR of the transactions contemplated thereby in accordance with the terms thereof, will conflict with or result in a breach of any provision of the Declaration of Trust or By-laws of EQR or the Partnership Agreement of ERP Operating Partnership and to our knowledge and belief without any duty of inquiry, will not violate, result in a breach of, or constitute a default under any contract, agreement or instrument to which EQR is a party or by which ERP or its properties is bound, which violation, breach or default individually or in the aggregate, should reasonably be expected to have a Material Adverse Effect. 9. Neither the execution and delivery by ERP Operating Partnership of the Newco Stock Purchase Agreement, the Palomino Agreement, the Palomino Credit Enhancement Agreement or the Sonterra Right of First Offer Agreement nor the consummation by ERP Operating Partnership of the transactions contemplated thereby in accordance with the terms thereof, will conflict with or result in a breach of any provision of the Declaration of Trust or By-laws of ERP or the Partnership Agreement of ERP Operating Partnership and to our knowledge and belief without due inquiry, will not violate, result in a breach of, or constitute a default under any contract, agreement or instrument ERP Operating Partnership is a party or by which ERP Operating Partnership or its properties is bound, which violation, breach or default individually or in the aggregate, should reasonably be expected to have a Material Adverse Effect. 10. To our knowledge and belief without due inquiry, and except as disclosed in the EQR SEC Documents or in Schedule 3.8 to the EQR Disclosure Letter and, other than personal injury and other routine tort litigation arising from the ordinary course of operations of EQR and the EQR Subsidiaries which are covered by adequate insurance, there is no suit, action or proceeding pending or threatened in writing against or affecting EQR or any EQR Subsidiary that, individually or in the aggregate, could reasonably be expected to (i) have a EQR Material Adverse Effect, or (ii) prevent the consummation of any of the transactions contemplated by this Agreement, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against EQR or any EQR Subsidiary having, or which, insofar as reasonably can be foreseen, in the future would have, any such effect. Such counsel shall also state the following: In the course of serving as special counsel to EQR we have participated in discussions with representatives of EQR during which the contents of drafts of the Form S-4 and the Proxy Statement/Prospectus were discussed and revised. Although we have made no independent investigation or verification of the correctness and completeness of the information included in the Form S-4 or the Proxy Statement/Prospectus, in the course of our participation in the preparation of the Form S-4, nothing has come to our attention that has caused us to believe that the Form S-4 and the prospectus included therein (except for the financial statements, supporting schedules and other financial, statistical and market data included therein, the section captioned "Management's Discussion and Analysis of Results of Operations and Financial Condition" relating to EQR and the information relating to and supplied by Wellsford, as to which we do not express any belief), at the time the Form S-4 became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Proxy Statement/Prospectus (except for the financial statements, supporting schedules and other financial, statistical and market data included therein, and the information relating to and supplied by Wellsford, as to which we do not express any belief), in each case at the time it was mailed to the respective shareholders of EQR and Wellsford, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. EX-5.1 3 OPINION OF BALLARD SPAHR FILE NUMBER 833605 April 21, 1997 The Board of Trustees Equity Residential Properties Trust The Board of Trustees Wellsford Residential Property Trust Re: Equity Residential Properties Trust Registration Statement on Form S-4 Registration No. 333-24653 ----------------------------------- Ladies and Gentlemen: We have served as Maryland counsel to Wellsford Residential Property Trust, a Maryland real estate investment trust (the "Company"), and Equity Residential Properties Trust, a Maryland real estate investment trust ("EQR"), in connection with certain matters of Maryland law arising out of the issuance by the Company of 13,095,727 common shares of beneficial interest, par value $.01 per share, of the Company (the "Shares"), to its current common shareholders, in connection with the merger (the "Merger") of EQR with and into the Company, pursuant to the Agreement and Plan of Merger, dated January 16, 1997, by and between the Company and EQR (the "Merger Agreement"), as described in the above-referenced Registration Statement (the "Registration Statement"), under the Securities Act of 1933, as amended (the "1933 Act"). Capitalized terms used but not defined herein shall have the meanings given to them in the Amended Registration Statement. In connection with our representation of the Company, and as a basis for the opinion hereinafter set forth, we have examined originals, or copies certified or otherwise identified Equity Residential Properties Trust Wellsford Residential Property Trust April 21, 1997 Page 2 to our satisfaction, of the following documents (hereinafter collectively referred to as the "Documents"): 1. The Registration Statement in the form in which it was transmitted to the Securities and Exchange Commission (the "Commission") on April 4, 1997, including the related form of Joint Proxy Statement/Prospectus/Information Statement (the "Proxy Statement/Prospectus") included therein; 2. The Amended and Restated Declaration of Trust of the Company, certified as of a recent date by the State Department of Assessments and Taxation of Maryland (the "SDAT"); 3. The Bylaws of the Company, certified as of a recent date by its Secretary; 4. Resolutions adopted by the Board of Trustees, or a duly authorized committee thereof, relating to (i) the sale and issuance of the Shares and (ii) the approval of the Merger Agreement, certified as of a recent date by the Secretary of the Company; 5. The Merger Agreement; 6. A certificate of the SDAT, as of a recent date, as to the good standing of the Company; 7. A certificate executed by the Secretary of the Company, dated the date hereof; 8. Such other documents and matters as we have deemed necessary or appropriate to express the opinion set forth in this letter, subject to the assumptions, limitations and qualifications stated herein. In expressing the opinion set forth below, we have assumed, and so far as is known to us there are no facts inconsistent with, the following: Equity Residential Properties Trust Wellsford Residential Property Trust April 21, 1997 Page 3 1. Each of the parties (other than the Company and EQR) executing any of the Documents has duly and validly executed and delivered each of the Documents to which such party is a signatory, and such party's obligations set forth therein are legal, valid and binding and are enforceable in accordance with all stated terms except as limited (a) by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other laws relating to or affecting the enforcement of creditors' rights and (b) by general equitable principles. 2. Each individual executing any of the Documents on behalf of a party (other than the Company and EQR) is duly authorized to do so. 3. Each individual executing any of the Documents, whether on behalf of such individual or another person, is legally competent to do so. 4. All Documents submitted to us as originals are authentic. All Documents submitted to us as certified or photostatic copies conform to the original documents. All signatures on all such Documents are genuine. All public records reviewed or relied upon by us or on our behalf are true and complete. All statements and information contained in the Documents are true and complete, however, we have not relied upon such statements and information to the extent that they constitute matters of Maryland law as to which we express an opinion herein. There are no oral or written modifications or amendments to the Documents, by action or omission of the parties or otherwise. 5. The Shares will be evidenced by certificates substantially in the form of the certificates which currently evidence EQR's common shares of beneficial interest, $.01 par value per share. The phrase "known to us" is limited to the actual knowledge, without independent inquiry, of the lawyers at our Equity Residential Properties Trust Wellsford Residential Property Trust April 21, 1997 Page 4 firm who have performed legal services in connection with the issuance of this opinion. Based upon the foregoing, and subject to the assumptions, limitations and qualifications stated herein, it is our opinion that: 1. The Company is a real estate investment trust duly formed and validly existing under and by virtue of the laws of the State of Maryland and is in good standing with the SDAT. 2. The Shares have been duly and validly authorized and, when and if issued in accordance with the resolutions of the Board of Trustees of the Company authorizing their issuance and the Merger Agreement, will be duly and validly issued, fully paid and nonassessable. The foregoing opinion is limited to the substantive laws of the State of Maryland and we do not express any opinion herein concerning any other law. We express no opinion as to compliance with any federal or state securities laws (including the securities laws of the State of Maryland). We assume no obligation to supplement this opinion if any applicable law changes after the date hereof or if we become aware of any fact that might change the opinion expressed herein after the date hereof. This opinion is being furnished to you solely for your submission to the Commission as an exhibit to the Registration Statement. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of the name of our firm in the section entitled "Legal Matters" in the Registration Statement. In giving this consent, we do not admit Equity Residential Properties Trust Wellsford Residential Property Trust April 21, 1997 Page 5 that we are within the category of persons whose consent is required by Section 7 of the 1933 Act. Very truly yours, /s/ Ballard Spahr Andrews & Ingersoll C:\WPF\368903.001 EX-8.1 4 OPINION OF RUDNICK RE: TAXES EXHIBIT 8.1 (312) 368-4000 April 21, 1997 Equity Residential Properties Trust Two North Riverside Plaza, Suite 400 Chicago, IL 60606 Re: Tax Opinion for Merger with Wellsford Residential Property Trust ---------------------------------------------------------------- Ladies and Gentlemen: You have requested our opinion as to the federal income tax consequences of the proposed merger (the "Merger") of Equity Residential Properties Trust, a Maryland real estate investment trust ("EQR"), with and into Wellsford Residential Property Trust, a Maryland real estate investment trust ("Wellsford"). As provided and/or described in that certain Contribution, Distribution and Assumption Agreement, by and between Wellsford and Wellsford Real Properties, Inc. ("WRP Newco"), dated January 16, 1997 (the "Contribution Agreement"), and the Registration Statement (defined below), immediately prior to the Merger (i) Wellsford will contribute certain of its assets to WRP Newco, (ii) WRP Newco will assume certain liabilities of Wellsford, and (iii) Wellsford will distribute to the Wellsford Common Shareholders, pro rata, all of the outstanding shares of WRP Newco Common owned by Wellsford (the "Distribution"). Immediately after the consummation of the Distribution, EQR will be merged, in accordance with the applicable provisions of the Maryland General Corporation Law ("MGCL"), with and into Wellsford, with Wellsford as the surviving trust (the "Surviving Trust"). As part of the Merger, Wellsford's name will change to "Equity Residential Properties Trust." The Merger will be voted upon, as required by law, by EQR shareholders and Wellsford shareholders at special meetings. April 21, 1997 Page 2 The Merger will be consummated pursuant to (i) an Agreement and Plan of Merger, dated as of January 16, 1997, between EQR and Wellsford (the "Merger Agreement"), and (ii) the Articles of Merger, by and between EQR and Wellsford, entered into in connection therewith (the "Articles"). The Merger Agreement, the Articles and the Contribution Agreement are collectively referred to herein as the "Agreements." The Merger, Distribution and the Agreements are more fully described in the Joint Proxy Statement/Prospectus/Information Statement (the "Joint Proxy Statement/Prospectus"), included in the Registration Statement on Form S-4 (File No. 333-24653), filed by EQR and Wellsford with the Securities and Exchange Commission, as amended (the "Registration Statement"). Terms not otherwise defined in this letter shall have the meanings assigned to them in the Agreements and/or the Joint Proxy Statement/Prospectus. As of the Effective Time and by virtue of the Merger: (i) each share of Wellsford Common outstanding immediately prior to the Effective Time shall be converted into .625 shares of Survivor Common; (ii) each share of EQR Common outstanding immediately prior to the Effective Time will be converted into one share of Survivor Common; (iii) each share of Wellsford Preferred will be converted into one share of Survivor Preferred, having the same preferences and other terms as the Wellsford Preferred previously outstanding of the same series; and (iv) each share of EQR Preferred will be converted into one share of Survivor Preferred, having the same preferences and other terms as the EQR Preferred previously outstanding of the same series. No fractional shares of Survivor Common will be issued in connection with the Merger. In lieu thereof, holders of Wellsford Common will receive cash. You have directed us to assume in preparing this opinion, and our opinion is based on the understanding, that (i) the Merger and related transactions will be consummated in accordance with the terms, conditions and other provisions of the Agreements, and (ii) all of the factual information, descriptions, representations and assumptions set forth in this letter, in the Agreements, in the letter to us from EQR, dated April 21, 1997, the letter to us from Wellsford, dated April 21, 1997, and in the Joint Proxy Statement/Prospectus are accurate and complete and will be accurate and complete at the time of the Merger (the "Effective Date"). We have not independently verified any factual matters relating to the Merger or the Distribution in connection with or apart from our preparation of this opinion, and accordingly, our opinion does not take into account any matters not set forth herein which might have been disclosed by independent verification. In connection with the rendering of this opinion, we have assumed or obtained representation and are relying thereon (without any independent investigation thereof) that: April 21, 1997 Page 3 1. Original documents (including signatures) are authentic, documents submitted to us as copies conform to the original documents (which are authentic), and there has been (or will be as of the Effective Time of the Merger) due execution and delivery of all documents where due execution and delivery are prerequisites to effectiveness thereof; 2. Any representation or statement referred to above made "to the best of knowledge" or otherwise similarly qualified is correct without such verification; and 3. The Merger will be effective under applicable State law. Based upon our review of the Agreements, the Joint Proxy Statement/Prospectus and such other documents as we have deemed necessary and upon representations made to us by EQR and certain beneficial owners of shares of EQR Common, we are of the opinion that, assuming the Merger and all other events occur as contemplated in the Agreements and the Joint Proxy Statement/Prospectus, under the United States federal income tax laws in effect on the date hereof: (i) the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code, and EQR and Wellsford will each be a party to such reorganization within the meaning of Section 368(b) of the Code; (ii) no gain or loss will be recognized by EQR as a result of the Merger; (iii) no gain or loss will be recognized by the shareholders of EQR upon the exchange of their EQR Common solely for Survivor Common pursuant to the Merger; (iv) no gain or loss will be recognized by the shareholders of EQR upon the exchange of their EQR Preferred solely for Survivor Preferred pursuant to the Merger; (v) the tax basis of the shares of Survivor Common received or deemed to be received in exchange for shares of EQR Common pursuant to the Merger will be the same as the tax basis of EQR Common exchanged therefore; (vi) the tax basis of the shares of Survivor Preferred received or deemed to be received in exchange for shares of EQR Preferred pursuant to the Merger will be the same as the tax basis of EQR Preferred exchanged therefore; (vii) the holding period for shares of Survivor Common received in exchange for shares of EQR Common pursuant to the Merger will include the period that such shares April 21, 1997 Page 4 of EQR Common were held by the holder, provided such shares of EQR Common were held as capital assets by the holder at the Effective Time; (viii) the holding period for shares of Survivor Preferred received in exchange for shares of EQR Preferred pursuant to the Merger will include the period that such shares of EQR Preferred were held by the holder, provided such shares of EQR Preferred were held as capital assets by the holder at the Effective Time; and (ix) the statement of federal income tax matters and consequences described in the Joint Proxy Statement/Prospectus under the heading "The Merger - Federal Income Tax Consequences," to the extent that it constitutes matters of law or legal conclusions, is accurate in all material respects. The foregoing opinion is limited to the matters specifically discussed herein, which are the only matters to which you have requested our opinion. We do not address any other federal income tax consequences of the Merger or any other matters of federal law and have not considered matters (including state or local tax consequences) arising under the laws of any jurisdiction other than the laws of the United States. This opinion letter is limited to the matters stated herein, and no opinion is implied or may be inferred beyond the matters expressly stated herein. This opinion letter shall not be construed as or deemed to be a guaranty or insuring agreement. You should be aware that an opinion of counsel represents only counsel's best legal judgment, and has no binding effect or official status of any kind, and that no assurance can be given that contrary positions may not be taken by the Internal Revenue Service or that a court considering the issues would not hold otherwise. This opinion is rendered as of the date hereof based on the law and facts in existence on the date hereof, and we do not undertake, and hereby disclaim, any obligation to advise you of any changes in law or fact, whether or not material, which may be brought to our attention at a later date. In rendering this opinion, we have assumed that there will be no change in the applicable laws of the State of Maryland, or in the Code, the regulations promulgated thereunder by the Treasury Department, and the interpretations of the Code and such regulations by the courts and the Internal Revenue Service, all as they are in effect and exist at the date of this letter. With respect to the last assumption, it should be noted that statutes, regulations, judicial decisions, and administrative interpretations are subject to change at any time and, in some circumstances, with retroactive effect. A material change that is made after the date hereof in any of the foregoing bases for our opinions could affect our conclusions. Moreover, if the facts vary from those relied upon (including if any representations, warranties, covenants or assumptions upon which we have April 21, 1997 Page 5 relied are inaccurate, incomplete, breached or ineffective), our opinion contained herein could be inapplicable. We hereby consent to the references to our firm appearing in the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement. April 21, 1997 Page 6 This opinion is being delivered solely for the purpose of satisfying the condition set forth in Section 6.2(e) of the Merger Agreement; it may not be relied upon or utilized for any other purpose or by any other person or entity, and except as provided above, may not be quoted, in whole or in part, or otherwise be referred to, nor filed with or furnished to any governmental agency or other person or entity, without the prior written consent of this firm. Very truly yours, /s/ Rudnick & Wolfe RUDNICK & WOLFE EX-8.2 5 OPINION OF RUDNICK RE: REIT QUALIFICATIONS EXHIBIT 8.2 (312) 368-4000 April 21, 1997 Wellsford Residential Property Trust 610 Fifth Avenue New York, New York 10020 Re: Tax Opinion for S-4 Registration Statement - REIT Status/Partnership -------------------------------------------------------------------- Classification - -------------- Ladies and Gentlemen: In connection with the proposed merger of Equity Residential Properties Trust, a Maryland real estate investment trust ("EQR"), with and into Wellsford Residential Property Trust, a Maryland real estate investment trust (the "Surviving Trust"), which shall thereafter be named "Equity Residential Properties Trust", pursuant to the Joint Proxy Statement/Prospectus/Information Statement (the "Joint Proxy Statement/Prospectus"), included in the Registration Statement on Form S-4 (File No. 333-24653), filed with the Securities and Exchange Commission, as amended (the "Registration Statement"), you have requested our opinion, as counsel to EQR, concerning: (i) the qualification and taxation of EQR as a real estate investment trust (a "REIT") under the Internal Revenue Code of 1986, as amended (the "Code"), for the taxable years ending December 31, 1993 through December 31, 1996; (ii) the qualification and taxation of the Surviving Trust as a REIT under the Code subsequent to the Merger; and (iii) the classification of the ERP Operating Partnership as a partnership for federal income tax purposes. Unless otherwise specifically defined herein, all capitalized terms have the meaning assigned to them in the Joint Proxy Statement/Prospectus as contained in the Registration Statement. In connection with rendering the opinions expressed below, we have examined originals (or copies identified to our satisfaction as true copies of the originals) of the following documents (collectively, the "Reviewed Documents"): (a) Amended and Restated Limited Partnership Agreement of ERP Operating Limited Partnership, an Illinois limited partnership, dated as of September 30, 1995, as amended (the "Partnership Agreement"); April 21, 1997 Page 2 (b) The Registration Statement; and (c) Such other documents as may have been presented to us by EQR from time to time. In addition, we have relied upon (i) EQR's certificate, dated April 21, 1997 (the "EQR Officer's Certificate"), executed by a duly appointed officer of EQR, setting forth certain representations relating to the organization and operation of EQR and ERP Operating Partnership before the Merger and the Surviving Trust and ERP Operating Partnership subsequent to the Merger, and (ii) Wellsford's certificate, dated April 21, 1997 (the "Wellsford Officer's Certificate"), executed by a duly appointed officer of Wellsford, setting forth certain representations relating to the organization and operation of Wellsford before the Merger (collectively, the EQR Officer's Certificate and Wellsford Officer's Certificate are referred to herein as the "Officer Certificates"). For the purposes of our opinion, we have not made an independent investigation of the facts set forth in the documents we reviewed. We consequently have assumed that the information presented in such documents or otherwise furnished to us accurately and completely describes all material facts relevant to our opinion. In the course of our representation of EQR, no information has come to our attention that would cause us to question the accuracy or completeness of the representations contained in the Officer Certificates or of the Reviewed Documents in a material way. In our review, we have assumed, with your consent, that all of the representations and statements set forth in the documents we reviewed are true and correct, and all of the obligations imposed by any such documents on the parties thereto have been and will be performed or satisfied in accordance with their terms. We have also assumed the genuineness of all signatures, the proper execution of all documents, the authenticity of all documents submitted to us as originals, the conformity to originals of documents submitted to us as copies, and the authenticity of the originals from which any copies were made. In rendering these opinions, we have assumed that the transactions contemplated by the Reviewed Documents will be consummated in accordance with the terms and provisions of such documents, and that such documents accurately reflect the material facts of such transactions. In addition, the opinions are based on the correctness of the following specific assumptions: (i) prior to the Merger, EQR, ERP Operating Partnership and Wellsford each have been operated in the manner described in the Partnership Agreement or other organizational documents of each such entity and in the Joint Proxy Statement/Prospectus, and all terms and provisions of such agreements and documents have been complied with by all parties thereto; (ii) following the merger, the Surviving Trust and the ERP Operating Partnership will each be operated in the manner described in the Partnership Agreement or other organizational documents of each such entity and in the Joint Proxy Statement/Prospectus, and all terms and provisions of such April 21, 1997 Page 3 agreements and documents will be complied with by all parties thereto; (iii) EQR and the Surviving Trust are each validly organized and duly formed real estate investment trusts under the laws of the State of Maryland; and (iv) there has been no change in the applicable laws of the State of Maryland, or in the Code, the regulations promulgated thereunder by the Treasury Department, and the interpretations of the Code and such regulations by the courts and the Internal Revenue Service, all as they are in effect and exist at the date of this letter. With respect to the last assumption, it should be noted that statutes, regulations, judicial decisions, and administrative interpretations are subject to change at any time and, in some circumstances, with retroactive effect. A material change that is made after the date hereof in any of the foregoing bases for our opinions could affect our conclusions. Moreover, the qualification and taxation of each of EQR and the Surviving Trust as a REIT depends upon its ability to meet, through actual annual operating results, distribution levels and diversity of share ownership and the various qualification tests imposed under the Code, the results of which will not be reviewed by the undersigned. Accordingly, no assurance can be given that the actual results of the operations of EQR or the Surviving Trust for any one taxable year will satisfy such requirements. Based upon and subject to the foregoing, it is our opinion that: (i) EQR was organized and has operated in conformity with the requirements for qualification as a REIT under the Code for the taxable years ended December 31, 1993 through December 31, 1996; and (ii) assuming the Merger and all other events occur as contemplated in the Agreements and the Registration Statement: (a) the Surviving Trust's proposed method of operation, as described in the Joint Proxy Statement/Prospectus and as represented in the Officer Certificates, will enable it to satisfy the requirements for qualification and taxation as a REIT under the Code; and (b) the ERP Operating Partnership will be classified as a partnership, and not as an association taxable as a corporation, for federal income tax purposes under Code Section 7701 and the Treasury Regulations promulgated thereunder. Other than as expressly stated above, we express no opinion on any issue relating to EQR, the Surviving Trust and ERP Operating Partnership, or to any investment therein. For a discussion relating the law to the facts and the legal analysis underlying the opinion set forth in this letter, we incorporate by reference the discussion of federal income tax issues, which we assisted in preparing, in the section of the Joint Proxy Statement/Prospectus under the heading "The Merger - Federal Income Tax Consequences." We assume no obligation to advise you of any changes in the foregoing subsequent to the date of this opinion letter, and we are not undertaking to update the opinion letter from time to time. April 21, 1997 Page 4 We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. This opinion may be incorporated by reference in any subsequent abbreviated registration statement of EQR or the Surviving Trust to the extent such incorporation is permitted under the Securities Act of 1933, as amended. This opinion letter has been prepared solely for your use in connection with the Registration Statement and should not be quoted in whole or in part or otherwise be referred to, nor filed with or furnished to any governmental agency or other person or entity, without the prior written consent of this firm. Very truly yours, /s/ Rudnick & Wolfe RUDNICK & WOLFE EX-8.3 6 OPINION OF ROBINSON RE: TAXES EXHIBIT 8.3 April 21, 1997 Wellsford Residential Property Trust 610 Fifth Avenue, 7th Floor New York, New York 10020 Re: Tax Opinion for Merger ---------------------- Ladies and Gentlemen: You have requested our opinion as to certain federal income tax consequences of the proposed merger (the "Merger") of Equity Residential Properties Trust, a Maryland real estate investment trust ("EQR"), with and into Wellsford Residential Property Trust, a Maryland real estate investment trust ("Wellsford"). As provided and/or described in that certain Contribution, Distribution and Assumption Agreement, by and between Wellsford and Wellsford Real Properties, Inc. ("WRP Newco"), dated January 16, 1997 (the "Contribution Agreement"), and the Registration Statement (defined below), immediately prior to the Merger (i) Wellsford will contribute certain of its assets to WRP Newco, (ii) WRP Newco will assume certain liabilities of Wellsford, and (iii) Wellsford will distribute to the Wellsford Common Shareholders, pro rata, all of the outstanding shares of WRP Newco Common owned by Wellsford (the "Distribution"). Immediately after the consummation of the Distribution, EQR will be merged, in accordance with the applicable provisions of the Maryland General Corporation Law ("MGCL"), with and into Wellsford, with Wellsford as the surviving trust (the "Surviving Trust"). As part of the Merger, Wellsford's name will change to "Equity Residential Properties Trust." The Merger will be voted upon, as required by law, by EQR shareholders and Wellsford shareholders at special meetings. The Merger will be consummated pursuant to (i) an Agreement and Plan of Merger, dated as of January 16, 1997, April 21, 1997 Page 2 between EQR and Wellsford (the "Merger Agreement"), and (ii) the Articles of Merger in connection therewith, by and between EQR and Wellsford (the "Articles"). The Merger Agreement, the Articles and the Contribution Agreement are collectively referred to herein as the "Agreements." The Merger, Distribution and the Agreements are more fully described in the Joint Proxy Statement/Prospectus/ Information Statement (the "Joint Proxy Statement/Prospectus"), included in the Registration Statement on Form S-4 (File No. 333-24653), filed by EQR and Wellsford with the Securities and Exchange Commission, as amended (the "Registration Statement"). Terms not otherwise defined in this letter shall have the meanings assigned to them in the Agreements and/or the Joint Proxy Statement/Prospectus. As of the Effective Time and by virtue of the Merger: (i) each share of Wellsford Common outstanding immediately prior to the Effective Time shall be converted into .625 shares of Survivor Common; (ii) each share of EQR Common outstanding immediately prior to the Effective Time will be converted into one share of Survivor Common; and (iii) each share of Wellsford Preferred will be converted into one share of Survivor Preferred, having the same preferences and other terms as the Wellsford Preferred previously outstanding of the same series; and (iv) each share of EQR Preferred will be converted into one share of Survivor Preferred, having the same preferences and other terms as the EQR Preferred previously outstanding of the same series. No fractional shares of Survivor Common will be issued in connection with the Merger. In lieu thereof, holders of Wellsford Common will receive cash. You have directed us to assume in preparing this opinion, and our opinion is based on the understanding, that (i) the Merger and related transactions will be consummated in accordance with the terms, conditions and other provisions of the Agreements, and (ii) all of the factual information, descriptions, representations and assumptions set forth in this letter, in the Agreements, in the letter to us from EQR, dated April 21, 1997, in the letter to us from Wellsford, dated April 21, 1997, and in the Joint Proxy Statement/Prospectus are accurate and complete and will be accurate and complete at the time of the Merger (the "Effective Date"). We have not independently verified any factual matters relating to the Merger or the Distribution in connection with or apart from our preparation of this opinion, and accordingly, our opinion does April 21, 1997 Page 3 not take into account any matters not set forth herein which might have been disclosed by independent verification. In connection with rendering this opinion, we have assumed or obtained representations and are relying thereon (without any independent investigation or review thereof) that: 1. Original documents (including signatures) are authentic, documents submitted to us as copies conform to the original documents (which are authentic), and there has been (or will be by the Effective Time of the Merger) due execution and delivery of all documents where due execution and delivery are prerequisites to effectiveness thereof; 2. Any representation or statement referred to above made "to the best of knowledge" or otherwise similarly qualified is correct without such qualification; and 3. The Merger will be effective under State law. Based upon our review of the Agreements, the Joint Proxy Statement/Prospectus and such other documents as we have deemed necessary and upon representations made to us by EQR and Wellsford, we are of the opinion that, assuming the Merger and all other events occur as contemplated in the Agreements and the Joint Proxy Statement/Prospectus, under the United States federal income tax laws in effect on the date hereof: (i) the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code, and EQR and Wellsford will each be a party to such reorganization within the meaning of Section 368(b) of the Code; (ii) no gain or less will be recognized by Wellsford as a result of the Merger; (iii) no gain or loss will be recognized by the shareholders of Wellsford upon the exchange of their Wellsford Common solely for Survivor Common pursuant to the Merger; (iv) no gain or loss will be recognized by the shareholders of Wellsford upon the exchange of their Wellsford Preferred solely for Survivor Preferred pursuant to the Merger; April 21, 1997 Page 4 (v) the tax basis of the shares of Survivor Common received or deemed to be received in exchange for shares of Wellsford Common pursuant to the Merger will be the same as the tax basis of Wellsford Common exchanged therefor; (vi) the tax basis of the shares of Survivor Preferred received or deemed to be received in exchange for shares of Wellsford Preferred pursuant to the Merger will be the same as the tax basis of Wellsford Preferred exchanged therefor; (vii) the holding period for shares of Survivor Common and Survivor Preferred received in exchange for shares of Wellsford Common and Wellsford Preferred, respectively, pursuant to the Merger will include the period that such shares of Wellsford Common and Wellsford Preferred, respectively, were held by the holder, provided such shares of Wellsford Common and Wellsford Preferred were held as capital assets by the holder at the Effective Time; (viii) a shareholder of Wellsford Common who receives cash in lieu of a fractional share of Wellsford Common pursuant to the Merger will recognize gain or loss equal to the difference, if any, between such shareholder's basis in the fractional share and the amount of cash received; and (ix) the statement of federal income tax matters and consequences described in the Joint Proxy Statement/ Prospectus under the heading "The Merger-Federal Income Tax Consequences," to the extent that it constitutes matters of law or legal conclusions, is accurate in all material respects. The foregoing opinion is limited to the matters specifically discussed herein, which are the only matters to which you have requested our opinion. We do not address any other federal income tax consequences of the Merger or any other matters of federal law and have not considered matters (including state or local tax consequences) arising under the laws of any jurisdiction other than the laws of the United States. This opinion letter is limited to the matters stated herein and no opinion is implied or may be inferred beyond the matters expressly stated herein. This opinion letter shall not be construed as or deemed to be a guaranty or insuring agreement. April 21, 1997 Page 5 You should be aware that an opinion of counsel represents only counsel's best legal judgment, and has no binding effect or official status of any kind, and that no assurance can be given that contrary positions may not be taken by the Internal Revenue Service or that a court considering the issues would not hold otherwise. This opinion is rendered as of the date hereof based on the law and facts in existence on the date hereof, and we do not undertake, and hereby disclaim, any obligations to advise you of any changes in law or fact, whether or not material, which may be brought to our attention at a later date. In rendering this opinion, we have assumed that there will be no change in the applicable laws of the State of Maryland, or in the Code, the regulations promulgated thereunder by the Treasury Department, and the interpretations of the Code and such regulations by the courts and the Internal Revenue Service, all as they are in effect and exist at the date of this letter. With respect to the last assumption, it should be noted that statutes, regulations, judicial decisions, and administrative interpretations are subject to change at any time and, in some circumstances, with retroactive effect. A material change that is made after the date hereof in any of the foregoing bases for our opinions could affect our conclusions. Moreover, if the facts vary from those relied upon (including if any representations, covenants, warranty or assumption upon which we have relied is inaccurate, incomplete, breached or ineffective), our opinion contained herein could be inapplicable. We hereby consent to the references to our firm appearing in the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement. This opinion is being delivered solely for the purpose of satisfying the condition set forth in Section 6.3(f) of the Merger Agreement; it may not be relied upon or utilized for any other purpose or by any other person or entity, and except as provided above, may not be quoted, in whole or in part, or otherwise be referred to, nor filed with or furnished to any governmental agency or other person or entity, without the prior written consent of this firm. Very truly yours, /s/ Robinson Silverman Pearce Aronsohn & Berman LLP EX-8.4 7 OPINION OF ROBINSON RE: REIT QUALIFICATIONS EXHIBIT 8.4 April 21, 1997 Equity Residential Properties Trust Two North Riverside Plaza Chicago, Illinois 60606 Re: Tax Opinion for S-4 Registration Statement - REIT Status -------------------------------------------------------- Ladies and Gentlemen: In connection with the proposed merger of Equity Residential Properties Trust, a Maryland real estate investment trust ("EQR"), with and into Wellsford Residential Property Trust, a Maryland real estate investment trust ("Wellsford" or the "Surviving Trust"), which shall thereafter be named "Equity Residential Properties Trust", pursuant to the Joint Proxy Statement/Prospectus/Information Statement (the "Joint Proxy Statement/Prospectus"), included in the Registration Statement on Form S-4 (File No. 333-24653), filed with the Securities and Exchange Commission, as amended (the "Registration Statement"), you have requested our opinion, as counsel to Wellsford, concerning the qualification and taxation of Wellsford as a real estate investment trust (a "REIT") under the Internal Revenue Code of 1986, as amended (the "Code"), for the taxable years ending December 31, 1992 through December 31, 1996. Unless otherwise specifically defined herein, all capitalized terms have the meaning assigned to them in the Joint Proxy Statement/Prospectus. In connection with rendering the opinions expressed below, we have examined originals (or copies identified to our satisfaction as true copies of the originals) of the following documents (collectively, the "Reviewed Documents"); (a) The Joint Proxy Statement/Prospectus; and (b) Such other documents as may have been presented to us by Wellsford from time to time. In addition, we have relied upon Wellsford's certificate, dated April 21, 1997 (the "Officer's Certificate"), executed by a duly appointed officer of Wellsford, setting forth certain representations relating to the organization and operation of Wellsford before the Merger. For the purposes of our opinion, we have not made an independent investigation of the facts set forth in the documents we reviewed. We consequently have assumed that the information presented in such documents or otherwise furnished to us accurately and completely describes all material facts relevant to our opinion. In the course of our representation of Wellsford, no information has come to our attention that would cause us to question the accuracy or completeness of the representations contained in the Officer's Certificate or of the Reviewed Documents in a material way. April 21, 1997 Page 2 In our review, we have assumed, with your consent, that all of the representations and statements set forth in the documents we reviewed are true and correct, and all of the obligations imposed by any such documents on the parties thereto have been and will be performed or satisfied in accordance with their terms. We have also assumed the genuineness of all signatures, the proper execution of all documents, the authenticity of all documents submitted to us as originals, the conformity to originals of documents submitted to us as copies, and the authenticity of the originals from which any copies were made. In rendering our opinion, we have assumed that the transactions contemplated by the Reviewed Documents will be consummated in accordance with the terms and provisions of such documents, and that such documents accurately reflect the material facts of such transactions. In addition, the opinions are based on the correctness of the following specific assumptions: (i) prior to the Merger, Wellsford has been operated in the manner described in the organizational documents and in the Joint Proxy Statement/Prospectus, and all terms and provisions of such agreements and documents have been complied with by all parties thereto; (ii) Wellsford and the Surviving Trust are validly organized and duly formed real estate investment trusts under the laws of the State of Maryland; and (iii) there will be no change in the applicable laws of the State of Maryland, or in the Code, the regulations promulgated thereunder by the Treasury Department, and the interpretations of the Code and such regulations by the courts and the Internal Revenue Service, all as they are in effect and exist at the date of this letter. With respect to the last assumption, it should be noted that statutes, regulations, judicial decisions, and administrative interpretations are subject to change at any time and, in some circumstances, with retroactive effect. A material change that is made after the date hereof in any of the foregoing bases for our opinions could affect our conclusions. Moreover, the qualification and taxation of Wellsford as a REIT depends upon its ability to meet, through actual annual operating results, distribution levels and diversity of share ownership and the various disqualification tests imposed under the Code, the results of which will not be reviewed by the undersigned. Accordingly, no assurance can be given that the actual results of the operations of Wellsford for any one taxable year will satisfy such requirements. Based upon and subject to the foregoing, it is our opinion that Wellsford was organized and has operated in conformity with the requirements for qualification as a REIT under the Code for the taxable years ended December 31, 1992 through December 31, 1996. Other than as expressly stated above, we express no opinion on any issue relating to Wellsford and the Surviving Trust or to any investment therein. We assume no obligation to advise you of any changes in the foregoing subsequent to the date of this opinion letter, and we are not undertaking to update the opinion letter from time to time. April 21, 1997 Page 3 We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. This opinion letter is being delivered solely for the purposes of satisfying the condition set forth in Section 6.2(d) of the Merger Agreement; it may not be relied upon or utilized for any other purpose or by any other person or entity, and except as provided above, may not be quoted, in whole or in part, or otherwise be referred to, nor filed with or furnished to any governmental agency or other person or entity, without the prior written consent of this firm. Very truly yours, /s/ Robinson Silverman Pearce Aronsohn & Berman LLP EX-23.1 8 CONSENT OF ERNST & YOUNG-CHICAGO EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-4 No. 333-24653) and related Prospectus of Equity Residential Properties Trust and to the incorporation by reference therein of our report dated February 12, 1997, except for Note 19, as to which the date is March 20, 1997, with respect to the consolidated financial statements and schedule of Equity Residential Properties Trust included in its Annual Report (Form 10-K/A), as amended, for the year ended December 31, 1996, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Ernst & Young LLP Chicago, Illinois April 21, 1997 EX-23.2 9 CONSENT OF ERNST & YOUNG-NY EXHIBIT 23.2 Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" in Amendment No. 1 to the Equity Residential Properties Trust and Wellsford Residential Property Trust Joint Proxy Statement/Equity Residential Properties Trust Prospectus/Wellsford Real Properties, Inc. Information Statement, that is made a part of the Registration Statement (Form S-4 No. 333-24653) and related Prospectus of Equity Residential Properties Trust, and to the incorporation by reference therein of our report dated February 10, 1997, (except for Note 13, as to which the date is February 28, 1997), with respect to the consolidated financial statements and schedule of Wellsford Residential Property Trust and subsidiaries included in its Annual Report (Form 10-K) for the year ended December 31, 1996, filed with the Securities and Exchange Commission, and to the inclusion therein of our report dated February 28, 1997, with respect to the combined financial statements of The Predecessor to Wellsford Real Properties, Inc. /s/ Ernst & Young LLP New York, New York April 21, 1997 EX-23.3 10 CONSENT OF GRANT THORTON EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We have issued our reports dated February 14, 1996, accompanying the consolidated financial statements and schedule included in the Annual Report of Equity Residential Properties Trust on Form 10-K/A for the year ended December 31, 1996. We hereby consent to the incorporation of said reports referenced in the Registration Statement on Form S-4 of Equity Residential Properties Trust filed on April 4, 1997, and to the use of our name as it appears under the caption "Experts". /s/ GRANT THORNTON LLP Chicago, Illinois April 21, 1997 EX-99.1 11 PROPOSED FORM OF DECLARATION OF TRUST EXHIBIT 99.1 Effective at the effective time of the merger (the "Merger") of Equity Residential Properties Trust with Wellsford Residential Property Trust ("Wellsford"), the Declaration of the Surviving Trust will be amended and restated in the following form. If the Additional Provisions attached hereto are not approved by two-thirds of Wellsford's common shares, the underlined cross references will be incorporated into the amendment and restatement; if the Additional Provisions are approved by two-thirds or more of Wellsford's common shares, the bracketed cross references will be incorporated in the Amendment and Restatement in lieu of the underlined cross references. EQUITY RESIDENTIAL PROPERTIES TRUST ----------------------------------- SECOND AMENDED AND RESTATED DECLARATION OF TRUST Dated ______ __, 1997 This SECOND AMENDED AND RESTATED DECLARATION OF TRUST is made as of the date set forth above by the undersigned Trustees. ARTICLE I THE TRUST; CERTAIN DEFINITIONS SECTION 1.1 Name. The name of the trust (hereinafter called the "Trust") is: Equity Residential Properties Trust SECTION 1.2 Resident Agent. The name and address of the resident agent of the Trust in the State of Maryland are The Prentice-Hall Corporation System, Maryland, 11 East Chase Street, Baltimore, Maryland 21202. The Trust may have such offices or places of business within or without the State of Maryland as the Trustees may from time to time determine. SECTION 1.3 Nature of Trust. The Trust is a real estate investment trust within the meaning of Title 8 (as hereinafter defined). SECTION 1.4 Powers. The Trust shall have all of the powers granted to real estate investment trusts generally by Title 8 and shall have any other and further powers as are not inconsistent with Title 8 or any other applicable law. SECTION 1.5 Definitions. As used in this Declaration of Trust, the following terms shall have the following meanings unless the context otherwise requires: "Affiliate" or "Affiliated" means, as to any corporation, partnership, trust or other association (other than the Trust), any Person (i) that holds beneficially, directly or indirectly, 5% or more of the outstanding stock or equity interests thereof or (ii) who is an officer, director, partner or trustee thereof or of any Person which controls, is controlled by, or is under common control with, such corporation, partnership, trust or other association or (iii) which controls, is controlled by, or is under common control with, such corporation, partnership, trust or other association. "Board of Trustees" means the Board of Trustees of the Trust. "Code" means the Internal Revenue Code of 1986, as amended. "Declaration" or "Declaration of Trust" means this Second Amended and Restated Declaration of Trust, including any amendments or supplements hereto. "Person" means an individual, corporation, partnership, estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity, or any government and agency or political subdivision thereof. "REIT Provisions of the Code" means Section 856 through 860 of the Code and any successor or other provisions of the Code relating to real estate investment trusts (including provisions as to the attribution of ownership of beneficial interests therein) and the regulations promulgated thereunder. "Securities" means Shares (as hereinafter defined), any stock, shares or other evidences of equity, beneficial or other interests, voting trust certificates, bonds, debentures, notes or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as "securities" or any certificates of interest, shares or participations in, temporary or interim certificates for, receipts for, guarantees of, or warrants, options or rights to subscribe to, purchase or acquire, any of the foregoing. "Securities of the Trust" means any Securities issued by the Trust. "Shareholders" means holders of record of outstanding Shares. -2- "Shares" means transferable shares of beneficial interest of the Trust of any class or series. "Title 8" means Title 8 of the Corporations and Associations Article of the Annotated Code of Maryland, as amended, or any successor statute. "Trustee" means, individually, an individual, and "Trustees" means, collectively, the individuals, in each case as named in Section 2.2 of this Declaration so long as they continue in office and any and all other individuals who have been duly elected and qualify as trustees of the Trust hereunder. "Trust Property" means any and all property, real, personal or otherwise, tangible or intangible, which is transferred or conveyed to the Trust or the Trustees (including all rents, income, profits and gains therefrom), which is owned or held by, or for the account of, the Trust or the Trustees. ARTICLE II TRUSTEES SECTION 2.1 Number. The number of Trustees initially shall be two, which number may thereafter be increased or decreased by the Trustees then in office from time to time; however, the total number of Trustees shall be not less than two and not more than 15. No reduction in the number of Trustees shall cause the removal of any Trustee from office prior to the expiration of his term. SECTION 2.2 Initial Board; Term. The names and addresses of the Trustees who shall serve until the first annual meeting of Shareholders or such time as specified below are: Name ---- Samuel Zell Douglas Crocker II Sheli Z. Rosenberg Gerald A. Spector James D. Harper, Jr. Errol R. Halperin Barry S. Sternlicht John W. Alexander B. Joseph White Henry H. Goldberg -3- The Trustees shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, one class to hold office initially for a term expiring at the annual meeting of Shareholders to be held in 1997, another class to hold office initially for a term expiring at the annual meeting of Shareholders to be held in 1998 and another class to hold office initially for a term expiring at the annual meeting of Shareholders to be held in 1999, with the members of each class to hold office until their successors are duly elected and qualify. At each annual meeting of the Shareholders, the successors to the class of Trustees whose term expires at such meeting shall be elected to hold office for a term expiring at the annual meeting of Shareholders held in the third year following the year of their election and the other Trustees shall continue in office. SECTION 2.3 Resignation, Removal or Death. Any Trustee may resign by written notice to the remaining Trustees, effective upon execution and delivery to the Trust of such written notice or upon any future date specified in the notice. A Trustee may be removed, with or without cause, at a meeting of the Shareholders called for that purpose, by the affirmative vote of the holders of not less than two-thirds of the Shares then outstanding and entitled to vote in the election of Trustees. Upon the resignation or removal of any Trustee, or his otherwise ceasing to be a Trustee, he shall automatically cease to have any right, title or interest in and to the Trust Property and shall execute and deliver such documents as the remaining Trustees require for the conveyance of any Trust Property held in his name, and shall account to the remaining Trustees as they require for all property which he holds as Trustee. Upon the incapacity or death of any Trustee, his legal representative shall perform those acts. SECTION 2.4 Legal Title. Legal title to all Trust Property shall be vested in the Trust, but it may cause legal title to any Trust Property to be held by or in the name of any or all of the Trustees or any other Person as nominee, in which case any right, title or interest of the Trustees in and to the Trust Property shall automatically vest in successor and additional Trustees upon their qualification and acceptance of election or appointment as Trustees, and they shall thereupon have all the rights and obligations of Trustees, whether or not conveyancing documents have been executed and delivered pursuant to Section 2.3 or otherwise. Written evidence of the qualification and acceptance of election or appointment of successor and additional Trustees may be filed with the records of the Trust and in such other offices, agencies or places as the Trust or Trustees may deem necessary or desirable. ARTICLE III POWERS OF TRUSTEES Subject to the express limitations herein or in the Bylaws, (1) the business and affairs of the Trust shall be managed under the direction of the Board of Trustees and (2) the Board of -4- Trustees shall have full, exclusive and absolute power, control and authority over the Trust Property and over the business of the Trust. The Board of Trustees may take any actions as in its sole judgment and discretion are necessary or desirable to conduct the business of the Trust. This Declaration of Trust shall be construed with a presumption in favor of the grant of power and authority to the Board of Trustees. Any construction of this Declaration or determination made in good faith by the Board of Trustees concerning the powers and authority of the Trust, the Shareholders, the Board of Trustees or the offices of the Trust hereunder shall be conclusive. The powers of the Board of Trustees shall in no way be limited or restricted by reference to or inference from the terms of this or any other provision of this Declaration or construed or deemed by inference or otherwise in any manner to exclude or limit the powers conferred upon the Board of Trustees under the general laws of the State of Maryland as now or hereafter in force. In the case of an ambiguity in the application of any provision of this Declaration of Trust, including any provision relating to share ownership and transfers, the Board of Trustees shall have the power to determine the application of that provision (subject, however, to the provisions of Section 6.6(d)(i)), and such determination shall be final and conclusive for all purposes. The Board of Trustees, without any action by the Shareholders, shall have and may exercise, on behalf of the Trust, without limitation, the power to terminate the status of the Trust as a real estate investment trust under the Code; to determine that compliance with any restriction or limitations on ownership and transfers of shares of the Trust's beneficial interest set forth in Sections 6.6 and 6.8 of this Declaration of Trust is no longer required in order for the Trust to qualify as a REIT; to adopt, amend and repeal Bylaws; to elect officers in the manner prescribed in the Bylaws; to solicit proxies from holders of shares of beneficial interest of the Trust; and to do any other acts and deliver any other documents necessary or appropriate to the foregoing powers. ARTICLE IV INVESTMENT POLICY The fundamental investment policy of the Trust is to make investments in such a manner as to comply with the REIT Provisions of the Code and with the requirements of Title 8 with respect to the composition of the Trust's investments and the derivation of its income. Subject to Section 6.10, the Trustees shall use their best efforts to carry out this fundamental investment policy and to conduct the affairs of the Trust in such a manner as to continue to qualify the Trust for the tax treatment provided in the REIT Provisions of the Code; provided, however, that no Trustee, officer, employee or agent of the Trust shall be liable for any act or omission resulting in the loss of tax benefits under the Code, except to the extent permitted in Section 11.2. The Board of Trustees may change from time to time, by resolution or in the Bylaws of the Trust, such investment policies as it determines to be in the best interest of the Trust, including prohibitions or restrictions upon certain types of investments. -5- ARTICLE V SHARES SECTION 5.1 Authorized Shares. The total number of Shares which the Trust has authority to issue is 300,000,000 shares, of which 200,000,000 are common shares, $0.01 par value per share (individually a "Common Share" or collectively "Common Shares"), and 100,000,000 are preferred shares, $0.01 par value per share ("Preferred Shares"), of which (a) 6,900,000 shares have been designated as 9-3/8% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest ($0.01 Par Value Per Share) (Liquidation Preference $25.00 Per Share) with the terms set forth in Section 13.1 of this Declaration, (b) 575,000 shares have been designated as 9-1/8% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest ($0.01 Par Value Per Share) (Liquidation Preference $250.00 Per Share) with the terms set forth in Section 13.2 of this Declaration, (c) 460,000 shares have been designated as 9-1/8% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest ($0.01 Par Value Per Share) (Liquidation Preference $250.00 Per Share) with the terms set forth in Section 13.3 of this Declaration, (d) 4,600,000 shares have been designated as Series D Cumulative Convertible Preferred Shares of Beneficial Interest with the terms set forth in Section 13.4 of this Declaration and (e) 2,300,000 shares have been designated as Series E Cumulative Redeemable Preferred Shares of Beneficial Interest with the terms set forth in Section 13.5 of this Declaration. SECTION 5.2 Common Shares. Subject to the provisions of [Article VII] Sections 6.6 and 6.8 regarding Excess Shares (as such term is defined therein), each Common Share shall entitle the holder thereof to one vote. Holders of Common Shares shall not be entitled to cumulative voting. SECTION 5.3 Preferred Shares. The Board of Trustees may classify any unissued Preferred Shares and reclassify any previously classified but unissued Preferred Shares of any series from time to time, in one or more series of Shares. SECTION 5.4 Classified or Reclassified Shares. Prior to issuance of classified or reclassified Shares of any class or series, the Board of Trustees by resolution shall (a) designate that class or series to distinguish it from all other classes and series of Shares; (b) specify the number of Shares to be included in the class or series; (c) set, subject to the provisions of [Article VII] Sections 6.6 and 6.8 and subject to the express terms of any class or series of Shares outstanding at the time, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each class or series; and (d) cause the Trust to file articles supplementary with the State Department of Assessments and Taxation of Maryland (the "SDAT"). Any of the terms of any class or series of Shares set pursuant to clause (c) of this Section 5.4 may be made dependent upon facts ascertainable outside the Declaration of Trust (including the occurrence of any event, determination or action by the Trust, or any other person or body) and may vary among holders thereof, provided that the manner in which such facts or variations shall operate upon the terms of such class or series of Shares is clearly and expressly set forth in the articles supplementary filed with the SDAT. SECTION 5.5 Authorization by Board of Share Issuance. The Board of Trustees may authorize the issuance from time to time of Shares of any class or series, whether now or hereafter authorized, or securities or rights convertible into Shares of any class or series, whether now or thereafter authorized, for such consideration (whether in cash, property, past or future services, obligation for future payment or otherwise) as the Board of Trustees may deem advisable (or without consideration in the case of a Share split or Share dividend), subject -6- to such restrictions or limitations, if any, as may be set forth in this Declaration of Trust or the Bylaws of the Trust. SECTION 5.6 Dividends and Distributions. The Board of Trustees may from time to time authorize and declare such dividends or distributions, in cash or other assets of the Trust or in securities of the Trust or from any other source as the Board of Trustees in its discretion shall determine. The Board of Trustees shall endeavor to authorize, declare and pay such dividends and distributions as shall be necessary for the Trust to qualify as a real estate investment trust under the Code; however, Shareholders shall have no right to any dividend or distribution unless and until authorized and declared by the Board. The exercise of the powers and rights of the Board of Trustees pursuant to this Section 5.6 shall be subject to the provisions of any class or series of Shares at the time outstanding. Notwithstanding any other provision in this Declaration of Trust, no determination shall be made by the Board of Trustees nor shall any transaction be entered into by the Trust which would cause any Shares or other beneficial interest in the Trust not to constitute "transferable shares" or "transferable certificates of beneficial interest" under Section 856(a)(2) of the Code or which would cause any distribution to constitute a preferential dividend as described in Section 562(c) of the Code. SECTION 5.7 General Nature of Shares. All Shares shall be personal property entitling the Shareholders only to those rights provided in this Declaration of Trust. The Shareholders shall have no interest in the property of the Trust and shall have no right to compel any partition, division, dividend or distribution of the Trust or of the property of the Trust. The death of a Shareholder shall not terminate the Trust. The Trust is entitled to treat as Shareholders only those persons in whose names Shares are registered as holders of Shares on the beneficial interest ledger of the Trust. SECTION 5.8 Fractional Shares. The Trust may, without the consent or approval of any Shareholder, issue fractional Shares, eliminate a fraction of a Share by rounding up or down to a full Share, arrange for the disposition of a fraction of a Share by the person entitled to it, or pay cash for the fair value of a fraction of a Share. SECTION 5.9 Declaration of Trust and Bylaws. All persons who shall acquire Shares shall acquire the same subject to the provisions of this Declaration of Trust and the Bylaws of the Trust. ARTICLE VI PROVISIONS FOR DEFINING, LIMITING AND REGULATING CERTAIN POWERS OF THE TRUST AND OF THE SHAREHOLDERS AND TRUSTEES -7- SECTION 6.1 Authorization by Board of Share Issuance. The Board of Trustees may authorize the issuance from time to time of Shares of any class, whether now or hereafter authorized, or securities convertible into Shares of any class, whether now or hereafter authorized, for such consideration as the Board of Trustees may deem advisable, subject to such restrictions or limitations, if any, as may be set forth in this Declaration of Trust or in the Bylaws of the Trust or in the general laws of the State of Maryland. SECTION 6.2 Preemptive and Appraisal Rights. Except as may be provided by the Board of Trustees in authorizing the issuance of Shares pursuant to Sections 5.4 and 5.5, no holder of Shares shall, as such holder, (a) have any preemptive right to purchase or subscribe for any additional Shares or any other security of the Trust which the Trust may issue or sell or (b), except as expressly required by Title 8, have any right to require the Trust to pay him the fair value of his Shares in an appraisal or similar proceeding. SECTION 6.3 Advisor Agreements. Subject to such approval of the Shareholders and other conditions, if any, as may be required by any applicable statute, rule or regulation, the Board of Trustees may authorize the execution and performance by the Trust of one or more agreements with any person, corporation, association, company, trust, partnership (limited or general) or other organization whereby, subject to the supervision and control of the Board of Trustees, any such other person, corporation, association, company, trust, partnership (limited or general) or other organization (the "Advisor") shall render or make available to the Trust managerial, investment, advisory and/or related services, office space and other services and facilities (including, if deemed advisable by the Board of Trustees, the management or supervision of the investments of the Trust) upon such terms and conditions as may be provided in such agreement or agreements (including, if deemed fair and equitable by the Board of Trustees, the compensation payable thereunder by the Trust). SECTION 6.4 Related Party Transactions. (a) Without limiting any other procedures available by law or otherwise to the Trust, the Board of Trustees may authorize any agreement of the character described in Section 6.3 or other transaction with any person, corporation, association, company, trust, partnership (limited or general) or other organization, although one or more of the Trustees or officers of the Trust may be a party to any such agreement or an officer, director, stockholder or member of such other party, and no such agreement or transaction shall be invalidated or rendered void or voidable solely by reason of the existence of any such relationship if the existence is disclosed or known to the Board of Trustees, and the contract or transaction is approved by the Board of Trustees (including the affirmative vote of a majority of the disinterested Trustees even if they constitute less than a quorum of the Board). Any Trustee who is also a director, officer, stockholder or member of such other entity may be counted in determining the existence of a quorum at any meeting of the Board of Trustees considering such matter. -8- (b) Subsequent to the date hereof (the "Restriction Date") the affirmative vote of a majority of the disinterested Trustees (even if they constitute less than a quorum of the Board) shall be required to approve the purchase by the Trust or its subsidiaries of any properties under the direct or indirect control of Samuel Zell or Starwood Capital Partners, L.P., a Delaware limited partnership, or in which he or it has a direct or indirect substantial economic interest on the Restriction Date. SECTION 6.5 Determinations by Board. The determination as to any of the following matters, made in good faith by or pursuant to the direction of the Board of Trustees consistent with this Declaration of Trust and in the absence of actual receipt of an improper benefit in money, property or services or active and deliberate dishonesty established by a court, shall be final and conclusive and shall be binding upon the Trust and every holder of Shares: (a) the amount of the net income of the Trust for any period and the amount of assets at any time legally available for the payment of dividends, redemption of Shares or the payment of other distributions with respect to Shares; (b) the amount of paid-in surplus, net assets, other surplus, annual or other net profit, net assets in excess of capital, undivided profits or excess of profits over losses on sales of assets; (c) the amount, purpose, time of creation, increase or decrease, alteration or cancellation of any reserves or charges and the propriety thereof (whether or not any obligation or liability for which such reserves or charges shall have been created shall have been paid or discharged); (d) the fair value, or any sale, bid or asked price to be applied in determining the fair value, of any asset owned or held by the Trust; and (e) any matters relating to the acquisition, holding and disposition of any assets by the Trust. SECTION 6.6 Trustees' Right to Refuse to Transfer Shares; Limitation on Holdings; Redemption of Shares. (a) Each person who owns directly or indirectly more than five percent in number or value of the total Shares outstanding shall, within 30 days after January 1 of each year, give written notice to the Trust stating the Person's name and address, the number of Shares directly or indirectly owned by such Person, and a description of the capacity in which such Shares are held. For purposes of this Declaration of Trust, the number and value of the total Shares outstanding shall be determined by the Trustees in good faith, which determination shall be conclusive for all purposes hereunder. In addition, each direct or indirect Shareholder, irrespective of such Shareholder's percentage ownership of outstanding Shares, shall upon demand be required to disclose to the Trust in writing such information with respect to the direct or indirect ownership of Shares as the Trustees deem necessary from time to time to enable the Trustees to determine whether the Trust complies with the REIT Provisions of the Code, to comply with the requirements of any taxing authority or governmental agency or to determine any such compliance. (b) If, in the opinion of the Trustees, which shall be binding upon any prospective acquiror of Shares, any proposed transfer or issuance would jeopardize the status of the Trust as a real estate investment trust under the REIT Provisions of the Code, the Trustees shall have -9- the right, but not the duty, to refuse to permit such transfer or issuance or refuse to give effect to such transfer or issuance and to take any action to void any such issuance or cause any such transfer not to occur. (c) As a condition to any transfer and/or registration of transfer on the books of the Trust of any Shares or Securities convertible into Shares which could result in direct or indirect ownership (as hereafter defined) of Shares exceeding 9.8% of the lesser of the number or the value of the total Shares outstanding (the "Excess Shares") by a Person other than an Excepted Person, such prospective transferee shall give written notice to the Trust of the proposed transfer and shall furnish such opinions of counsel, affidavits, undertakings, agreements and information as may be required by the Trustees no later than the 15th day prior to any transfer which, if consummated, would result in such ownership. (d) Any transfer of Shares or Securities convertible into Shares that would (i) create a direct or indirect owner of Excess Shares other than an Excepted Person; (ii) result in the Shares being owned by fewer than 100 Persons for purposes of the REIT Provisions of the Code; or (iii) result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, shall be void ab initio and the prospective acquiror shall not be entitled to any rights afforded to owners of Shares hereunder and shall be deemed never to have had an interest therein. Any issuance of Shares or Securities convertible into Shares that would (i) create a direct or indirect owner of Excess Shares other than an Excepted Person; or (ii) result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, shall be void ab initio and the prospective acquiror shall not be entitled to any rights afforded to owners of Shares hereunder and shall be deemed never to have had an interest therein. "Excepted Person" shall mean (i) Edward Lowenthal and Jeffrey H. Lynford; and (ii) any other Person approved by the Trustees, at their option and in their sole discretion, provided, however, that such approval shall not be granted to any Person whose ownership of in excess of 9.8% of the lesser of the number or the value of the total Shares outstanding would result, directly, indirectly or as a result of attribution of ownership, in termination of the status of the Trust as a real estate investment trust under the REIT Provisions of the Code. (e) The Trust, by notice to the holder thereof, may purchase any or all Shares that are proposed to be transferred pursuant to a transfer which, in the opinion of the Trustees, which shall be binding upon any proposed transferor or transferee of Shares, would result in any Person acquiring Excess Shares, or would otherwise jeopardize the status of the Trust as a real estate investment trust under the REIT Provisions of the Code. The Trust shall have the power, by lot or other means deemed equitable by them in their sole discretion, to purchase such Excess Shares from the prospective transferor. The purchase price for any Excess Shares shall be equal to the fair market value of the Shares on the last trading day immediately preceding the day on which notice of such proposed transfer is sent, as reflected in the closing sale price for the Shares, if then listed on a national securities exchange, or such price for the Shares on the principal exchange if then listed on more than one national securities exchange, or if the Shares -10- are not then listed on a national securities exchange, the latest bid quotation for the Shares if then traded over-the-counter, or, if no such closing sales prices or quotations are available, then the purchase price shall be equal to the fair market value of such Shares as determined by the Trustees in good faith. Prompt payment of the purchase price shall be made in cash by the Trust in such manner as may be determined by the Trustees. From and after the date fixed for purchase by the Trustees, and so long as payment of the purchase price for the Shares to be so redeemed shall have been made or duly provided for, the holder of any Excess Shares so called for purchase shall cease to be entitled to dividends, distributions, voting rights and other benefits with respect to such Shares, excepting only the right to payment of the purchase price fixed as aforesaid. Any dividend or distribution paid to a proposed transferee on Excess Shares prior to the discovery by the Trust that the Shares have been transferred in violation of this Section 6.6 shall be repaid to the Trust upon demand. (f) Notwithstanding any other provision in this Declaration of Trust or the Bylaws, Sections 6.6(d), (e), (f) and (g) may not be amended or repealed without the affirmative vote of the holders of not less than two-thirds of the Shares then outstanding and entitled to vote. If Section 6.6(d), (e), (f) or (g) is determined to be void or invalid by virtue of any legal decision, statute, rule or regulation, then the acquiror of Shares or Securities convertible into Shares in violation of such Sections shall be deemed, at the option of the Trust, to have acted as agent on behalf of the Trust in acquiring such Shares and to hold such Shares on behalf of the Trust. (g) Subject to Section 6.6(k), notwithstanding any other provision of this Declaration of Trust to the contrary, any purported transfer, sale or acquisition of Shares (whether such purported transfer, sale or acquisition results from the direct or indirect acquisition of ownership (as hereafter defined) of Shares) which would result in the termination of the status of the Trust as a real estate investment trust under the REIT Provisions of the Code shall be null and void ab initio. Any such Shares may be treated by the Trustees in the manner prescribed for Excess Shares in subsection (e) of this Section 6.6. (h) Subject to Section 6.6(k), nothing contained in this Section 6.6 or in any other provision of this Declaration of Trust shall limit the authority of the Trustees to take such other action as they deem necessary or advisable to protect the Trust and the interests of the Shareholders by preservation of the Trust's status as a real estate investment trust under the REIT Provisions of the Code. (i) If any provision of this Section 6.6 or any application of any such provision is determined to be invalid by any federal or state court having jurisdiction over the issues, the validity of the remaining provisions shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court. To the extent this Section 6.6 may be inconsistent with any other provision of this Declaration of Trust, this Section 6.6 shall be controlling. -11- (j) For purposes of this Declaration of Trust, Shares not owned directly shall be deemed to be owned indirectly by a person if that person or a group of which he is a member would be the beneficial owner of such Shares, as defined in Rule 13d-3 under the Securities Exchange Act of 1934, and/or would be considered to own such Shares by reason of the REIT Provisions of the Code. (k) Notwithstanding any other provision of Section 6.6, nothing in this Declaration of Trust shall preclude the settlement of transactions entered into through the facilities of the New York Stock Exchange, Inc. The fact that the settlement of any transaction is permitted shall not negate the effect of any other provision of this Section 6.6 and any transferee in such a transaction shall be subject to all of the provisions and limitations set forth in this Section 6.6. SECTION 6.7 Additional Definitions. The following terms shall have the following definitions in this Section 6.7 and Section 6.8 only: "Charitable Beneficiary" shall mean one or more beneficiaries of the Charitable Trust as determined pursuant to Section 6.8(g), provided that each such organization must be described in Section 501(c)(3) of the Code and contributions to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code. "Charitable Trust" shall mean any trust provided for in Section 6.8(b). "Equity Shares" shall mean all classes or series of Shares, including, without limitation, Common Shares and Preferred Shares. "Market Price" on any date shall mean, with respect to any class or series of outstanding Equity Shares, the Closing Price for such Equity Shares on such date. The "Closing Price" on any date shall mean the last sale price for such Equity Shares, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, for such Equity Shares, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the NYSE or, if such Equity Shares are not listed or admitted to trading on the NYSE, as reported on the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which such Equity Shares are listed or admitted to trading or, if such Equity Shares are not listed or admitted to trading on any national securities exchange, the last quoted price, or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or, if such system is no longer in use, the principal other automated quotation system that may then be in use or, if such Equity Shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in such Equity Shares selected -12- by the Board of Trustees or, in the event that no trading price is available for such Equity Shares, the fair market value of Equity Shares, as determined in good faith by the Board of Trustees. "Person" shall mean a Person as defined in Article I, but solely for purposes of this Article VI shall not include an underwriter that participated in a public offering of the Common Shares and/or Preferred Shares for a period of 25 days following the purchase by such underwriter of the Common Shares and/or Preferred Shares. "Prohibited Owner" shall mean, with respect to any purported transfer, any Person who, but for the provisions of Section 6.6, would directly or indirectly own Equity Shares, and if appropriate in the context, shall also mean any Person who would have been the record owner of Equity Shares that the Prohibited Owner would have so owned. "Trustee" shall mean the Person unaffiliated with the Trust and a Prohibited Owner, that is appointed by the Trust to serve as Trustee of the Charitable Trust. SECTION 6.8 Additional Effects. If any Shares which are proposed to be transferred pursuant to a transfer which would result in any Person acquiring Excess Shares, or would otherwise jeopardize the status of the Trust as a real estate investment trust under the Code, and such Excess Shares are not purchased by the Trust pursuant to Section 6.6(d), then: (a) Charitable Trust for Excess Shares. Such Excess Shares shall be deemed to have been transferred to a Charitable Trust for the benefit of a Charitable Beneficiary, as described in Section 6.8(b), and such Person shall acquire no rights in such Equity Shares. (b) Ownership in Trust. Upon any purported transfer described in this Section 6.8 that would result in a transfer of Equity Shares to a Charitable Trust, such Equity Shares shall be deemed to have been transferred to the Trustee as trustee of a Charitable Trust for the exclusive benefit of one or more Charitable Beneficiaries. Such transfer to the Trustee shall be deemed to be effective as of the close of business on the Business Day prior to the purported transfer. The Trustee shall be appointed by the Trust and shall be a Person unaffiliated with the Trust and any Prohibited Owner. Each Charitable Beneficiary shall be designated by the Trust as provided in Section 6.8(g). (c) Status of Shares Held by the Trustee. Equity Shares held by the Trustee shall be issued and outstanding Equity Shares of the Trust. The Prohibited Owner shall have no rights in the shares held by the Trustee. The Prohibited Owner shall not benefit economically from ownership of any shares held in trust by the Trustee, shall have no rights to dividends and shall not possess any rights to vote or other rights attributable to the shares held in the Charitable Trust. -13- (d) Dividend and Voting Rights. The Trustee shall have all voting rights and rights to dividends or other distributions with respect to Equity Shares held in the Charitable Trust, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend or other distribution paid prior to the discovery by the Trust that Equity Shares have been transferred to the Trustee shall be paid with respect to such Equity Shares to the Trustee upon demand and any dividend or other distribution authorized but unpaid shall be paid when due to the Trustee. Any dividends or distributions so paid over to the Trustee shall be held in trust for the Charitable Beneficiary. The Prohibited Owner shall have no voting rights with respect to shares held in the Charitable Trust and, subject to Maryland law, effective as of the date that Equity Shares have been transferred to the Trustee, the Trustee shall have the authority (at the Trustee's sole discretion) (i) to rescind as void any vote cast by a Prohibited Owner prior to the discovery by the Trust that Equity Shares have been transferred to the Trustee and (ii) to recast such vote in accordance with the desires of the Trustee acting for the benefit of the Charitable Beneficiary. Notwithstanding the provisions of this Article VI, until the Trust has received notification that Equity Shares have been transferred into a Charitable Trust, the Trust shall be entitled to rely on its share transfer and other shareholder records for purposes of preparing lists of shareholders entitled to vote at meetings, determining the validity and authority of proxies and otherwise conducting votes of shareholders. (e) Sale of Shares by Trustee. Within 20 days of receiving notice from the Trust that Equity Shares have been transferred to the Charitable Trust, the Trustee of the Charitable Trust shall sell the shares held in the Charitable Trust to a person, designated by the Trustee, whose ownership of the shares will not violate the ownership limitations set forth in Section 6.6. Upon such sale, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Prohibited Owner and to the Charitable Beneficiary as provided in this Section 6.8(d). The Prohibited Owner shall receive the lesser of (1) the price paid by the Prohibited Owner for the shares or, if the Prohibited Owner did not give value for the shares in connection with the event causing the shares to be held in the Charitable Trust (e.g., in the case of a gift, devise or other such transaction), the Market Price of the shares on the day of the event causing the shares to be held in the Charitable Trust and (2) the price per share received by the Trustee from the sale or other disposition of the shares held in the Charitable Trust. Any net sales proceeds in excess of the amount payable to the Prohibited Owner shall be immediately paid to the Charitable Beneficiary. If, prior to the discovery by the Trust that Equity Shares have been transferred to the Trustee, such shares are sold by a Prohibited Owner, then (i) such shares shall be deemed to have been sold on behalf of the Charitable Trust and (ii) to the extent that the Prohibited Owner received an amount for such shares that exceeds the amount that such Prohibited Owner was entitled to receive pursuant to this Section 6.8(d), such excess shall be paid to the Trustee upon demand. (f) Purchase Right in Shares Transferred to the Trustee. Equity Shares transferred to the Trustee shall be deemed to have been offered for sale to the Trust, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in such transfer to the Charitable Trust (or, in the case of a devise or gift, the Market Price at the -14- time of such devise or gift) and (ii) the Market Price on the date the Trust, or its designee, accepts such offer. The Trust shall have the right to accept such offer until the Trustee has sold the shares held in the Charitable Trust pursuant to Section 6.8(e). Upon such a sale to the Trust, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Prohibited Owner. (g) Designation of Charitable Beneficiaries. By written notice to the Trustee, the Trust shall designate one or more nonprofit organizations to be the Charitable Beneficiary of the interest in the Charitable Trust such that (i) Equity Shares held in the Charitable Trust would not violate the restrictions set forth in Section 6.6 in the hands of such Charitable Beneficiary and (ii) each such organization must be described in Section 501(c)(3) of the Code and contributions to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code. (h) Legend. Each certificate for Common Shares and for Preferred Shares shall bear substantially the following legend: The securities represented by this certificate are subject to restrictions on transfer for the purpose of the Trust's maintenance of its status as a real estate investment trust under the Internal Revenue Code of 1986, as amended. Except as otherwise provided pursuant to the Declaration of Trust of the Trust, no Person (unless such Person is an Excepted Person) may directly or indirectly own Common Shares and/or Preferred Shares in excess of that number of Shares which equals the lesser of 5.0% (or such greater percentage as may be determined by the Board of Trustees of the Trust) of (a) the number of outstanding Equity Shares of the Trust and (b) the value of outstanding Equity Shares of the Trust. Any Person who attempts or proposes to directly or indirectly own Common Shares and/or Preferred Shares in excess of the above limitations must notify the Trust in writing at least 15 days prior to such proposed or attempted transfer. All italicized terms in this legend have the meanings defined in the Declaration of Trust of the Trust, a copy of which, including the restrictions on transfer, will be sent without charge to each Shareholder who so requests. If the restrictions on transfer are violated, the securities represented hereby will be designated and treated as Excess Shares pursuant to the Declaration of Trust of the Trust. Instead of the foregoing legend, the certificate may state that the Trust will furnish a full statement about certain restrictions on transferability to a shareholder on request and without charge. -15- SECTION 6.9 Reserved Powers of Board. The enumeration and definition of powers of the Board of Trustees included in this Article VI shall in no way be limited or restricted by reference to or inference from the terms of any other clause of this or any other provision of the Declaration of Trust, or construed or deemed by inference or otherwise in any manner to exclude or limit the powers conferred upon the Board of Trustees under the general laws of the State of Maryland as now or hereafter in force. SECTION 6.10 REIT Qualification. The Board of Trustees shall use its reasonable best efforts to cause the Trust and the Shareholders to qualify for federal income tax treatment in accordance with the REIT Provisions of the Code. In furtherance of the foregoing, the Board of Trustees shall use its reasonable best efforts to take such actions as are necessary, and may take such actions as in its sole judgment and discretion are desirable, to preserve the status of the Trust as a REIT, including amending the provisions of this Declaration of Trust as provided in Article IX; provided, however, that if the Board of Trustees determines that it is no longer in the best interests of the Trust for it to continue to qualify as a REIT, the Board of Trustees may revoke or otherwise terminate the Trust's REIT election. ARTICLE VII SECTIONS 7.1 - 7.22 [RESERVED] ARTICLE VIII SHAREHOLDERS SECTION 8.1. Meetings of Shareholders. There shall be an annual meeting of the Shareholders, to be held on proper notice, at such time (after delivery of the annual report) and convenient location as shall be determined by or in the manner prescribed in the Bylaws, at which Trustees shall be elected and any other proper business may be conducted. Except as otherwise provided in this Declaration of Trust, special meetings of Shareholders may be called in the manner provided in the Bylaws. If there are no Trustees, the President or any other officer of the Trust shall promptly call a special meeting of the Shareholders entitled to vote for the election of successor Trustees. Any meeting may be adjourned and reconvened as the Trustees determine or as provided in the Bylaws. SECTION 8.2. Voting Rights of Shareholders. Subject to the provisions of any class or series of Shares then outstanding, the Shareholders shall be entitled to vote only on the following matters: (a) the election or removal of Trustees; (b) the amendment of this Declaration of Trust; (c) the voluntary dissolution or termination of the Trust; (d) the merger -16- or consolidation of the Trust or the sale or other disposition of all or substantially all of the Trust Property; and (e) such other matters with respect to which the Board of Trustees has adopted a resolution declaring advisable or recommending a proposal and directing that the matter be submitted to the Shareholders for consideration. Except with respect to the foregoing matters, no action taken by the Shareholders at any meeting shall in any way bind the Trustees. SECTION 8.3 Board Approval. The submission of any action to the Shareholders for their consideration shall first be approved by the Board of Trustees. ARTICLE IX AMENDMENT SECTION 9.1 Amendment. (a) This Declaration of Trust may be amended by the affirmative vote of the holders of not less than a majority of the Shares then outstanding and entitled to vote thereon, except that Sections 2.3, 6.6, 9.2 and 9.3 hereof, and this subsection or subsection (b) of this Section 9.1, may be amended only by the affirmative vote of not less than two-thirds of the Shares then outstanding and entitled to vote. (b) The Trustees, by a two-thirds vote, may amend provisions of this Declaration of Trust from time to time to enable the Trust to qualify as a real estate investment trust under the REIT Provisions of the Code or under Title 8. (c) This Declaration of Trust may not be amended except as provided in this Article IX. SECTION 9.2 Reorganization. Subject to the provisions of any class or series of Shares at the time outstanding, the Trustees shall have the power to (a) cause the organization of a corporation, association, trust or other organization to take over the Trust Property and carry on the affairs of the Trust; (b) merge the Trust into, or sell, convey and transfer the Trust Property to, any such corporation, association, trust or organization in exchange for Securities thereof or beneficial interests therein, and the assumption by the transferee of the liabilities of the Trust; and (c) thereupon terminate the Trust and deliver such Securities or beneficial interests ratably among the Shareholders according to the respective rights of the class or series of Shares held by them; provided that any such action shall have been approved, at a meeting of the Shareholders called for the purpose, by the affirmative vote of the holders of not less than two-thirds of the Shares then outstanding and entitled to vote thereon. SECTION 9.3 Merger, Consolidation or Sale of Trust Property. Subject to the provisions of any class or series of Shares at the time outstanding, the Trustees shall have the power to (a) merge the Trust into another entity, (b) consolidate the Trust with one or more -17- other entities into a new entity or (c) sell or otherwise dispose of all or substantially all of the Trust Property; provided, that such action shall have been approved, at a meeting of the Shareholders called for the purpose, by the affirmative vote of the holders of not less than (i) two-thirds, if the Trust is not the surviving entity in any such merger or consolidation or in the event of a proposed sale or disposition of all or substantially all of the Trust Property, or (ii) a majority, in all other cases, of the Shares then outstanding and entitled to vote thereon. ARTICLE X DURATION OF TRUST The Trust shall continue perpetually unless terminated pursuant to any applicable provision of Title 8. The Trust may be voluntarily dissolved or its existence terminated only by the affirmative vote of the holders of not less than two-thirds of all the Shares then outstanding and entitled to vote on the matter. The Trust may sell or otherwise dispose of all or substantially all of the Trust Property only by the affirmative vote of the holders of not less than a majority of all the Shares then outstanding and entitled to vote on the matter. Upon the termination of the Trust: (i) The Trust shall carry on no business except for the purpose of winding up its affairs. (ii) The Trustees shall proceed to wind up the affairs of the Trust and all of the powers of the Trustees under this Declaration of Trust shall continue, including the powers to fulfill or discharge the Trust's contracts, collect its assets, sell, convey, assign, exchange, transfer or otherwise dispose of all or any part of the remaining property of the Trust to one or more persons at public or private sale for consideration which may consist in whole or in part of cash, securities or other property of any kind, discharge or pay its liabilities and do all other acts appropriate to liquidate its business. (iii) After paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and agreements as they deem necessary for their protection, the Trust may distribute the remaining property of the Trust among the Shareholders so that after payment in full or the setting apart for payment of such preferential amounts, if any, to which the holders of any Shares at the time outstanding shall be entitled, the remaining property of the Trust shall, subject to any participating or similar rights of Shares at the time outstanding, be distributed ratably among the holders of Common Shares at the time outstanding. (b) After termination of the Trust, the liquidation of its business and the distribution to the Shareholders as herein provided, a majority of the Trustees shall execute and file with the Trust's records a document certifying that the Trust has been duly terminated, and the Trustees -18- shall be discharged from all liabilities and duties hereunder, and the rights and interests of all Shareholders shall cease. ARTICLE XI LIABILITY OF SHAREHOLDERS, TRUSTEES, OFFICERS, EMPLOYEES AND AGENTS AND TRANSACTIONS BETWEEN THEM AND THE TRUST SECTION 11.1 Limitation of Shareholder Liability. No Shareholder shall be liable for any debt, claim, demand, judgment or obligation of any kind of, against or with respect to the Trust by reason of his being a Shareholder, nor shall any Shareholder be subject to any personal liability whatsoever, in tort, contract or otherwise, to any Person in connection with the Trust Property or the affairs of the Trust. SECTION 11.2 Limitation of Trustee and Officer Liability. To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of trustees and officers of a real estate investment trust, no Trustee or officer of the Trust shall be liable to the Trust or to any Shareholder for money damages. Neither the amendment nor repeal of this Section, nor the adoption or amendment of any other provision of this Declaration of Trust inconsistent with this Section, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. In the absence of any Maryland statute limiting the liability of trustees and officers of a Maryland real estate investment trust for money damages in a suit by or on behalf of the Trust or by any Shareholder, no Trustee or officer of the Trust shall be liable to the Trust or to any Shareholder for money damages except to the extent that (a) the Trustee or officer actually received an improper benefit or profit in money, property or services, for the amount of the benefit or profit in money, property or services actually received or (b) a judgment or other final adjudication adverse to the Trustee or officer is entered in a proceeding based on a finding in the proceeding that the Trustee's or officer's action or failure to act was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. SECTION 11.3 Indemnification and Advance for Expenses. The Trust shall have the power, to the maximum extent permitted by Maryland law in effect from time to time, to obligate itself to indemnify, and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to, (a) any individual who is a present or former Shareholder, Trustee or officer of the Trust or (b) any individual who, while a Shareholder, Trustee or officer of the Trust and at the express request of the Trust, serves or has served another corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, Shareholder, partner or trustee of such corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, from and against all claims and liabilities to which -19- such person may become subject by reason of his being or having been a Shareholder, Trustee or officer. The Trust shall have the power, with the approval of its Board of Trustees, to provide such indemnification and advancement of expenses to a person who served a predecessor of the Trust in any of the capacities described in (a) or (b) above and to any employee or agent of the Trust or a predecessor of the Trust. SECTION 11.4 Transactions Between the Trust and its Trustees, Officers, Employees and Agents. Subject to any express restriction in this Declaration of Trust, including (but not limited to) Section 6.4, or any restriction adopted by the Trustees in the Bylaws or by resolution, the Trust may enter into any contract or transaction of any kind (including, without limitation, for the purchase or sale of property or for any type of services, including those in connection with the underwriting or the offer or sale of Securities of the Trust) with any Person, including any Trustee, officer, employee or agent of the Trust or any Person Affiliated with a Trustee, officer, employee or agent of the Trust, whether or not any of them has a financial interest in such transaction. ARTICLE XII MISCELLANEOUS SECTION 12.1 Governing Law. This Declaration of Trust is executed by the Trustees and delivered in the State of Maryland with reference to the laws thereof, and the rights of all parties and the validity, construction and effect of every provision hereof shall be subject to and construed according to the laws of the State of Maryland without regard to conflicts of laws provisions thereof. SECTION 12.2 Reliance by Third Parties. Any certificate shall be final and conclusive as to any Person dealing with the Trust if executed by an individual who, according to the records of the Trust or of any recording office in which this Declaration of Trust may be recorded, appears to be the Secretary or an Assistant Secretary of the Trust or a Trustee, and if certifying to: (a) the number or identify of Trustees, officers of the Trust or Shareholders; (b) the due authorization of the execution of any document; (c) any action or vote taken, and the existence of a quorum at a meeting of Trustees or Shareholders; (d) a copy of this Declaration or of the Bylaws as a true and complete copy as then in force; (e) an amendment to this Declaration; (f) the termination of the Trust; or (g) the existence of any fact or facts which relate to the affairs of the Trust. No purchaser, lender, transfer agent or other Person shall be bound to make any inquiry concerning the validity of any transaction purporting to be made on behalf of the Trust by the Trustees or by any officer, employee or agent of the Trust. SECTION 12.3 Severability. -20- (a) The provisions of this Declaration of Trust are severable, and if the Trustees shall determine, with the advice of counsel, that any one or more of such provisions (the "Conflicting Provisions") are in conflict with the REIT Provisions of the Code, Title 8 or any other applicable federal or state law, the Conflicting Provisions shall be deemed never to have constituted a part of this Declaration of Trust, even without any amendment of this Declaration pursuant to Article IX; provided, however, that such determination by the Trustees shall not affect or impair any of the remaining provisions of this Declaration of Trust or render invalid or improper any action taken or omitted prior to such determination. No Trustee shall be liable for making or failing to make such a determination. (b) If any provision of this Declaration of Trust shall be held invalid or unenforceable in any jurisdiction, such holding shall not in any manner affect or render invalid or unenforceable such provision in any other jurisdiction or any other provision of this Declaration of Trust in any jurisdiction. SECTION 12.4 Construction. In this Declaration of Trust, unless the context otherwise requires, words used in the singular or in the plural include both the plural and singular and words denoting any gender include all genders. The title and headings of different parts of this Declaration are inserted for convenience and shall not affect the meaning, construction or effect of this Declaration. In defining or interpreting the powers and duties of the Trust and its Trustees and officers, reference may be made by the Board of Trustees and the officers of the Trust, to the extent appropriate and not inconsistent with the Code or Title 8, to Titles 1 through 3 of the Corporations and Associations Article of the Annotated Code of Maryland. In furtherance and not in limitation of the foregoing, in accordance with the provisions of Title 3, Subtitles 6 and 7, of the Corporations and Associations Article of the Annotated Code of Maryland, the Trust shall be included within the definition of "corporation" for purposes of such provisions. SECTION 12.5 Recordation. This Declaration of Trust and any amendment or supplement hereto shall be filed for record with the State Department of Assessments and Taxation of Maryland and may also be filed or recorded in such other places as the Trustees deem appropriate, but failure to file for record this Declaration or any amendment or supplement hereto in any office other than in the State of Maryland shall not affect or impair the validity or effectiveness of this Declaration or any amendment hereto. A restated Declaration shall, upon filing, be conclusive evidence of all amendments or supplements contained therein and may thereafter be referred to in lieu of the original Declaration and the various amendments or supplements thereto. ARTICLE XIII DESIGNATION OF PREFERRED SHARES -21- SECTION 13.1 Series A Preferred Shares. Pursuant to Section 5.4 of this Declaration, a series of preferred shares of beneficial interest designated 9-3/8% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest ($0.01 Par Value Per Share) (Liquidation Preference $25.00 Per Share) (the "Series A Preferred Shares") is hereby established on the following terms: (a) Certain Definitions. Unless the context otherwise requires, the terms defined in this Section 13.1(a) shall have the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural). "Business Day" shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close. "Common Shares" shall mean the common shares of beneficial interest, $.01 par value per share, of the Trust. "Dividend Period" shall have the meaning set forth in Section 13.1(b)(3). "Junior Shares" shall have the meaning set forth in Section 13.1(b)(2). "Person" shall mean an individual, corporation, partnership, estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity, and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended; but does not include an underwriter which participates in a public offering of the Series A Preferred Shares provided that the ownership of Series A Preferred Shares by such underwriter would not result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, or would otherwise result in the Trust failing to qualify as a REIT. "Preferred Shares" shall mean shares of beneficial interest that are either Series A Preferred Shares, Series B Preferred Shares, Series C Preferred Shares, Series D Preferred Shares, Series E Preferred Shares or Excess Preferred Shares. "Quarterly Dividend Date" shall have the meaning set forth in Section 13.1(b)(3). "Record Date" shall have the meaning set forth in Section 13.1(b)(3). -22- "REIT" shall mean a Real Estate Investment Trust under Section 856 of the Code. "Series A Redemption Date" shall have the meaning set forth in Section 13.1(b)(5). "Series A Redemption Price" shall have the meaning set forth in Section 13.1(b)(5). (b) Series A Preferred Shares (1) Number. The number of shares of the Series A Preferred Shares shall be 6,900,000. (2) Relative Seniority. In respect of rights to receive dividends and to participate in distributions or payments in the event of any Liquidation, dissolution or winding up of the Trust, the Series A Preferred Shares shall rank senior to the Common Shares and any other class or series of shares of beneficial interest of the Trust ranking, as to dividends and upon Liquidation, junior to the Series A Preferred Shares (collectively, "Junior Shares"). (3) Dividends. The holders of the then outstanding Series A Preferred Shares shall be entitled to receive, when and as declared by the Board of Trustees out of any funds legally available therefor, cumulative dividends at the rate of $2.34375 per share per year, payable in equal amounts of $.5859375 per share quarterly in cash on the fifteenth day, or the next succeeding Business Day, of January, April, July and October in each year, beginning July 17, 1995 (each such day being hereinafter called a "Quarterly Dividend Date" and each period ending on a Quarterly Dividend Date being hereinafter called a "Dividend Period"), to shareholders of record at the close of business on such date as shall be fixed by the Board of Trustees at the time of declaration of the dividend (the "Record Date"), which shall be not less than 10 nor more than 30 days preceding the Quarterly Dividend Date. The amount of any dividend payable for the initial Dividend Period and for any other Dividend Period shorter than a full Dividend Period shall be prorated and computed on the basis of a 360-day year of twelve 30-day months. Dividends on each share of Series A Preferred Shares shall accrue and be cumulative from and including the date of original issue thereof, whether or not (i) dividends on such shares are earned or declared or (ii) on any Quarterly Dividend Date there shall be funds legally available for the payment of dividends. Dividends paid on the Series A Preferred Shares in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a per share basis among all such shares at the time outstanding. The amount of any dividends accrued on any Series A Preferred Shares at any Quarterly Dividend Date shall be the amount of any unpaid dividends accumulated -23- thereon, to and including such Quarterly Dividend Date, whether or not earned or declared, and the amount of dividends accrued on any shares of Series A Preferred Shares at any date other than a Quarterly Dividend Date shall be equal to the sum of the amount of any unpaid dividends accumulated thereon, to and including the last preceding Quarterly Dividend Date, whether or not earned or declared, plus an amount calculated on the basis of the annual dividend rate of $2.34375 for the period after such last preceding Quarterly Dividend Date to and including the date as of which the calculation is made based on a 360-day year of twelve 30-day months. Except as provided in this Section 13.1, the Series A Preferred Shares shall not be entitled to participate in the earnings or assets of the Trust. (4) Liquidation Rights. (A) Upon the voluntary or involuntary dissolution, liquidation or winding up of the Trust, the holders of the Series A Preferred Shares then outstanding shall be entitled to receive and to be paid out of the assets of the Trust available for distribution to its shareholders, before any payment or distribution shall be made on any Junior Shares, the amount of $25.00 per share, plus accrued and unpaid dividends thereon. (B) After the payment to the holders of the Series A Preferred Shares of the full preferential amounts provided for in this paragraph (b), the holders of the Series A Preferred Shares as such shall have no right or claim to any of the remaining assets of the Trust. (C) If, upon any voluntary or involuntary dissolution, liquidation, or winding up of the Trust, the amounts payable with respect to the preference value of the Series A Preferred Shares and any other shares of beneficial interest of the Trust ranking as to any such distribution on a parity with the Series A Preferred Shares are not paid in full, the holders of the Series A Preferred Shares and of such other shares will share ratably in any such distribution of assets of the Trust in proportion to the full respective preference amounts to which they are entitled. (D) Neither the sale of all or substantially all the property or business of the Trust, nor the merger or consolidation of the Trust into or with any other entity or the merger or consolidation of any other entity into or with the Trust, shall be deemed to be a dissolution, Liquidation or winding up, voluntary or involuntary, for the purposes of this paragraph (b). (5) Redemption. -24- (A) Optional Redemption. On and after June 1, 2000, the Trust may, at its option, redeem at any time all or, from time to time, part of the Series A Preferred Shares at a price per share (the "Series A Redemption Price"), payable in cash, of $25.00, together with all accrued and unpaid dividends to and including the date fixed for redemption (the "Series A Redemption Date"). (B) Procedures for Redemption. (i) Notice of any redemption will be mailed by the Trust, postage prepaid, not less than 30 nor more than 60 days prior to the Series A Redemption Date, addressed to the holders of record of the Series A Preferred Shares to be redeemed at their addresses as they appear on the share transfer records of the Trust. No failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any Series A Preferred Shares except as to the holder to whom the Trust has failed to give notice or except as to the holder to whom notice was defective. In addition to any information required by law or by the applicable rules of any exchange upon which Series A Preferred Shares may be listed or admitted to trading, such notice shall state: (a) the Series A Redemption Date; (b) the Series A Redemption Price; (c) the number of Series A Preferred Shares to be redeemed; (d) the place or places where certificates for such shares are to be surrendered for payment of the Series A Redemption Price; (e) that dividends on the shares to be redeemed will cease to accumulate on the Series A Redemption Date; and (f) the date on which conversion rights shall expire, the conversion price and the place or places where certificates for such shares are to be surrendered for conversion. (ii) If notice has been mailed in accordance with subparagraph (5)(B)(i) above and provided that on or before the Series A Redemption Date specified in such notice all funds necessary for such redemption shall have been irrevocably set aside by the Trust, separate and apart from its other funds in trust for the pro rata benefit of the holders of the Series A Preferred Shares so called for redemption, so as to be, and to continue to be available therefor, then, from and after the Series A Redemption Date, dividends on the Series A Preferred Shares so called for redemption shall cease to accumulate, and said shares shall no longer be deemed to be outstanding and shall not have the status of Series A Preferred Shares and all rights of the holders thereof as shareholders of the Trust (except the right to receive the Series A Redemption Price) shall cease. Upon surrender, in accordance with said notice, of the certificates for any Series A Preferred Shares so redeemed (properly endorsed or assigned for transfer, if the Trust shall so require and the notice shall so state), such Series A Preferred Shares shall be redeemed by the Trust at the Series A Redemption Price. In case fewer than all the Series A Preferred Shares represented by any such certificate are redeemed, -25- a new certificate or certificates shall be issued representing the unredeemed Series A Preferred Shares without cost to the holder thereof. (iii) Any funds deposited with a bank or trust company for the purpose of redeeming Series A Preferred Shares shall be irrevocable except that: (a) the Trust shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any shares redeemed shall have no claim to such interest or other earnings; and (b) any balance of monies so deposited by the Trust and unclaimed by the holders of the Series A Preferred Shares entitled thereto at the expiration of two years from the applicable Series A Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Trust, and after any such repayment, the holders of the shares entitled to the funds so repaid to the Trust shall look only to the Trust for payment without interest or other earnings. (iv) No Series A Preferred Shares may be redeemed except with funds legally available for the payment of the Series A Redemption Price. (v) Unless full accumulated dividends on all Series A Preferred Shares shall have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past Dividend Periods and the then current Dividend Period, no Series A Preferred Shares shall be redeemed (unless all outstanding Series A Preferred Shares are simultaneously redeemed) or purchased or otherwise acquired directly or indirectly (except by conversion into or exchange for capital shares of the Trust ranking junior to the Series A Preferred Shares as to dividends and upon liquidation); provided, however, that the foregoing shall not prevent the redemption of Series A Preferred Shares pursuant to [Article VII] Sections 6.6 and 6.8 of the Declaration of Trust or the purchase or acquisition of Series A Preferred Shares pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of Series A Preferred Shares. (vi) If the Series A Redemption Date is after a Record Date and before the related Quarterly Dividend Date, the dividend payable on such Quarterly Dividend Date shall be paid to the holder in whose name the Series A Preferred Shares to be redeemed are registered at the close of business on such Record Date notwithstanding the redemption thereof between such Record Date and the related Quarterly Dividend Date or the Trust's default in the payment of the dividend due. -26- (vii) In case of redemption of less than all Series A Preferred Shares at the time outstanding, the Series A Preferred Shares to be redeemed shall be selected pro rata from the holders of record of such shares in proportion to the number of Series A Preferred Shares held by such holders (with adjustments to avoid redemption of fractional shares) or by any other equitable method determined by the Trust. (6) Voting Rights. Except as required by law, the holders of the Series A Preferred Shares shall not be entitled to vote at any meeting of the shareholders for election of trustees or for any other purpose or otherwise to participate in any action taken by the Trust or the shareholders thereof, or to receive notice of any meeting of shareholders. (A) Whenever dividends on any Series A Preferred Shares shall be in arrears for six or more quarterly periods, the holders of such Series A Preferred Shares (voting separately as a class with all other series of Preferred Shares upon which like voting rights have been conferred and are exercisable) will be entitled to vote for the election of two additional Trustees of the Trust at a special meeting called by the holders of record of at least ten percent (10%) of any series of Preferred Shares so in arrears (unless such request is received less than 90 days before the date fixed for the next annual or special meeting of the shareholders) or at the next annual meeting of shareholders, and at each subsequent annual meeting until all dividends accumulated on such Series A Preferred Shares for the past dividend periods and the then current dividend period shall have been fully paid or declared and a sum sufficient for the payment thereof set aside for payment. In such case, the entire Board of Trustees of the Trust will be increased by two Trustees. (B) So long as any Series A Preferred Shares remain outstanding, the Trust will not, without the affirmative vote or consent of the holders of at least two-thirds of the Series A Preferred Shares outstanding at the time, given in person or by proxy, either in writing or at a meeting (such series voting separately as a class), (i) authorize or create, or increase the authorized or issued amount of, any class or series of shares of beneficial interest ranking prior to the Series A Preferred Shares with respect to the payment of dividends or the distribution of assets upon liquidation, dissolution or winding up or reclassify any authorized shares of beneficial interest of the Trust into such shares, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such shares; or (ii) amend, alter or repeal the provisions of the Trust's Declaration of Trust, whether by merger, consolidation or otherwise (an "Event"), so as to materially and adversely affect any right, preference, privilege or voting power of the Series A Preferred Shares or the holders thereof; provided, however, with respect to the occurrence of any of the Events set forth -27- in (ii) above, so long as the Series A Preferred Shares remain outstanding with the terms thereof materially unchanged, taking into account that upon the occurrence of an Event, the Trust may not be the surviving entity, the occurrence of any such Event shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting power of holders of Series A Preferred Shares and provided further that (x) any increase in the amount of the authorized Preferred Shares or the creation of issuance of any other Series A Preferred Shares, or (y) any increase in the amount of authorized Series A Preferred Shares or any other Preferred Shares, in each case ranking on a parity with or junior to the Series A Preferred Shares with respect to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding Series A Preferred Shares shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. (7) Conversion. The Series A Preferred Shares are not convertible into or exchangeable for any other property or securities of the Trust. (8) Exclusion of Other Rights. Except as may otherwise be required by law, the Series A Preferred Shares shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this Declaration of Trust. The Series A Preferred Shares shall have no preemptive or subscription rights. (9) Headings of Subdivisions. The headings of the various subdivisions within this Section 13.1 are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. (10) Severability of Provisions. If any voting powers, preferences and relative, participating, optional and other special rights of the Series A Preferred Shares and qualifications, limitations and restrictions thereof set forth in this Section 13.1 is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Series A Preferred Shares and qualifications, limitations and restrictions thereof set forth in this Section 13.1 which can be given effect without the invalid, -28- unlawful or unenforceable voting powers, preferences and relative, participating, optional or other special rights of Series A Preferred Shares and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special right of Series A Preferred Shares and qualifications, limitations and restrictions there of unless so expressed herein. (c) Article VII of the Trusts's Declaration of Trust shall be supplemented by adding the following Section 7.23. 7.23 Special Rules for Series A Preferred Shares. (1) Certain Definitions. For purposes of this Section 7.23 the following terms shall have the following meanings: "Closing Date of the Series A Preferred Shares Offering" shall mean the time and date of payment for and delivery of Series A Preferred Shares issued pursuant to the effective registration statement for such Series A Preferred Shares filed under the Securities Act of 1933, as amended. "Special Triggering Event" shall mean either (i) the redemption or purchase by the Trust of all or a portion of the outstanding shares of beneficial interest in the Trust, or (ii) a change in the value of the Series A Preferred Shares relative to any other class of beneficial interest in the Trust. (2) Special Triggering Event. If during the period commencing on the Closing Date of the Series A Preferred Shares Offering and prior to the date on which the Board of Trustees determines that it is no longer in the best interest of the Trust to attempt to, or continue to, qualify as a REIT, a Special Triggering Event (if effective) or other event or occurrence (if effective) would result in any violation of Section [7.21(a)] 6.6(d)(i) of the Trust's Declaration of Trust (or would result in the Trust being "closely held" within the meaning of Section 856(h) of the Code or would otherwise cause the Trust to fail to qualify as a REIT), then (i) the number of Series A Preferred Shares (rounded up to the nearest whole share) that would (but for this Section 7.23) cause any Person to directly or indirectly own either Series A Preferred Shares, or to directly or indirectly own Series A Preferred Shares and any other shares of beneficial interest in the Trust, in violation of Section [7.21(a)] 6.6(d)(i) (or would result in the Trust being "closely held" or otherwise fail to qualify as a REIT) shall constitute "Excess Shares" and shall be treated as provided in [Article VII] Sections 6.6 and 6.8. Such designation and treatment shall be effective as of the close of business on the -29- business day prior to the date of the Special Triggering Event or other event or occurrence. SECTION 13.2 Series B Preferred Shares. Pursuant to Section 5.4 of this Declaration, a series of preferred shares of beneficial interest designated 9-1/8% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest ($0.01 Par Value Per Share) (Liquidation Preference $250.00 Per Share) (collectively, the "Series B Preferred Shares") is hereby established on the following terms: (a) Certain Definitions. Unless the context otherwise requires, the terms defined in this Section 13.2(a) shall have the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural). "Business Day" shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close. "Common Shares" shall mean the common shares of beneficial interest, $.01 par value per share, of the Trust. "Dividend Period" shall have the meaning set forth in Section 13.2(b)(3). "Junior Shares" shall have the meaning set forth in Section 13.2(b)(2). "Person" shall mean an individual, corporation, partnership, estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity, and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended; but does not include an underwriter which participates in a public offering of the Series B Preferred Shares provided that the ownership of Series B Preferred Shares by such underwriter would not result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, or would otherwise result in the Trust failing to qualify as a REIT. "Preferred Shares" shall mean preferred shares of beneficial interest, $.01 par value per share, including Series A Preferred Shares, Series B Preferred Shares, Series C Preferred Shares, Series D Preferred Shares, and Series E Preferred Shares. -30- "Quarterly Dividend Date" shall have the meaning set forth in Section 13.2(b)(3) below. "Record Date" shall have the meaning set forth in Section 13.2(b)(3) below. "REIT" shall mean a Real Estate Investment Trust under Section 856 of the Code. "Series B Redemption Date" shall have the meaning set forth in Section 13.2(b)(5) below. "Series B Redemption Price" shall have the meaning set forth in Section 13.2(b)(5) below. (b) Series B Preferred Shares (1) Number. The maximum number of shares of the Series B Preferred Shares shall be 575,000. (2) Relative Seniority. In respect of rights to receive dividends and to participate in distributions or payments in the event of any Liquidation, dissolution or winding up of the Trust, the Series B Preferred Shares shall rank pari passu with any other preferred shares of beneficial interest of the Trust, including the Series A Preferred Shares, Series C Preferred Shares, Series D Preferred Shares, and Series E Preferred Shares. The Series B Preferred Shares will rank senior to the Common Shares and any other class or series of shares of beneficial interest of the Trust ranking, as to dividends and upon Liquidation, junior to the Preferred Shares (collectively, "Junior Shares"). (3) Dividends. The holders of the then outstanding Series B Preferred Shares shall be entitled to receive, when and as declared by the Board of Trustees out of any funds legally available therefor, cumulative dividends at the rate of $22.8125 per share per year, payable in equal amounts of $5.703125 per share quarterly in cash on the fifteenth day, or if not a Business Day, the next succeeding Business Day, of January, April, July and October in each year, beginning January 15, 1996 (each such day being hereinafter called a "Quarterly Dividend Date" and each period ending on a Quarterly Dividend Date being hereinafter called a "Dividend Period"), to shareholders of record at the close of business on such date as shall be fixed by the Board of Trustees at the time of declaration of the dividend (the "Record Date"), which shall be not less than 10 nor more than 30 days preceding the Quarterly Dividend Date. The amount of any dividend payable for the initial Dividend Period and for any other Dividend Period shorter than a full Dividend Period shall be prorated and computed on the basis of a 360-day year of twelve 30-day months. Dividends on each share of Series B Preferred Shares shall accrue and be cumulative from and including the date of original issue thereof, whether or not (i) dividends on such shares are earned or declared or (ii) on any -31- Quarterly Dividend Date there shall be funds legally available for the payment of dividends. Dividends paid on the Series B Preferred Shares in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a per share basis among all such shares at the time outstanding. The amount of any dividends accrued on any Series B Preferred Shares at any Quarterly Dividend Date shall be the amount of any unpaid dividends accumulated thereon, to and including such Quarterly Dividend Date, whether or not earned or declared, and the amount of dividends accrued on any shares of Series B Preferred Shares at any date other than a Quarterly Dividend Date shall be equal to the sum of the amount of any unpaid dividends accumulated thereon, to and including the last preceding Quarterly Dividend Date, whether or not earned or declared, plus an amount calculated on the basis of the annual dividend rate of $22.8125 for the period after such last preceding Quarterly Dividend Date to and including the date as of which the calculation is made based on a 360-day year of twelve 30-day months. Except as provided in this Section 13.2, the Series B Preferred Shares shall not be entitled to participate in the earnings or assets of the Trust. (4) Liquidation Rights. (A) Upon the voluntary or involuntary dissolution, liquidation or winding up of the Trust, the holders of the Series B Preferred Shares then outstanding shall be entitled to receive and to be paid out of the assets of the Trust available for distribution to its shareholders, before any payment or distribution shall be made on any Junior Shares, the amount of $250.00 per Series B Preferred Share, plus accrued and unpaid dividends thereon. (B) After the payment to the holders of the Series B Preferred Shares of the full preferential amounts provided for in this paragraph (b), the holders of the Series B Preferred Shares as such shall have no right or claim to any of the remaining assets of the Trust. (C) If, upon any voluntary or involuntary dissolution, liquidation, or winding up of the Trust, the amounts payable with respect to the preference value of the Series B Preferred Shares and any other shares of beneficial interest of the Trust ranking as to any such distribution on a parity with the Series B Preferred Shares are not paid in full, the holders of the Series B Preferred Shares and of such other shares will share ratably in any such distribution of assets of the Trust in proportion to the full respective preference amounts to which they are entitled. (D) Neither the sale of all or substantially all the property or business of the Trust, nor the merger or consolidation of the Trust into or with any other -32- entity or the merger or consolidation of any other entity into or with the Trust, shall be deemed to be a dissolution, Liquidation or winding up, voluntary or involuntary, for the purposes of this paragraph (b). (5) Redemption. (A) Optional Redemption. On and after October 15, 2005, the Trust may, at its option, redeem at any time all or, from time to time, part of the Series B Preferred Shares at a price per share (the "Series B Redemption Price"), payable in cash, of $250.00 per Series B Preferred Share, together with all accrued and unpaid dividends to and including the date fixed for redemption (the "Series B Redemption Date"). (B) Procedures for Redemption. (i) Notice of any redemption will be mailed by the Trust, postage prepaid, not less than 30 nor more than 60 days prior to the Series B Redemption Date, addressed to the holders of record of the Series B Preferred Shares to be redeemed at their addresses as they appear on the share transfer records of the Trust. No failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any Series B Preferred Shares except as to the holder to whom the Trust has failed to give notice or except as to the holder to whom notice was defective. In addition to any information required by law or by the applicable rules of any exchange upon which Series B Preferred Shares may be listed or admitted to trading, such notice shall state: (a) the Series B Redemption Date; (b) the Series B Redemption Price; (c) the number of Series B Preferred Shares to be redeemed; (d) the place or places where certificates for such shares are to be surrendered for payment of the Series B Redemption Price; (e) that dividends on the shares to be redeemed will cease to accumulate on the Series B Redemption Date; and (f) the date on which conversion rights shall expire, the conversion price and the place or places where certificates for such shares are to be surrendered for conversion. (ii) If notice has been mailed in accordance with Section 13.2(b)(5)(B)(i) above and provided that on or before the Series B Redemption Date specified in such notice all funds necessary for such redemption shall have been irrevocably set aside by the Trust, separate and apart from its other funds in trust for the pro rata benefit of the holders of the Series B Preferred Shares so called for redemption, so as to be, and to continue to be available therefor, then, from and after the Series B Redemption Date, dividends on the Series B Preferred Shares so called for redemption shall cease to accumulate, and said shares shall no longer be deemed to be outstanding and shall not have the status of Series B Preferred Shares and all rights of the holders thereof as shareholders of the Trust -33- (except the right to receive the Series B Redemption Price) shall cease. Upon surrender, in accordance with said notice, of the certificates for any Series B Preferred Shares so redeemed (properly endorsed or assigned for transfer, if the Trust shall so require and the notice shall so state), such Series B Preferred Shares shall be redeemed by the Trust at the Series B Redemption Price. In case fewer than all the Series B Preferred Shares represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the unredeemed Series B Preferred Shares without cost to the holder thereof. (iii) Any funds deposited with a bank or trust company for the purpose of redeeming Series B Preferred Shares shall be irrevocable except that: (a) the Trust shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any shares redeemed shall have no claim to such interest or other earnings; and (b) any balance of monies so deposited by the Trust and unclaimed by the holders of the Series B Preferred Shares entitled thereto at the expiration of two years from the applicable Series B Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Trust, and after any such repayment, the holders of the shares entitled to the funds so repaid to the Trust shall look only to the Trust for payment without interest or other earnings. (iv) No Series B Preferred Shares may be redeemed except with funds legally available for the payment of the Series B Redemption Price. (v) Unless full accumulated dividends on all Series B Preferred Shares shall have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past Dividend Periods and the then current Dividend Period, no Series B Preferred Shares shall be redeemed (unless all outstanding Series B Preferred Shares are simultaneously redeemed) or purchased or otherwise acquired directly or indirectly (except by conversion into or exchange for capital shares of the Trust ranking junior to the Series B Preferred Shares as to dividends and upon liquidation); provided, however, that the foregoing shall not prevent the redemption of Series B Preferred Shares pursuant to [Article VII] Sections 6.6 and 6.8 of this Declaration of Trust or the purchase or acquisition of Series B Preferred Shares pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of Series B Preferred Shares. -34- (vi) If the Series B Redemption Date is after a Record Date and before the related Quarterly Dividend Date, the dividend payable on such Quarterly Dividend Date shall be paid to the holder in whose name the Series B Preferred Shares to be redeemed are registered at the close of business on such Record Date notwithstanding the redemption thereof between such Record Date and the related Quarterly Dividend Date or the Trust's default in the payment of the dividend due. (vii) In case of redemption of less than all Series B Preferred Shares at the time outstanding, the Series B Preferred Shares to be redeemed shall be selected pro rata from the holders of record of such shares in proportion to the number of Series B Preferred Shares held by such holders (with adjustments to avoid redemption of fractional shares) or by any other equitable method determined by the Trust. (6) Voting Rights. Except as required by law, the holders of the Series B Preferred Shares shall not be entitled to vote at any meeting of the shareholders for election of trustees or for any other purpose or otherwise to participate in any action taken by the Trust or the shareholders thereof, or to receive notice of any meeting of shareholders. (A) In any matter in which the Series B Preferred Shares are entitled to vote (as expressly provided herein or as may be required by law), including any action by written consent, each Series B Preferred Share shall be entitled to 10 votes, each of which 10 votes may be directed separately by the holder thereof (or by any proxy or proxies of such holder). With respect to each Series B Preferred Share, the holder thereof may designate up to 10 proxies, with each such proxy having the right to vote a whole number of votes (totaling 10 votes per Series B Preferred Share). (B) Whenever dividends on any Series B Preferred Shares shall be in arrears for six or more quarterly periods, the holders of the Depositary Shares representing such Series B Preferred Shares (voting separately as a class with all other series of Preferred Shares upon which like voting rights have been conferred and are exercisable) will be entitled to vote for the election of two additional Trustees of the Trust at a special meeting called by the holders of record of at least ten percent (10%) of any series of Preferred Shares so in arrears (unless such request is received less than 90 days before the date fixed for the next annual or special meeting of the shareholders) or at the next annual meeting of shareholders, and at each subsequent annual meeting until all dividends accumulated on such Series B Preferred Shares for the past dividend periods and the then current dividend period shall have been fully paid or declared and a sum sufficient for the payment thereof set aside for payment. In -35- such case, the entire Board of Trustees of the Trust will be increased by two Trustees. (C) So long as any Series B Preferred Shares remain outstanding, the Trust will not, without the affirmative vote or consent of the holders of at least two-thirds of the Series B Preferred Shares outstanding at the time, given in person or by proxy, either in writing or at a meeting (such series voting separately as a class), (i) authorize or create, or increase the authorized or issued amount of, any class or series of shares of beneficial interest ranking prior to the Series B Preferred Shares with respect to the payment of dividends or the distribution of assets upon liquidation, dissolution or winding up or reclassify any authorized shares of beneficial interest of the Trust into such shares, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such shares; or (ii) amend, alter or repeal the provisions of this Declaration of Trust, whether by merger, consolidation or otherwise (an "Event"), so as to materially and adversely affect any right, preference, privilege or voting power of the Series B Preferred Shares or the holders thereof; provided, however, with respect to the occurrence of any of the Events set forth in (ii) above, so long as the Series B Preferred Shares remain outstanding with the terms thereof materially unchanged, taking into account that upon the occurrence of an Event, the Trust may not be the surviving entity, the occurrence of any such Event shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting power of holders of Series B Preferred Shares and provided further that (x) any increase in the amount of the authorized Preferred Shares or the creation of issuance of any other Series B Preferred Shares, or (y) any increase in the amount of authorized the Series B Preferred Shares or any other Preferred Shares, in each case ranking on a parity with or junior to the Series B Preferred Shares with respect to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding Series B Preferred Shares shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. (7) Conversion. The Series B Preferred Shares are not convertible into or exchangeable for any other property or securities of the Trust, except into Excess Shares in connection with maintaining the ability of the Trust to qualify as a REIT. (8) Exclusion of Other Rights. -36- Except as may otherwise be required by law, the Series B Preferred Shares shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this Section 13.2. The Series B Preferred Shares shall have no preemptive or subscription rights. (9) Headings of Subdivisions. The headings of the various subdivisions within this Section 13.2 are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. (10) Severability of Provisions. If any voting powers, preferences and relative, participating, optional and other special rights of the Series B Preferred Shares and qualifications, limitations and restrictions thereof set forth in this Section 13.2 is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Series B Preferred Shares and qualifications, limitations and restrictions thereof set forth in this Section 13.2 which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional or other special rights of Series B Preferred Shares and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special right of Series B Preferred Shares and qualifications, limitations and restrictions there of unless so expressed herein. (c) Article VII of the Trust's Declaration of Trust shall be supplemented by adding the following new section 7.24. 7.24 Special Rules for Series B Preferred Shares. (1) Certain Definitions. For purposes of this Section 7.24 the following terms shall have the following meanings: "Closing Date of the Series B Preferred Shares Offering" shall mean the time and date of payment for and delivery of Series B Preferred Shares issued pursuant to the effective registration statement for such Series B Preferred Shares filed under the Securities Act of 1933, as amended. "Special Triggering Event" shall mean either (i) the redemption or purchase by the Trust of all or a portion of the outstanding shares of beneficial interest in the Trust, or (ii) a change in the value of the Series B Preferred Shares relative to any other class of beneficial interest in the Trust. -37- (2) Special Triggering Event. If during the period commencing on the Closing Date of the Series B Preferred Shares Offering and prior to the date on which the Board of Trustees determines that it is no longer in the best interest of the Trust to attempt to, or continue to, qualify as a REIT, a Special Triggering Event (if effective) or other event or occurrence (if effective) would result in any violation of Section [7.2(a)] 6.6(d)(i) of the Trust's Declaration of Trust (or would result in the Trust being "closely held" within the meaning of Section 856(h) of the Code or would otherwise cause the Trust to fail to qualify as a REIT), then (i) the number of Series B Preferred Shares (rounded up to the nearest whole share) that would (but for this Section 7.24) cause any Person to directly or indirectly own either Series B Preferred Shares, or to directly or indirectly own Series B Preferred Shares and any other shares of beneficial interest in the Trust, in violation of Section [7.2(a)] 6.6(d)(i) (or would result in the Trust being "closely held" or otherwise fail to qualify as a REIT) shall constitute "Excess Shares" and shall be treated as provided in [Article VII] Sections 6.6 and 6.8. Such designation and treatment shall be effective as of the close of business on the business day prior to the date of the Special Triggering Event or other event or occurrence. SECTION 13.3 Series C Preferred Shares. Pursuant to Section 5.4 of this Declaration, a series of preferred shares of beneficial interest designated 9-1/8% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest ($0.01 Par Value Per Share) (Liquidation Preference $250.00 Per Share) (the "Series C Preferred Shares") is hereby established on the following terms: (a) Certain Definitions. Unless the context otherwise requires, the terms defined in this Section 13.3 shall have the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural). "Business Day" shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close. "Common Shares" shall mean the common shares of beneficial interest, $.01 par value per share, of the Trust. "Distribution Period" shall have the meaning set forth in Section 13.3(b)(3). "Junior Shares" shall have the meaning set forth in Section 13.3(b)(2). -38- "Person" shall mean an individual, corporation, partnership, estate, trust (including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity, and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended; but does not include an underwriter which participates in a public offering of the Series C Preferred Shares provided that the ownership of Series C Preferred Shares by such Underwriter would not result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, or would otherwise result in the Trust failing to qualify as a REIT. "Preferred Shares" shall mean preferred shares of beneficial interest, $.01 par value per share, including Series A Preferred Shares, Series B Preferred Shares, Series C Preferred Shares, Series D Preferred Shares, and Series E Preferred Shares. "Quarterly Distribution Date" shall have the meaning set forth in Section 13.3(b)(3) below. "Record Date" shall have the meaning set forth in Section 13.3(b)(3) below. "REIT" shall mean a Real Estate Investment Trust under Section 856 of the Code. "Series C Redemption Date" shall have the meaning set forth in Section 13.3(b)(5) below. "Series C Redemption Price" shall have the meaning set forth in Section 13.3(b)(5) below. (b) Series C Preferred Shares. (1) Number. The maximum number of shares of the Series C Preferred Shares shall be 460,000. (2) Relative Seniority. In respect of rights to receive distributions and to participate in distributions or payments in the event of any Liquidation, dissolution or winding up of the Trust, the Series C Preferred Shares shall rank pari passu with any other preferred shares of beneficial interest of the Trust, including the Series A Preferred Shares, Series B Preferred Shares, Series D Preferred Shares, and Series E Preferred Shares. The Series C Preferred Shares will rank senior to the Common Shares and any other class or series of shares of beneficial interest of the Trust ranking, as to distributions and upon Liquidation, junior (collectively, the "Junior Shares") to the Preferred Shares. -39- (3) Distributions. The holders of the then outstanding Series C Preferred Shares shall be entitled to receive, when and as declared by the Board of Trustees out of any funds legally available therefor, cumulative distributions at the rate of $22.8125 per share per year, payable in equal amounts of $5.703125 per share quarterly in cash on the fifteenth day, or if not a Business Day, the next succeeding Business Day, of January, April, July and October in each year, beginning October 15, 1996 (each such day being hereinafter called a "Quarterly Distribution Date" and each period ending on a Quarterly Distribution Date being hereinafter called a "Distribution Period"), to shareholders of record at the close of business on such date as shall be fixed by the Board of Trustees at the time of declaration of the distribution (the "Record Date"), which shall not be less than 10 nor more than 30 days preceding the Quarterly Distribution Date. The amount of any distribution payable for the initial Distribution Period and for any other Distribution Period shorter than a full Distribution Period shall be prorated and computed on the basis of a 360-day year of twelve 30-day months. Distributions on each share of Series C Preferred Shares shall accrue and be cumulative from and including the date of original issue thereof, whether or not (i) distributions on such shares are earned or declared or (ii) on any Quarterly Distribution Date there shall be funds legally available for the payment of distributions. Distributions paid on the Series C Preferred Shares in an amount less than the total amount of such distributions at the time accrued and payable on such shares shall be allocated pro rata on a per share basis among all such shares at the time outstanding. The amount of any distributions accrued on any Series C Preferred Shares at any quarterly Distribution Date shall be the amount of any unpaid distributions accumulated thereon, to and including such Quarterly Distribution Date, whether or not earned or declared, and the amount of distributions accrued on any shares of Series C Preferred Shares at any date other than a Quarterly Distribution Date shall be equal to the sum of the amount of any unpaid distributions accumulated thereon, to and including the last preceding Quarterly Distribution Date, whether or not earned or declared, plus an amount calculated on the basis of the annual distribution rate of $22.8125 for the period after such last preceding Quarterly Distribution Date to and including the date as of which the calculation is made based on a 360-day year of twelve 30-day months. Except as provided in this Section 13.3, the Series C Preferred Shares shall not be entitled to participate in the earnings or assets of the Trust. (4) Liquidation Rights. (A) Upon the voluntary or involuntary dissolution, liquidation or winding up of the Trust, the holders of the Series C Preferred Shares then outstanding shall be entitled to receive and to be paid out of the assets of the Trust available for distribution to its shareholders, before any payment or distribution shall be made on any Junior Shares, the amount of $250.00 per Series C Preferred Share, plus accrued and unpaid distributions thereon. -40- (B) After the payment to the holders of the Series C Preferred Shares of the full preferential amounts provided for in this paragraph (b), the holders of the Series C Preferred Shares as such shall have no right or claim to any of the remaining assets of the Trust. (C) If, upon any voluntary or involuntary dissolution, liquidation, or winding up of the Trust, the amounts payable with respect to the preference value of the Series C Preferred Shares and any other shares of beneficial interest of the Trust ranking as to any such distribution on a parity with the Series C Preferred Shares are not paid in full, the holders of the Series C Preferred Shares and of such other shares will share ratably in any such distribution of assets of the Trust in proportion to the full respective preference amounts to which they are entitled. (D) Neither the sale of all or substantially all the property or business of the Trust, nor the merger or consolidation of the Trust into or with any other entity or the merger or consolidation of any other entity into or with the Trust, shall be deemed to be a dissolution, Liquidation or winding up, voluntary or involuntary, for the purposes of this paragraph (b). (5) Redemption. (A) Optional Redemption. On and after September 9, 2006, the Trust may, at its option, redeem at any time all or, from time to time, part of the Series C Preferred Shares at a price per share (the "Series C Redemption Price"), payable in cash, of $250.00 per Series C Preferred Share, together with all accrued and unpaid distributions to and including the date fixed for redemption (the "Series C Redemption Date"). (B) Procedures for Redemption. (i) Notice of any redemption will be mailed by the Trust, postage prepaid, not less than 30 nor more than 60 days prior to the Series C Redemption Date, addressed to the holders of record of the Series C Preferred Shares to be redeemed at their addresses as they appear on the share transfer records of the Trust. No failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any Series C Preferred Shares except as to the holder to whom the Trust has failed to give notice or except as to the holder to whom notice was defective. In addition to any information required by law or by the applicable rules of any -41- exchange upon which Series C Preferred Shares may be listed or admitted to trading, such notice shall state: (a) the Series C Redemption Date; (b) the Series C Redemption Price; (c) the number of Series C Preferred Shares to be redeemed; (d) the place or places where certificates for such shares are to be surrendered for payment of the Series C Redemption Price; and (e) that distributions on the shares to be redeemed will cease to accumulate on the Series C Redemption Date. (ii) If notice has been mailed in accordance with Section 13.3(b)(5)(B)(i) above and provided that on or before the Series C Redemption Date specified in such notice all funds necessary for such redemption shall have been irrevocably set aside by the Trust, separate and apart from its other funds in trust for the pro rata benefit of the holders of the Series C Preferred Shares so called for redemption, so as to be, and to continue to be available therefor, then, from and after the Series C Redemption Date, distributions on the Series C Preferred Shares so called for redemption shall cease to accumulate, and said shares shall no longer be deemed to be outstanding and shall not have the status of Series C Preferred Shares and all rights of the holders thereof as shareholders of the Trust (except the right to receive the Series C Redemption Price) shall cease. Upon surrender, in accordance with said notice, of the certificates for any Series C Preferred Shares so redeemed (properly endorsed or assigned for transfer, if the Trust shall so require and the notice shall so state), such Series C Preferred Shares shall be redeemed by the Trust at the Series C Redemption Price. In case fewer than all the Series C Preferred Shares represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the unredeemed Series C Preferred Shares without cost to the holder thereof. (iii) Any funds deposited with a bank or trust company for the purpose of redeeming Series C Preferred Shares shall be irrevocable except that: (a) the Trust shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any shares redeemed shall have no claim to such interest or other earnings; and -42- (b) any balance of monies so deposited by the Trust and unclaimed by the holders of the Series C Preferred Shares entitled thereto at the expiration of two years from the applicable Series C Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Trust, and after any such repayment, the holders of the shares entitled to the funds so repaid to the Trust shall look only to the Trust for payment without interest or other earnings. (iv) No Series C Preferred Shares may be redeemed except with funds legally available for the payment of the Series C Redemption Price. (v) Unless full accumulated distributions on all Series C Preferred Shares shall have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past Distribution Periods and the then current Distribution Period, no Series C Preferred Shares shall be redeemed (unless all outstanding Series C Preferred Shares are simultaneously redeemed) or purchased or otherwise acquired directly or indirectly (except by conversion into or exchange for capital shares of the Trust ranking junior to the Series C Preferred Shares as to distributions and upon liquidation); provided, however, that the foregoing shall not prevent the redemption of Series C Preferred Shares pursuant to [Article VII] Sections 6.6 and 6.8 of this Declaration of Trust or the purchase or acquisition of Series C Preferred Shares pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of Series C Preferred Shares. (vi) If the Series C Redemption Date is after a Record Date and before the related Quarterly Distribution Date, the distribution payable on such Quarterly Distribution Date shall be paid to the holder in whose name the Series C Preferred Shares to be redeemed are registered at the close of business on such Record Date notwithstanding the redemption thereof between such Record Date and the related Quarterly Distribution Date or the Trust's default in the payment of the distribution due. (vii) In case of redemption of less than all Series C Preferred Shares at the time outstanding, the Series C Preferred Shares to be -43- redeemed shall be selected pro rata from the holders of record of such shares in proportion to the number of Series C Preferred Shares held by such holders (with adjustments to avoid redemption of fractional shares) or by any other equitable method determined by the Trust. (6) Voting Rights. Except as required by law, the holders of the Series C Preferred Shares shall not be entitled to vote at any meeting of the shareholders for election of trustees or for any other purposes or otherwise to participate in any action taken by the Trust or the shareholders thereof, or to receive notice of any meeting of shareholders. (A) In any matter in which the Series C Preferred Shares are entitled to vote (as expressly provided herein or as may be required by law), including any action by written consent, each Series C Preferred Share shall be entitled to 10 votes, each of which 10 votes may be directed separately by the holder thereof (or by any proxy or proxies of such holder). With respect to each Series C Preferred Share, the holder thereof may designate up to 10 proxies, with each such proxy having the right to vote a whole number of votes (totaling 10 votes per Series C Preferred Share). (B) Whenever distributions on any Series C Preferred Shares shall be in arrears for six or more quarterly periods, the holders of the Depositary Shares representing such Series C Preferred Shares, voting separately as a class with all other series of Preferred Shares upon which like voting rights have been conferred and are exercisable, will be entitled to vote for the election of two additional Trustees of the Trust at a special meeting called by the holders of record of at least ten percent (10%) of any series of Preferred Shares so in arrears (unless such request is received less than 90 days before the date fixed for the next annual or special meeting of the shareholders) or at the next annual meeting of shareholders, and at each subsequent annual meeting until all distributions accumulated on such Series C Preferred Shares for the past distribution periods and the then current distribution period shall have been fully paid or declared and a sum sufficient for the payment thereof set aside for payment. In such case, the entire Board of Trustees of the Trust will be increased by two Trustees. (C) So long as any Series C Preferred Shares remain outstanding, the Trust will not, without the affirmative vote or consent of the holders of at least two-thirds of the Series C Preferred Shares -44- outstanding at the time, given in person or by proxy, either in writing or at a meeting (such series voting separately as a class), (i) authorize or create, or increase the authorized or issued amount of, any class or series of shares of beneficial interest ranking prior to the Series C Preferred Shares with respect to the payment of distributions or the distribution of assets upon liquidation, dissolution or winding up or reclassify any authorized shares of beneficial interest of the Trust into such shares, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such shares; or (ii) amend, alter or repeal the provisions of this Declaration of Trust whether by merger, consolidation or otherwise (an "Event"), so as to materially and adversely affect any right, preference, privilege or voting power of the Series C Preferred Shares or the holders thereof; provided, however, with respect to the occurrence of any of the Events set forth in (ii) above, so long as the Series C Preferred Shares remain outstanding with the terms thereof materially unchanged, taking into account that upon the occurrence of an Event, the Trust may not be the surviving entity, the occurrence of any such Event shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting power of holders of Series C Preferred Shares and provided further that (x) any increase in the amount of the authorized Preferred Shares or the creation or issuance of any other Series C Preferred Shares, or (y) any increase in the amount of authorized Series C Preferred Shares or any other Preferred Shares, in each case ranking on a parity with or junior to the Series C Preferred Shares with respect to payment of distributions or the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding Series C Preferred Shares shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. (7) Conversion. The Series C Preferred Shares are not convertible into or exchangeable for any other property or securities of the Trust, except into Excess Shares in connection with maintaining the ability of the Trust to qualify as a REIT. (8) Exclusion of Other Rights. -45- Except as may otherwise be required by law, the Series C Preferred Shares shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this Section 13.3. The Series C Preferred Shares shall have no preemptive or subscription rights. (9) Headings of Subdivisions. The headings of the various subdivisions within this Section 13.3 are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. (10) Severability of Provisions. If any voting powers, preferences and relative, participating, optional and other special rights of the Series C Preferred Shares and qualifications, limitations and restrictions thereof set forth in this Section 13.3 is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Series C Preferred Shares and qualifications, limitations and restrictions thereof set forth in this Section 13.3 which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional or other special rights of Series C Preferred Shares and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special right of Series C Preferred Shares and qualifications, limitations and restrictions thereof unless so expressed herein. (c) Article VII of the Trust's Declaration of Trust shall be supplemented by adding the following new Section 7.25. 7.25 Special Rules for Series C Preferred Shares. (1) Certain Definitions. For purposes of this Section 7.25 the following terms shall have the following meanings: "Closing Date of the Series C Preferred Shares Offering" shall mean the time and date of payment for and delivery of Series C Preferred Shares issued pursuant to the effective registration statement for such Series C Preferred Shares filed under the Securities Act of 1933, as amended. "Special Triggering Event" shall mean either (i) the redemption or purchase by the Trust of all or a portion of the outstanding shares of beneficial interest in the Trust, or (ii) a change in the value of the Series C Preferred Shares relative to any other class of beneficial interest in the Trust. -46- (2) Special Triggering Event. If during the period commencing on the Closing Date of the Series C Preferred Shares Offering and prior to the date on which the Board of Trustees determines that it is no longer in the best interest of the Trust to attempt to, or continue to, qualify as a REIT, a Special Triggering Event (if effective) or other event or occurrence (if effective) would result in any violation of Section [7.2(a)] 6.6(d)(i) of the Trust's Declaration of Trust (or would result in the Trust being "closely held" within the meaning of Section 856(h) of the Code or would otherwise cause the Trust to fail to qualify as a REIT), then (i) the number of Series C Preferred Shares (rounded up to the nearest whole share) that would (but for this Section 7.25) cause any Person to directly or indirectly own either Series C Preferred Shares, or to directly or indirectly own Series C Preferred Shares and any other shares of beneficial interest in the Trust, in violation of Section [7.2(a)] 6.6(d)(i) (or would result in the Trust being "closely held" or otherwise fail to qualify as a REIT) shall constitute "Excess Shares" and shall be treated as provided in [Article VII] Sections 6.6 and 6.8. Such designation and treatment shall be effective as of the close of business on the business day prior to the date of the Special Triggering Event or other event or occurrence. SECTION 13.4. Series D Preferred Shares. Pursuant to Section 5.4 of this Declaration, a series of preferred shares of beneficial interest designated the "Series D Cumulative Convertible Preferred Shares of Beneficial Interest" (the "Series D Convertible Preferred Shares") is hereby established on the following terms: 1. Designation and Amount. The shares of the series of preferred shares established hereunder shall be designated as Series D Convertible Preferred Shares and the authorized number of shares constituting such series shall be 4,600,000. The par value of the Series D Convertible Preferred Shares shall be $.01 per share. 2. Distributions. (a) The holders of shares of the Series D Convertible Preferred Shares will be entitled to receive, when, as and if authorized by the Board of Trustees out of assets of the Trust legally available therefor (and subject to the limitation described in the last sentence of this paragraph), cumulative cash distributions on the shares of the Series D Convertible Preferred Shares at the annual rate of $1.75 per share, payable quarterly on January 1, April 1, July 1 and October 1 of each year, commencing on January 1, 1994 (which initial partial distribution shall be from the date of issuance of the Series D Convertible Preferred Shares). Such distributions shall be cumulative from the date of original issue of the Series D Convertible Preferred Shares. If permissible under applicable law and provided the distributions will qualify for the dividends paid deduction (within the meaning of Sections 561 and 562 of the Internal Revenue Code of 1986 or any successor provisions thereto), such distributions shall be paid as follows: first, from income of the Trust other than net capital gains, and the balance, if any, from net capital gains of the Trust. If the Board of Trustees determines, in its sole discretion, that distributions to be paid in accordance with the preceding sentence would not qualify for such dividends paid -47- deduction, then such distributions shall be paid in a manner determined by the Board of Trustees. Each distribution shall be paid to the holders of record of the Series D Convertible Preferred Shares as they appear on the share register of the Trust on such record date, not more than 90 days preceding the distribution payment date thereof, as shall be fixed by the Board of Trustees or a duly authorized committee thereof. If a holder converts Series D Convertible Preferred Shares after the close of business on the record date for a distribution and before the opening of business on the payment date for such distribution, then, pursuant to Section 13.4(7) hereof, the holder will be required to pay to the Trust at the time of such conversion the amount of such distribution (unless the shares were converted after the issuance of a notice of redemption with respect to such shares, in which event the holder of such shares shall be entitled to the distribution payable thereon on such distribution payment date without making such payment). (b) If any Convertible Preferred Shares are outstanding, no full distributions shall be declared or paid or set apart for payment on any other preferred shares of beneficial interest of the Trust ranking as to distributions on a parity with or junior to the Series D Convertible Preferred Shares for any period unless full cumulative distributions have been declared and paid or declared and a sum sufficient for the payment thereof has been set apart for such payment on the Series D Convertible Preferred Shares for all past distribution periods and the then current distribution period. If distributions are not paid in full, or not declared in full and a sum sufficient for such full payment is not set apart for the payment thereof, upon the Series D Convertible Preferred Shares and any other preferred shares ranking on a parity as to distributions with the Series D Convertible Preferred Shares, all distributions declared upon Series D Convertible Preferred Shares and upon any other preferred shares ranking on a parity as to distributions shall be paid or declared pro rata so that in all cases the amount of distributions paid or declared per share on the Series D Convertible Preferred Shares and such other preferred shares shall bear to each other the same ratio that accumulated distributions per share, including distributions accrued or in arrears, if any, on the Series D Convertible Preferred Shares and such other preferred shares bear to each other. Except as provided in the preceding sentence, unless full cumulative distributions on the Series D Convertible Preferred Shares have been paid or declared and a sum sufficient for such full payment set apart for payment for all past distribution periods and the then current distribution period, no distributions (other than distributions in shares of Common Shares (as hereinafter defined) or in any other shares of beneficial interest of the Trust ranking junior to the Series D Convertible Preferred Shares as to distribution rights and the liquidation preference) shall be declared or paid or set apart for payment or other distribution upon the Trust's common shares of beneficial interest, par value $.01 per share (the "Common Shares"), or, except as provided above, on any other shares of beneficial interest of the Trust ranking junior to or on a parity with the Series D Convertible Preferred Shares as to distribution rights or the liquidation preference, nor shall any Common Shares or any other shares of beneficial interest of the Trust ranking junior to or on a parity with the Series D Convertible Preferred Shares as to distribution rights or the liquidation preference be redeemed, purchased or otherwise acquired for any consideration (or any payment made to or available for a sinking fund for the redemption of any such shares) by the Trust or any -48- subsidiary of the Trust (except by conversion into or exchange for shares of beneficial interest of the Trust ranking junior to the Series D Convertible Preferred Shares as to distribution rights and the liquidation preference). Holders of the Series D Convertible Preferred Shares shall not be entitled to any distributions, whether payable in cash, property or shares of beneficial interest, in excess of full accrued and cumulative distributions as herein provided. No interest or sum of money in lieu of interest shall be payable in respect of any distribution payment or payments on the Series D Convertible Preferred Shares that may be in arrears. The terms "accrued distributions," "distributions accrued" and "distributions in arrears," whenever used herein with reference to shares of preferred shares of beneficial interest, shall be deemed to mean an amount which shall be equal to distributions thereon at the annual distribution rates per share for the respective series thereof from the date or dates on which such distributions commence to accrue to the end of the then current quarterly distribution period for such preferred shares (or, in the case of redemption, to the date of redemption), less the amount of all distributions paid, or declared in full and set aside for the payment thereof, upon such shares of preferred shares. (c) Distributions payable on the Series D Convertible Preferred Shares for any period less than a full quarterly distribution period shall be computed on the basis of a 360-day year of twelve 30-day months. Quarterly distributions payable on the Series D Convertible Preferred Shares shall be computed by dividing the annual distribution rate by four. 3. Trustees' Right to Refuse to Transfer Series D Convertible Preferred Shares; Limitation on Holdings. (a) The terms and provisions of this Section 13.4(3) shall apply in addition to, and not in limitation of, the terms and provisions of [Article VII] Sections 6.6 and 6.8 of this Declaration of Trust. (b) Each Person (as defined in Section 1.5 of the Declaration of Trust) who owns directly or indirectly more than five percent in number or value of the total Series D Convertible Preferred Shares outstanding shall, within 30 days after January 1 of each year, give written notice to the Trust stating the Person's name and address, the number of Series D Convertible Preferred Shares directly or indirectly owned by such Person, and a description of the capacity in which such Series D Convertible Preferred Shares are held. For purposes of this Section 13.4, the number and value of the total Series D Convertible Preferred Shares outstanding shall be determined by the Board of Trustees in good faith, which determination shall be conclusive for all purposes hereunder. In addition, each direct or indirect holder of Series D Convertible Preferred Shares, irrespective of such shareholder's percentage ownership of outstanding Series D Convertible Preferred Shares, shall upon demand disclose to the Trust in writing such information with respect to the direct or indirect ownership of Series D Convertible Preferred Shares as the Board of Trustees deems necessary from time to time to -49- enable the Board of Trustees to determine whether the Trust complies with the REIT Provisions of the Code (as defined in Section 1.5 of the Declaration of Trust), to comply with the requirements of any taxing authority or governmental agency or to determine any such compliance. (c) If, in the opinion of the Board of Trustees, which shall be binding upon any prospective acquiror of Series D Convertible Preferred Shares, any proposed transfer or issuance would jeopardize the status of the Trust as a real estate investment trust under the REIT Provisions of the Code, the Board of Trustees shall have the right, but not the duty, to refuse to permit such transfer or issuance or refuse to give effect to such transfer or issuance and to take any action to void any such issuance or cause any such transfer not to occur. (d) As a condition to any transfer and/or registration of transfer on the books of the Trust of any Series D Convertible Preferred Shares which could result in direct or indirect ownership (as hereinafter defined) of Series D Convertible Preferred Shares exceeding 20% of the lesser of the number or the value of the total Series D Convertible Preferred Shares outstanding (the "Excess Preferred Shares") by a Person other than a Preferred Excepted Person (as defined in Section 3(e) below), such prospective transferee shall give written notice to the Trust of the proposed transfer and shall furnish such opinions of counsel, affidavits, undertakings, agreements and information as may be required by the Board of Trustees no later than the 15th day prior to any transfer which, if consummated, would result in such ownership. (e) Any transfer of Series D Convertible Preferred Shares that would (i) create a direct or indirect owner of Excess Preferred Shares other than a Preferred Excepted Person; or (ii) result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, shall be void ab initio and the prospective acquiror shall not be entitled to any rights afforded to owners of Series D Convertible Preferred Shares hereunder and shall be deemed never to have had an interest therein. Any issuance of Series D Convertible Preferred Shares that would (i) create a direct or indirect owner of Excess Preferred Shares other than a Preferred Excepted Person; or (ii) result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, shall be void ab initio and the prospective acquiror shall not be entitled to any rights afforded to owners of Series D Convertible Preferred Shares hereunder and shall be deemed never to have had an interest therein. "Preferred Excepted Person" shall mean any Person approved by the Board of Trustees, at their option and in their sole discretion, provided, however, that such approval shall not be granted to any Person whose ownership of in excess of 20% of the lesser of the number or the value of the total Series D Convertible Preferred Shares outstanding would result, directly, indirectly or as a result of attribution of ownership, in termination of the status of the Trust as a real estate investment trust under the REIT Provisions of the Code. (f) The Trust, by notice to the holder thereof, may purchase any or all Series D Convertible Preferred Shares that are proposed to be transferred pursuant to a transfer -50- which, in the opinion of the Board of Trustees, which shall be binding upon any proposed transferor or transferee of Series D Convertible Preferred Shares, would result in any Person acquiring Excess Preferred Shares, or would otherwise jeopardize the status of the Trust as a real estate investment trust under the REIT Provisions of the Code. The Trust shall have the power, by lot or other means deemed equitable by the Board of Trustees in their sole discretion, to purchase such Excess Preferred Shares from the prospective transferor. The purchase price for any Excess Preferred Shares shall be equal to the fair market value of the Series D Convertible Preferred Shares on the last trading day immediately preceding the day on which notice of such proposed transfer is sent, as reflected in the closing sale price for the Series D Convertible Preferred Shares, if then listed on a national securities exchange, or such price for the Series D Convertible Preferred Shares on the principal exchange if then listed on more than one national securities exchange, or if the Series D Convertible Preferred Shares are not then listed on a national securities exchange, the latest bid quotation for the Series D Convertible Preferred Shares if then traded over-the-counter, or, if no such closing sales prices or quotations are available, then the purchase price shall be equal to the fair market value of such Series D Convertible Preferred Shares as determined by the Board of Trustees in good faith. Prompt payment of the purchase price shall be made in cash by the Trust in such manner as may be determined by the Board of Trustees. From and after the date fixed for purchase by the Board of Trustees, and so long as payment of the purchase price for the Series D Convertible Preferred Shares to be so redeemed shall have been made or duly provided for, the holder of any Excess Preferred Shares so called for purchase shall cease to be entitled to dividends, distributions, voting rights and other benefits with respect to such Series D Convertible Preferred Shares, excepting only the right to payment of the purchase price fixed as aforesaid. Any dividend or distribution paid to a proposed transferee of Excess Preferred Shares prior to the discovery by the Trust that the Series D Convertible Preferred Shares have been transferred in violation of this Section 3 shall be repaid to the Trust upon demand. (g) Notwithstanding any other provision in this Declaration of Trust or the Trust's Bylaws, Sections 13.4(3)(e), (f), (g) and (h) may not be amended or repealed without the affirmative vote of the holders of not less than two-thirds of the Series D Convertible Preferred Shares then outstanding and entitled to vote. If Section 13.4(3)(e), (f), (g) or (h) is determined to be void or invalid by virtue of any legal decision, statute, rule or regulation, then the acquiror of Series D Convertible Preferred Shares in violation of such Sections shall be deemed, at the option of the Trust, to have acted as agent on behalf of the Trust in acquiring such Series D Convertible Preferred Shares on behalf of the Trust. (h) Subject to Section 13.4(3)(l), notwithstanding any other provision of this Section 13.4 to the contrary, any purported transfer, sale or acquisition of Series D Convertible Preferred Shares (whether such purported transfer, sale or acquisition results from the direct or indirect acquisition of ownership of Series D Convertible Preferred Shares) which would result in the termination of the status of the Trust as a real estate investment trust under the REIT Provisions of the Code shall be null and void ab initio. Any such Series D -51- Convertible Preferred Shares may be treated by the Board of Trustees in the manner prescribed for Excess Preferred Shares in subsection (f) of this Section 13.4(3). (i) Subject to Section 13.4(3)(l), nothing contained in this Section 13.4(3) or in any other provision of this Section 13.4 shall limit the authority of the Board of Trustees to take such other action as they deem necessary or advisable to protect the Trust and the interests of the shareholders by preservation of the Trust's status as a real estate investment trust under the REIT Provisions of the Code. (j) If any provision of this Section 13.4(3) or any application of any such provision is determined to be invalid by any federal or state court having jurisdiction over the issues, the validity of the remaining provisions shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court. To the extent this Section 13.4(3) may be inconsistent with any other provision of this Section 13.4, this Section 13.4(3) shall be controlling. (k) For purposes of this Section 13.4, Series D Convertible Preferred Shares not owned directly shall be deemed to be owned indirectly by a person if that person or a group of which he is a member would be the beneficial owner of such Series D Convertible Preferred Shares, as defined in Rule 13d-3 under the Securities Exchange Act of 1934, and/or would be considered to own such Series D Convertible Preferred Shares by reason of the REIT Provisions of the Code. (l) Notwithstanding any other provision of Section 13.4(3), nothing in this Section 13.4 shall preclude the settlement of transactions entered into through the facilities of the New York Stock Exchange, Inc. The fact that the settlement of any transaction is permitted shall not negate the effect of any other provision of this Section 13.4(3) and any transferee in such a transaction shall be subject to all of the provisions and limitations set forth in this Section 13.4(3). 4. Redemption at the Option of the Trust. (a) The Series D Convertible Preferred Shares are not redeemable prior to November 1, 1998. On and after November 1, 1998, the Series D Convertible Preferred Shares may be redeemed at the option of the Trust by resolution of its Board of Trustees, in whole or from time to time in part, subject to the limitations set forth below, at the following redemption prices per share if redeemed during the twelve-month period beginning November 1 of the year -52- indicated below (the "Call Price"), plus, in each case, all distributions accrued and unpaid on the shares of the Series D Convertible Preferred Shares up to the date of such redemption, upon giving notice as provided below: If redeemed during the twelve-month period beginning Call November 1, Price ------------------ ----- 1998.......................................... $25.875 1999.......................................... $25.700 2000.......................................... $25.525 2001.......................................... $25.350 2002.......................................... $25.175 2003 and thereafter........................... $25.000 (b) If fewer than all of the outstanding Series D Convertible Preferred Shares are to be redeemed, the shares to be redeemed shall be determined pro rata or by lot or in such other manner and subject to such regulations as the Board of Trustees in its sole discretion shall prescribe. In the event that such redemption is to be by lot, if as a result of such redemption any holder of Series D Convertible Preferred Shares would become a holder of in excess of 20% of the lesser of the number or the value of the total Series D Convertible Preferred Shares outstanding because such holder's Series D Convertible Preferred Shares were not redeemed, or were only redeemed in part, then the Trust shall redeem the requisite number of Series D Convertible Preferred Shares of such shareholder such that he will not hold in excess of 20% of the lesser of the number or the value of the total Series D Convertible Preferred Shares outstanding subsequent to such redemption, unless the holder is a Preferred Excepted Person (as defined in Section 3(e) hereof), in which event the Trust shall have the option to redeem such requisite number of Series D Convertible Preferred Shares, as determined in the sole discretion of the Board of Trustees. (c) At least 30 days but not more than 60 days prior to the date fixed for the redemption of the Series D Convertible Preferred Shares, the Trust shall mail a written notice to each holder of record of the Series D Convertible Preferred Shares to be redeemed in a postage prepaid envelope addressed to such holder at his address as shown on the records of the Trust, notifying such holder of the election of the Trust to redeem such shares, stating the date fixed for redemption thereof (the "Redemption Date"), the redemption price, the number of shares to be redeemed (and, if fewer than all the Series D Convertible Preferred Shares are to be redeemed, the number of shares to be redeemed from such holder) and the place(s) where the certificate(s) representing such shares are to be surrendered for payment. On or after the Redemption Date each holder of the Series D Convertible Preferred Shares to be redeemed shall present and surrender his certificate or certificates for such shares to the Trust at the place designated in such notice and thereupon the redemption price of such shares shall be paid to or -53- on the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. In the event that fewer than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. From and after the Redemption Date (unless default shall be made by the Trust in payment of the redemption price), all distributions on the Series D Convertible Preferred Shares designated for redemption in such notice shall cease to accrue, and all rights of the holders thereof as shareholders of the Trust, except the right to receive the redemption price of such shares (including all accrued and unpaid distributions up to the Redemption Date) upon the surrender of certificates representing the same, shall cease and terminate and such shares shall not thereafter be transferred (except with the consent of the Trust) on the books of the Trust, and such shares shall not be deemed to be outstanding for any purpose whatsoever. At its election, the Trust prior to the Redemption Date may irrevocably deposit the redemption price (including all accrued and unpaid distributions up to the Redemption Date) of the Series D Convertible Preferred Shares so called for redemption in trust for the holders thereof with a bank or trust company (having a capital surplus and undivided profits aggregating not less than $50,000,000) in the Borough of Manhattan, City and State of New York, or in any other city in which the Trust at the time shall maintain a transfer agency with respect to such shares, in which case the aforesaid notice to holders of the Series D Convertible Preferred Shares to be redeemed shall state the date of such deposit, shall specify the office of such bank or trust company as the place of payment of the redemption price, and shall call upon such holders to surrender the certificates representing such shares at such place on or after the date fixed in such redemption notice (which shall not be later than the Redemption Date) against payment of the redemption price (including all accrued and unpaid distributions up to the Redemption Date). Any interest accrued on such funds shall be paid to the Trust from time to time. Any moneys so deposited which shall remain unclaimed by the holders of the Series D Convertible Preferred Shares at the end of two years after the Redemption Date shall be returned by such bank or trust company to the Trust. If a notice of redemption has been given pursuant to this Section 13.4(4) and any holder of Series D Convertible Preferred Shares shall, prior to the close of business on the last business day preceding the Redemption Date, give written notice to the Trust pursuant to Section 13.4(7) below of the conversion of any or all of the shares to be redeemed held by such holder (accompanied by a certificate or certificates for such shares, duly endorsed or assigned to the Trust, and any necessary transfer tax payment, as required by Section 13.4(7) below, then such redemption shall not become effective as to such shares to be converted, such conversion shall become effective as provided in Section 13.4(7) below and any moneys set aside by the Trust for the redemption of such shares of converted Series D Convertible Preferred Shares shall revert to the general funds of the Trust (unless such shares were converted after the close of business on the record date for a distribution and before the opening of business on the payment date for such distribution, in which event the holders of such shares shall be entitled to the distribution payable thereon on such distribution payment date). -54- Notwithstanding the foregoing, unless full cumulative distributions on all outstanding Series D Convertible Preferred Shares have been paid or declared and a sum sufficient for the payment thereof set apart for payment for all past distribution periods and the then current distribution period, no Series D Convertible Preferred Shares shall be redeemed unless all outstanding Series D Convertible Preferred Shares are simultaneously redeemed; provided, however, that the foregoing shall not prevent the purchase or acquisition of Series D Convertible Preferred Shares pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding Series D Convertible Preferred Shares, and, unless full cumulative distributions on all outstanding Series D Convertible Preferred Shares have been paid or declared and a sum sufficient for the payment thereof set apart for payment for all past distribution periods and the then current distribution period, the Trust shall not purchase or otherwise acquire directly or indirectly any Series D Convertible Preferred Shares (except by conversion into or exchange for shares of beneficial interest of the Trust ranking junior to the Series D Convertible Preferred Shares as to distribution rights and the liquidation preference). (d) The Series D Convertible Preferred Shares redeemed, repurchased or retired pursuant to the provisions of this Section 13.4(4) or surrendered to the Trust upon conversion shall thereupon be retired and may not be reissued as Series D Convertible Preferred Shares but shall thereafter have the status of authorized but unissued shares of beneficial interest. 5. Voting Rights. (a) The holders of Series D Convertible Preferred Shares shall not be entitled to vote on any matter except (i) as provided in Section 13.4(9), (ii) as provided in Section 13.4(5)(b) and (iii) as required by law. (b) In the event the Trust shall have failed to declare and pay or set apart for payment in full the distributions accumulated on the outstanding Series D Convertible Preferred Shares for any six consecutive quarterly distribution payment periods (a "Preferential Distribution Non-Payment"), the number of trustees of the Trust shall be increased by two and the holders of the outstanding Series D Convertible Preferred Shares, voting together as a class with all other classes or series of preferred shares of the Trust ranking on a parity with the Series D Convertible Preferred Shares with respect to distribution rights and then entitled to vote on the election of such additional two trustees, shall be entitled to elect such two additional trustees until the full distributions accumulated on all outstanding Series D Convertible Preferred Shares have been declared and paid or set apart for payment. Upon the occurrence of a Preferential Distribution Non-Payment or a vacancy in the office of a Preferred Shares Trustee (as defined below), the Board of Trustees shall within a reasonable period call a special meeting of the holders of the Series D Convertible Preferred Shares and all holders of other classes or series of preferred shares of the Trust ranking on a parity with the Series D Convertible Preferred Shares with respect to distribution rights who are then entitled to vote on the election of such additional trustee or trustees for the purpose of electing the additional trustee or trustees. If and when all accumulated distributions on the Series D Convertible Preferred Shares have -55- been declared and paid or set aside for payment in full, the holders of the Series D Convertible Preferred Shares shall be divested of the special voting rights provided by this Section 13.4(5)(b), subject to revesting in the event of each and every subsequent Preferential Distribution Non-Payment. Upon termination of such special voting rights attributable to all holders of the Series D Convertible Preferred Shares and shares of any other class or series of preferred shares of the Trust ranking on a parity with the Series D Convertible Preferred Shares with respect to distribution rights, the term of office of each trustee elected by the holders of the Series D Convertible Preferred Shares and such parity preferred shares (a "Preferred Shares Trustee") pursuant to such special voting rights shall forthwith terminate and the number of trustees constituting the entire Board of Trustees shall be reduced by the number of Preferred Shares Trustees. Any Preferred Shares Trustee may be removed by, and shall not be removed otherwise than by, the vote of the holders of record of a majority of the outstanding Series D Convertible Preferred Shares and all other series of preferred shares of the Trust ranking on a parity with the Series D Convertible Preferred Shares with respect to distribution rights who were entitled to vote in such Preferred Shares Trustee's election, voting as a separate class, at a meeting called for such purpose. (c) So long as any Series D Convertible Preferred Shares are outstanding, the number of trustees constituting the entire Board of Trustees of the Trust shall at all times be such that the exercise, by the holders of the Series D Convertible Preferred Shares and the holders of preferred shares of the Trust ranking on a parity with the Series D Convertible Preferred Shares with respect to distribution rights, of the right to elect trustees under the circumstances provided for in subclause (b) of this Section 13.4(5) will not contravene any other provision of this Declaration restricting the number of trustees which may constitute the entire Board of Trustees of the Trust. (d) Trustees elected pursuant to subclause (b) of this Section 13.4(5) shall serve until the earlier of (x) the next annual meeting of the shareholders of the Trust and the election (by the holders of the Series D Convertible Preferred Shares and the holders of preferred shares of the Trust ranking on a parity with the Series D Convertible Preferred Shares with respect to distribution rights) and qualification of their respective successors or (y) the termination of the term of office of each Preferred Shares Trustee upon the termination of the special voting rights as provided for in Section 13.4(5)(b). (e) So long as a Preferential Distribution Non-Payment shall continue, any vacancy in the office of a Preferred Shares Trustee may be filled by vote of the holders of record of a majority of the outstanding Series D Convertible Preferred Shares and all other series of preferred shares ranking on a parity with the Series D Convertible Preferred Shares with respect to distribution rights who are then entitled to vote in the election of such Preferred Shares Trustee as provided above. As long as the Preferential Distribution Non-Payment shall continue, holders of the Series D Convertible Preferred Shares shall not, as such shareholders, be entitled to vote on the election or removal of trustees other than Preferred Shares Trustees, -56- but shall not be divested of any other voting rights provided to such shareholders by law, this Declaration with respect to any other matter to be acted upon by the shareholders of the Trust. 6. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the affairs of the Trust, whether voluntary or otherwise, after payment or provision for payment of the debts and other liabilities of the Trust, the holders of Series D Convertible Preferred Shares shall be entitled to receive, in cash, out of the remaining assets of the Trust legally available therefor, the amount of Twenty-five Dollars ($25.00) for each Series D Convertible Preferred Share, plus an amount equal to all distributions accrued and unpaid on each such share up to the date of such distribution of assets, before any distribution shall be made to the holders of Common Shares or any other shares of beneficial interest of the Trust ranking (as to any such distribution of assets) junior to the Series D Convertible Preferred Shares. If upon any liquidation, dissolution or winding up of the Trust, the assets distributable among the holders of Series D Convertible Preferred Shares and all other classes and series of preferred shares ranking (as to any such distribution of assets) on a parity with the Series D Convertible Preferred Shares are insufficient to permit the payment in full to the holders of all such shares of all preferential amounts payable to all such holders, then the entire assets of the Trust thus distributable shall be distributed ratably among the holders of Series D Convertible Preferred Shares and such other classes and series of preferred shares ranking (as to any such distribution of assets) on a parity with the Series D Convertible Preferred Shares in proportion to the respective amounts that would be payable per share if such assets were sufficient to permit payment in full. (b) For purposes of this Section 13.4(6), a distribution of assets in any dissolution, winding up or liquidation shall not include (i) any consolidation or merger of the Trust with or into any other corporation, (ii) any dissolution, liquidation, winding up or reorganization of the Trust immediately followed by incorporation of another corporation to which such assets are distributed or (iii) a sale or other disposition of all or substantially all of the Trust's assets to another corporation; provided, however, that, in each case, effective provision is made in the charter of the resulting and surviving corporation or otherwise for the recognition, preservation and protection of the rights of the holders of Series D Convertible Preferred Shares. (c) After the payment of the full preferential amounts provided for herein to the holders of Series D Convertible Preferred Shares or funds necessary for such payment have been set aside in trust for the holders thereof, such holders shall be entitled to no other or further participation in the distribution of the assets of the Trust. (d) In determining whether a distribution by dividend, redemption or other acquisition of Shares or otherwise is permitted under Maryland law, no effect shall be given to amounts that would be needed, if the Trust were to be dissolved at the time of the distribution, -57- to satisfy the preferential rights upon dissolution of shareholders whose preferential rights on dissolution are superior to those receiving the distribution. 7. Conversion. (a) Holders of Series D Convertible Preferred Shares shall have the right, exercisable at any time and from time to time, except in the case of the Series D Convertible Preferred Shares called for redemption as set forth below, to convert all or any such Series D Convertible Preferred Shares into Common Shares at [the conversion price and ratio determined by the provisions of the Wellsford Articles Supplementary designating the Wellsford Series A Convertible Preferred Shares], subject to adjustment as described below. In the case of Series D Convertible Preferred Shares called for redemption, conversion rights will expire at the close of business on the last business day preceding the Redemption Date. Notice of redemption at the option of the Trust must be mailed not less than 30 days and not more than 60 days prior to the Redemption Date as provided in Section 13.4(4)(c) hereof. Upon conversion, no adjustment or payment will be made for distributions, but if any holder surrenders Series D Convertible Preferred Shares for conversion after the close of business on the record date for the payment of a distribution and prior to the opening of business on the related distribution payment date, then, notwithstanding such conversion, the distribution payable on such distribution payment date will be paid to the registered holder of such shares on such distribution record date. In such event, such shares, when surrendered for conversion during the period between the close of business on any distribution record date and the opening of business on the corresponding distribution payment date, must be accompanied by payment of an amount equal to the distribution payable on such distribution payment date on the shares so converted (unless such shares were converted after the issuance of a notice of redemption with respect to such shares, in which event such shares shall be entitled to the distribution payable thereon on such distribution payment date without making such payment). (b) Any holder of one or more Series D Convertible Preferred Shares electing to convert such share or shares shall deliver the certificate or certificates therefor to the principal office of any transfer agent for the Common Shares, with the form of notice of election to convert as the Trust shall prescribe fully completed and duly executed and (if so required by the Trust or any conversion agent) accompanied by instruments of transfer in form satisfactory to the Trust and to any conversion agent, duly executed by the registered holder or his duly authorized attorney, and transfer taxes, stamps or funds therefor or evidence of payment thereof if required pursuant to Section 13.4(7)(a) or 13.4(7)(d) hereof. The conversion right with respect to any such shares shall be deemed to have been exercised at the date upon which the certificates therefor accompanied by such duly executed notice of election and instruments of transfer and such taxes, stamps, funds or evidence of payment shall have been so delivered, and the person or persons entitled to receive the shares of the Common Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of the Common Shares upon said date. -58- (c) No fractional Common Share or scrip representing a fractional share shall be issued upon conversion of Series D Convertible Preferred Shares. If more than one Series D Convertible Preferred Share shall be surrendered for conversion at one time by the same holder, the number of full Common Shares which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate number of Series D Convertible Preferred Shares so surrendered. Instead of any fractional Common Share which would otherwise be issuable upon conversion of any Series D Convertible Preferred Shares, the Trust shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the closing price for the Common Shares on the last trading day preceding the date of conversion. The closing price for such day shall be the last reported sales price regular way or, in case no such reported sale takes place on such date, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange, or if the Common Shares are not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Shares are listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, the closing sale price of the Common Shares or in case no reported sale takes place, the average of the closing bid and asked prices, on NASDAQ or any comparable system. If the Common Shares are not quoted on NASDAQ or any comparable system, the Board of Trustees shall in good faith determine the current market price on the basis of such quotation as it considers appropriate. (d) If a holder converts Series D Convertible Preferred Shares, the Trust shall pay any documentary, stamp or similar issue or transfer tax due on the issuance of Common Shares upon the conversion. The holder, however, shall pay to the Trust the amount of any tax which is due (or shall establish to the satisfaction of the Trust payment thereof) if the shares are to be issued in a name other than the name of such holder and shall pay to the Trust any amount required by the last sentence of Section 13.4(7)(a) hereof. (e) The Trust shall reserve and shall at all times have reserved out of its authorized but unissued Common Shares a sufficient number of Common Shares to permit the conversion of the then outstanding Series D Convertible Preferred Shares. All Common Shares which may be issued upon conversion of Series D Convertible Preferred Shares shall be validly issued, fully paid and nonassessable, and not subject to preemptive or other similar rights. In order that the Trust may issue Common Shares upon conversion of Series D Convertible Preferred Shares, the Trust will endeavor to comply with all applicable Federal and State securities laws and will endeavor to list such Common Shares to be issued upon conversion on each securities exchange on which the Common Shares are listed. (f) The conversion rate in effect at any time shall be subject to adjustment from time to time as follows: (i) In case the Trust shall (1) pay or make a distribution in Common Shares to holders of the Common Shares, (2) reclassify the outstanding Common Shares into shares of some other class or series of shares, (3) subdivide the -59- outstanding Common Shares into a greater number of Common Shares or (4) combine the outstanding Common Shares into a smaller number of Common Shares, the conversion rate immediately prior to such action shall be adjusted so that the holder of any Series D Convertible Preferred Shares thereafter surrendered for conversion shall be entitled to receive the number of Common Shares which he would have owned immediately following such action had such Series D Convertible Preferred Shares been converted immediately prior thereto. An adjustment made pursuant to this Section 13.4(7)(f)(i) shall become effective immediately after the record date in the case of a distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. (ii) In case the Trust shall issue rights or warrants to all holders of the Common Shares entitling them to subscribe for or purchase Common Shares (or securities convertible into Common Shares) at a price per share less than the current market price (as determined pursuant to Section 13.4(7)(f)(iv)) of the Common Shares on such record date, the number of Common Shares into which each Series D Convertible Preferred Share shall be convertible shall be adjusted so that the same shall be equal to the number determined by multiplying the number of Common Shares into which such Series D Convertible Preferred Share was convertible immediately prior to such record date by a fraction of which the numerator shall be the number of Common Shares outstanding on such record date plus the number of additional Common Shares offered (or into which the convertible securities so offered are convertible), and of which the denominator shall be the number of Common Shares outstanding on such record date, plus the number of Common Shares which the aggregate offering price of the additional Common Shares offered (or into which the convertible securities so offered are convertible) would purchase at such current market price. Such adjustments shall become effective immediately after such record date for the determination of the holders of the Common Shares entitled to receive such distribution. For purposes of this subsection (ii), the number of Common Shares at any time outstanding shall not include Common Shares held in the treasury of the Trust. (iii) In case the Trust shall distribute to all holders of the Common Shares any class of shares of beneficial interest other than the Common Shares, evidences of indebtedness or assets of the Trust (other than cash distributions out of current or retained earnings), or shall distribute to all holders of the Common Shares rights or warrants to subscribe for securities (other than those referred to in Section 13.4(7)(f)(ii)), then in each such case the number of Common Shares into which each Series D Convertible Preferred Share shall be convertible shall be adjusted so that the same shall equal the number determined by multiplying the number of Common Shares into which such Series D Convertible Preferred Share was convertible immediately prior to the date of such distribution by a fraction -60- of which the numerator shall be the current market price (determined as provided in Section 13.4(7)(f)(iv)) of the Common Shares on the record date mentioned below, and of which the denominator shall be such current market price of the Common Shares, less the then fair market value (as determined by the Board of Trustees, whose determination shall be conclusive evidence of such fair market value) of the portion of the securities or assets so distributed or of such subscription rights or warrants applicable to one Common Share. Such adjustment shall become effective immediately after the record date for the determination of the holders of the Common Shares entitled to receive such distribution. Notwithstanding the foregoing, in the event that the Trust shall distribute rights or warrants (other than those referred to in Section 13.4(7)(f)(ii)) ("Rights") pro rata to holders of the Common Shares, the Trust may, in lieu of making any adjustment pursuant to this Section 13.4(7)(f)(iii), make proper provision so that each holder of a Series D Convertible Preferred Share who converts such share after the record date for such distribution and prior to the expiration or redemption of the Rights shall be entitled to receive upon such conversion, in addition to the Common Shares issuable upon such conversion (the "Conversion Shares"), a number of Rights to be determined as follows: (1) if such conversion occurs on or prior to the date for the distribution to the holders of Rights of separate certificates evidencing such Rights (the "Distribution Date"), the same number of Rights to which a holder of a number of Common Shares equal to the number of Conversion Shares is entitled at the time of such conversion in accordance with the terms and provisions of and applicable to the Rights; and (2) if such conversion occurs after the Distribution Date, the same number of Rights to which a holder of the number of Common Shares into which a Series D Convertible Preferred Share so converted was convertible immediately prior to the Distribution Date would have been entitled on the Distribution Date in accordance with the terms and provisions of and applicable to the Rights. (iv) The current market price per share of the Common Shares on any date shall be deemed to be the average of the daily closing prices for thirty consecutive trading days commencing forty-five trading days before the date in question. The closing price for each day shall be the last reported sales price regular way or, in case no such reported sale takes place on such date, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange, or if the Common Shares are not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Shares are listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, the closing sale price of the Common Shares or, in case no reported sale takes place, the average of the closing bid and asked prices, on NASDAQ or any comparable system, or if the Common Shares are not quoted on NASDAQ or any comparable system, the closing sale price or, in case no reported sale takes place, the average of the -61- closing bid and asked prices, as furnished by any two members of the National Association of Securities Dealers, Inc. selected from time to time by the Trust for that purpose. (v) In any case in which this Section 13.4(7) shall require that an adjustment be made immediately following a record date, the Trust may elect to defer (but only until five business days following the mailing of the notice described in Section 13.4(7)(j)) issuing to the holder of any Series D Convertible Preferred Shares converted after such record date the Common Shares and other shares of beneficial interest of the Trust issuable upon such conversion over and above the Common Shares and other shares of beneficial interest of the Trust issuable upon such conversion only on the basis of the conversion rate prior to adjustment; and, in lieu of the shares the issuance of which is so deferred, the Trust shall issue or cause its transfer agents to issue appropriate evidence of the right to receive such shares. (g) No adjustment in the conversion rate shall be required until cumulative adjustments result in a change of 1% or more of the conversion price as in effect prior to the last adjustment of the conversion rate; provided, however, that any adjustment which by reason of this Section 13.4(7)(g) is not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 13.4(7) shall be made to the nearest cent ($.01) or to the nearest one-hundredth (1/100) of a share, as the case may be. No adjustment to the conversion rate shall be made for cash dividends. (h) In the event that, as a result of an adjustment made pursuant to Section 13.4(7)(f), the holder of any Series D Convertible Preferred Shares thereafter surrendered for conversion shall become entitled to receive any shares of beneficial interest of the Trust other than Common Shares, thereafter the number of such other shares so receivable upon conversion of any Series D Convertible Preferred Shares shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Shares contained in this Section 13.4(7). (i) The Trust may make such increases in the conversion rate, in addition to those required by Sections 13.4(7)(f)(i), (ii) and (iii), as is considered to be advisable in order that any event treated for Federal income tax purposes as a distribution of shares or share rights shall not be taxable to the recipients thereof. (j) Whenever the conversion rate is adjusted, the Trust shall promptly mail to all holders of record of Series D Convertible Preferred Shares a notice of the adjustment and shall cause to be prepared a certificate signed by a principal financial officer of the Trust setting forth the adjusted conversion rate and a brief statement of the facts requiring such adjustment and the computation thereof; such certificate shall forthwith be filed with each transfer agent for the Series D Convertible Preferred Shares. -62- (k) In the event that: (1) the Trust takes any action which would require an adjustment in the conversion rate, (2) the Trust consolidates or merges with, or transfers all or substantially all of its assets to, another corporation and shareholders of the Trust must approve the transaction, or (3) there is a dissolution, winding up or liquidation of the Trust, a holder of Series D Convertible Preferred Shares may wish to convert some or all of such shares into Common Shares prior to the record date for, or the effective date of, the transaction so that he may receive the rights, warrants, securities or assets which a holder of Common Shares on that date may receive. Therefore, the Trust shall mail to holders of Series D Convertible Preferred Shares a notice stating the proposed record or effective date of the transaction, as the case may be. The Trust shall mail the notice at least 10 days before such date; however, failure to mail such notice or any defect therein shall not affect the validity of any transaction referred to in clauses (1), (2) or (3) of this Section 13.4(7)(k). (l) If any of the following shall occur, namely: (i) any reclassification or change of outstanding Common Shares issuable upon conversion of Series D Convertible Preferred Shares (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), (ii) any consolidation or merger to which the Trust is a party other than a merger in which the Trust is the surviving entity and which does not result in any reclassification of, or change (other than a change in name, or par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination) in, outstanding Common Shares or (iii) any sale, transfer or lease of all or substantially all of the property or business of the Trust as an entirety, then the Trust, or such successor or purchasing entity, as the case may be, shall, as a condition precedent to such reclassification, change, consolidation, merger, sale, transfer or lease, provide in its charter document that each Series D Convertible Preferred Share shall be convertible into the kind and amount of shares of stock or beneficial interest and other securities and property (including cash) receivable upon such reclassification, change, consolidation, merger, sale, transfer or lease by a holder of the number of Common Shares deliverable upon conversion of such Series D Convertible Preferred Share immediately prior to such reclassification, change, consolidation, merger, sale, transfer or lease. Such charter document shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 13.4(7). The foregoing, however, shall not in any way affect the right that a holder of Series D Convertible Preferred Shares may otherwise have, pursuant to clause (2) of the last sentence of Section 13.4(7)(f)(iii), to receive Rights upon conversion of Series D Convertible Preferred Shares. If, in the case of any such consolidation, merger, sale, transfer or lease, the shares of stock or beneficial interest or other securities and property -63- (including cash) receivable thereupon by a holder of the Common Shares includes shares of stock or beneficial interest or other securities and property of a corporation other than the successor or purchasing corporation, as the case may be, in such consolidation, merger, sale, transfer or lease, then the charter document of such other corporation shall contain such additional provisions to protect the interests of the holders of Series D Convertible Preferred Shares as the Board of Trustees shall reasonably consider necessary by reason of the foregoing. The provisions of this Section 13.4(7)(l) shall similarly apply to successive consolidations, mergers, sales, transfers or leases. 8. Ranking. With regard to rights to receive distributions and amounts payable upon liquidation, dissolution or winding up of the Trust, the Series D Convertible Preferred Shares shall rank senior to the Common Shares and on a parity with any other preferred shares issued by the Trust, unless the terms of such other preferred shares provide otherwise and, if applicable, the requirements of Section 9 hereof have been complied with. However, the Trust may authorize or increase any class or series of shares of beneficial interest ranking on a parity with or junior to the Series D Convertible Preferred Shares as to distribution rights and the liquidation preference without the vote or consent of the holders of the Series D Convertible Preferred Shares. 9. Limitations. In addition to any other rights provided by applicable law, so long as any Series D Convertible Preferred Shares are outstanding, the Trust shall not, without the affirmative vote, or the written consent as provided by law, of the holders of at least two-thirds (2/3) of the total number of outstanding Series D Convertible Preferred Shares, voting as a class, (a) authorize, create or issue, or increase the authorized or issued amount of, any class or series of, or rights to subscribe to or acquire, any security convertible into, any class or series of shares of beneficial interest ranking as to distribution rights or the liquidation preference, senior to the Series D Convertible Preferred Shares, or reclassify any shares of beneficial interest into any such shares; or (b) amend, alter or repeal, whether by merger, consolidation or otherwise, any of the provisions of this Declaration that would change the preferences, rights or powers with respect to the Series D Convertible Preferred Shares so as to affect the Series D Convertible Preferred Shares adversely; but (except as otherwise required by applicable law) nothing herein contained shall require such a vote or consent (i) in connection with any increase in the total number of authorized Common Shares, or (ii) in connection with the authorization or increase of any class or series of shares of beneficial interest ranking, as to distribution rights and the liquidation preference, on a parity with or junior to the Series D Convertible Preferred Shares; and provided further that no such vote or written consent of the holders of the Series D Convertible Preferred Shares shall be -64- required if, at or prior to the time when the issuance of any such shares ranking senior to the Series D Convertible Preferred Shares is to be made or any such change is to take effect, as the case may be, proper notice has been given and sufficient funds have been irrevocably deposited in trust for the redemption of all the then outstanding Series D Convertible Preferred Shares. 10. No Preemptive Rights. No holder of Series D Convertible Preferred Shares will possess any preemptive rights to subscribe for or acquire any unissued shares of beneficial interest of the Trust (whether now or hereafter authorized) or securities of the Trust convertible into or carrying a right to subscribe to or acquire shares of beneficial interest of the Trust. SECTION 13.5. Series E Preferred Shares. Pursuant to Section 5.4 of this Declaration, a series of preferred shares of beneficial interest consisting of 2,300,000 shares designated as the "Series E Cumulative Redeemable Preferred Shares of Beneficial Interest" (the "Series E Preferred Shares"), and having a par value of $.01 per share, is hereby established on the following terms: A. Certain Definitions. Unless the context otherwise requires, the terms defined in this paragraph (A) shall have, for all purposes of the provisions of this Declaration in respect of the Series E Preferred Shares, the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural). Business Day. The term "Business Day" shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close. Capital Stock. The term "Capital Stock" shall mean, with respect to any Person, any capital stock (including preferred stock), shares, interests, participants or other ownership interests (however designated) of such Person and any rights (other than debt securities convertible into or exchangeable for capital stock), warrants or options to purchase any thereof. Code. The term "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. Common Equity. The term "Common Equity" shall mean all shares now or hereafter authorized of any class of common shares of beneficial interest of the Trust, including the Common Shares, and any other shares of beneficial interest of the Trust, howsoever designated, which has the right (subject always to prior rights of any class or series of preferred shares of -65- beneficial interest) to participate in the distribution of the assets and earnings of the Trust without limit as to per share amount. Common Shares. The term "Common Shares" shall mean the Common Shares of Beneficial Interest, $.01 par value per share, of the Trust. Distribution Payment Date. The term "Distribution Payment Date" shall have the meaning set forth in subparagraph (2) of paragraph (B) below. Distribution Period. The term "Distribution Period" shall mean the period from, and including, the Initial Issue Date to, but not including, the first Distribution Payment Date and thereafter, each quarterly period from, and including, the Distribution Payment Date to, but not including, the next Distribution Payment Date. Initial Issue Date. The term "Initial Issue Date" shall mean the date that Series E Preferred Shares are first issued by the Trust. Junior Shares. The term "Junior Shares" shall mean, as the case may be, (i) the Common Equity and any other class or series of shares of beneficial interest of the Trust which is not entitled to receive any distributions in any Distribution Period unless all distributions required to have been paid or declared and set apart for payment on the Series E Preferred Shares shall have been so paid or declared and set apart for payment and (ii) the Common Equity and any other class or series of shares of beneficial interest of the Trust which is not entitled to receive any assets upon liquidation, dissolution or winding up of the affairs of the Trust until the Series E Preferred Shares shall have received the entire amount to which such Class E Preferred Shares is entitled upon such liquidation, dissolution or winding up. Liquidation Preference. The term "Liquidation Preference" shall mean $25.00 per share. Parity Shares. The term "Parity Shares" shall mean, as the case may be, (i) any class or series of shares of beneficial interest of the Trust which is entitled to receive payment of distributions on a parity with the Series E Preferred Shares or (ii) any class or series of shares of beneficial interest of the Trust which is entitled to receive assets upon liquidation, dissolution or winding up of the affairs of the Trust on a parity with the Series E Preferred Shares. The term "Parity Shares" shall include the Series A Preferred Shares, Series B Preferred Shares, Series C Preferred Shares, and Series D Preferred Shares. Person. The term "Person" shall mean an individual, corporation, partnership, estate, trust (including a trust classified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) -66- of the Code, joint stock company or other entity, and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, but does not include an underwriter which participates in a public offering of the Series E Preferred Shares, provided that such ownership by such underwriter would not result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, or otherwise result in the Trust failing to qualify as a REIT. Record Date. The term "Record Date" shall mean the date designated by the Board of Trustees of the Trust at the time a distribution is declared, provided, however, that such Record Date shall be the first day of the calendar month in which the applicable Distribution Payment Date falls or such other date designated by the Board of Trustees for the payment of distributions that is not more than ninety (90) days prior to such Distribution Payment Date. Redemption Date. The term "Redemption Date" shall have the meaning set forth in subparagraph (2) of paragraph (D) below. Redemption Price. The term "Redemption Price" shall mean a price per Series E Preferred Share equal to $25.00 together with accrued and unpaid distributions, if any, thereon to the Redemption Date, without interest. REIT. The term "REIT" shall mean a real estate investment trust under Section 856 of the Code. Senior Shares. The term "Senior Shares" shall mean, as the case may be, (i) any class or series of shares of beneficial interest of the Trust ranking senior to the Series E Preferred Shares in respect of the right to receive distributions or (ii) any class or series of shares of beneficial interest of the Trust ranking senior to the Series E Preferred Shares in respect of the right to participate in any distribution upon liquidation, dissolution or winding up of the affairs of the Trust. B. Distributions. 1. The record holders of Series E Preferred Shares shall be entitled to receive distributions, when, as and if authorized by the Board of Trustees, out of assets legally available for payment of distributions. Such distributions shall be payable by the Trust in cash at a rate of 9.65% of the Liquidation Preference per annum (equivalent to $2.4125 per Series E Preferred Share per annum). 2. Distributions on Series E Preferred Shares shall accrue and be cumulative from the Initial Issue Date. Distributions shall be payable quarterly in arrears when, as and if authorized by the Board of Trustees of the Trust on January 15, April 15, July 15 and October 15 of each year (each, a "Distribution Payment Date"), commencing on the business day -67- succeeding October 15, 1995. If any Distribution Payment Date occurs on a day that is not a Business Day, any accrued distributions otherwise payable on such Distribution Payment Date shall be paid on the next succeeding Business Day. The amount of distributions payable on Series E Preferred Shares for each full Distribution Period shall be computed by dividing by four (4) the annual distribution rate set forth in subparagraph (1) of this paragraph (B) above. Distributions payable in respect of any Distribution Period which is less than a full Distribution Period in length will be computed on the basis of a 360-day year consisting of twelve 30-day months. Distributions shall be paid to the holders of record of the Series E Preferred Shares as their names shall appear on the share records of the Trust at the close of business on the Record Date for such distribution. Distributions in respect of any past Distribution Periods that are in arrears may be declared and paid at any time to holders of record on the Record Date therefor. Any distribution payment made on Series E Preferred Shares shall be first credited against the earliest accrued but unpaid distribution due which remains payable. Upon issuance, the Series E Preferred Shares will rank on a parity as to distributions with the Series A Preferred Shares, Series B Preferred Shares, Series C Preferred Shares, and Series D Preferred Shares. 3. If any Series E Preferred Shares are outstanding, no full distributions shall be authorized or paid or set apart for payment on any other class or series of Shares ranking junior to or on a parity with the Series E Preferred Shares as to distributions for any period unless full cumulative distributions have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for such payment on the Series E Preferred Shares for all past Distribution Periods and the then current Distribution Period. When distributions are not paid in full (or a sum sufficient for such full payment is not so set apart) upon the Series E Preferred Shares and any other class or series of Preferred Shares ranking on a parity as to distributions with the Series E Preferred Shares, all distributions authorized upon the Series E Preferred Shares and any other such class or series of Shares shall be authorized pro rata so that the amount of distributions authorized per share on the Series E Preferred Shares and such class or series of Shares shall in all cases bear to each other the same ratio that accrued and unpaid distributions per share on the Series E Preferred Shares and such class or series of Shares bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any distribution payment or payments on the Series E Preferred Shares which may be in arrears. 4. Except as provided in subparagraph (3) of this paragraph (B), unless full cumulative distributions on the Series E Preferred Shares have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for payment for all past Distribution Periods and the then current Distribution Period, no distributions (other than in common shares or other shares ranking junior to the Series E Preferred Shares as to distributions and upon liquidation, dissolution and winding up of the affairs of the Trust) shall be authorized or paid or set apart for payment or other distribution shall be authorized or made upon any Junior Shares or Parity Shares nor shall any Junior Shares or Parity Shares be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any such shares) -68- by the Trust (except by conversion into or exchange for other shares of the Trust ranking junior to the Series E Preferred Shares as to distributions and upon liquidation, dissolution or winding up of the affairs of the Trust). 5. Notwithstanding anything contained herein to the contrary, no distributions on Series E Preferred Shares shall be authorized by the Board of Trustees of the Trust or paid or set apart for payment by the Trust at such time as the terms and provisions of any agreement of the Trust, including any agreement relating to its indebtedness, prohibits such authorization, payment or setting apart for payment or provides that such authorization, payment or setting apart for payment would constitute a breach thereof or a default thereunder, or to the extent such authorization, payment or setting apart for payment shall be restricted or prohibited by law. 6. Notwithstanding anything contained herein to the contrary, distributions on the Series E Preferred Shares, if not paid on the applicable Distribution Payment Date, will accrue whether or not distributions are authorized for such Distribution Payment Date, whether or not the Trust has earnings and whether or not there are assets legally available for the payment of such distributions. 7. If the Board of Trustees determines that it is permissible under applicable law and that the distributions will qualify for the dividends paid deduction (within the meaning of Sections 561 and 562 of the Code or any successor provisions thereto), such distributions shall be paid as follows: first, from income of the Trust other than net capital gains, and the balance, if any, from net capital gains of the Trust. If the Board of Trustees determines, in its sole discretion, that distributions to be paid in accordance with the preceding sentence might not qualify for such dividends paid deduction, or might not be permissible under applicable law, then such distributions shall be paid in a manner determined by the Board of Trustees. C. Distributions Upon Liquidation, Dissolution or Winding Up. 1. Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Trust, subject to the prior preferences and other rights of any Senior Shares as to liquidation preferences, but before any distribution or payment shall be made to the holders of any Junior Shares as to the distribution of assets upon any liquidation, dissolution or winding up of the affairs of the Trust, the holders of Series E Preferred Shares shall be entitled to receive out of the assets of the Trust legally available for distribution to its shareholders liquidating distributions in cash or property at its fair market value as determined by the Board of Trustees in the amount of the Liquidation Preference per share plus an amount equal to all distributions accrued and unpaid thereon to the date of such liquidation, dissolution or winding up. After payment of the full amount of the liquidating distributions to which they are entitled, the holders of Series E Preferred Shares will have no right or claim to any of the remaining assets of the Trust and shall not be entitled to any other distribution in the event of liquidation, dissolution or winding up of the affairs of the Trust. -69- 2. In the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, the legally available assets of the Trust are insufficient to pay the amount of the Liquidation Preference per share plus an amount equal to all distributions accrued and unpaid on the Series E Preferred Shares and the corresponding amounts payable on all shares of Parity Shares as to the distribution of assets upon liquidation, dissolution or winding up, then the holders of the Series E Preferred Shares and all such Parity Shares shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they otherwise would be respectively entitled. Upon issuance, the Series E Preferred Shares will rank on parity with the Series A Preferred Shares, Series B Preferred Shares, Series C Preferred Shares, and Series D Preferred Shares as to the distribution of assets upon any liquidation, dissolution or winding up of the affairs of the Trust. Neither the consolidation or merger of the Trust into or with another entity nor the dissolution, liquidation, winding up or reorganization of the Trust immediately followed by incorporation of another corporation to which such assets are distributed, nor the sale, lease, transfer or conveyance of all or substantially all of the assets of the Trust to another entity shall be deemed a liquidation, dissolution or winding up of the affairs of the Trust within the meaning of this paragraph (C); provided, however, that, in each case, effective provision is made in the charter of the resulting or surviving corporation or otherwise for the recognition, preservation and protection of the rights of the holders of the Series E Preferred Shares. 3. In determining whether a distribution by dividend, redemption or other acquisition of Shares or otherwise is permitted under Maryland law, no effect shall be given to amounts that would be needed, if the Trust were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights on dissolution are superior to those receiving the distribution. D. Redemption by the Trust. 1. The Series E Preferred Shares may be redeemed for cash, in whole or from time to time in part, on any date on or after August 24, 2000 at the option of the Trust at the Redemption Price. The Redemption Price of the Series E Preferred Shares (other than any portion thereof consisting of accrued and unpaid distributions) may be paid solely from the sale of proceeds of Capital Stock of the Trust. 2. Each date fixed for redemption pursuant to subparagraph (1) of this paragraph (D) is called a "Redemption Date". If the Redemption Date is after a Record Date and before the related Distribution Payment Date, the distribution payable on such Distribution Payment Date shall be paid to the holder in whose name the Series E Preferred Shares to be redeemed are registered at the close of business on such Record Date notwithstanding the redemption thereof between such Record Date and the related Distribution Payment Date or the Trust's default in the payment of the distribution. -70- 3. In case of redemption of less than all of the Series E Preferred Shares at the time outstanding, the shares to be redeemed shall be selected by the Trust pro rata from the holders of record of such shares in proportion to the number of shares held by such holders (with adjustments to avoid redemption of fractional shares) or by any other equitable method determined by the Board of Trustees. 4. Notice of any redemption will be given by publication in a newspaper of general circulation in the City of New York, such publication to be made once a week for two successive weeks commencing not less than 30 nor more than 60 days prior to the Redemption Date. A similar notice will be mailed by the Trust, postage prepaid, not less than 30 nor more than 60 days prior to the Redemption Date, addressed to the respective holders of record of the Series E Preferred Shares to be redeemed at their respective addressees as they appear on the share transfer records of the Trust. No failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any Series E Preferred Shares except as to any holder to whom the Trust has failed to give notice or except as to any holder to whom notice was defective. In addition to any information required by law or by the applicable rules of any exchange upon which Series E Preferred Shares may be listed or admitted to trading, such notice shall state: (i) the Redemption Date; (ii) the Redemption Price; (iii) the number of Series E Preferred Shares to be redeemed and, if less than all shares held by the particular holder are to be redeemed, the number of such shares to be redeemed; (iv) the place or places where certificates for such shares are to be surrendered for payment of the Redemption Price; and (v) that distributions on the shares to be redeemed will cease to accrue on the Redemption Date. 5. If notice has been mailed in accordance with subparagraph (4) of this paragraph (D), and such notice provided that on or before the Redemption Date specified therein all funds necessary for such redemption shall have been set aside by the Trust, separate and apart from its other funds in trust for the pro rata benefit of the holders of the shares so called for redemption, so as to be, and to continue to be available therefor, then, from and after the Redemption Date, distributions on the Series E Preferred Shares so called for redemption shall cease to accrue, and said shares shall no longer be deemed to be outstanding and shall not have the status of Series E Preferred Shares, and all rights of the holders thereof as shareholders of the Trust (except the right to receive from the Trust the Redemption Price) shall cease. Upon surrender, in accordance with said notice, of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Trust shall so require and the notice shall so state), such shares shall be redeemed by the Trust at the Redemption Price. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the unredeemed shares without cost to the holder thereof. 6. Any funds deposited with a bank or trust company for the purpose of redeeming Series E Preferred Shares shall be irrevocable except that: -71- a. the Trust shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any shares redeemed shall have no claim to such interest or other earnings; and b. any balance of monies so deposited by the Trust and unclaimed by the holders of the Series E Preferred Shares entitled thereto at the expiration of two (2) years from the applicable Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Trust, and after any such repayment, the holders of the shares entitled to the funds so repaid to the Trust shall look only to the Trust for payment without interest or other earnings. 7. No Series E Preferred Shares may be redeemed except with assets legally available for the payment of the Redemption Price. 8. Unless full cumulative distributions on all Series E Preferred Shares shall have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for payment for all past Distribution Periods and the then current Distribution Period, no Series E Preferred Shares shall be redeemed unless all outstanding Series E Preferred Shares are simultaneously redeemed; provided, however, that the foregoing shall not prevent the purchase or acquisition of Series E Preferred Shares pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding Series E Preferred Shares, provided further, however, that the foregoing shall not prevent the purchase or acquisition of Series E Preferred Shares from persons owning in the aggregate 9.8% or more of the number or value of the total outstanding shares of beneficial interest of the Trust or 20% or more of the number or value of the total outstanding Series E Preferred Shares pursuant to provisions of the Declaration of Trust. Unless full cumulative distributions on all outstanding Series E Preferred Shares have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for payment for all past Distribution Periods and the then current Distribution Period, the Trust shall not purchase or otherwise acquire directly or indirectly any Series E Preferred Shares (except by exchange for shares of the Trust ranking junior to the Series E Preferred Shares as to distributions and upon liquidation, dissolution or winding up of the affairs of the Trust). 9. All Series E Preferred Shares redeemed pursuant to this paragraph (D) shall be retired and shall be reclassified as authorized and unissued preferred shares, without designation as to class or series, and may thereafter be reissued as any class or series of preferred shares. E. Voting Rights. 1. The holders of Series E Preferred Shares shall not be entitled to vote on any matter except (i) as provided in paragraph (K), (ii) as provided in subparagraph (2) of this paragraph (E), or (iii) as specifically required by law. -72- 2. In the event the Trust shall have failed to authorize and pay or set apart for payment in full the distributions accumulated on the outstanding Series E Preferred Shares for any six or more quarterly Distribution Periods, regardless of whether such quarterly periods are consecutive (a "Preferential Distribution Non-Payment"), the number of trustees of the Trust shall be increased by two and the holders of the outstanding Series E Preferred Shares, voting together as a class with all other classes or series of preferred shares of the Trust ranking on a parity with the Series E Preferred Shares with respect to distribution rights and then entitled to vote on the election of such additional two trustees, shall be entitled to elect such two additional trustees until the full distributions accumulated on all outstanding Series E Preferred Shares have been authorized and paid or set apart for payment. Upon the occurrence of a Preferential Distribution Non-Payment or a vacancy in the office of a Preferred Shares Trustee (as defined below), the Board of Trustees shall within a reasonable period call a special meeting of the holders of the Series E Preferred Shares and all holders of other classes or series of preferred shares of the Trust ranking on a parity with the Series E Preferred Shares with respect to distribution rights who are then entitled to vote on the election of such additional trustee or trustees for the purpose of electing the additional trustee or trustees. If and when all accumulated distributions on the Series E Preferred Shares have been authorized and paid or set aside for payment in full, the holders of the Series E Preferred Shares shall be divested of the special voting rights provided by this subparagraph (2) of paragraph (E), subject to revesting in the event of each and every subsequent Preferential Distribution Non-Payment. Upon termination of such special voting rights attributable to all holders of the Series E Preferred Shares and shares of any other class or series of preferred shares of the Trust ranking on a parity with the Series E Preferred Shares with respect to distribution rights, the term of office of each trustee elected by the holders of the Series E Preferred Shares and such parity preferred shares (a "Preferred Shares Trustee") pursuant to such special voting rights shall forthwith terminate and the number of trustees constituting the entire Board of Trustees shall be reduced by the number of Preferred Shares Trustees. In the event the holders of the outstanding Series A Convertible Preferred Shares shall become entitled to vote on the election of additional trustees because the Trust shall have failed to declare and pay or set apart for payment in full the distributions accumulated on the outstanding Convertible Preferred Shares for any six consecutive quarterly distribution payment periods, the term of office of each Preferred Shares Trustee previously elected by holders of Series E Preferred Shares shall forthwith terminate and the holders of the Series E Preferred Shares, voting together as a class with all other classes or series of preferred shares of the Trust ranking on a parity with the Series E Preferred Shares with respect to distribution rights and then entitled to vote on the election of two additional trustees, shall be entitled to elect such two additional trustees pursuant to this paragraph (E). Any Preferred Shares Trustee may be removed only by the vote of the holders of record of a majority of the outstanding Series E Preferred Shares and all other series of preferred shares of the Trust ranking on a parity with the Series E Preferred Shares with respect to distribution rights who would then be entitled to vote in such Preferred Shares Trustee's election, voting together as a separate class, at a meeting called for such purpose. -73- 3. So long as any Series E Preferred Shares are outstanding, the number of trustees constituting the entire Board of Trustees of the Trust shall at all times be such that the exercise, by the holders of the Series E Preferred Shares and the holders of preferred shares of the Trust ranking on a parity with the Series E Preferred Shares with respect to distribution rights, of the right to elect trustees under the circumstances provided for in subparagraph (2) of this paragraph (E) will not contravene any other provision of this Declaration restricting the number of trustees which may constitute the entire Board of Trustees. 4. Trustees elected pursuant to subparagraph (2) of this paragraph (E) shall serve until the earlier of (x) the next annual meeting of the shareholders of the Trust and the election (by the holders of the Series E Preferred Shares and the holders of preferred shares of the Trust ranking on a parity with the Series E Preferred Shares with respect to distribution rights) and qualification of their respective successors or (y) the termination of the term of office of each Preferred Shares Trustee upon the termination of the special voting rights as provided for in subparagraph (2) of this paragraph (E) or as otherwise provided for in subparagraph (2) of this paragraph (E). 5. So long as a Preferential Distribution Non-Payment shall continue, any vacancy in the office of a Preferred Shares Trustee may be filled by vote of the holders of record of a majority of the outstanding Series E Preferred Shares and all other series of preferred shares ranking on a parity with the Series E Preferred Shares with respect to distribution rights who are then entitled to vote in the election of such Preferred Shares Trustee as provided above. As long as the Preferential Distribution Non-Payment shall continue, holders of the Series E Preferred Shares shall not, as such shareholders, be entitled to vote on the election or removal of trustees other than Preferred Shares Trustees, but shall not be divested of any other voting rights provided to such shareholders by law or this Declaration of Trust with respect to any other matter to be acted upon by the shareholders of the Trust. F. Trustees' Right to Refuse to Transfer Series E Preferred Shares; Limitation on Holdings. 1. The terms and provisions of this paragraph (F) shall apply in addition to, and not in limitation of, the terms and provisions of [Article VII] Sections 6.6 and 6.8. 2. Each Person who owns directly or indirectly more than five percent in number or value of the total Series E Preferred Shares outstanding shall, by January 30 of each year, give written notice to the Trust stating the Person's name and address, the number of Series E Preferred Shares directly or indirectly owned by such Person, and a description of the capacity in which such Series E Preferred Shares are held. For purposes of this Section 13.5, the number and value of the total Series E Preferred Shares outstanding shall be determined by the Board of Trustees in good faith, which determination shall be conclusive for all purposes hereunder. In addition, each direct or indirect holder of Series E Preferred Shares, irrespective -74- of such shareholder's percentage ownership of outstanding Series E Preferred Shares, shall upon demand disclose to the Trust in writing such information with respect to the direct or indirect ownership of Series E Preferred Shares as the Board of Trustees deems necessary from time to time to enable the Board of Trustees to determine whether the Trust complies with the REIT Provisions of the Code (as defined in Section 1.5 of the Declaration of Trust), to comply with the requirements of any taxing authority or governmental agency or to determine any such compliance or to determine any such compliance with this paragraph (F). 3. If, in the opinion of the Board of Trustees, which shall be binding upon any prospective acquiror of Series E Preferred Shares, any proposed transfer or issuance would jeopardize the status of the Trust as a REIT under the REIT Provisions of the Code, the Board of Trustees shall have the right, but not the duty, to refuse to permit such transfer or issuance or refuse to give effect to such transfer or issuance and to take any action to cause any such transfer not to occur or to void any such issuance. 4. As a condition to any transfer and/or registration of transfer on the books of the Trust of any Series E Preferred Shares which could result in direct or indirect ownership (as hereinafter defined) of Series E Preferred Shares exceeding 20% of the lesser of the number or the value of the total Series E Preferred Shares outstanding (the "Series E Excess Preferred Shares") by a Person other than a Series E Preferred Excepted Person (as defined in subparagraph (5) below), such prospective transferee shall give written notice to the Trust of the proposed transfer and shall furnish such opinions of counsel, affidavits, undertakings, agreements and information as may be required by the Board of Trustees no later than the 15th day prior to any transfer which, if consummated, would result in such ownership. 5. Any transfer or issuance of Series E Preferred Shares that would (i) create a direct or indirect owner of Series E Excess Preferred Shares other than a Series E Preferred Excepted Person; or (ii) result in the Trust being "closely held" within the meaning of Section 856(h) of the Code, shall be void ab initio and the prospective acquiror shall not be entitled to any rights afforded to owners of Series E Preferred Shares hereunder and shall be deemed never to have had an interest therein. "Series E Preferred Excepted Person" shall mean any Person approved by the Board of Trustees, at their option and in their sole discretion, provided, however, that such approval shall not be granted to any Person whose ownership of in excess of 20% of the lesser of the number or the value of the total Series E Preferred Shares outstanding would result, directly, indirectly or as a result of attribution of ownership, in termination of the status of the Trust as a REIT under the REIT Provisions of the Code. 6. The Trust, by notice to the holder thereof, may purchase any or all Series E Preferred Shares that are proposed to be transferred pursuant to a transfer which, in the opinion of the Board of Trustees, which shall be binding upon any proposed transferor or transferee of Series E Preferred Shares, would result in any Person acquiring Series E Excess Preferred -75- Shares, or would otherwise jeopardize the status of the Trust as a real estate investment trust under the REIT Provisions of the Code. The Trust shall have the power, by lot or other means deemed equitable by the Board of Trustees in their sole discretion, to purchase such Series E Excess Preferred Shares from the prospective transferor. The purchase price for any Series E Excess Preferred Shares shall be equal to the fair market value of the Series E Preferred Shares on the last trading day immediately preceding the day on which notice of such proposed transfer is sent, as reflected in the closing sale price for the Series E Preferred Shares, if then listed on a national securities exchange, or such price for the Series E Preferred Shares on the principal exchange if then listed on more than one national securities exchange, or if the Series E Preferred Shares are not then listed on a national securities exchange, the latest bid quotation for the Series E Preferred Shares if then traded over- the-counter, or, if no such closing sales prices or quotations are available, then the purchase price shall be equal to the fair market value of such Series E Preferred Shares as determined by the Board of Trustees in good faith. Prompt payment of the purchase price shall be made in cash by the Trust in such manner as may be determined by the Board of Trustees. From and after the date fixed for purchase by the Board of Trustees, and so long as payment of the purchase price for the Series E Preferred Shares to be so redeemed shall have been made or duly provided for, the holder of any Series E Excess Preferred Shares so called for purchase shall cease to be entitled to dividends, distributions, voting rights and other benefits with respect to such Series E Preferred Shares, excepting only the right to payment of the purchase price fixed as aforesaid. Any dividend or distribution paid to a proposed transferee of Series E Excess Preferred Shares prior to the discovery by the Trust that the Series E Preferred Shares have been transferred in violation of this paragraph (F) shall be repaid to the Trust upon demand. 7. Notwithstanding any other provision in this Declaration or the Trust's Bylaws, subparagraphs (5), (6), (7) and (8) of this paragraph (F) may not be amended or repealed without the affirmative vote of the holders of not less than a majority of the Series E Preferred Shares then outstanding and entitled to vote. If subparagraph (5), (6), (7) or (8) of this paragraph (F) is determined to be void or invalid by virtue of any legal decision, statute, rule or regulation, then the acquiror of Series E Preferred Shares in violation of such Sections shall be deemed, at the option of the Trust, to have acted as agent on behalf of the Trust in acquiring such Series E Preferred Shares on behalf of the Trust. 8. Subject to subparagraph (12), notwithstanding any other provision of this Section 13.5 to the contrary, any purported transfer, sale or acquisition of Series E Preferred Shares (whether such purported transfer, sale or acquisition results from the direct or indirect acquisition of ownership of Series E Preferred Shares) which would result in the termination of the status of the Trust as a REIT under the REIT Provisions of the Code shall be null and void ab initio. Any such Series E Preferred Shares may be treated by the Board of Trustees in the manner prescribed for Series E Excess Preferred Shares in subparagraph (6) of this paragraph (F). -76- 9. Subject to subparagraph (12), nothing contained in this paragraph (F) or in any other provision of this Section 13.5 shall limit the authority of the Board of Trustees to take such other action as it deems necessary or advisable to protect the Trust and the interests of the shareholders by preservation of the Trust's status as a REIT under the REIT Provisions of the Code. 10. If any provision of this paragraph (F) or any application of any such provision is determined to be invalid by any federal or state court having jurisdiction over the issues, the validity of the remaining provisions shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court. To the extent this paragraph (F) may be inconsistent with any other provision of this Section 13.5, this paragraph (F) shall be controlling. 11. For purposes of this Section 13.5, Series E Preferred Shares not owned directly shall be deemed to be owned indirectly by a person if that person or a group of which he is a member would be the beneficial owner of such Series E Preferred Shares, as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended, and/or would be considered to own such Series E Preferred Shares by reason of the REIT Provisions of the Code. 12. Notwithstanding any other provision of paragraph (F), nothing in this Section 13.5 shall preclude the settlement of transactions entered into through the facilities of the New York Stock Exchange, Inc. The fact that the settlement of any transaction is permitted shall not negate the effect of any other provision of this paragraph (F) and any transferee in such a transaction shall be subject to all of the provisions and limitations set forth in this paragraph (F). G. Exclusion of Other Rights. Except as may otherwise be required by law, the Series E Preferred Shares shall not have any preferences or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption other than specifically set forth in this Declaration. H. Headings of Subdivisions. The headings of the various subdivisions in this Section 13.5 are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. I. Severability of Provisions. If any preferences or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption of the Series E Preferred Shares set forth in this Declaration is invalid, unlawful or incapable of being enforced -77- by reason of any rule of law or public policy, all other preferences or other rights, voting powers, restrictions, limitations as to distributions, qualifications or terms or conditions of redemption of Series E Preferred Shares set forth in this Declaration which can be given effect without the invalid, unlawful or unenforceable provision thereof shall, nevertheless, remain in full force and effect and no preferences or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption of the Series E Preferred Shares herein set forth shall be deemed dependent upon any other provision thereof unless so expressed therein. J. Ranking. With regard to rights to receive distributions and amounts payable upon liquidation, dissolution or winding up of the Trust, the Series E Preferred Shares shall rank senior to the Common Shares and on a parity with any other preferred shares issued by the Trust, unless the terms of such other preferred shares provide otherwise and, if applicable, the requirements of Paragraph K hereof have been complied with. However, the Trust may authorize or increase any class or series of shares of beneficial interest ranking on a parity with or junior to the Series E Preferred Shares as to distribution rights or liquidation preference without the vote or consent of the holders of the Series E Preferred Shares. K. Limitations. In addition to any other rights provided by applicable law, so long as any Series E Preferred Shares are outstanding, the Trust shall not, without the affirmative vote, or the written consent as provided by law, of the holders of at least two-thirds of the total number of outstanding Series E Preferred Shares, voting as a class, 1. authorize, create or issue, or increase the authorized or issued amount of, any class or series of, or rights to subscribe to or acquire, any security convertible into, any class or series of shares of beneficial interest ranking as to distribution rights or liquidation preference, senior to the Series E Preferred Shares, or reclassify any shares of beneficial interest into any such shares; or 2. amend, alter or repeal, whether by merger, consolidation or otherwise, any of the provisions of this Declaration that would change the preferences, rights or powers with respect to the Series E Preferred Shares so as to affect the Series E Preferred Shares materially and adversely; but (except as otherwise required by applicable law) nothing herein contained shall require such a vote or consent (i) in connection with any increase in the total number of authorized Common Shares, or (ii) in connection with the authorization or increase of any class or series of shares of beneficial interest ranking, as to distribution rights and liquidation preference, on a parity with or junior to the Series E Preferred Shares; provided, however, that no such vote or written -78- consent of the holders of the Series E Preferred Shares shall be required if, at or prior to the time when the issuance of any such shares ranking senior to the Series E Preferred Shares is to be made or any such change is to take effect, as the case may be, proper notice has been given and sufficient funds have been irrevocably deposited in trust for the redemption of all the then outstanding Series E Preferred Shares. L. No Preemptive Rights. No holder of Series E Preferred Shares shall be entitled to any preemptive rights to subscribe for or acquire any unissued shares of beneficial interest of the Trust (whether now or hereafter authorized) or securities of the Trust convertible into or carrying a right to subscribe to or acquire shares of beneficial interest of the Trust. -79- IN WITNESS WHEREOF, this Amended and Restated Declaration of Trust has been signed on this _____ day of ________, 1997, by the undersigned Trustees, each of whom acknowledge that this document is his free act and deed, that, to the best of his knowledge, information and belief, the matters and facts set forth herein are true in all material respects and that this statement is made under the penalties for perjury. - ---------------------------------- -------------------------------------- Samuel Zell Douglas Crocker II - ---------------------------------- -------------------------------------- Sheli Z. Rosenberg Gerald A. Spector - ---------------------------------- -------------------------------------- James D. Harper, Jr. Errol R. Halperin - ---------------------------------- -------------------------------------- Barry S. Sternlicht John Alexander - ---------------------------------- -------------------------------------- B. Joseph White Henry H. Goldberg - ---------------------------------- -------------------------------------- Jeffrey M. Lynford Edward Lowenthal -80- ADDITIONAL PROVISIONS The following changes shall be included in the Second Amended and Restated Declarartion of Trust upon approval by the affirmative vote of not less than two-thirds of the Wellsford Common: 1. Section 2.3 shall be deleted in its entirety, and the following shall be inserted in place thereof: SECTION 2.3 Resignation, Removal or Death. Any Trustee may resign by written notice to the remaining Trustees, effective upon execution and delivery to the Trust of such written notice or upon any future date specified in the notice. A Trustee may be removed, only with Cause (as hereinafter defined), at a meeting of the Shareholders called for that purpose, by the affirmative vote of the holders of not less than two-thirds of the Shares then outstanding and entitled to vote in the election of Trustees. As used herein, "Cause" shall mean (a) material theft, fraud or embezzlement or active and deliberate dishonesty by a Trustee; (b) habitual neglect of duty by a Trustee having a material and adverse significance to the Trust; or (c) the conviction of a Trustee of a felony or of any crime involving moral turpitude. Upon the resignation or removal of any Trustee, or his otherwise ceasing to be a Trustee, he shall automatically cease to have any right, title or interest in and to the Trust Property and shall execute and deliver such documents as the remaining Trustees require for the conveyance of any Trust Property held in his name, and shall account to the remaining Trustees as they require for all property which he holds as Trustee. Upon the incapacity or death of any Trustee, his legal representative shall perform those acts. 2. Sections 6.6, 6.7 and 6.8 shall be deleted in their entirety, and Sections 6.9 and 6.10 shall be redesignated as Sections 6.6 and 6.7, respectively. 3. New Sections 7.1-7.22 shall be added to Article VII, which shall read as follows: RESTRICTION ON TRANSFER AND OWNERSHIP OF SHARES SECTION 7.1 Definitions. For the purpose of this Article VII, the following terms shall have the following meanings: Beneficial Ownership. The term "Beneficial Ownership" shall mean ownership of Shares by a Person, whether the interest in Shares is held directly or indirectly (including by a nominee), and shall include interests that would be treated as owned through the application of -81- Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner," "Beneficially Owns" and "Beneficially Owned" shall have the correlative meanings. Business Day. The term "Business Day" shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in Chicago, Illinois are authorized or required by law, regulation or executive order to close. Charitable Beneficiary. The term "Charitable Beneficiary" shall mean one or more beneficiaries of the Charitable Trust as determined pursuant to Section 7.3(g), provided that each such organization must be described in Sections 501(c)(3), 170(b)(1)(A) and 170(c)(2) of the Code. Charitable Trust. The term "Charitable Trust" shall mean any trust provided for in Section 7.2(a)(2)(A) and Section 7.3(a). Charitable Trustee. The term "Charitable Trustee" shall mean the Person unaffiliated with the Trust and a Prohibited Owner, that is appointed by the Trust to serve as trustee of the Charitable Trust. Code. The term "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. Constructive Ownership. The term "Constructive Ownership" shall mean ownership of Shares by a Person, whether the interest in Shares is held directly or indirectly (including by a nominee), and shall include interests that would be treated as owned through the application of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code. The terms "Constructive Owner," "Constructively Owns" and "Constructively Owned" shall have the correlative meanings. Declaration of Trust. The term "Declaration of Trust" shall mean this Amended and Restated Declaration of Trust as filed for record with the SDAT, and any amendments thereto. Excepted Holder. The term "Excepted Holder" shall mean (i) a shareholder of the Trust for whom an Excepted Holder Limit is created by the Board of Trustees pursuant to Section 7.2(g) or (ii) a shareholder of the Trust who was an "Existing Holder" under the Amended and Restated Declaration of Trust of Equity Residential Properties Trust prior to the date hereof. Excepted Holder Limit. The term "Excepted Holder Limit" shall mean (i) provided that the affected Excepted Holder agrees to comply with the requirements established by the Board of Trustees pursuant to Section 7.2(g), and subject to adjustment pursuant to Section 7.2(h), the percentage limit established by the Board of Trustees pursuant to Section 7.2(g) or (ii) if the -82- Excepted Holder is an Excepted Holder due to its prior status as an "Existing Holder" under the Amended and Restated Declaration of Trust of Equity Residential Properties Trust, the "Existing Holder Limit" as defined under such Amended and Restated Declaration of Trust. Initial Date. The term "Initial Date" shall mean the date upon which this Amended and Restated Declaration of Trust containing this Article VII is filed for record with the SDAT. Market Price. The term "Market Price" on any date shall mean, with respect to any class or series of outstanding Shares, the Closing Price for such Shares on such date. The "Closing Price" on any date shall mean the last sale price for such Shares, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, for such Shares, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the NYSE or, if such Shares are not listed or admitted to trading on the NYSE, as reported on the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which such Shares are listed or admitted to trading or, if such Shares are not listed or admitted to trading on any national securities exchange, the last quoted price, or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the NASDAQ Stock Market or, if such system is no longer in use, the principal other automated quotation system that may then be in use or, if such Shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in such Shares selected by the Board of Trustees or, in the event that no trading price is available for such Shares, the fair market value of Shares, as determined in good faith by the Board of Trustees. NYSE. The term "NYSE" shall mean the New York Stock Exchange, Inc. Ownership Limit. The term "Ownership Limit" shall mean (i) with respect to the Common Shares, 5.0% (in value or number of shares, whichever is more restrictive) of the outstanding Common Shares of the Trust; and (ii) with respect to any class or series of Preferred Shares, 5.0% (in value or number of Shares, whichever is more restrictive) of the outstanding shares of such class or series of Preferred Shares of the Trust. Person. The term "Person" shall mean an individual, corporation, partnership, estate, trust (including a trust qualified under Sections 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended. Prohibited Owner. The term "Prohibited Owner" shall mean, with respect to any purported Transfer, any Person who, but for the provisions of Section 7.2(a), would Beneficially Own or Constructively Own Shares, and if appropriate in the context, shall also mean any -83- Person who would have been the record owner of Shares that the Prohibited Owner would have so owned. REIT. The term "REIT" shall mean a real estate investment trust within the meaning of Section 856 of the Code. Restriction Termination Date. The term "Restriction Termination Date" shall mean the first day after the Initial Date on which the Board of Trustees determines that it is no longer in the best interests of the Trust to attempt to, or continue to, qualify as a REIT or that compliance with the restrictions and limitations on Beneficial Ownership, Constructive Ownership and Transfers of Shares set forth herein is no longer required in order for the Trust to qualify as a REIT. SDAT. The term "SDAT" shall mean the State Department of Assessments and Taxation of Maryland. Transfer. The term "Transfer" shall mean any issuance, sale, transfer, gift, assignment, devise or other disposition, as well as any other event that causes any Person to acquire Beneficial Ownership or Constructive Ownership, or any agreement to take any such actions or cause any such events, of Shares or the right to vote or receive dividends on Shares, including (a) a change in the capital structure of the Trust, (b) a change in the relationship between two or more Persons which causes a change in ownership of Shares by application of Section 544 of the Code, as modified by Section 856(h), (c) the granting or exercise of any option or warrant (or any disposition of any option or warrant), pledge, security interest, or similar right to acquire Shares, (d) any disposition of any securities or rights convertible into or exchangeable for Shares or any interest in Shares or any exercise of any such conversion or exchange right and (e) Transfers of interests in other entities that result in changes in Beneficial or Constructive Ownership of Shares; in each case, whether voluntary or involuntary, whether owned of record, Constructively Owned or Beneficially Owned and whether by operation of law or otherwise. (For purposes of this Article VII, the right of a limited partner in ERP Operating Limited Partnership, an Illinois limited partnership, to require the partnership to redeem such limited partner's units of partnership interest pursuant to Section 3.2 of the Agreement of Limited Partnership of EOP Operating Limited Partnership shall not be considered to be an option or similar right to acquire Shares of the Trust.) The terms "Transferring" and "Transferred" shall have the correlative meanings. SECTION 7.2 Shares. (a) Ownership Limitations. During the period commencing on the Initial Date and prior to the Restriction Termination Date: (1) Basic Restrictions. -84- (A) (i) No Person, other than an Excepted Holder, shall Beneficially Own or Constructively Own Shares in excess of the Ownership Limit and (ii) no Excepted Holder shall Beneficially Own or Constructively Own Shares in excess of the Excepted Holder Limit for such Excepted Holder. (B) No Person shall Beneficially or Constructively Own Shares to the extent that (i) such Beneficial Ownership of Shares would result in the Trust being "closely held" within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year), or (ii) such Beneficial or Constructive Ownership of Shares would result in the Trust otherwise failing to qualify as a REIT (including, but not limited to, Constructive Ownership that would result in the Trust owning (actually or Constructively) an interest in a tenant that is described in Section 856(d)(2)(B) of the Code if the income derived by the Trust from such tenant would cause the Trust to fail to satisfy any of the gross income requirements of Section 856(c) of the Code). (C) No Person shall Transfer any Shares if, as a result of the Transfer, the Shares would be beneficially owned by less than 100 Persons (determined without reference to the rules of attribution under Section 544 of the Code). Notwithstanding any other provisions contained herein, any Transfer of Shares (whether or not such Transfer is the result of a transaction entered into through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation system) that, if effective, would result in Shares being beneficially owned by less than 100 Persons (determined under the principles of Section 856(a)(5) of the Code) shall be void ab initio, and the intended transferee shall acquire no rights in such Shares. (2) Transfer in Trust. If any Transfer of Shares (whether or not such Transfer is the result of a transaction entered into through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation system) occurs which, if effective, would result in any Person Beneficially Owning or Constructively Owning Shares in violation of Section 7.2(a)(1)(A) or (B), (i) then that number of Shares the Beneficial or Constructive Ownership of which otherwise would cause such Person to violate Section 7.2(a)(1)(A) or (B) (rounded to the nearest whole share) shall be automatically transferred to a Charitable Trust for the benefit of a Charitable Beneficiary, as described in Section 7.3, effective as of the close of business on the Business Day prior to the date of such Transfer, and such Person shall acquire no rights in such Shares; or (ii) if the transfer to the Charitable Trust described in clause (i) of this sentence would not be effective for any reason to prevent the violation of Section 7.2(a)(1)(A) or (B), then the Transfer of that number of Shares that otherwise would cause any Person to violate Section 7.2(a)(1)(A) or (B) shall be void ab initio, and the intended transferee shall acquire no rights in such Shares. -85- (b) Remedies for Breach. If the Board of Trustees or any duly authorized committee thereof shall at any time determine in good faith that a Transfer or other event has taken place that results in a violation of Section 7.2(a) or that a Person intends to acquire or has attempted to acquire Beneficial or Constructive Ownership of any Shares in violation of Section 7.2(a) (whether or not such violation is intended), the Board of Trustees or a committee thereof shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or other event, including, without limitation, causing the Trust to redeem Shares, refusing to give effect to such Transfer on the books of the Trust or instituting proceedings to enjoin such Transfer or other event; provided, however, that any Transfer or attempted Transfer or other event in violation of Section 7.2(a) shall automatically result in the transfer to the Charitable Trust described above, and, where applicable, such Transfer (or other event) shall be void ab initio as provided above irrespective of any action (or non-action) by the Board of Trustees or a committee thereof. (c) Notice of Restricted Transfer. Any Person who acquires or attempts or intends to acquire Beneficial Ownership or Constructive Ownership of Shares that will or may violate Section 7.2(a)(1), or any Person who would have owned Shares that resulted in a transfer to the Charitable Trust pursuant to the provisions of Section 7.2(a)(2), shall immediately give written notice to the Trust of such event, or in the case of such a proposed or attempted transaction, give at least 15 days prior written notice, and shall provide to the Trust such other information as the Trust may request in order to determine the effect, if any, of such acquisition or ownership on the Trust's status as a REIT. (d) Owners Required To Provide Information. From the Initial Date and prior to the Restriction Termination Date: (2) every owner of more than five percent (or such lower percentage as required by the Code or the Treasury Regulations promulgated thereunder) of the outstanding Shares, within 30 days after the end of each taxable year, shall give written notice to the Trust stating the name and address of such owner, the number of Shares Beneficially Owned and a description of the manner in which such Shares are held; provided that a shareholder of record who holds outstanding Shares as nominee for another Person, which other Person is required to include in gross income the dividends received on such Shares (an "Actual Owner"), shall give written notice to the Trust stating the name and address of such Actual Owner and the number of Shares of such Actual Owner with respect to which the shareholder of record is nominee. Each owner shall provide to the Trust such additional information as the Trust may request in order to determine the effect, if any, of such Beneficial Ownership on the Trust's status as a REIT and to ensure compliance with the Ownership Limit. (2) each Person who is a Beneficial or Constructive Owner of Shares and each Person (including the shareholder of record) who is holding Shares for a Beneficial or Constructive Owner shall provide to the Trust such information as the Trust may request, in -86- good faith, in order to determine the Trust's status as a REIT and to comply with requirements of any taxing authority or governmental authority or to determine such compliance. (e) Remedies Not Limited. Subject to Article III of the Declaration of Trust, nothing contained in this Section 7.2 shall limit the authority of the Board of Trustees to take such other action as it deems necessary or advisable to protect the Trust and the interests of its shareholders in preserving the Trust's status as a REIT. (f) Ambiguity. If Section 7.2 or 7.3 requires an action by the Board of Trustees and the Declaration of Trust fails to provide specific guidance with respect to such action, the Board of Trustees shall have the power to determine the action to be taken so long as such action is not contrary to the provisions of Sections 7.1, 7.2 or 7.3. (g) Exceptions. (1) The Board, in its sole and absolute discretion, may grant to any Person who makes a request therefor an exception to the Ownership Limit with respect to the ownership of any series or class of Preferred Shares, subject to the following conditions and limitations: (A) the Board shall have determined that (x) assuming such Person would Beneficially or Constructively Own the maximum amount of Common Shares and Preferred Shares permitted as a result of the exception to be granted and (y) assuming that all other Persons who would be treated as "individuals" for purposes of Section 542(a)(2) (determined taking into account Section 856(h)(3)(A) of the Code) would Beneficially or Constructively Own the maximum amount of Common Shares and Preferred Shares permitted under this Article VII (taking into account any exception, waiver, or exemption granted under this Section 7.2(g) to (or with respect to) such Persons), the Trust would not be "closely held" within the meaning of Section 856(h) of the Code (assuming that the ownership of Shares is determined during the second half of a taxable year) and would not otherwise fail to qualify as a REIT; and (B) such Person provides to the Board such representations and undertakings, if any, as the Board may, in its sole and absolute discretion, require (including, without limitation, an agreement as to a reduced Ownership Limit or Excepted Holder Limit for such Person with respect to the Beneficial or Constructive Ownership of one or more other classes of Shares not subject to the exception), and such Person agrees that any violation of such representations and undertakings or any attempted violation thereof will result in the application of the remedies set forth in Section 7.2 with respect to Shares held in excess of the Ownership Limit or the Excepted Holder Limit (as may be applicable) with respect to such Person (determined without regard to the exception granted such Person under this subparagraph (1)). If a member of the Board requests that the Board grant an exception pursuant to this subparagraph (1) with respect to such member or with respect to any other Person if such Board member would be considered to be the Beneficial or Constructive Owner of Shares owned by such Person, such member of the Board shall not participate in the decision of the Board as to whether to grant any such exception. -87- (2) In addition to exceptions permitted under subparagraph (1) above, the Board, in its reasonable discretion, may except a Person from the Ownership Limit if: (i) such Person submits to the Board information satisfactory to the Board, in its reasonable discretion, demonstrating that such Person is not an individual for purposes of Section 542(a)(2) of the Code (determined taking into account Section 856(h)(3)(A) of the Code); (ii) such Person submits to the Board information satisfactory to the Board, in its reasonable discretion, demonstrating that no Person who is an individual for purposes of Section 542(a)(2) of the Code (determined taking into account Section 856(h)(3)(A) of the Code) would be considered to Beneficially Own Shares in excess of the Ownership Limit by reason of the Excepted Holder's ownership of Shares in excess of the Ownership Limit pursuant to the exception granted under this subparagraph (2); (iii) such Person submits to the Board information satisfactory to the Board, in its reasonable discretion, demonstrating that clause (2) of subparagraph (1)(B) of Section 7.2(a) will not be violated by reason of the Excepted Holder's ownership of Shares in excess of the Ownership Limit pursuant to the exception granted under this subparagraph (2); and (iv) such Person provides to the Board such representations and undertakings, if any, as the Board may, in its reasonable discretion, require to ensure that the conditions in clauses (i), (ii) and (iii) hereof are satisfied and will continue to be satisfied throughout the period during which such Person owns Shares in excess of the Ownership Limit pursuant to any exception thereto granted under this subparagraph (2), and such Person agrees that any violation of such representations and undertakings or any attempted violation thereof will result in the application of the remedies set forth in Section 7.2 with respect to Shares held in excess of the Ownership Limit with respect to such Person (determined without regard to the exception granted such Person under this subparagraph (2)). (3) Prior to granting any exception or exemption pursuant to subparagraph (1) or (2), the Board may require a ruling from the IRS or an opinion of counsel, in either case in form and substance satisfactory to the Board, in its sole and absolute discretion as it may deem necessary or advisable in order to determine or ensure the Trust's status as a REIT; provided, however, that the Board shall not be obligated to require obtaining a favorable ruling or opinion in order to grant an exception hereunder. (4) Subject to Section 7.2(a)(1)(B), an underwriter that participates in a public offering or a private placement of Shares (or securities convertible into or exchangeable for Shares) may Beneficially or Constructively Own Shares (or securities convertible into or exchangeable for Shares) in excess of the Ownership Limit, but only to the extent necessary to facilitate such public offering or private placement. (5) The Board of Trustees may only reduce the Excepted Holder Limit for an Excepted Holder: (1) with the written consent of such Excepted Holder at any time, or (2) pursuant to the terms and conditions of the agreements and undertakings entered into with such Excepted Holder in connection with the establishment of the Excepted Holder Limit for that Excepted Holder. No Excepted Holder Limit shall be reduced to a percentage that is less than the Ownership Limit. -88- (h) Increase in Ownership Limit. The Board of Trustees may from time to time increase the Ownership Limit, subject to the limitations provided in this Section 7.2(h). (1) The Ownership Limit may not be increased if, after giving effect to such increase, five Persons who are considered individuals pursuant to Section 542 of the Code, as modified by Section 856(h)(3) of the Code (taking into account all of the Excepted Holders), could Beneficially Own, in the aggregate, more than 49.5% of the value of the outstanding Shares. (2) Prior to the modification of the Ownership Limit pursuant to this Section 7.2(h), the Board may require such opinions of counsel, affidavits, undertakings or agreements as it may deem necessary or advisable in order to determine or ensure the Trust's status as a REIT if the modification in the Ownership Limit were to be made. (i) Legend. Each certificate for Shares shall bear substantially the following legend: The shares represented by this certificate are subject to restrictions on Beneficial and Constructive Ownership and Transfer for the purpose of the Trust's maintenance of its status as a Real Estate Investment Trust (a "REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). Subject to certain further restrictions and except as expressly provided in the Trust's Declaration of Trust, (i) no Person may Beneficially or Constructively Own Common Shares of the Trust in excess of 5.0 percent (in value or number of shares) of the outstanding Comm on Shares of the Trust unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (ii) with respect to any class or series of Preferred Shares, no Person may Beneficially or Constructively Own more than 5.0 percent (in value or number of shares) of the outstanding shares of such class or series of Preferred Shares of the Trust, unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (iii) no Person may Beneficially or Constructively Own Shares that would result in the Trust being "closely held" under Section 856(h) of the Code or otherwise cause the Trust to fail to qualify as a REIT; and (iv) no Person may Transfer Shares if such Transfer would result in Shares of the Trust being owned by fewer than 100 Persons. Any Person who Beneficially or Constructively Owns or attempts to Beneficially or Constructively Own Shares which cause or will cause a Person to Beneficially or Constructively Own Shares in excess or in violation of the above limitations must immediately notify the Trust. If any of the restrictions on transfer or ownership are violated, the Shares -89- represented hereby will be automatically transferred to a Charitable Trustee of a Charitable Trust for the benefit of one or more Charitable Beneficiaries. In addition, upon the occurrence of certain events, attempted Transfers in violation of the restrictions described above may be void ab initio. A Person who attempts to Beneficially or Constructively Own Shares in violation of the ownership limitations described above shall have no claim, cause of action, or any recourse whatsoever against a transferor of such Shares. All capitalized terms in this legend have the meanings defined in the Trust's Declaration of Trust, as the same may be amended from time to time, a copy of which, including the restrictions on transfer and ownership, will be furnished to each holder of Shares of the Trust on request and without charge. Instead of the foregoing legend, the certificate may state that the Trust will furnish a full statement about certain restrictions on transferability to a shareholder on request and without charge. SECTION 7.3 Transfer of Shares in Trust. (a) Ownership in Trust. Upon any purported Transfer or other event described in Section 7.2(a)(2) that would result in a transfer of Shares to a Charitable Trust, such Shares shall be deemed to have been transferred to the Charitable Trustee as trustee of a Charitable Trust for the exclusive benefit of one or more Charitable Beneficiaries. Such transfer to the Charitable Trustee shall be deemed to be effective as of the close of business on the Business Day prior to the purported Transfer or other event that results in the transfer to the Charitable Trust pursuant to Section 7.2(a)(2). The Charitable Trustee shall be appointed by the Trust and shall be a Person unaffiliated with the Trust and any Prohibited Owner. Each Charitable Beneficiary shall be designated by the Trust as provided in Section 7.3(g). (b) Status of Shares Held by the Charitable Trustee. Shares held by the Charitable Trustee shall be issued and outstanding Shares of the Company. The Prohibited Owner shall have no rights in the Shares held by the Charitable Trustee. The Prohibited Owner shall not benefit economically from ownership of any Shares held in trust by the Charitable Trustee, shall have no rights to dividends or other distributions and shall not possess any rights to vote or other rights attributable to the Shares held in the Charitable Trust. The Prohibited Owner shall have no claim, cause of action, or any other recourse whatsoever against the purported transferor of such Shares. (c) Dividend and Voting Rights. The Charitable Trustee shall have all voting rights and rights to dividends or other distributions with respect to Shares held in the Charitable Trust, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend or other distribution paid prior to the discovery by the Trust that Shares have been -90- transferred to the Charitable Trustee shall be paid with respect to such Shares to the Charitable Trustee upon demand and any dividend or other distribution authorized but unpaid shall be paid when due to the Charitable Trustee. Any dividends or distributions so paid over to the Charitable Trustee shall be held in trust for the Charitable Beneficiary. The Prohibited Owner shall have no voting rights with respect to Shares held in the Charitable Trust and, subject to Maryland law, effective as of the date that Shares have been transferred to the Charitable Trustee, the Charitable Trustee shall have the authority (at the Charitable Trustee's sole discretion) (i) to rescind as void any vote cast by a Prohibited Owner prior to the discovery by the Trust that Shares have been transferred to the Charitable Trustee and (ii) to recast such vote in accordance with the desires of the Charitable Trustee acting for the benefit of the Charitable Beneficiary; provided, however, that if the Trust has already taken irreversible action, then the Charitable Trustee shall not have the power to rescind and recast such vote. Notwithstanding the provisions of this Article VII, until the Trust has received notification that Shares have been transferred into a Charitable Trust, the Trust shall be entitled to rely on its share transfer and other shareholder records for purposes of preparing lists of shareholders entitled to vote at meetings, determining the validity and authority of proxies and otherwise conducting votes of shareholders. (d) Rights Upon Liquidation. Upon any voluntary or involuntary liquidation, dissolution or winding up of or any distribution of the assets of the Trust, the Charitable Trustee shall be entitled to receive, ratably with each other holder of Shares of the class or series of Shares that is held in the Charitable Trust, that portion of the assets of the Trust available for distribution to the holders of such class or series (determined based upon the ratio that the number of Shares or such class or series of Shares held by the Charitable Trustee bears to the total number of Shares of such class or series of Shares then outstanding). The Charitable Trustee shall distribute any such assets received in respect of the Shares held in the Charitable Trust in any liquidation, dissolution or winding up of, or distribution of the assets of the Trust, in accordance with Section 7.3(e). (e) Sale of Shares by Charitable Trustee. Within 20 days of receiving notice from the Trust that Shares have been transferred to the Charitable Trust, the Charitable Trustee of the Charitable Trust shall sell the Shares held in the Charitable Trust to a person, designated by the Charitable Trustee, whose ownership of the Shares will not violate the ownership limitations set forth in Section 7.2(a)(1). Upon such sale, the interest of the Charitable Beneficiary in the Shares sold shall terminate and the Charitable Trustee shall distribute the net proceeds of the sale to the Prohibited Owner and to the Charitable Beneficiary as provided in this Section 7.3(e). The Prohibited Owner shall receive the lesser of (1) the price paid by the Prohibited Owner for the Shares or, if the Prohibited Owner did not give value for the Shares in connection with the event causing the Shares to be held in the Charitable Trust (e.g., in the case of a gift, devise or other such transaction), the Market Price of the Shares on the day of the event causing the Shares to be held in the Charitable Trust and (2) the price per share received by the Charitable Trustee from the sale or other disposition of the Shares held in the Charitable Trust. Any net sales proceeds in excess of the amount payable to the Prohibited -91- Owner shall be immediately paid to the Charitable Beneficiary. If, prior to the discovery by the Trust that Shares have been transferred to the Charitable Trustee, such Shares are sold by a Prohibited Owner, then (i) such Shares shall be deemed to have been sold on behalf of the Charitable Trust and (ii) to the extent that the Prohibited Owner received an amount for such Shares that exceeds the amount that such Prohibited Owner was entitled to receive pursuant to this Section 7.3(e), such excess shall be paid to the Charitable Trustee upon demand. The Charitable Trustee shall have the right and power (but not the obligation) to offer any Equity Share held in trust for sale to the Trust on such terms and conditions as the Charitable Trustee shall deem appropriate. (f) Purchase Right in Shares Transferred to the Charitable Trustee. Shares transferred to the Charitable Trustee shall be deemed to have been offered for sale to the Trust, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in such transfer to the Charitable Trust (or, in the case of a devise or gift, the Market Price at the time of such devise or gift) and (ii) the Market Price on the date the Trust, or its designee, accepts such offer. The Trust shall have the right to accept such offer until the Charitable Trustee has sold the Shares held in the Charitable Trust pursuant to Section 7.3(e). Upon such a sale to the Trust, the interest of the Charitable Beneficiary in the Shares sold shall terminate and the Charitable Trustee shall distribute the net proceeds of the sale to the Prohibited Owner. (g) Designation of Charitable Beneficiaries. By written notice to the Charitable Trustee, the Trust shall designate one or more nonprofit organizations to be the Charitable Beneficiary of the interest in the Charitable Trust such that (i) Shares held in the Charitable Trust would not violate the restrictions set forth in Section 7.2(a)(1) in the hands of such Charitable Beneficiary and (ii) each such organization must be described in Sections 501(c)(3), 170(b)(1)(A) or 170(c)(2) of the Code. SECTION 7.4 NYSE Transactions. Nothing in this Article VII shall preclude the settlement of any transaction entered into through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation system. The fact that the settlement of any transaction is so permitted shall not negate the effect of any other provision of this Article VII and any transferee in such a transaction shall be subject to all of the provisions and limitations set forth in this Article VII. SECTION 7.5 Enforcement. The Trust is authorized specifically to seek equitable relief, including injunctive relief, to enforce the provisions of this Article VII. SECTION 7.6 Non-Waiver. No delay or failure on the part of the Trust or the Board of Trustees in exercising any right hereunder shall operate as a waiver of any right of the Trust or the Board of Trustees, as the case may be, except to the extent specifically waived in writing. SECTION 7.7 - 7.22 [RESERVED] -92- 4. Sections 9.1, 9.2 and 9.3 shall be deleted in their entirety, and the following shall be inserted in place thereof: SECTION 9.1 By Shareholders. (a) Except as provided in Section 9.2 and subsection (b) hereof, this Declaration of Trust may be amended only by the affirmative vote of the holders of not less than two-thirds of all the Shares then outstanding and entitled to vote on the matter. (b) Subject to the provisions of any class or series of Shares at the time outstanding, the Trustees shall have the power to (i) merge the Trust into another entity, (ii) consolidate the Trust with one or more other entities into a new entity or (iii) sell or otherwise dispose of all or substantially all of the Trust Property; provided, however, that such action shall have been approved, at a meeting of the Shareholders called for the purpose, by the affirmative vote of the holders of not less than a majority of the Shares then outstanding and entitled to vote thereon. SECTION 9.2 By Trustees. The Trustees, by a two-thirds vote, may amend provisions of this Declaration of Trust from time to time to enable the Trust to qualify as a real estate investment trust under the Code or Under Title 8. 5. The words "shall constitute 'Excess Shares' and" shall be deleted from Sections 13.1(c)(2), 13.2(c)(2) and 13.3(c)(2). -93- EX-99.4 12 FORM OF PROXY EXHIBIT 99.4 Preliminary Copy FORM OF PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF WELLSFORD RESIDENTIAL PROPERTY TRUST The undersigned shareholder of Wellsford Residential Property Trust, a Maryland real estate investment trust (the "Company"), hereby appoints Edward Lowenthal and Jeffrey H. Lynford, and each of them, as proxy for the undersigned, with full power of substitution to attend the Special Meeting of Shareholders of the Company to be held on May 28, 1997, at 10:00 a.m., local time, at The Princeton Club, 15 West 43rd Street, New York, New York, and at any adjournment(s) or postponement(s) thereof, and to vote and otherwise represent all the shares that the undersigned is entitled to vote with the same effect as if the undersigned were present and voting such shares, on the following matters and in the following manner as further described in the accompanying Joint Proxy Statement/Prospectus/Information Statement. The undersigned hereby revokes any proxy previously given with respect to such shares. The undersigned acknowledges receipt of the Notice of Special Meeting of Shareholders and the Joint Proxy Statement/Prospectus/Information Statement of the Company dated April 16, 1997. THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATIONS MADE. IF THIS PROXY IS EXECUTED BUT NO SPECIFICATION IS MADE, THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED "FOR" THE APPROVAL OF THE PROPOSALS SET FORTH IN PARAGRAPHS 1 THROUGH 4 BELOW, EACH AS DESCRIBED IN THE JOINT PROXY STATEMENT/PROSPECTUS/INFORMATION STATEMENT OF THE COMPANY DATED APRIL 16, 1997 HERETOFORE RECEIVED BY THE UNDERSIGNED, AND IN THE DISCRETION OF THE PROXY HOLDERS ON ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENTS(S) OR POSTPONEMENT(S) THEREOF. 1. The approval of the merger (the "Merger") of Equity Residential Properties Trust, a Maryland real estate investment trust ("EQR"), into the Company, pursuant to an Agreement and Plan of Merger entered into by the Company and EQR on January 16, 1997, including the adoption of an amended and restated declaration of trust for the surviving trust (the "Amended and Restated Declaration of Trust"). / / FOR / / AGAINST / / ABSTAIN 2. The approval of modifications to Sections 2.3, 6.6, 6.7, 6.8, 9.1, 9.2, 9.3, 13.1, 13.2 and 13.3 of, and of the addition of a new Article VII to, the Amended and Restated Declaration of Trust. / / FOR / / AGAINST / / ABSTAIN 3. The issuance by Wellsford Real Properties, Inc. ("WRP Newco"), a subsidiary of the Company, shares of which are to be distributed to the common shareholders of Wellsford, pro rata, immediately prior to the Merger, of up to 12,000,000 additional shares of common stock, $.01 par value per share, of WRP Newco. / / FOR / / AGAINST / / ABSTAIN 4. The adoption of WRP Newco's 1997 Management Incentive Plan. / / FOR / / AGAINST / / ABSTAIN 5. To vote and otherwise represent the shares on any other matters which may properly come before the meeting or any adjournment(s) or postponement(s) thereof in their discretion. / / MARK HERE IF YOU PLAN TO ATTEND THE MEETING Please sign exactly as name appears hereon and date. If the shares are held jointly, each holder should sign. When signing as an attorney, executor, administrator, trustee, guardian or as an officer signing for an entity, please give the full title under signature. ___________________________________________ Signature ___________________________________________ Signature, if held jointly Dated:_______________________________, 1997 -2- -----END PRIVACY-ENHANCED MESSAGE-----