0000950123-01-506908.txt : 20011009 0000950123-01-506908.hdr.sgml : 20011009 ACCESSION NUMBER: 0000950123-01-506908 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 20011002 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEXINGTON CORPORATE PROPERTIES TRUST CENTRAL INDEX KEY: 0000910108 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 133717318 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-70790 FILM NUMBER: 1751015 BUSINESS ADDRESS: STREET 1: 355 LEXINGTON AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2126927260 MAIL ADDRESS: STREET 1: 355 LEXINGTON AVE STREET 2: 14TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: LEXINGTON CORPORATE PROPERTIES INC DATE OF NAME CHANGE: 19930816 S-4 1 y53433s-4.txt FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 2, 2001 REGISTRATION NO. 333- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 LEXINGTON CORPORATE PROPERTIES TRUST (Exact name of Registrant as specified in its charter) MARYLAND 6798 133717318 (State or other (Primary North American (I.R.S. Employer Jurisdiction of organization) Industry Classification Number) Identification No.)
355 LEXINGTON AVENUE NEW YORK, NY 10017 (212) 692-7260 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) T. WILSON EGLIN PRESIDENT AND CHIEF OPERATING OFFICER LEXINGTON CORPORATE PROPERTIES TRUST 355 LEXINGTON AVENUE NEW YORK, NEW YORK 10017 (212) 692-7260 (Name, address, including zip code, and telephone number, including area code, of agent for service) WITH COPIES TO: BARRY A. BROOKS, ESQ. MARK SCHONBERGER, ESQ. PAUL, HASTINGS, JANOFSKY & WALKER, LLP 399 PARK AVENUE NEW YORK, NEW YORK 10022 (212) 318-6000 Approximate date of commencement of the proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] --------------------- CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM AMOUNT TO BE AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF SECURITY TO BE REGISTERED REGISTERED OFFERING PRICE(2) REGISTRATION FEE --------------------------------------------------------------------------------------------------------------------------------- Common shares, par value $0.0001 per share............ $32,175,000(3) $8,043.75 8.5% senior subordinated debentures due 2009.......... (1) $20,000,000(4) $5,000.00 Total............................................. $52,175,000 $13,043.75(5) --------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------------
(1) Omitted pursuant to Rule 457(o) under the Securities Act of 1933, as amended. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o), promulgated under the Securities Act of 1933, as amended. (3) Represents the maximum number of common shares issuable upon consummation of the transactions described herein. Fifty percent of the merger consideration will be paid in common shares, and fifty percent of the merger consideration will be paid in cash. The number of common shares issued will be determined on the basis of the average closing price of common shares during the 20 day period prior to, but not including, the closing date of the mergers. The maximum number of common shares would be issued if the average closing price is $14.00 per share. (4) Represents the maximum principal amount of the 8.5% senior subordinated debentures that may be issued in lieu of common shares and cash. (5) Pursuant to Rule 457(b) under the Securities Act of 1933, as amended, the total registration fee of $13,043.75 (calculated by multiplying the proposed maximum aggregate offering price by .00025) may be reduced by the amount of any fee previously paid with respect to the same transaction pursuant to Sections 13(e) and 14(g) under the Securities Exchange Act of 1934, as amended. Lexington paid a filing fee in the amount of $12,870.00 pursuant to Section 14(g) and Rule 0-11 under the Securities Exchange Act of 1934 in connection with the filing of its preliminary proxy materials with the Securities and Exchange Commission on November 13, 2000, and therefore the fee required to be paid at this time has been reduced to $173.75. The transaction described herein initially contemplated 100% of the merger consideration being comprised of securities, and the filing fee paid was calculated on that basis. --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 PRELIMINARY COPY -- SUBJECT TO COMPLETION LEXINGTON CORPORATE PROPERTIES TRUST 355 LEXINGTON AVENUE NEW YORK, NEW YORK 10017 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD NOVEMBER 28, 2001 To the Shareholders of Lexington Corporate Properties Trust: NOTICE IS HEREBY GIVEN that a special meeting of shareholders of Lexington Corporate Properties Trust, a Maryland statutory real estate investment trust, will be held at on November 28, 2001, at 10 a.m., local time, for the following purposes: - APPROVAL AND ADOPTION OF MERGER AGREEMENTS. To consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger, as amended, pursuant to which each of Net 1 L.P., a Delaware limited partnership, and Net 2 L.P., a Delaware limited partnership, respectively, will merge into Net 3 Acquisition L.P., a Delaware limited partnership and a controlled subsidiary of Lexington, in exchange for a specified number of Lexington common shares and a specified amount of cash. A copy of each Agreement and Plan of Merger and the applicable amendment, containing the terms and conditions of the respective merger, is attached as Annex A-1 and Annex A-2, respectively, to the Joint Consent and Proxy Solicitation Statement/Prospectus enclosed with this notice. - APPROVAL AND ADOPTION OF ARTICLES OF AMENDMENT OF DECLARATION OF TRUST. To consider and vote upon a proposal to approve and adopt the Articles of Amendment pursuant to which Lexington's Declaration of Trust will be amended to increase the number of common shares which Lexington has authority to issue from 40,000,000 common shares to 80,000,000 common shares. A copy of the Articles of Amendment is attached as Annex A-5 to the Joint Consent and Proxy Solicitation Statement/Prospectus enclosed with this notice. - ADJOURNMENT OF MEETING. To consider and vote upon a proposal to adjourn the special meeting to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting to approve the proposed mergers and the proposed amendment to the Declaration of Trust. - OTHER BUSINESS. To transact such other business as may properly come before the special meeting or any adjournments of the special meeting. Lexington's Board of Trustees has fixed the close of business on October 12, 2001 as the record date for the determination of Lexington shareholders entitled to notice of, and to vote at, the special meeting and any adjournments of the special meeting. Only shareholders of record on the record date are entitled to notice of, and to vote on, the proposals. The proposals to approve and adopt the merger agreements and the amendment to the Declaration of Trust each require the affirmative vote of the holders of a majority of the outstanding Lexington shares entitled to vote on the proposal. All other proposals must be approved by the holders of a majority of the outstanding Lexington shares as of the record date present in person or represented by a properly executed proxy at the special meeting. Regardless of whether you plan to attend the special meeting, please complete, sign and date the enclosed proxy card and return it promptly in the enclosed postage paid envelope. It is important that your interests be represented at the special meeting. BY ORDER OF THE BOARD OF TRUSTEES PAUL R. WOOD Secretary , 2001 New York, New York 3 PRELIMINARY COPY -- SUBJECT TO COMPLETION NET 1 L.P. AND NET 2 L.P. 355 LEXINGTON AVENUE, 14TH FLOOR NEW YORK, NEW YORK 10017 NOTICE OF CONSENT SOLICITATION TO LIMITED PARTNERS To the Limited Partners of Net 1 L.P. and Net 2 L.P.: NOTICE IS HEREBY GIVEN that the general partners of Net 1 L.P., a Delaware limited partnership, and Net 2 L.P., a Delaware limited partnership, are soliciting the consent of the holders of units of limited partnership interests in Net 1 and Net 2, respectively, to the following proposals: - APPROVAL OF TRANSACTION. To approve and adopt (i) the Agreement and Plan of Merger, as amended, pursuant to which each of Net 1 and Net 2, respectively, will merge into Net 3 Acquisition L.P., a Delaware limited partnership and a controlled subsidiary of Lexington Corporate Properties Trust, a Maryland statutory real estate investment trust, in exchange for a specified number of Lexington common shares and a specified aggregate amount of cash; and (ii) the amendment of the partnership agreements of Net 1 and Net 2, respectively, to permit the transfer by the general partners of their respective general partnership interests to Net 3. A copy of each Agreement and Plan of Merger and the applicable amendment, containing the terms and conditions of the respective merger, is attached as Annex A-1 and Annex A-2, respectively, to the Joint Consent and Proxy Solicitation Statement/Prospectus enclosed with this notice. - EXTENSION OF CONSENT SOLICITATION PERIOD. To extend the period for the solicitation of consents, if either Net 1 or Net 2 has not received the affirmative consent of the holders of a sufficient number of units to approve its respective merger proposal. Only the limited partners of Net 1 and Net 2 holding limited partnership interests at the close of business on October 12, 2001 are entitled to notice of, and to consent or deny consent to, the proposals. The proposal to approve the transaction requires the affirmative consent of the holders of more than 50% of the outstanding limited partnership interests. The proposal to approve an extension of the consent solicitation period requires the affirmative consent of a majority of the votes cast. We invite you to consent or deny consent to the proposals using the enclosed consent form because it is important that your interests in Net 1 or Net 2, as applicable, be represented. Please sign, date and return the enclosed consent card in the accompanying postage-paid envelope. BY ORDER OF THE GENERAL PARTNERS LEPERCQ NET 1 L.P., A DELAWARE LIMITED PARTNERSHIP By: Lepercq Net 1 Inc., its general partner By: ----------------------------------------- Name: E. Robert Roskind Title: President LEPERCQ NET 2 L.P., A DELAWARE LIMITED PARTNERSHIP By: Lepercq Net 2 Inc., its general partner By: ----------------------------------------- Name: E. Robert Roskind Title: President , 2001 New York, New York 4 The information in this Joint Consent and Proxy Solicitation Statement/Prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This joint consent and proxy solicitation statement/prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED OCTOBER 2, 2001 JOINT CONSENT AND PROXY SOLICITATION STATEMENT/PROSPECTUS LEXINGTON CORPORATE PROPERTIES TRUST COMMON SHARES 8.5% SENIOR SUBORDINATED DEBENTURES, DUE 2009 IF YOU ARE A SHAREHOLDER OF LEXINGTON CORPORATE PROPERTIES TRUST OR A LIMITED PARTNER OF NET 1 OR NET 2, YOUR VOTE OR CONSENT IS VERY IMPORTANT. Lexington Corporate Properties Trust, a Maryland statutory real estate investment trust (NYSE: LXP), is seeking to acquire each of Net 1 L.P., a Delaware limited partnership and Net 2 L.P., a Delaware limited partnership, in a merger of each Net Partnership into Net 3 Acquisition L.P., a Delaware limited partnership and a controlled subsidiary of Lexington. For purposes of this Joint Consent and Proxy Solicitation Statement/Prospectus, we refer to Lexington Corporate Properties Trust and its consolidated subsidiaries, including Net 3, as Lexington, and we refer to the mergers and related transactions as the Transaction. The maximum aggregate dollar amount of consideration to be paid in the Transaction is $65.0 million. Each limited partnership unit will be exchanged for merger consideration equal to the agreed upon adjusted net asset value per unit of Net 1 and Net 2, which is $820.38 and $81.96, respectively. The merger consideration will be payable 50% in Lexington common shares and 50% in cash. THERE ARE MATERIAL RISKS AND POTENTIAL DISADVANTAGES ASSOCIATED WITH THE TRANSACTION AS DESCRIBED IN "RISK FACTORS" BEGINNING ON PAGE 38. YOU SHOULD CONSIDER: - Although limited partners will receive 50% of their merger consideration in Lexington common shares, the fair market value of those common shares may not equal 50% of the agreed upon adjusted net asset value of the Net Partnerships' units, and investors selling the common shares may realize less than 50% of the agreed upon adjusted net asset value upon resale. - The maximum and minimum number of Lexington common shares that may be issued is fixed. Limited partners will not be entitled to receive any more common shares if the average closing price is less than $14.00 per share than they would if the average closing price were $14.00 per share, and Lexington will not be entitled to issue any fewer common shares if the average closing price is greater than $16.00 per share than they would if the average closing price were $16.00 per share. - Estimated liquidation costs of $6.0 million, which would be incurred upon a liquidation, have been deducted from the agreed upon fair market value of the Net Partnerships' properties in calculating the total merger consideration being offered to limited partners. - The senior subordinated debentures, which we refer to as the dissenter debentures, are likely to sell for less than their face amount, and therefore, if a limited partner elects to receive the dissenter debentures, the fair market value of that limited partner's merger consideration might not equal the agreed upon adjusted net asset value of the Net Partnerships at such time. The dissenter debentures will not have a public market and will be subordinated to aggregate mortgages and notes payable of Lexington of approximately $447.4 million on a pro forma basis as of June 30, 2001. - The ownership and voting interests of limited partners and shareholders will be diluted, meaning that they will have a smaller percentage ownership and voting interest in Lexington than they currently have in their respective Net Partnership or Lexington, as applicable. You will not know the number of Lexington common shares to be exchanged in the Transaction, and thus the magnitude of this dilutive effect, at the time you make your voting decision. - No independent representative was retained to negotiate on behalf of the limited partners. The general partners are controlled by E. Robert Roskind who is also the Co-Chief Executive Officer and Chairman of the Board of Trustees of Lexington. Mr. Roskind's affiliation with both the general partners and Lexington creates a conflict of interest in recommending the Transaction. Therefore, the terms of the Transaction, including the merger consideration being offered, were not determined through arm's length negotiations. - An original limited partner will incur taxable gain of approximately $40.76 and $4.87 per unit of Net 1 and Net 2, respectively. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT CONSENT AND PROXY SOLICITATION STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS JOINT CONSENT AND PROXY SOLICITATION STATEMENT/PROSPECTUS IS , 2001. 5 AVAILABLE INFORMATION Lexington and the Net Partnerships are subject to the informational requirements of the Securities Exchange Act of 1934 which require them to file reports and other information with the Securities and Exchange Commission. You can inspect and copy reports, proxy statements and other information filed by Lexington and the Net Partnerships at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can obtain copies of this material by mail from the Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can also obtain such reports, proxy statements and other information from the web site that the SEC maintains at http://www.sec.gov. Reports, proxy statements and other information concerning Lexington may also be obtained electronically at Lexington's website, http://www.lxp.com and through a variety of databases, including, among others, the SEC's Electronic Data Gathering and Retrieval ("EDGAR") program, Knight-Ridder Information Inc., Federal Filing/Dow Jones and Lexis/Nexis. Lexington has filed with the SEC a registration statement on Form S-4 under the Securities Act of 1933 with respect to the Lexington common shares and dissenter debentures to be issued in connection with the mergers. This Joint Consent and Proxy Solicitation Statement/Prospectus does not contain all of the information set forth in that registration statement, parts of which have been omitted in accordance with the rules and regulations of the SEC. For further information, reference is hereby made to that registration statement. Any statements contained herein concerning the provisions of any document filed as an exhibit to that registration statement or otherwise filed with the SEC are not necessarily complete, and in each instance reference is made to the copy of that document so filed. Each of those statements is qualified in its entirety by this reference. If you have any questions about the mergers, limited partners should call Morrow & Co., Inc. toll free at (877) 807-8896, and Lexington shareholders should call Mellon Investor Services, LLC toll free at (800) 279-1247. No person has been authorized to give any information or to make any representation other than those contained in or incorporated by reference into this Joint Consent and Proxy Solicitation Statement/Prospectus in connection with the solicitation of proxies or the offering of securities made hereby and, if given or made, that information or representation must not be relied upon as having been authorized by Lexington or the Net Partnerships. Neither the delivery of this Joint Consent and Proxy Solicitation Statement/Prospectus nor any distribution of the Lexington common shares, cash or dissenter debentures offered hereby will under any circumstances create an implication that there has been no change in the affairs of Lexington or either of the Net Partnerships since the date hereof or that the information set forth or incorporated by reference herein is correct as of any time subsequent to its date. This Joint Consent and Proxy Solicitation Statement/Prospectus does not constitute an offer to sell, or a solicitation of an offer to purchase, any securities or the solicitation of a proxy or consent, in any jurisdiction in which, or to any person to whom, it is unlawful to make such offer or solicitation of an offer or proxy solicitation. i 6 TABLE OF CONTENTS
PAGE ---- SUMMARY..................................................... 1 Purpose of this Joint Consent and Proxy Solicitation Statement/Prospectus................................... 1 Information Concerning the Merger......................... 2 Description of the REIT Structure, Lexington and the Net Partnerships........................................... 2 Lexington................................................. 2 The Net Partnerships...................................... 3 Risk Factors and Adverse Effects of the Transaction....... 8 Conflicts of Interest..................................... 9 The Transaction........................................... 9 Background of the Transaction and Alternatives to the Transaction that the General Partners Considered....... 15 Fairness Opinions......................................... 18 Comparison of Valuation Analyses.......................... 20 Unaudited Comparative Per Share/Unit Data................. 25 Recommendation of the Board of Trustees of Lexington and the General Partners of the Net Partnerships........... 26 Consequences if Mergers Not Consummated................... 28 Effective Time of the Mergers............................. 28 Transaction Expenses...................................... 29 Comparison of Rights of the Limited Partners and Shareholders of Lexington.............................. 29 Federal Income Tax Considerations......................... 29 Information Concerning the Amendment to Lexington's Declaration of Trust................................... 29 Approval of Merger and Proposed Amendment; Election of Merger Consideration................................... 30 Summary Financial Information............................. 33 RISK FACTORS................................................ 38 THE MERGERS................................................. 49 Reasons for the Transaction -- Net Partnerships........... 49 Reasons for the Transaction -- Lexington.................. 50 Background of the Transaction............................. 50 The Board of Trustees' Reasons and Recommendations for the Merger................................................. 55 The General Partners' Reasons and Recommendations for the Merger................................................. 57 The Merger Consideration.................................. 60 Comparison of Common Shares and Cash versus Dissenter Debentures............................................. 62 Methodology Used to Determine Merger Consideration........ 64 Calculation of Agreed Upon Adjusted Net Asset Value....... 64 Transaction Expenses...................................... 66 Anticipated Accounting Treatment.......................... 67 No Fractional Common Shares............................... 67 ALTERNATIVES TO THE TRANSACTIONS THAT THE GENERAL PARTNERS CONSIDERED................................................ 67 Summary of Valuation Alternatives......................... 67 Continuation.............................................. 68 Liquidation............................................... 70
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PAGE ---- Conclusion................................................ 72 Consequences if Mergers Not Consummated................... 72 THE MERGER AGREEMENT........................................ 72 Conversion of Shares...................................... 72 Exchange of Certificates.................................. 72 Effective Time of the Mergers............................. 73 Representations and Warranties............................ 73 Conditions to Consummation of the Mergers................. 74 Conduct of Business Pending the Merger.................... 75 Alternative Proposals..................................... 76 Termination............................................... 76 Extension; Waiver......................................... 78 CONFLICTS OF INTEREST....................................... 78 Affiliated General Partners............................... 78 Related Party Transactions/Prior Dealings................. 79 The Independent Trustees.................................. 80 Lexington's Ownership of Units of Limited Partnership of the Net Partnerships................................... 80 FAIRNESS OPINIONS........................................... 80 General................................................... 80 Prudential Securities Fairness Opinion.................... 81 Opinion of Cohen & Steers Capital Advisors LLC for Net 1 L.P.................................................... 89 Opinion of Cohen & Steers Capital Advisors LLC for Net 2 L.P.................................................... 96 APPRAISALS.................................................. 103 1999 Portfolio Appraisals................................. 104 2000 Portfolio Appraisal.................................. 105 COMPARISON OF OWNERSHIP OF UNITS, COMMON SHARES AND DISSENTER DEBENTURES...................................... 109 OTHER PROPOSALS............................................. 121 Amendment to Lexington's Declaration of Trust............. 121 VOTING PROCEDURES........................................... 122 Voting Procedures for Lexington Shareholders.............. 122 Voting Procedures for Limited Partners.................... 122 Record Date; Votes Required............................... 124 Procedures for Limited Partners to Receive Dissenter Debentures............................................. 124 Investor Lists............................................ 125 INFORMATION ABOUT LEXINGTON................................. 126 General................................................... 126 Recent Developments....................................... 126 Objectives and Strategy................................... 127 Internal Growth; Effectively Managing Assets.............. 127 External Growth; Strategies for Acquisitions and Increasing Assets Under Management..................... 128 Strategic Joint Venture Co-Investments.................... 129 Revenue Enhancement from Advisory Services................ 130 Matching Indebtedness to Lease Expirations and Increasing Access to Capital...................................... 130
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PAGE ---- Common Share Repurchase................................... 130 Competition............................................... 130 Investment Policies....................................... 131 Financing Policies........................................ 131 Miscellaneous Policies.................................... 131 Environmental Matters..................................... 132 Employees................................................. 132 Industry Segments......................................... 132 Price Range of the Lexington Common Shares and Distribution History................................... 132 Management................................................ 134 Board of Trustees......................................... 136 Compensation of Trustees.................................. 138 Compensation Committee Interlocks and Insider Participation.......................................... 138 Report of the Compensation Committee of the Board of Trustees............................................... 139 Fiduciary Responsibility.................................. 139 Employment Agreements..................................... 140 Share Ownership of Principal Security Holders, Trustees and Executive Officers................................. 140 Description of Capital Shares............................. 141 Transfer Agent............................................ 144 Real Estate Portfolio..................................... 144 Real Estate Holdings...................................... 144 Insurance................................................. 157 Legal Proceedings......................................... 157 INFORMATION ABOUT THE NET PARTNERSHIPS...................... 158 Business of Net 1......................................... 158 Business of Net 2......................................... 160 Competition............................................... 161 Investment Policies....................................... 161 Financing Policies........................................ 162 General Partners.......................................... 162 Compensation, Reimbursements and Distributions to the General Partners....................................... 162 Directors and Executive Officers of the Net Partnerships........................................... 163 Fiduciary Duty............................................ 164 Environmental Matters..................................... 165 Net Partnership Distributions............................. 166 Market Price of the Units................................. 166 Employees................................................. 167 Real Estate Portfolios.................................... 167 Real Estate Holdings...................................... 168 FEDERAL INCOME TAX CONSIDERATIONS........................... 173 Certain Tax Differences between the Ownership of Units and Common Shares.......................................... 173 Tax Consequences of the Mergers........................... 174 Treatment of Holders of Dissenter Debentures.............. 176 Taxation of Lexington..................................... 177
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PAGE ---- Taxation as a REIT........................................ 182 Failure to Qualify as a REIT.............................. 182 Taxation of Taxable U.S. Shareholders..................... 183 Backup Withholding........................................ 184 Taxation of Tax-Exempt Entities........................... 184 Taxation of Foreign Investors............................. 185 EXPERTS..................................................... 186 LEGAL MATTERS............................................... 186 INCORPORATION OF INFORMATION BY REFERENCE................... 186 FORWARD-LOOKING STATEMENTS.................................. 188 PRO FORMA FINANCIAL INFORMATION............................. F-1 Lexington Corporate Properties Trust...................... F-1 Pro Forma Equivalent Calculations for the Net Partnerships........................................... F-8
ANNEX A-1 MERGER AGREEMENT AND AMENDMENT BETWEEN LEXINGTON, NET 3 AND NET 1 ANNEX A-2 MERGER AGREEMENT AND AMENDMENT BETWEEN LEXINGTON, NET 3 AND NET 2 ANNEX A-3 CONTRIBUTION AGREEMENT AND AMENDMENT BETWEEN NET 3 AND NET 1 GP ANNEX A-4 CONTRIBUTION AGREEMENT AND AMENDMENT BETWEEN NET 3 AND NET 2 GP ANNEX A-5 ARTICLES OF AMENDMENT TO LEXINGTON'S DECLARATION OF TRUST ANNEX B OPINION OF PRUDENTIAL SECURITIES INCORPORATED ANNEX C OPINION OF COHEN & STEERS CAPITAL ADVISORS LLC ANNEX D ROBERT A. STANGER & CO., INC. PORTFOLIO APPRAISAL AS OF DECEMBER 31, 2000
v 10 SUMMARY This Summary highlights selected information from this Joint Consent and Proxy Solicitation Statement/Prospectus, and may not contain all of the information regarding the Transaction that is important to you. To understand the Transaction fully, and for a more complete description of the terms of and risks related to the Transaction, you should carefully read this entire Joint Consent and Proxy Solicitation Statement/Prospectus. You should also read the other documents which are referred to in this Joint Consent and Proxy Solicitation Statement/Prospectus. See "AVAILABLE INFORMATION" on page i. PURPOSE OF THIS JOINT CONSENT AND PROXY SOLICITATION STATEMENT/PROSPECTUS GENERAL. This Joint Consent and Proxy Solicitation Statement/Prospectus describes: - the proposed mergers of Net 1 and Net 2, respectively, into Net 3, a controlled subsidiary of Lexington; and - the proposed amendment of Lexington's Declaration of Trust to increase the total number of authorized common shares. MERGERS. Through this Joint Consent and Proxy Solicitation Statement/Prospectus, the general partners of each Net Partnership are soliciting the consent of the limited partners of Net 1 and Net 2 to the mergers and the amendment of their limited partnership agreement. Amendments to the limited partnership agreements will permit the contribution of the general partner's general partnership interest in the Net Partnerships to Net 3 immediately prior to consummation of the mergers in return for operating partnership interests in Net 3. Through this Joint Consent and Proxy Solicitation Statement/Prospectus, Lexington is soliciting the vote of its shareholders to approve the mergers of Net 3 with each of the Net Partnerships. Lexington will acquire the Net Partnerships if: - limited partners holding greater than 50% of the outstanding units of limited partnership of each of the Net Partnerships consent to the applicable merger and to the amendment of its respective Net Partnership's limited partnership agreement; - shares representing greater than 50% of the voting shares of Lexington approve the mergers; and - all other conditions to the Transaction are met. The affirmative vote of greater than 50% of a Net Partnership's units will bind all partners of that Net Partnership. Lexington's obligation to acquire Net 1 is conditioned upon Lexington's concurrent acquisition of Net 2, and Lexington's obligation to acquire Net 2 is conditioned upon Lexington's concurrent acquisition of Net 1. INCREASE IN AUTHORIZED SHARES. The Board of Trustees of Lexington has approved, subject to shareholder approval, an amendment to the Declaration of Trust which would increase the number of authorized shares which Lexington has authority to issue from 40,000,000 common shares to 80,000,000 common shares. As of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, Lexington had approximately 4.8 million common shares authorized but unissued, taking into account the number of common shares that (i) were issued and outstanding as of that date, (ii) were issuable by Lexington upon exercise of outstanding common share options or upon conversion of outstanding securities convertible into common shares, including Lexington's preferred shares and units of limited partnership of Lexington's operating partnership subsidiaries, (iii) have been repurchased and retired by Lexington, and (iv) may be issued or issuable in connection with the Transaction, assuming that the average closing price of Lexington common shares is $15.00, which is the midpoint of the range for determining the number of common shares to be issued, and that no limited partners elect to receive their merger consideration in the form of dissenter debentures. 1 11 The Board of Trustees unanimously recommends that the shareholders of Lexington approve the proposal to amend the Declaration of Trust. INFORMATION CONCERNING THE MERGER DESCRIPTION OF THE REIT STRUCTURE, LEXINGTON AND THE NET PARTNERSHIPS REAL ESTATE INVESTMENTS TRUSTS (REITS) Real Estate Investment Trusts, or REITs, are companies, usually traded publicly, that manage portfolios of real estate to earn profits for shareholders. REITs make investments in a diverse array of real estate such as office buildings, shopping centers, medical facilities, nursing homes, industrial warehouses and hotels. Some REITs, known as equity REITs, take equity positions in real estate; shareholders receive income, in the form of dividends, from the rents received from the properties and receive capital gains as properties are sold at a profit. Others, known as mortgage REITs, specialize in lending money to building developers and owners and pass interest income on to shareholders, while still others combine these two approaches. Lexington operates as an equity REIT. To avoid taxation at the corporate level, 75% or more of the REIT's income must be from real property and 90% of its taxable income must be distributed to shareholders annually. Since REITs must distribute most of their earnings, they tend to pay higher dividend yields than other investments. LEXINGTON AND THE NET PARTNERSHIPS The business of each of the Net Partnerships and Lexington are substantially identical. Each of the entities has a portfolio of net leased office, industrial and retail properties. A net lease is a lease under which the tenant is generally responsible for paying property operating costs. LEXINGTON GENERAL. Lexington is a self-managed and self-administered REIT listed on the New York Stock Exchange and acquires, owns and manages a geographically diverse portfolio of net leased office, industrial and retail properties. Of Lexington's 73 properties, 71 are currently leased, and 68 are subject to triple net leases, which are generally characterized as leases in which the tenant bears all, or substantially all, of the costs and cost increases for real estate taxes, insurance and ordinary maintenance. Lexington grows its portfolio primarily by acquiring properties from corporations in sale-leaseback transactions and from developers of newly constructed properties built to suit the needs of a corporate tenant. THE OPERATING PARTNERSHIP STRUCTURE. Lexington has three controlled operating partnership subsidiaries: Lepercq Corporate Income Fund L.P., Lepercq Corporate Income Fund II L.P. and Net 3. Lexington is the sole shareholder of Lex GP-1, Inc., a Delaware corporation which is the 1% general partner of each of the operating partnership subsidiaries. The operating partnership structure enables Lexington to acquire properties by issuing to a seller, as a form of consideration, interests in Lexington's operating partnerships. Management believes that this structure provides capital raising flexibility while providing a tax benefit for the seller and preserving available cash for Lexington. Lexington is also the sole shareholder of Lex LP-1, Inc., a Delaware corporation which holds, as of the date of this Joint Consent and Proxy Solicitation Statement/Prospectus, 75.1% and 67.7% limited partnership interest in Lepercq Corporate Income Fund L.P. and Lepercq Corporate Income Fund II L.P., respectively; and a 99.0% limited partnership interest in Net 3. OTHER SUBSIDIARIES. Lexington, through its affiliates, manages the Net Partnerships' properties, for which it receives a fee in the amount of 1% of gross annual rental receipts, and provides investment advisory and asset management services to institutional investors in the net-lease area. THE PROPERTIES. As of June 30, 2001, Lexington had ownership interests in 73 properties, located in 29 states and containing an aggregate of 13.1 million net rentable square feet of space. Approximately 99.7% of the net rentable square feet was leased. 2 12 The number of properties, historical revenues for the six months ended June 30, 2001, percentage of historical revenues, square footage and square footage mix is as follows: WHOLLY-OWNED PROPERTIES
HISTORICAL PERCENTAGE OF SQUARE NUMBER OF REVENUES HISTORICAL FOOTAGE PERCENTAGE OF TYPE OF PROPERTY PROPERTIES ($000) REVENUES (000'S) SQUARE FOOTAGE ---------------- ---------- ---------- ------------- ------- -------------- Office................................ 20 $21,141 55% 3,158 30% Industrial............................ 21 12,280 32% 5,712 55% Retail................................ 21 5,313 13% 1,536 15% -- ------- --- ------ --- Total............................ 62 $38,734 100% 10,406 100% == ======= === ====== ===
NON-CONSOLIDATED PROPERTIES
HISTORICAL PERCENTAGE OF SQUARE NUMBER OF REVENUES HISTORICAL FOOTAGE PERCENTAGE OF TYPE OF PROPERTY PROPERTIES ($000) REVENUES (000'S) SQUARE FOOTAGE ---------------- ---------- ---------- ------------- ------- -------------- Office................................ 8 $17,462 92% 2,028 75% Industrial............................ 3 1,465 8% 688 25% Retail................................ -- -- -- -- -- -- ------- --- ----- --- Total............................ 11 $18,927 100% 2,716 100% == ======= === ===== ===
Subsequent to June 30, 2001, Lexington's tenant in its Brownsville, Texas property (Montgomery Ward), which was in bankruptcy, notified Lexington of its election to disaffirm the lease, and accordingly is no longer paying rent. This property represented 0.2% of revenues for the six months ended June 30, 2001. In addition, Lexington entered into an agreement with the tenant in its Columbia, Maryland property (MOR Dobbin LLC) to terminate its lease (including below market renewals) and purchase option agreement, and to transfer to Lexington title to all leasehold improvements in exchange for forgiveness of the balance of unpaid rent, which approximated $272,000. This has enabled Lexington to immediately begin marketing this property to new tenants. This property represented 0.8% of revenues for the six months ended June 30, 2001. THE NET PARTNERSHIPS GENERAL. The Net Partnerships are Delaware limited partnerships formed for the purpose of investing primarily in existing commercial properties that are net-leased to corporations or other entities. The Net Partnerships invest in net-leased real properties in the United States which offer the potential for: - preservation and protection of capital; - providing cash distributions partially sheltered from current taxation; and - appreciation in value. The Net Partnerships commenced their original offerings in November 1987 (Net 1) and January 1989 (Net 2). As set forth in the original offering documents, the Net Partnerships originally intended to sell their properties within seven to ten years after the final closing of their offerings. However, in 1994, the limited partners of each of the Net Partnerships approved an amendment to the limited partnership agreement of their respective Net Partnership which permitted the Net Partnerships to invest in new properties, reinvest cash from operations and sale and refinancing proceeds, and use additional leverage to finance its operations. Since the date of the amendments, Net 1 has acquired six properties, including three properties that it acquired from Lexington or its affiliates. Since the date of the amendments, Net 2 has acquired 13 properties, including three properties that it acquired from Lexington or its affiliates, and has sold two properties to Lexington. Neither Net 1 or Net 2 has ever made any distributions to limited partners representing a return of capital. 3 13 THE GENERAL PARTNERS OF THE NET PARTNERSHIPS. The general partner of Net 1 is Lepercq Net 1 L.P., a Delaware limited partnership, whose general partner is Lepercq Net 1, Inc. The general partner of Net 2 is Lepercq Net 2 L.P., a Delaware limited partnership, whose general partner is Lepercq Net 2, Inc. The LCP Group, L.P. is the sole shareholder of Lepercq Net 1, Inc. and Lepercq Net 2, Inc. E. Robert Roskind, the Chairman of the Board of Trustees and Co-Chief Executive Officer of Lexington, controls the general partners of the Net Partnerships as the sole shareholder of Third Lero Corp., which, in turn, is the general partner of The LCP Group, L.P. THE PROPERTIES. As of June 30, 2001: - Net 1 owned nine properties, 100% of the space of which is leased, located in 7 states and containing an aggregate of 740,525 net rentable square feet of space. - Net 2 owned fifteen properties, 100% of the space of which is leased, located in 10 states and containing an aggregate of 1,759,471 net rentable square feet of space. The number of properties, historical revenues for the six months ended June 30, 2001, percentage of historical revenues, square footage and square footage mix is as follows: NET 1
HISTORICAL PERCENTAGE OF NUMBER OF REVENUES HISTORICAL SQUARE PERCENTAGE OF TYPE OF PROPERTY PROPERTIES ($000) REVENUES FOOTAGE SQUARE FOOTAGE ---------------- ---------- ---------- ------------- ------- -------------- Office............................... 2 $ 961 34% 202,813 27% Industrial........................... 1 400 14% 196,946 27% Retail............................... 6 1,502 52% 340,766 46% -- ------ --- ------- --- Total........................... 9 $2,863 100% 740,525 100% == ====== === ======= ===
NET 2
HISTORICAL PERCENTAGE OF NUMBER OF REVENUES HISTORICAL SQUARE PERCENTAGE OF TYPE OF PROPERTY PROPERTIES ($000) REVENUES FOOTAGE SQUARE FOOTAGE ---------------- ---------- ---------- ------------- --------- -------------- Office............................. 5 $2,084 38% 374,093 21% Industrial......................... 5 1,975 36% 1,058,106 60% Retail............................. 5 1,467 26% 327,272 19% -- ------ --- --------- --- Total......................... 15 $5,526 100% 1,759,471 100% == ====== === ========= ===
4 14 ORGANIZATIONAL CHART The following diagrams show the organizational structure of Lexington and the Net Partnerships both before and after the Transaction. [LEXINGTON BEFORE THE MERGER ORGANIZATIONAL CHART] 5 15 [NET PARTNERSHIPS ORGANIZATIONAL CHART] 6 16 [AFTER THE MERGER ORGANIZATIONAL CHART] 7 17 RISK FACTORS AND ADVERSE EFFECTS OF THE TRANSACTION There are risks involved in the Transaction. These risks include: - Although limited partners will receive 50% of their merger consideration in Lexington common shares, the fair market value of those common shares may not equal 50% of the agreed upon adjusted net asset value of the Net Partnerships' units, and investors selling the common shares may realize less than 50% of the agreed upon adjusted net asset value upon resale. - The maximum and minimum number of Lexington common shares that may be issued is fixed. Limited partners will not be entitled to receive any more common shares if the average closing price is less than $14.00 per share than they would if the average closing price were $14.00 per share, and Lexington will not be entitled to issue any fewer common shares if the average closing price is greater than $16.00 per share than they would if the average closing price were $16.00 per share. - Estimated liquidation costs of $6.0 million, which would be incurred upon a liquidation, have been deducted from the agreed upon fair market value of the Net Partnerships' properties in calculating the total merger consideration being offered to limited partners. - The senior subordinated debentures, which we refer to as the dissenter debentures, are likely to sell for less than their face amount, and therefore, if a limited partner elects to receive dissenter debentures, the fair market value of that limited partner's merger consideration might not equal the agreed upon adjusted net asset value of the Net Partnerships at such time. The dissenter debentures will not have a public market and will be subordinated to aggregate liabilities of Lexington of approximately $447.4 million on a pro forma basis as of June 30, 2001. - The ownership and voting interests of limited partners and shareholders will be diluted, meaning that they will have a smaller percentage ownership and voting interest in Lexington than they currently have in their respective Net Partnership or Lexington, as applicable. You will not know the number of Lexington common shares to be exchanged in the Transaction, and thus the magnitude of this dilutive effect, at the time you make your voting decision. - No independent representative was retained to negotiate on behalf of the limited partners. The general partners are controlled by E. Robert Roskind who is also the Co-Chief Executive Officer and the Chairman of the Board of Trustees of Lexington. Mr. Roskind's affiliation with both the general partners and Lexington creates a conflict of interest in recommending the Transaction. The terms of the Transaction, including the merger consideration being offered, were not determined through arm's length negotiations between two independent parties which may have resulted in more favorable terms being obtained for the limited partners of Net 1 and Net 2 or for Lexington. - The fairness opinions of Prudential Securities and Cohen & Steers, and the appraisals of Stanger & Co., were prepared in reliance on information which was provided by Lexington's management and the general partners, without independent verification. - An original limited partner will incur taxable gain of approximately $40.76 and $4.87 per unit of Net 1 and Net 2, respectively. - The anticipated benefits of the Transaction to the limited partners, which include greater liquidity, risk diversification and cost savings, might not be realized. This could have a negative impact on the market price of Lexington common shares. IN ADDITION TO THE ABOVE FACTORS, LIMITED PARTNERS WHO ELECT TO RECEIVE DISSENTER DEBENTURES IN LIEU OF COMMON SHARES AND CASH SHOULD CONSIDER THE FOLLOWING FACTORS: - No Recommendation. The general partners are not making any recommendation as to whether limited partners should elect to receive dissenter debentures. No investment bank or other financial advisor has rendered an opinion as to the fairness of the dissenter debentures. 8 18 - No Shareholder Rights. Limited partners receiving dissenter debentures will own debt instruments of Lexington and will not have the right to elect trustees or to vote with the holders of common shares on any matters. CONFLICTS OF INTEREST There are conflicts of interest that arise in the Transaction. These conflicts include: - Mr. Roskind, the Chairman of the Board of Trustees and Co-Chief Executive Officer of Lexington, controls the general partners of the Net Partnerships. As a result, the terms of the mergers were not determined through arm's length negotiations between two independent parties. - Following the Transaction, Mr. Roskind will continue as Chairman of the Board of Trustees and Co-Chief Executive of Lexington. As such, Mr. Roskind will continue to be entitled to receive common share options under Lexington's share option plan. These share options may appreciate in value if the benefits of the Transaction are realized. - If the Transaction is consummated, the general partners of the Net Partnerships will receive operating partnership units in Net 3 in return for contributing their general partnership interest in the Net Partnerships in a tax-deferred transaction. The receipt of these operating partnership units is tax-deferred to the general partners, whereas the consideration offered to the limited partners is a taxable event. - No independent representative has been retained to act on behalf of the limited partners for purposes of negotiating or structuring the terms of the Transaction. It is possible that, if the general partners had not been affiliated with Lexington, the terms of the Transaction, including the number of common shares issued to the limited partners in the Transaction, would have been more advantageous to the limited partners. - Lexington held, as of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, approximately 540 limited partnership units of Net 1, (representing approximately 1.8% of the outstanding units) and 15,782 limited partnership units of Net 2 (representing approximately 3.3% of the outstanding units). Lexington intends to consent to the Transaction with respect to these units. THE TRANSACTION If the Transaction is consummated, Net 1 and Net 2 will merge into Net 3, a controlled subsidiary of Lexington. MERGER CONSIDERATION PAYABLE TO LIMITED PARTNERS Overview. If the Transaction is completed, each unit of Net 1 and Net 2 will be exchanged for merger consideration equal to the agreed upon adjusted net asset value per unit. As calculated below, the agreed upon adjusted net asset value per unit is $820.38 for Net 1 and $81.96 for Net 2. In the aggregate, assuming that the average closing price of Lexington common shares during the 20 day period prior to, but not including, the closing date of the mergers is between $14.00 and $16.00 per share: - limited partners of Net 1 will receive merger consideration of $25,245,000 in exchange for their 99.0% interests in Net 1; - limited partners of Net 2 will receive merger consideration of $39,105,000 in exchange for their 99.0% interests in Net 2; and - limited partners who do not elect to receive their merger consideration in the form of dissenter debentures will receive for each unit they own: - an amount of Lexington common shares having an aggregate value equal to 50% of the agreed upon adjusted net value per unit of their respective Net Partnership; and 9 19 - cash in an amount equal to 50% of the agreed upon adjusted net asset value per unit of their respective Net Partnership. Notwithstanding the foregoing, limited partners may elect to receive dissenter debentures in lieu of the merger consideration described above, if they deny consent to the Transaction. Common Shares. The common shares are listed on the New York Stock Exchange. The number of common shares will be based upon the average closing price of the common shares during the 20 day period prior to, but not including, the closing date of the mergers. However, if the average closing price is outside of the "collar" of $14.00 and $16.00, the number of common shares will not fluctuate. This means that if the average closing price is less than $14.00 per share or greater than $16.00 per share, limited partners will receive the same number of shares as they would receive if the average closing price were $14.00 or $16.00, respectively. In this regard, limited partners in Net 1 and Net 2 will be entitled to receive: - no less than 25.6 shares or 2.6 shares, respectively, which is the amount to which they will be entitled if the average closing price is $16.00 per share; or - no more than 29.3 shares or 2.9 shares, respectively, which is the amount to which they will be entitled if the average closing price is $14.00 per share. Assuming that the average closing price is between the "collar" of $14.00 per share and $16.00 per share: - holders of units of Net 1 would receive, for each unit they own, common shares based upon an aggregate adjusted net asset value of $410.19, and collectively, common shares having an aggregate value of $12,622,500; and - holders of units of Net 2 would receive, for each unit they own, common shares based upon an aggregate adjusted net asset value of $40.98, and collectively, common shares having an aggregate value of $19,552,500. The following table sets forth, for purposes of illustration, the number of shares that limited partners would receive, assuming that no limited partners elect to receive their merger consideration in the form of dissenter debentures, at various hypothetical average closing prices for Lexington common shares: EFFECT OF FLUCTUATIONS IN THE 20 DAY AVERAGE CLOSING PRICE OF LEXINGTON COMMON SHARES(1)
Assumed Average Closing Price(2).................... $13.00 $14.00 $14.28(3) $15.00 $16.00 $17.00 NET 1 Number of Common Shares to be Exchanged Per Unit of Net 1........................... 29.3(4) 29.3 28.7 27.3 25.6 25.6(5) Aggregate Number of Common Shares to be Exchanged for Net 1 Units(6).............. 901,607 901,607 883,929 841,500 788,906 788,906 Aggregate Value of Common Shares to be Exchanged for Net 1 Units(7).............. $11,720,891 $12,622,500 $12,622,500 $12,622,500 $12,622,500 $13,411,402 Total Merger Consideration Being Offered for Net 1 Units(8).................... $24,343,391 $25,245,000 $25,245,000 $25,245,000 $25,245,000 $26,033,902
10 20
NET 2 Number of Common Shares to be Exchanged Per Unit of Net 2........................... 2.9(4) 2.9 2.9 2.7 2.6 2.6(5) Aggregate Number of Common Shares to be Exchanged for Net 2 Units(6).............. 1,396,607 1,396,607 1,369,223 1,303,500 1,222,031 1,222,031 Aggregate Value of Common Shares to be Exchanged for Net 2 Units(7).............. $18,155,891 $19,552,500 $19,552,500 $19,552,500 $19,552,500 $20,774,527 Total Merger Consideration Being Offered for Net 2 Units(8).................... $37,708,391 $39,105,000 $39,105,000 $39,105,000 $39,105,000 $40,327,027
--------------- (1) Assumes that no limited partners elect to receive their merger consideration in the form of dissenter debentures. (2) The prices and amounts included in this table are presented solely for the purpose of illustrating the effect of fluctuations in the average closing price of Lexington common shares during the 20 day period prior to, but not including, the closing date of the mergers, and their use for that purpose is not intended to express or imply any expectation or opinion of Lexington or its management or Trustees, or of the Net Partnerships or their general partners as to what the average closing price will actually be if the Transaction is completed. (3) Closing price of Lexington common shares as of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus. (4) If the average closing price of Lexington common shares is less than $14.00 per share, each unit will be exchanged for the maximum number of common shares being offered per unit (29.3 shares for each unit of Net 1, 2.9 shares for each unit of Net 2). (5) If the average closing price of Lexington common shares is greater than $16.00 per share, each unit will be exchanged for the minimum number of common shares being offered per unit (25.6 shares for each unit of Net 1, 2.6 shares for each unit of Net 2). (6) Calculated by multiplying the number of common shares to be exchanged per unit by the number of units of Net 1 (30,772) or Net 2 (477,167), as applicable. (7) Calculated by multiplying the aggregate number of common shares to be exchanged by the average closing price. (8) Calculated by adding the aggregate value of common shares to be exchanged to the aggregate amount of cash to be paid ($12,622,500 for Net 1 and $19,552,500 for Net 2). Cash. Limited partners who do not elect to receive their merger consideration in the form of dissenter debentures will receive, in addition to the common shares described above, $410.19 in cash for each unit of Net 1 and $40.98 in cash for each unit of Net 2. Dissenter Debentures. If a limited partner denies consent to the Transaction, but its Net Partnership is nevertheless merged with Net 3, that limited partner may elect to receive, at its option, either: - the same merger consideration that limited partners who consent to the Transaction will receive; or - dissenter debentures. The maximum aggregate amount of the dissenter debentures will be $20.0 million, subject to waiver by Lexington. The exact amount of dissenter debentures will be determined at the closing of the Transaction based upon the number of units held by dissenting limited partners who elect to receive dissenter debentures. The dissenter debentures will rank expressly subordinated in right and priority of payment to all institutional indebtedness of Lexington outstanding on the closing date and any other indebtedness of Lexington issued in the future which is not, by its terms, expressly subordinated to the dissenter debentures. 11 21 This means that, in the event of the bankruptcy or liquidation of Lexington, its assets will be available to pay obligations on the dissenter debentures only after all of Lexington's obligations that rank senior to the dissenter debentures have been paid in full. Significant characteristics of the dissenter debentures include the following: - they are not redeemable by Lexington or convertible by the holders; - Lexington must use a minimum of 80.0% of the net proceeds from any taxable sale or refinancing of the Net Partnerships' properties to prepay the dissenter debentures; and - unless the restriction is waived, Lexington is only obligated to issue up to $20.0 million of dissenter debentures. Dissenters will not have a right to receive cash based on an appraisal of their units. As of June 30, 2001, on a pro forma basis, Lexington would have had aggregate liabilities to which the dissenter debentures were effectively subordinated, of approximately $447.4 million. MERGER CONSIDERATION PAYABLE TO GENERAL PARTNERS. The general partner of each Net Partnership owns a 1.0% capital interest in its Net Partnership. If the Transaction is approved, the general partner of each Net Partnerships will receive, in return for contributing their general partnership interests, operating partnership units in Net 3 with an aggregate value equal to 1.0% of the agreed upon adjusted net asset value of their respective Net Partnership which will entitle the general partners to receive the same distributions as holders of the common shares. The general partners will receive their operating partnership units in a tax-deferred transaction, whereas the merger consideration to be received by the limited partners is taxable. The operating partnership units may not be redeemed for Lexington common shares for a period of five years from the date of the mergers. Neither the general partners nor their respective affiliates will receive any special compensation in connection with the Transaction. METHODOLOGY USED TO DETERMINE MERGER CONSIDERATION. In order to determine the merger consideration, Lexington and the Net Partnerships considered utilizing a number of different methodologies, each of which involved a comparison of Lexington, on the one hand, and the Net Partnerships, on the other, with respect to the following: - net asset value; - historical market value and trading activity of their equity securities; - distribution levels; and - liquidation and going concern values. After reviewing these different methodologies, Lexington and the Net Partnerships agreed to calculate the merger consideration based on the agreed upon adjusted net asset value of the Net Partnerships for the following reasons: - the general partners believed that net asset value was a fair method of valuing the Net Partnerships because it is based primarily on objective balance sheet data; - while the fair market value of the Net Partnerships' properties, which was one of the factors used to determine adjusted net asset value, was derived without taking into account third party appraisals, it was, nonetheless, supported by those appraisals; - net asset value has been reported to the limited partners on an annual basis since the inception of each Net Partnership, and although other methods could have been used to establish the merger consideration, the general partners believed it was important to present the Transaction to the limited partners utilizing a valuation measure with which they were familiar; and - Lexington's management believed it was important that the Transaction be accretive to Lexington's funds from operations per share, and utilizing agreed upon adjusted net asset value as the basis for calculating the merger consideration has that effect. 12 22 CALCULATION OF AGREED UPON ADJUSTED NET ASSET VALUE. The agreed upon adjusted net asset value of each Net Partnership was determined as of June 30, 2000 by: - subtracting - an estimate of the Net Partnership's mortgage notes payable at June 30, 2001 (which was the originally anticipated closing date of the Transaction) based primarily upon the scheduled amortization of all mortgages outstanding at June 30, 2000, estimated mortgage assumption fees and repayment fees and all other liabilities outstanding at June 30, 2000; and - estimated costs associated with liquidating such Net Partnership's properties; - from - the agreed upon fair market value of the Net Partnership's properties as of June 30, 2000. Lexington derived a fair market value for each of the Net Partnerships' properties by capitalizing projected rental revenue at a 10.2% blended rate, consistent with the implied going-in capitalization rates in Stanger & Co.'s 1999 appraisals. Projected rental revenue is estimated rental revenue for the year 2001 under the leases currently in place, assuming 100% occupancy without any allowance for vacancy or reserves. Where, as in the case of the Net Partnerships, rental revenue is generated under net leases, rental revenue is synonymous with net operating income. Lexington's management determined that this capitalization rate was appropriate and adequate based on its review of the following factors: - tenant creditworthiness; - comparable market rents; - length and quality of leases; - strategic importance of each property to the tenant; and - local economic conditions. The capitalization rate utilized by Lexington is consistent with the implied going-in capitalization rates in Stanger & Co.'s 1999 appraisals. The implied going-in capitalization rate for a portfolio is determined by dividing the portfolio's estimated net operating income for the coming year, the so-called "going-in net operating income", by the estimated value of the portfolio. This capitalization rate can be interpreted as the current yield generated by a portfolio based on the valuation ascribed to the portfolio. Based on the foregoing formula, the calculation of the agreed upon adjusted net asset value for each of the Net Partnerships is summarized below (in $000):
NET 1 NET 2 ------- -------- Agreed upon fair market value of the Net Partnership's properties as of June 30, 2000............................ $46,750 $101,562 Less: Projected Liabilities(1).................................. 19,435 57,846 Estimated liquidation costs............................... 1,815 4,216 ------- -------- Agreed upon adjusted net asset value........................ $25,500 $ 39,500 ======= ========
--------------- (1) Projected liabilities were calculated based upon an estimate of mortgage notes payable at June 30, 2001 (which was the originally anticipated closing date of the Transaction) based primarily upon the scheduled amortization of all mortgages outstanding at June 30, 2000, estimated mortgage assumption 13 23 fees and repayment fees, and all other liabilities outstanding at June 30, 2000. The following table details the assumptions used in calculating projected liabilities (000's):
NET 1 NET 2 ------- ------- Estimated mortgages payable............................... $18,477 $56,406 Estimated mortgage assumption and repayment fees.......... 355 887 Accrued interest payable.................................. 165 213 Other liabilities......................................... 438 340 ------- ------- $19,435 $57,846 ======= =======
The adjusted net asset values derived by Lexington were agreed to by the general partners, based, in part, on the fact that the fair market property values were supported by the conclusions reached by Stanger & Co. in its 1999 appraisals, even though the general partners did not use the appraisals in their determination of such fair market property values. However, the parties recognized that the 1999 appraisals did not include all of the properties then owned by the Net Partnerships. Therefore, each merger agreement required the respective Net Partnership to obtain an updated appraisal as of December 31, 2000, and provided that, if the conclusions reached in the 2000 appraisals varied from the agreed upon fair market property values by more than 5%, either Lexington or the respective Net Partnership would have the right to terminate the merger agreement. The 2000 appraisals of Stanger & Co. were within 1.5% and 0.8% of the agreed upon fair market property values for Net 1 and Net 2, respectively. AMOUNT OF CONSIDERATION PAID TO NET PARTNERSHIPS AND CUMULATIVE DISTRIBUTIONS Assuming that no limited partners elect to receive their merger consideration in the form of dissenter debentures, the following table sets forth for each Net Partnership: - the aggregate amount of original limited partner investments in each Net Partnership; - the original amount of limited partner investments in each Net Partnership; - the portion of the merger consideration payable in common shares to limited partners of the Net Partnerships, per $1,000 original investment; - the portion of the merger consideration payable in cash to limited partners of the Net Partnerships, per $1,000 original investment; - the total merger consideration, per $1,000 original investment; - the cumulative distributions to limited partners per $1,000 original investment; and - the total distributions and merger consideration per $1,000 original investment.
MERGER CONSIDERATION PER $1,000 CUMULATIVE ORIGINAL ORIGINAL INVESTMENT PAYABLE TO LIMITED DISTRIBUTIONS TO LIMITED PARTNER PARTNERS OF THE NET PARTNERSHIPS: LIMITED ORIGINAL INVESTMENTS PER ----------------------------------------- PARTNERS PER NET LIMITED PARTNER $1,000 ORIGINAL COMMON TOTAL MERGER $1,000 ORIGINAL PARTNERSHIP INVESTMENTS(1) INVESTMENT(1) SHARES(2) CASH CONSIDERATION(2)(3) INVESTMENTS(4) ----------- --------------- --------------- --------- ------- ------------------- ---------------- Net 1................ $30,772,000 $1,000 $410.19 $410.19 $820.38 $816.06 Net 2................ $47,716,700 $1,000 $409.76 $409.76 $819.52 $632.54 TOTAL DISTRIBUTIONS AND MERGER CONSIDERATION PER $1,000 NET ORIGINAL PARTNERSHIP INVESTMENT ----------- ------------- Net 1................ $1,636.44 Net 2................ $1,452.06
--------------- (1) Each original Net 1 unit was $1,000. Each original Net 2 unit was $100. No distributions of net sales proceeds have been made. (2) The number of Lexington common shares which will be received by limited partners will be based upon the average closing price of common shares during the 20 day period prior to, but not including, the closing date of the Transaction. If the average closing price is between the "collar" of $14.00 and $16.00, as is assumed for purposes of this table, the aggregate value of the common shares to be exchanged per 14 24 limited partnership unit, and thus the total merger consideration, will not be impacted by a fluctuation in the average closing price. However, if the average closing price falls below $14.00 per share or rises above $16.00 per share, the aggregate value of the common shares to be exchanged, and thus the total merger consideration, will fluctuate accordingly. See the table on pages 10 and 11 entitled "Effect of Fluctuations in 20 Day Average Closing Price of Lexington Common Shares" for an explanation of how these values would fluctuate if the average closing price is not between $14.00 and $16.00 per share. (3) The total merger consideration per $1,000 original limited partner investment is calculated by dividing the total merger consideration attributable to limited partners ($25,245,000 for Net 1 and $39,105,000 for Net 2) by the total number of limited partnership units outstanding (30,772 for Net 1 and 477,167 for Net 2). See "THE MERGERS -- The Merger Consideration" on page 60 for an explanation of how the merger consideration was calculated. (4) Assumes that the limited partner was admitted as of the date of the first closing of the offering of units of limited partnership. OTHER CONSIDERATIONS. The general partners believe that the Transaction has been structured so as to be procedurally fair to the limited partners. Although no independent representative was retained to negotiate on behalf of the limited partners, and the limited partners were not given the opportunity to participate in the structuring or negotiation of the terms of the Transaction, the general partners believe that the limited partners' interests are protected because: - the general partners thoroughly analyzed the Transaction and its alternatives; - the general partners had available to them the 1999 appraisal report of Robert A. Stanger & Co., Inc. with respect to 22 of the 25 properties of the Net Partnerships and the 2000 portfolio appraisals of Stanger & Co. were within 1.5% and 0.8% of the agreed upon fair market property values for Net 1 and Net 2, respectively; - the general partners retained Cohen & Steers to render a fairness opinion to each of the Net Partnerships; - the Transaction requires approval of a majority in interest of the limited partners in both Net Partnerships; and - limited partners who deny consent to the Transaction have the option of electing to receive their merger consideration in the form of dissenter debentures in lieu of common shares and cash. BACKGROUND OF THE TRANSACTION AND ALTERNATIVES TO THE TRANSACTION THAT THE GENERAL PARTNERS CONSIDERED Prior to negotiating the terms of this Transaction, the general partners evaluated three possible strategic alternatives for better achieving the Net Partnership's original investment objectives: - continuation of the Net Partnerships; - liquidation of the Net Partnerships; and - a combination of the Net Partnerships with a publicly traded REIT specializing in net-lease investments. Between 1996 and November 1998, the general partners, represented by E. Robert Roskind, engaged in informal discussions with Lexington, represented by T. Wilson Eglin, regarding a potential transaction. These discussions were terminated when the parties concluded that they were unable to agree on a structure for the transaction that made economic sense for both parties. In September 1999, Lexington re-initiated negotiations with the general partners and suggested transaction structures that could address the general partners' criteria for fair consideration, greater dividends and safety of principal in an entity that would continue to have a net-lease-oriented investment strategy. A non-binding term sheet was entered into on July 11, 2000. 15 25 Following execution of the term sheet, both the general partners and Lexington conducted additional due diligence and began drafting merger agreements and this Joint Consent and Proxy Solicitation Statement/ Prospectus. In October and November 2000, Lexington and the general partners agreed in principal on the terms of the Transaction. Following receipt by Lexington and the Net Partnerships of fairness opinions from Prudential Securities Incorporated and Cohen & Steers Capital Advisors LLC, respectively, Lexington and the Net Partnerships entered into the merger agreements, and Net 3 and the general partners entered into the contribution agreements with respect to the contribution of the general partnership interests of the Net Partnerships to Net 3. In June and July 2001: - Lexington and the general partners agreed to re-negotiate the terms of the Transaction based on: - favorable conditions in the capital markets; - an increase in Lexington's common share price; and - the desire to provide greater liquidity to the limited partners; - Lexington and the general partners agreed to the amended terms of the Transaction, which are reflected in this Joint Proxy and Consent Solicitation Statement/Prospectus; - the general partners, based in part on the fairness opinions they received from Cohen & Steers and the appraisals received from Stanger & Co., determined that they had negotiated a transaction that would be fair, from a financial point of view, to the limited partners, and approved the Transaction; - the Board of Trustees of Lexington, based in part on the fairness opinion it received from Prudential Securities Incorporated, approved the Transaction; and - Lexington and the Net Partnerships entered into the amendments to the merger agreements and Net 3 and the general partners entered into the amendments to the contribution agreements. The general partners, based upon their own analysis, came to the conclusion that the value of the consideration the limited partners will receive in the Transaction will exceed the going concern value and the liquidation value of the Net Partnerships. The following table compares the merger consideration to the results of the general partners' comparative analysis of the alternatives based on a per $1,000 original investment:
PER $1,000 ORIGINAL INVESTMENT ----------------------------------------------------------- TOTAL MERGER ESTIMATED GOING- ESTIMATED NET PARTNERSHIP CONSIDERATION(1) CONCERN VALUE(2) LIQUIDATION VALUE(3) --------------- ---------------- ----------------- -------------------- Net 1............................. $820.38 $637.96 - $706.24 $751.17 Net 2............................. $819.52 $723.35 - $801.18 $762.77
--------------- (1) Based upon the agreed upon adjusted net asset value, which is the estimated value of each Net Partnership's properties at June 30, 2000 less estimated liquidation costs, an estimate of mortgage notes payable at June 30, 2001 (which was the originally anticipated closing date of the Transaction) based primarily upon the scheduled amortization of all mortgages outstanding at June 30, 2000, estimated mortgage assumption fees and repayment fees, and all other liabilities outstanding at June 30, 2000. (2) Based upon a discounted cash flow approach utilizing a range of discount rates from 13.5% to 15%. (3) Based upon estimated value of each Net Partnership's properties less estimated liquidation costs, mortgage assumption fees and repayment fees, if any, and stated liabilities at June 30, 2000. 16 26 ROBERT A. STANGER & CO. APPRAISAL Since 1990 for Net 1 and 1991 for Net 2, the partnership agreements of each of the Net Partnerships have required the general partners to obtain an annual independent appraisal of the Net Partnership's properties and to prepare an appraisal of the net asset value of each unit. The purpose of the appraisals is to assist limited partners subject to ERISA with the fulfillment of their reporting requirements under ERISA. In compliance with this requirement, the general partners engaged an independent appraiser, Robert A. Stanger & Co., Inc., to appraise the portfolios of real properties owned by Net 1 and Net 2 as of December 31, 1999. The 1999 appraisals: - were not obtained in connection with the Transaction; - were conducted on a limited scope basis; - involved site visits and concurrent local market research for only a sample of the properties; and - did not include the three properties acquired by the Net Partnerships in 2000. Stanger & Co. was again engaged by the Net Partnerships to appraise the portfolios of real properties owned by Net 1 and Net 2 as of December 31, 2000. Due to the type of real estate assets held by the Net Partnerships and the nature of the lease terms, Stanger & Co. was engaged to value the portfolios of properties based solely on the income approach, utilizing a discounted cash flow analysis as encumbered by current lease contracts. The same method was used for each Net Partnership. In performing the appraisals, Stanger & Co. conducted such investigations and inquiries as it deemed appropriate in establishing its estimates of value. Stanger & Co. also made such assumptions and identified such qualifications and limitations as it deemed necessary. The appraisals included individual inspections of a sample of the properties for the 1999 portfolio appraisal and all of the properties for the 2000 portfolio appraisal. The portfolio appraisals represents Stanger & Co.'s opinion of the estimated value of the portfolios of properties owned by the Net Partnerships as of the date specified. They do not necessarily reflect the true worth or value of the portfolios that would be realized in actual sales. These values could be higher or lower than the appraised values of the portfolios. Based on its appraisal, Stanger & Co. estimated the value of the portfolio of properties owned by each Net Partnership as of December 31, 1999 as follows:
REAL ESTATE PORTFOLIO PARTNERSHIP VALUE CONCLUSION ----------- --------------------- Net 1....................................................... $39,000,000(1) Net 2....................................................... $81,460,000(2)
--------------- (1) Does not include one property, which was acquired in 2000 and therefore not appraised, at a purchase price, including transaction costs, of $7,750,000. (2) Does not include two properties, which were acquired in 2000 and therefore not appraised, at a purchase price, including transaction costs, of $20,102,000. Based on its appraisal, Stanger & Co. estimated the value of the portfolio of properties owned by each Net Partnership as of December 31, 2000 as follows:
REAL ESTATE PORTFOLIO PARTNERSHIP VALUE CONCLUSION ----------- --------------------- Net 1....................................................... $ 47,470,000 Net 2....................................................... $102,375,000(1)
--------------- (1) Includes one property, which was sold in 2001 at a sale price, before transaction costs, of $4,175,000. Stanger & Co. did not render a fairness opinion in the Transaction, nor was the merger consideration in the Transaction determined as a result of Stanger & Co.'s appraisals alone. Rather, Stanger & Co.'s appraisals 17 27 related to one of the components of value of the Net Partnerships and were one among a number of factors reviewed by the parties. The merger consideration was based upon the valuation of the Net Partnerships and not just their portfolios, which valuation included other assets and the liabilities of each of the Net Partnerships. Further, the merger consideration was arrived at through the general partners' and Lexington's financial analysis of the properties and the Net Partnerships and through negotiation. The resulting negotiated price was confirmed as fair to each party to the Transaction by their respective financial advisors. FAIRNESS OPINIONS The general partners and Lexington received fairness opinions with respect to the fairness of the merger consideration from a financial point of view pursuant to both the merger agreements and the subsequent amendments. Set forth below are summaries of each of the fairness opinions delivered in connection with the Transaction as reflected in the amended merger agreements. COHEN & STEERS CAPITAL ADVISORS LLC Cohen & Steers Capital Advisors LLC was engaged by the Net Partnerships to render opinions to the general partners as to the fairness of the merger consideration, from a financial point of view, to the limited partners. Because Cohen & Steers was engaged by, and its fairness opinions were delivered to, the general partners of the Net Partnerships, the purpose of Cohen & Sterns' analysis was to determine whether the consideration being paid by Lexington for the Net Partnerships was fair, from a financial point of view from the perspective of the limited partners, rather than from the perspective of Lexington or its shareholders. Copies of the written Cohen & Steers fairness opinions, which set forth the procedures followed, assumptions made, matters considered and limitations on the scope of review undertaken by Cohen & Steers and the level of reliance which may be placed on the Cohen & Steers fairness opinions, are attached as Annex C to this Joint Consent and Proxy Solicitation Statement/Prospectus and should be read in their entirety. In connection with its review and analysis of the fairness of their merger consideration, and in arriving at its fairness opinion, Cohen & Steers conducted the following analyses, and reached the following conclusions: - Summary of Analyses -- Cohen & Steers calculated the estimated market value of the merger consideration by combining the market value of Lexington common shares to be received with the cash consideration to be received. Based upon the analyses summarized below -- and described in detail in Cohen & Steers' full description of its fairness opinion analyses -- Cohen & Steers determined that: - The total estimated market value of the merger consideration would be $820.38 per Net 1 limited partnership unit; and - The total estimated market value of the merger consideration would be $81.95 per Net 2 limited partnership unit. - Analysis of Selected Comparable Publicly Traded Companies -- Cohen & Steers compared selected financial information about the Net Partnerships with that of several other companies engaged in the same or similar lines of business, and concluded that: - the estimated market value of the merger consideration to be paid to Net 1 was within the range of limited partnership unit values implied by this analysis; and - the estimated market value of the merger consideration to be paid to Net 2 was within the range of limited partnership unit values implied by this analysis. - Discounted Cash Flow Analysis -- Cohen & Steers calculated the present value, as of June 30, 2001, of the projected unleveraged cash flows for each Net Partnership for the period from July 1, 2001 to December 31, 2005, and concluded that; - the estimated market value of the merger consideration to be paid to Net 1 was within the range of limited partnership unit values implied by this analysis and was greater than the mean of that range; and 18 28 - the estimated market value of the merger consideration to be paid to Net 2 was within the range of limited partnership unit values implied by this analysis, and was greater than the mean of that range. - Net Asset Value Analysis -- Cohen & Steers calculated the net asset value of each Net Partnership based on projections provided by each of the general partners, and concluded that: - the estimated market value of the merger consideration to be paid to Net 1 was greater than the high of the range of limited partnership unit values implied by this analysis; and - the estimated market value of the merger consideration to be paid to Net 2 was within the range of limited partnership unit values implied by this analysis. - Share Trading History -- Cohen & Steers reviewed the average trading prices for Lexington common shares for the 20, 30, 60, 90, 120 and 180-day trading periods ending July 13, 2001 and observed that the latest trading price was greater than the 20, 30, 60, 90, 120 and 180-day average for each other period. Cohen & Steers also observed that the 20 and 30-day averages were greater than $14.00 per share, the low end of the fixed price range of the merger consideration. PRUDENTIAL SECURITIES INCORPORATED Prudential Securities Incorporated was engaged by Lexington to render an opinion to the Board of Trustees of Lexington as to the fairness of the merger consideration, from a financial point of view, to the shareholders of Lexington. On July 30, 2001, Prudential Securities delivered its written opinion, to the Board of Trustees of Lexington to the effect that, as of such date, and based on and subject to the assumptions, limitations and qualifications set forth in its written opinion, the merger consideration was fair to the shareholders of Lexington from a financial point of view. Because Prudential Securities was engaged by, and its fairness opinion was delivered to, the Board of Trustees of Lexington, the purpose of Prudential Securities' analysis was to determine whether the consideration being paid by Lexington for the Net Partnerships was fair from a financial point of view from the perspective of Lexington's shareholders, rather than from the perspective of the Net Partnerships. The full text of the Prudential Securities fairness opinion, which contains a description of the assumptions made, matters considered and limitations on the review and analysis, is attached as Annex B to this Joint Consent and Proxy Solicitation Statement/Prospectus and should be read in its entirety. In connection with its review of the fairness of their merger consideration, and in arriving at its fairness opinion, Prudential Securities conducted several different financial analyses, as more fully described under "FAIRNESS OPINIONS -- Prudential Securities Fairness Opinion" beginning on page 81. The results of these analyses were as follows: - Comparable Company Analysis -- Prudential Securities compared selected financial information about the Net Partnerships with that of several other companies engaged in the acquisition, operation and management of triple net lease properties which Prudential Securities considered to be reasonably comparable to the Net Partnerships for purposes of its analysis. Based on this analysis, Prudential Securities observed that the merger consideration was less than the range of consideration implied by this analysis. However, none of these comparable companies is identical to the Net Partnerships. - Precedent Transactions Analysis -- Prudential Securities compared the consideration to be paid in the mergers with the consideration paid in several recent real estate portfolio transactions considered by Prudential Securities to be reasonably similar to the mergers, and noted that the merger consideration was within the range of consideration implied by this analysis, and was less than the mean of that range. However, none of the precedent transactions was identical to the mergers. - Asset Value Analysis -- Prudential Securities analyzed the gross real estate asset value of the Net Partnerships, adjusted for non-real estate assets and liabilities, in relation to the merger consideration and noted that the adjusted asset value resulting from this analysis was greater than the merger consideration. 19 29 - Liquidation Value Analysis -- Prudential Securities analyzed the liquidation present value of the Net Partnerships in relation to the merger consideration, and observed that the merger consideration was greater than the range of discounted liquidation values resulting from this liquidation value analysis. In connection with its fairness opinion, Prudential Securities made numerous assumptions, many of which relate to matters beyond the control of management of Lexington and the general partners of the Net Partnerships. Accordingly, the results of these analyses are inherently subject to substantial uncertainty. For additional information about these assumptions and the important limitations on the Prudential Securities fairness opinion and the analyses performed by Prudential Securities, see "FAIRNESS OPINIONS -- Prudential Securities Fairness Opinion" beginning on page 81. COMPARISON OF VALUATION ANALYSES GENERAL In order for you to better understand how the amount of merger consideration being offered in the Transaction compares to other analyses of the value of the Net Partnerships, you should review the tables set forth below, each of which was prepared on the basis of $1,000 of original investment in the Net Partnerships. For your convenience, the amount of merger consideration is repeated in each table and is indicated by a box. Prudential Securities, Cohen & Steers and the general partners have, in some cases, used different assumptions for purposes of their respective analyses and therefore may have reached different conclusions with respect to aspects of their analyses even though each of them ultimately concluded that the merger consideration is fair from a financial point of view. HISTORICAL DATA AND AGREED UPON MERGER CONSIDERATION The following table sets forth the book value of a $1,000 original investment in the Net Partnerships as of June 30, 2000, the portion of the agreed upon adjusted net asset value of the Net Partnerships attributable to such an investment and the portion of the total merger consideration attributable to such an investment, based upon the low, high and mean average trading price of Lexington common shares during the 20 day period prior to, but not including, September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus.
PER $1,000 ORIGINAL INVESTMENT OF LIMITED PARTNERSHIP INTEREST NET VALUATION --------------------------------- PARTNERSHIP METHODOLOGY LOW HIGH MEAN* ----------- ----------- --------- --------- --------- Lexington Common Share Price(1)...................... $ 13.60 $ 14.85 $ 14.24 Net 1 Book Value as of June 30, 2000....................... -- -- $785.06 Agreed Upon Adjusted Net Asset Value as of June 30, 2000(2)............................................ -- -- $820.38 TOTAL MERGER CONSIDERATION(3)(4)..................... $808.67 $820.38 $820.38 Net 2 Book Value as of June 30, 2000....................... -- -- $807.75 Agreed Upon Adjusted Net Asset Value as of June 30, 2000(2)............................................ -- -- $819.52 TOTAL MERGER CONSIDERATION(3)(4)..................... $807.82 $819.52 $819.52
--------------- * If there is no amount listed under the "Low" and/or "High" column, then the amount under the "Mean" column represents the single conclusion reached. (1) The table assumes that the closing date was September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, and represents the low, high and mean average closing prices of Lexington common shares during the 20 days prior to, but not including, that date. 20 30 (2) Based upon estimated value of each Net Partnership's properties less estimated liquidation costs and mortgage notes payable at June 30, 2001, which was the originally anticipated closing date of the Transaction, including estimated mortgage assumption fees and repayment fees, if any, based primarily upon the scheduled amortization of all mortgages outstanding at June 30, 2000. (3) The value of the total merger consideration is based on the sum of the market value of the common shares and the amount of cash being offered to limited partners. The number of common shares which will be received by limited partners will be based upon the average closing price. As indicated by the table, if the average closing price is between $14.00 and $16.00 per share, the value of the merger consideration will not be impacted by a fluctuation in the average closing price. The low price in this table is less than $14.00 per share, and accordingly, the value of the total merger consideration per $1,000 of original investment decreases. See the table on pages 10 and 11 entitled "Effect of Fluctuations in 20 Day Average Closing Price of Lexington Common Shares" for an explanation of how the amount of total merger consideration fluctuates if the average closing price is not between $14.00 and $16.00 per share. (4) See "THE MERGERS -- The Merger Consideration" on page 60 for an explanation of how the merger consideration was calculated. VALUATION ANALYSES PREPARED FROM THE PERSPECTIVE OF THE NET PARTNERSHIPS The following tables set forth the conclusions of each of Cohen & Steers and the general partners as to the fairness of the merger consideration, from a financial point of view, to the limited partners under the various valuation methodologies used by each of them. These tables are included so that you can more easily compare the results of the analyses of Cohen & Steers and the general partners to the merger consideration. These tables did not serve as the basis for the general partners' belief that the merger consideration is fair. CONCLUSIONS OF COHEN & STEERS
PER $1,000 ORIGINAL INVESTMENT OF LIMITED PARTNERSHIP INTEREST NET VALUATION ----------------------------------- PARTNERSHIP METHODOLOGY LOW HIGH MEAN* ----------- ----------- --------- ----------- --------- Net 1 Comparable Publicly Traded Companies(1)............. $620.73 $1,081.76 $835.65 Discounted Cash Flow Analysis(2).................... $655.41 $ 849.74 $750.03 Net Asset Value Analysis(3)......................... $580.77 $ 720.72 $650.74 Net Liquidation Value Analysis(4)................... $532.79 $ 669.25 $601.02 Market Value of Net 1 Merger Consideration(5)....... -- -- $820.38 TOTAL NET 1 MERGER CONSIDERATION(6)(7).............. $808.67 $ 820.38 $820.38 Net 2 Comparable Publicly Traded Companies(1)............. $663.50 $1,205.90 $919.60 Discounted Cash Flow Analysis(2).................... $645.80 $ 901.50 $770.40 Net Asset Value Analysis(3)......................... $735.00 $ 928.20 $831.60 Net Liquidation Value Analysis(4)................... $657.30 $ 845.70 $751.50 Market Value of Net 2 Merger Consideration(5)....... -- -- $819.52 TOTAL NET 2 MERGER CONSIDERATION(6)(7).............. $807.82 $ 819.52 $819.52
--------------- * If there is no amount listed under the "Low" and/or "High" column, then the amount under the "Mean" column represents the single conclusion reached. (1) Based upon the overall mean value calculated from a range of trading multiples of comparable publicly traded companies as a function of actual 2000 and projected 2001 funds from operations and earnings before interest, taxes, depreciation and amortization. (2) Based upon a range of discount rates from 11.0% - 13.0%, with a mean of 12.0%, and a range of terminal multiples of EBITDA from 9.25x - 10.25x, with a mean of 9.75x for Net 1 and 9.75x - 10.75x, with a mean of 10.25x for Net 2. The Discounted Cash Flow Analysis was computed utilizing a methodology similar to that used by the general partners in calculating their Estimated Going Concern Value, but 21 31 reflects different assumptions with respect to several factors, including measurement period and range of discount rates as determined by Cohen & Steers. (3) Based upon a range of capitalization rates from 9.8% - 10.8%, with a mean of 10.3% for Net 1 and 9.3% - 10.3%, with a mean of 9.8% for Net 2, applied to projected net operating income for the twelve months ending June 30, 2002, and adjustments to the June 30, 2001 balance sheet to reflect the subsequent cash dividend distribution to the general and limited partners and the anticipated final distribution of cash outstanding to the general and limited partners at the closing of the transaction. (4) Based upon a range of capitalization rates from 9.8% - 10.8%, with a mean of 10.3% for Net 1 and 9.3% - 10.3% , with a mean of 9.8% for Net 2, applied to projected net operating income for the twelve months ending June 30, 2002, and adjustments to the June 30, 2001 balance sheet to reflect the subsequent cash dividend distribution to the general and limited partners and the anticipated final distribution of cash outstanding to the general and limited partners at the closing of the transaction. The resulting value was then reduced by ordinary liquidation costs. (5) Based upon an estimated market valuation of 100% of face value of the common shares and cash consideration to be received. The common shares were valued using the then prevailing market price of $15.00 as of the close of business on July 13, 2001. (6) The value of the total merger consideration is based on the sum of the market value of the common shares and the amount of cash being offered to limited partners. The number of common shares which will be received by limited partners will be based upon the average closing price. The table assumes that the closing date was September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, and represents the low, high and mean average closing prices of Lexington common shares during the 20 day period prior to, but not including, that date. As indicated by the table, if the average closing price is between $14.00 and $16.00 per share, the value of the merger consideration will not be impacted by a fluctuation in the average closing price. The low price in this table is less than $14.00 per share, and accordingly, the value of the total merger consideration per $1,000 of original investment decreases. See the table on pages 10 and 11 entitled "Effect of Fluctuations in 20 Day Average Closing Price of Lexington Common Shares" for an explanation of how the amount of total merger consideration fluctuates if the average closing price is not between $14.00 and $16.00 per share. (7) See "THE MERGERS -- The Merger Consideration" on page 60 for an explanation of how the merger consideration was calculated. CONCLUSIONS OF THE GENERAL PARTNERS
PER $1,000 ORIGINAL INVESTMENT OF LIMITED PARTNERSHIP INTEREST NET VALUATION ------------------------------------ PARTNERSHIP METHODOLOGY LOW HIGH MEAN* ----------- ----------- ------- ------- ---------------- Net 1 Agreed Upon Adjusted Net Asset Value(1)....... $ -- $ -- $820.38 Estimated Going Concern Value(2).............. $637.96 $706.24 $671.60(2) Estimated Liquidation Value(3)................ $ -- $ -- $751.17 Range of Secondary Market Prices(4)........... $ -- $ -- $510.00 - 665.00 TOTAL MERGER CONSIDERATION(5)(6).............. $808.67 $820.38 $820.38 Net 2 Agreed Upon Adjusted Net Asset Value(1)....... $ -- $ -- $819.52 Estimated Going Concern Value(2).............. $723.35 $801.18 $761.70 Estimated Liquidation Value(3)................ $ -- $ -- $762.77 Range of Secondary Market Prices(4)........... $ -- $ -- $560.00 - 693.50 TOTAL MERGER CONSIDERATION(5)(6).............. $807.82 $819.52 $819.52
--------------- * If there is no amount listed under the "Low" and/or "High" column, then the amount under the "Mean" column represents the single conclusion reached. 22 32 (1) Based upon estimated value of each Net Partnership's properties less estimated liquidation costs, an estimate of mortgage notes payable at June 30, 2001, which was the originally anticipated closing date of the Transaction, including estimated mortgage assumption fees and repayment fees, if any, based primarily upon the scheduled amortization of all mortgages outstanding at June 30, 2000 and all other liabilities outstanding at June 30, 2000. (2) Overall mean value based upon a range of discount rates from 13% - 15%. (3) Based upon estimated value of each Net Partnership's properties less estimated liquidation costs, mortgage assumption/repayment fees and stated liabilities at June 30, 2000. (4) Based on reported sales of units from January 1, 1999 to September 30, 2000, as reported by Stanger & Co. (5) The value of the total merger consideration is based on the sum of the market value of the common shares and the amount of cash being offered to limited partners. The number of common shares which will be received by limited partners will be based upon the average closing price. The table assumes that the closing date was September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, and represents the low, high and mean average closing prices of Lexington common shares during the 20 day period prior to, but not including, that date. As indicated by the table, if the average closing price is between $14.00 and $16.00 per share, the value of the merger consideration will not be impacted by a fluctuation in the average closing price. The low price in this table is less than $14.00 per share, and accordingly, the value of the total merger consideration per $1,000 of original investment decreases. See the table on pages 10 and 11 entitled "Effect of Fluctuations in 20 Day Average Closing Price of Lexington Common Shares" for an explanation of how the amount of total merger consideration fluctuates if the average closing price is not between $14.00 and $16.00 per share. (6) See "THE MERGERS -- The Merger Consideration" on page 60 for an explanation of how the merger consideration was calculated. VALUATION ANALYSES PREPARED FROM THE PERSPECTIVE OF LEXINGTON The following table sets forth the conclusions of Prudential Securities as to the fairness of the merger consideration, from a financial point of view, to Lexington's shareholders, under the various valuation methodologies used by Prudential Securities, each of which assumes that no limited partners elect to receive their merger consideration in the form of dissenter debentures. The amounts shown in the table represent the combined value of the Net Partnerships under the relevant valuation methodology based upon an original investment of $1,000 in the Net Partnerships, although Prudential Securities did not analyze the value of the Net Partnerships in relation to an original investment in them. Because Prudential Securities served as a financial advisor to Lexington, and because Lexington's acquisition of each of the Net Partnerships is conditioned upon the concurrent acquisition of both Net 1 and Net 2, Prudential Securities viewed Net 1 and Net 2 as a single asset and did not prepare separate valuations for each of them. 23 33 CONCLUSIONS OF PRUDENTIAL SECURITIES
PER $1,000 ORIGINAL INVESTMENT OF LIMITED PARTNERSHIP INTEREST NET VALUATION ---------------------------------- PARTNERSHIP METHODOLOGY(1) LOW HIGH MEAN* ----------- -------------- -------- ---------- ---------- Net 1 & COMBINED NET 1 AND NET 2 Net 2 TOTAL MERGER CONSIDERATION(2)(3).................. $808.14 $ 819.85 $ 819.85 Comparable Company(4) 2000 Actual Combined Net 1 and Net 2 FFO.......... $827.08 $1,130.06 $ 959.90 2001 Projected Combined Net 1 and Net 2 FFO....... $958.18 $1,534.61 $1,171.52 2002 Projected Combined Net 1 and Net 2 FFO....... $896.19 $1,227.26 $1,039.12 Precedent Transaction (Combined Net 1 and Net 2 LTM NOI)(5)..................................... $707.59 $1,705.29 $1,107.43 Asset Value(6).................................... $ -- $ -- $ 951.03 Liquidation Present Value(7)...................... $787.06 $ 802.19 $ 794.62
--------------- * If there is no amount listed under the "Low" and/or "High" column, then the amount under the "Mean" column represents the single conclusion reached. (1) Because Prudential Securities served as financial advisor to Lexington, and because Lexington's acquisition of each of the Net Partnerships was conditioned upon the concurrent acquisitions of both Net 1 and Net 2, Prudential Securities viewed Net 1 and Net 2 as a single asset and did not prepare separate valuations for each of the Net Partnerships. All of the amounts set forth in this table reflect the conclusions of Prudential Securities under each valuation methodology divided by the sum of the original investments in Net 1 and Net 2 combined, multiplied by 1,000. (2) The value of the total merger consideration is based on the sum of the market value of the common shares and the amount of cash being offered to limited partners. The number of common shares which will be received by limited partners will be based upon the average closing price. The table assumes that the closing date was September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, and represents the low, high and mean average closing prices of Lexington common shares during the 20 day period prior to, but not including, that date. As indicated by the table, if the average closing price is between $14.00 and $16.00 per share, the value of the merger consideration will not be impacted by a fluctuation in the average closing price. The low price in this table is less than $14.00 per share, and accordingly, the value of the total merger consideration per $1,000 of original investment decreases. See the table on pages 10 and 11 entitled "Effect of Fluctuations in 20 Day Average Closing Price of Lexington Common Shares" for an explanation of how the amount of total merger consideration fluctuates if the average closing price is not between $14.00 and $16.00 per share. (3) See "THE MERGERS -- The Merger Consideration" on page 60 for an explanation of how the merger consideration was calculated. (4) Gross value based upon the overall mean value calculated from a range of trading multiples of comparable publicly traded companies as a function of actual 2000 and projected 2001 and 2002 funds from operations. (5) Gross value based upon a range of capitalization rates of comparable real estate portfolio transactions from 7.1% - 11.4%, with a mean of 9.2%, applied to the Net Partnerships' net operating income for the twelve months ended March 31, 2001. (6) Gross value based upon the appraisals performed by Stanger & Co. for properties owned as of December 31, 2000, and the estimated value of non-real estate assets and liabilities as of March 31, 2001 adjusted for the subsequent sale of property. (7) Gross value based upon the appraisals performed by Stanger & Co. for properties owned as of December 31, 2000 and the estimated value of non-real estate assets and liabilities as of March 31, 2001 24 34 adjusted for the subsequent sale of property. The resulting gross value was adjusted for disposition costs, resulting in estimated sales proceeds of $146.8 million. This amount was then discounted to take account of the fact that such sales proceeds would not be available immediately but instead would be realized as real estate assets were sold. An orderly liquidation over a twelve month period was assumed with sale proceeds discounted at a range of discount rates from 11.0% to 13.0%, with a mean of 12.0%. UNAUDITED COMPARATIVE PER SHARE/UNIT DATA The following table sets forth Lexington's, Net 1's and Net 2's historical per share/unit data, unaudited pro forma per share data after giving effect to the mergers, and the equivalent pro forma combined per share amounts of Net 1 and Net 2. The Net 1 and Net 2 pro forma equivalent data are not necessarily indicative of actual financial position or future operating results or that which would have occurred or will occur upon consummation of the mergers. UNAUDITED HISTORICAL AND PRO FORMA COMPARATIVE PER SHARE/UNIT DATA
YEAR ENDED DECEMBER 31, 2000 SIX MONTHS ENDED JUNE 30, 2001 -------------------------------------------------- -------------------------------------------------- NET 1 NET 2 NET 1 NET 2 LEXINGTON PRO FORMA PRO FORMA LEXINGTON PRO FORMA PRO FORMA HISTORICAL PRO FORMA EQUIVALENT EQUIVALENT PRO FORMA EQUIVALENT EQUIVALENT (A) (B)(C) (C)(D)(E) (C)(D)(E) HISTORICAL (B)(C) (C)(D)(E) (C)(D)(E) ------------ --------- ---------- ---------- ------------ --------- ---------- ---------- Income before extraordinary item Lexington Basic............ $ 1.15 $1.03 -- -- $ 0.50 $ 0.55 -- -- Diluted.......... $ 1.10 $1.01 -- -- $ 0.48 $ 0.53 -- -- Net 1 Basic............ $46.97-50.47 -- $28.17 -- $40.77-43.72 -- $ 15.04 -- Diluted.......... $46.97-50.47 -- $27.62 -- $40.77-43.72 -- $ 14.50 -- Net 2 Basic............ $ 3.77-4.48 -- -- $2.81 $ 4.11-4.85 -- -- $ 1.50 Diluted.......... $ 3.77-4.48 -- -- $2.76 $ 4.11-4.85 -- -- $ 1.45 Cash Dividends/Distribution Lexington.......... $ 1.22 $1.22 -- -- $ 0.63 $ 0.63 -- -- Net 1.............. $ 50.04 -- $33.37 -- $ 25.02 -- $ 17.23 -- Net 2.............. $ 5.00 -- -- $3.33 $ 2.50 -- -- $ 1.72 Book Value Per Common Share/ Unit Lexington.......... $ 10.37 -- -- -- $ 10.23 $11.20 -- -- Net 1.............. $ 770.80 -- -- -- $ 788.35 -- $716.51 -- Net 2.............. $ 79.31 -- -- -- $ 81.36 -- -- $71.56
--------------- (A) A range of earnings per share is provided for both Net 1 and Net 2 because amounts allocated to individual partners depends on the date their respective units were originally issued. (B) The unaudited pro forma per share data was prepared using the purchase method of accounting. (C) The pro forma combined per share data has been prepared assuming that no limited partners elect to receive their merger consideration in the form of dissenter debentures. (D) The equivalent pro forma combined per share amounts of Net 1 and Net 2 are calculated by multiplying pro forma Net Income per share of Lexington and pro forma cash dividends/distributions per share of Lexington by the exchange ratio of Net 1 and Net 2 so that the per share amounts are equated to the comparative values for each such Net 1 and Net 2 limited partnership interest. The pro forma Book 25 35 Value per share is similarly computed, but also includes the cash component of the merger consideration. See pages F-7 through F-8 for a detailed analysis of the calculation of the exchange ratio and the pro forma amounts reflected in this table. (E) See page F-7 for calculation of pro forma earnings per share. RECOMMENDATION OF THE BOARD OF TRUSTEES OF LEXINGTON AND THE GENERAL PARTNERS OF THE NET PARTNERSHIPS LEXINGTON. The Board of Trustees of Lexington, including the independent trustees but excluding E. Robert Roskind, who abstained from voting because of his affiliation with the Net Partnerships, has unanimously approved the Transaction and believes that the terms of the merger agreements are fair to the shareholders of Lexington. The Board of Trustees unanimously recommends that shareholders vote for approval of the merger agreements and the issuance of the merger consideration. Lexington has specifically adopted the conclusions in the fairness opinion delivered by Prudential Securities. The determinations of the Board of Trustees are directed only to the shareholders of Lexington and not to the limited partners of the Net Partnerships. NET PARTNERSHIPS. Each general partner believes that both the individual merger of its Net Partnership with and into Net 3, as well as the Transaction taken as a whole, are fair to and in the best interests of the limited partners of its Net Partnership. The general partners also believe that the Transaction is the best means to maximize the value of the limited partners' investments in the Net Partnerships. The general partners based these beliefs and made their determinations on the basis of their own extensive due diligence of the properties owned by each of Lexington and the Net Partnerships. The general partners used, as part of their determinations, the appraisals provided by Stanger & Co. and the analyses, in the form of fairness opinions, solicited from Cohen & Steers as to the fairness, from a financial point of view, of the consideration to be received by the limited partners of the Net Partnerships. Each of the Net 1 and Net 2 general partners has specifically adopted both the conclusions in the fairness opinions delivered by Cohen & Steers and the appraisals delivered by Stanger & Co. The general partners have approved the merger agreements and unanimously recommend that the limited partners consent to approval of their respective merger agreement and the amendment of their respective agreement of limited partnership. The determinations of the general partners are directed only to the limited partners of the Net Partnerships and not to Lexington's shareholders. BENEFITS OF THE TRANSACTION. Lexington and the general partners believe that the following are the benefits associated with the proposed Transaction: - Greater Liquidity for Limited Partners. The mergers provide limited partners with greater liquidity of investment, because they will receive 50% of their merger consideration in cash and 50% in common shares which will trade on the New York Stock Exchange. Currently, the limited partners' ability to sell their units is limited because the units are not listed on an exchange. In addition, because the units are not listed on an exchange, no market exists to reliably establish the value of the units. - Growth in Funds from Operations. As a result of the Transaction, the Board of Trustees believes that Lexington should have greater funds from operations, commonly referred to as FFO. Lexington believes that an FFO measurement enhances an investors' understanding of the company's financial condition, results from operations and cash flows. Lexington believes that it is an appropriate measure of the performance of an equity REIT, and that it can be one measure of a REITs ability to make cash distributions. FFO is defined in the October 1999 "White Paper," issued by the National Association of Real Estate Investment Trusts, Inc., or NAREIT, as "net income (or loss) computed in accordance with generally accepted accounting principles ("GAAP") excluding gains (or losses) from sales of property, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures." Lexington's method of calculating FFO may be different from methods used by other REITs and accordingly is not comparable to such other REITS. FFO should not be considered an alternative to net income as an indicator of operating performance or to cash flow from operating activities as determined in accordance with GAAP, or as a measure of liquidity to other income or cash flow data as determined in accordance with GAAP. 26 36 - Risk Diversification for both Limited Partners and Shareholders. The combination of the properties owned by the Net Partnerships with Lexington's properties will diversify the investors' investment over a larger number of properties. This diversification will reduce the current dependence of the limited partners' and Lexington shareholders' investment upon the performance of, and the exposure to the risks associated with, the particular group of properties currently owned by the Net Partnerships and Lexington, respectively. - Greater Access to Capital. Following the Transaction, Lexington believes it should have improved access to capital markets for future growth as a result of the larger total equity market capitalization of the combined entity. - Greater Potential for Appreciation in Value. The general partners believe that the limited partners will have a greater potential to realize appreciation in the value of common shares than they would in units. - Cost Savings. The combination of the Net Partnerships with Lexington will result in administrative cost savings. For example, because Lexington and the Net Partnerships are public entities subject to the reporting requirements of the SEC, their combination into a single public company would reduce SEC compliance costs. - No Schedule K-1. If the Net Partnerships are acquired, each limited partner will no longer receive a Schedule K-1 for its tax reporting. Limited partners who become holders of common shares will instead receive a Form 1099-DIV, a much simpler reporting form, each January. DETRIMENTS OF THE TRANSACTION Lexington. Lexington believes that the following are the detriments to the shareholders of Lexington associated with the proposed Transaction: - Failure to Realize Benefits. The anticipated benefits of the Transaction might not be fully realized. - Increase in Leverage. If the Transaction is consummated, Lexington may issue and assume substantial indebtedness in the form of the dissenter debentures and mortgages payable encumbering the Net Partnership properties. This increased debt service may increase the risk of Lexington's default. This increased leverage could adversely affect Lexington's financial condition and results of operations, the market price of its common shares and its ability to make distributions. - Fixed Minimum Number of Common Shares. The minimum number of common shares to be exchanged as merger consideration is fixed. If the average closing price is more than $16.00 per share, Lexington will nevertheless be obligated to issue to the limited partners of the Net Partnerships the same number of common shares per unit as it would have been obligated had the average closing price been $16.00 per share. - Transaction Costs. Lexington will bear significant costs, estimated to be approximately $2.01 million, in connection with the consummation of the Transaction. - Smaller Percentage Ownership Interest. Shareholders will have a smaller percentage ownership and voting interest in Lexington after the Transaction. - Dilution of Ownership Interest. There is a risk of dilution of Lexington's current shareholders in the event the merger consideration exceeds the fair market value of the Net Partnerships. As a result of this possible dilution there may be a corresponding negative effect on net income per share. Net Partnerships. The general partners of the Net Partnerships believe that the following are the detriments to the limited partners of the Net Partnerships associated with the Transaction: - Taxable Transaction. The limited partners will realize taxable gain or loss in the mergers. Limited partners receiving common shares will be able to liquidate their common shares and use the cash 27 37 proceeds and the cash received as 50% of their merger consideration towards the payment of any taxes due on any taxable gain. - Transaction Costs. The Net Partnerships will bear significant costs, estimated to be approximately $0.63 million each, in connection with consummating the Transaction. - Failure to Realize Benefits. The anticipated benefits of the mergers may not be realized. - Increase in Leverage. If the Transaction is consummated, Lexington may issue and assume substantial indebtedness in the form of the dissenter debentures and mortgages payable encumbering the Net Partnership properties. This increased debt service may increase the risk of Lexington's default. This increased leverage could also adversely affect Lexington's financial condition and results of operations, the market price of its common shares and its ability to make distributions or payments on the dissenter debentures. - Fluctuations in the Value of the Merger Consideration. The prices at which the common shares trade will fluctuate following the mergers, and may not correspond to 50% of the fair market value of the Net Partnerships. - Fixed Maximum Number of Common Shares. The maximum number of common shares to be exchanged as merger consideration is fixed. If the average closing price is less than $14.00 per share, limited partners will not be entitled to receive any more common shares per unit than they would have received had the average closing price been $14.00 per share. - Smaller Percentage Ownership Interest. Limited partners will have a smaller percentage ownership and voting interest in Lexington after the Transaction than they have in their Net Partnership. - Dilution to Net Income and Book Value. On a pro forma per unit equivalent basis, the mergers are immediately dilutive to both per unit net income and book value of the Net Partnerships. Specifically, the diluted pro forma net income per unit for the year ended December 31, 2000 is reduced for Net 1 by $19.35 - $22.85 to $27.62 per unit, and for Net 2 is reduced by $1.01 - $1.72 to $2.76 per unit, and the diluted pro forma net income per unit for the six months ended June 30, 2001 is reduced for Net 1 by $26.27 - $29.22 to $14.50 per unit, and for Net 2 is reduced by $2.66 - $3.40 to $1.45 per unit. The immediate dilution of book value as of June 30, 2001 for Net 1 is $71.84 per unit and for Net 2 is $9.80 per unit. - No Independent Representation. The general partners did not retain an unaffiliated representative to negotiate on behalf of the Net Partnerships, either individually or together, or on behalf of the limited partners, in the mergers. CONSEQUENCES IF MERGERS NOT CONSUMMATED If the mergers are not consummated, each Net Partnership will continue to operate as a separate legal entity, with its own assets and liabilities, and with no change in its investment objectives, policies and restrictions. EFFECTIVE TIME OF THE MERGERS As soon as practicable after satisfaction of all conditions to consummation of the mergers, Lexington and the Net Partnerships will file certificates of merger with the Secretary of State of the State of Delaware in order to effect the mergers. The mergers will become effective upon the filing of the certificates of merger, or at a later time which Lexington and the general partners will have agreed upon and designated in their filings in accordance with applicable law. Lexington and each of the Net Partnerships have the right, acting unilaterally, so long as they have not willfully and materially breached the relevant merger agreement, to terminate the relevant merger agreement should the relevant merger not be consummated by the close of business on December 31, 2001. It is expected that the mergers will be consummated in the fourth quarter of 2001. 28 38 TRANSACTION EXPENSES Net 1, Net 2 and Lexington will each be responsible for and bear the aggregate costs and expenses incurred by each of them at any time in connection with pursuing, negotiating or consummating the Transaction. Net 1 and Net 2 will each bear 50% of the fees and expenses of Cohen & Steers. Lexington will enter into an indemnification agreement with each of the general partners that will provide indemnification protection to each of the general partners and their respective affiliates with respect to claims which could arise in connection with the proposed Transaction, whether or not the Transaction is consummated. COMPARISON OF RIGHTS OF THE LIMITED PARTNERS AND SHAREHOLDERS OF LEXINGTON The rights of limited partners are currently governed by Delaware law and by the terms and conditions of the respective limited partnership agreement. If the mergers are approved, the rights of the limited partners receiving common shares will be governed by Maryland law, the Lexington Declaration of Trust and the Lexington By-Laws, all of which differ from the partnership agreements. FEDERAL INCOME TAX CONSIDERATIONS Paul, Hastings, Janofsky & Walker LLP has given an opinion to Lexington to the effect that the material federal income tax consequences of the mergers to the limited partners are as discussed in the section entitled "FEDERAL INCOME TAX CONSIDERATIONS" beginning on page 173. - As discussed in that section, the limited partners will realize taxable gain or loss in the mergers, whether they receive common shares and cash or dissenter debentures. The general partners have determined that an original limited partner's estimated taxable gain for each Net 1 unit and each Net 2 unit would be approximately $40.76 and $4.87, respectively. Gain or loss will be recognized in the year the mergers are consummated. - The amount of taxable gain per unit described above is only an estimate and will ultimately vary by limited partner. The amount of a limited partner's taxable gain or loss will depend on whether the limited partner receives common shares and cash or elects to receive dissenter debentures. Based on Treasury regulations, a consenting limited partner that receives common shares and cash will be treated as selling its units. It would realize taxable gain or loss based on the consideration it receives and its share of partnership liabilities assumed, less its adjusted tax basis in its units. A limited partner that does not consent to sale treatment and elects to receive dissenter debentures will be allocated its share of gain or loss from its respective Net Partnership. To the extent a Net Partnership's limited partners elect to receive dissenter debentures, such Net Partnership will be treated as transferring its assets and liabilities to Net 3 in exchange for the dissenter debentures. The transfer will be a taxable sale to the Net Partnership and will result in the allocation of taxable gain or loss to each dissenting limited partner. Each dissenting limited partner will then be treated as receiving its share of dissenter debentures in liquidation of its Net Partnership. Tax matters are very complicated, and the tax consequences of the mergers to limited partners will depend on the facts of each individual situation. You should consult your tax advisor for a full understanding of the Transaction's tax consequences to you. INFORMATION CONCERNING THE AMENDMENT TO LEXINGTON'S DECLARATION OF TRUST In addition to the proposals relating to the Transaction, Lexington's shareholders are being asked to approve and adopt the Articles of Amendment pursuant to which Lexington's Declaration of Trust will be amended to increase the number of common shares that Lexington has authority to issue from 40,000,000 common shares to 80,000,000 common shares. A copy of the Articles of Amendment is attached to this Joint Consent and Proxy Solicitation Statement/Prospectus as Annex A-5. Following consummation of the Transaction, the number of common shares which would be available for issuance from time to time for various business purposes that the Board of Trustees may in the future deem advisable would be diminished. 29 39 The Board of Trustees believes that an increase in the number of authorized common shares will provide additional common shares for issuance, without the delay and expense of further shareholder approval, for various business purposes as the Board of Trustees may in the future deem advisable, including, but not limited to, as consideration in connection with acquisitions and to raise additional capital for Lexington. However, the Board of Trustees is not presently contemplating any specific transactions that would require the approval of this proposed increase. APPROVAL OF MERGER AND PROPOSED AMENDMENT; ELECTION OF MERGER CONSIDERATION VOTING PROCEDURES FOR LEXINGTON SHAREHOLDERS Shareholders may vote at the special meeting of the shareholders of Lexington, to be held at 10 a.m. on November 28, 2001, at , by attending the meeting and voting in person, by completing the enclosed proxy card and returning it in the enclosed postage paid envelope or by faxing it to the transfer agent as directed below. Proxies will be received, tabulated and certified as to time of receipt and vote by Mellon Investor Services LLC, Lexington's transfer agent. Proxies should be returned to Mellon at 44 Wall Street, 7th Floor, New York, NY 10005, Attention: Lexington Proxies, or faxed to Mellon at (917) 320-6295. Faxed proxies will be accepted until the polls close on the date of the special meeting. Shareholders of Lexington should indicate on the enclosed proxy how they vote in respect of each of the proposals, then sign and mail it in the enclosed return envelope as soon as possible so that their shares may be voted "For" or "Against" the proposals. If shareholders sign and send in their proxy but do not indicate how they want to vote, their proxy will be counted as a vote "For" the mergers and the amendment. If the shareholders do not return a proxy or indicate on their proxy that they abstain, it will count as a vote "Against" the mergers. Shareholders of Lexington may revoke their proxy by either: - delivering to the Secretary of Lexington, prior to the taking of the vote at the special meeting, a written notice of revocation bearing a date later than the date of the proxy or a later-dated proxy relating to the same shares; or - attending the meeting and voting in person. If the shareholders have any questions regarding the Transaction, they should call Mellon toll free at (800) 279-1247. CONSENT PROCEDURES FOR NET PARTNERSHIPS Each limited partner is requested to: - indicate on the enclosed consent form whether they consent or deny consent to the Transaction; - complete all other applicable sections of the consent form; - sign and date the consent form; and - return the consent form for receipt, in original or by facsimile, to the Net Partnerships' solicitation agent before the end of the solicitation period. Morrow & Co., Inc. has been designated as the Net Partnerships' solicitation agent for purposes of the Transaction. Limited partners should return their consent form to Morrow at 445 Park Avenue, New York, New York 10022, Attention: William P. Smith, or fax it to Morrow at (212) 754-8300. Faxed consents will be accepted until 12:00 midnight, New York time, on November 27, 2001. Limited partners should return their consent forms as soon as possible to ensure that their units are counted in determining whether their Net Partnership approves the Transaction. 30 40 The consent solicitation period will continue until 12:00 midnight on November 27, 2001 unless the requisite vote is received prior to that date or the general partners extend the consent solicitation period with requisite limited partner consent. A consent by a limited partner to a Net Partnership's participation in the Transaction will constitute a consent by that limited partner to all actions by that Net Partnership necessary to consummate the Transaction, including any required amendments to the Net Partnership's partnership agreements. If a limited partner signs and sends in its consent form and does not indicate whether it gives or denies consent, the consent form will be counted as having consented to the Transaction. If a limited partner does not return its consent form or the limited partner indicates on its consent form that it abstains, the consent form will count as having denied consent to the Transaction. A limited partner that receives common shares and cash will be deemed to consent to treatment of the merger of its respective Net Partnership as a sale of its units for tax purposes. A limited partner that does not consent to this treatment may not receive common shares and cash and must elect to receive dissenter debentures. Limited partners may revoke their consent by delivering a written notice of revocation bearing a later date than the consent or a later-dated consent relating to the same units to Morrow or by calling Morrow toll free at (877) 807-8896. Limited partners may withdraw or revoke their consent at any time before the earlier of November 27, 2001 or the date on which consents from limited partners equal to more than 50% of the limited partnership interests are received by their Net Partnership. If the limited partners have any questions regarding the Transaction, they should call Morrow toll free at (877) 807-8896. Limited partners can obtain additional information about the Transaction, including information regarding the exchange rate and the number of consents received, by calling Morrow toll free at (877) 807-8896. RECORD DATE; VOTES REQUIRED Lexington. Only holders of shares of record at the close of business on October 12, 2001 will be entitled to notice of and to vote at the Lexington meeting of shareholders. The merger agreements and the amendment to Lexington's Declaration of Trust will be approved if Lexington receives the affirmative vote, in person or by proxy, of a majority of the outstanding shares entitled to vote at the Lexington meeting. As of the record date for the meeting, there were common shares and 2,000,000 preferred shares outstanding and entitled to vote. The members of the Board of Trustees and executive officers of Lexington and their affiliates beneficially owned, as of the record date common shares and 2,000,000 preferred shares, which represented approximately % of the outstanding voting shares. Abstentions and broker non-votes have the same effect as a vote against the proposals. The Net Partnerships. Only limited partners of record at the close of business on October 12, 2001 will be entitled to consent or deny consent to the Transaction. Limited partners of record on the record date are entitled to consent or deny consent with respect to each unit held. As of June 30, 2001, the number of units held by limited partners of Net 1 and Net 2 was 30,772 and 477,167, respectively, and the number of those units which must consent in order to approve the Transaction was 15,387 and 238,584, respectively. The consent of the holders of a majority of the outstanding units of each Net Partnership, is required to approve the relevant merger and the amendment to the relevant partnership agreement. Abstentions and broker non-votes will have the same effect as denying consent to the relevant merger and the amendments to the relevant partnership agreements. Lexington held, as of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, approximately 540 limited partnership units of Net 1, (representing approximately 1.8% of the outstanding units) and 15,782 limited partnership units of Net 2 (representing approximately 3.3% of the outstanding units). Lexington intends to consent to the Transaction with respect to these units. 31 41 PROCEDURE FOR LIMITED PARTNERS TO RECEIVE DISSENTER DEBENTURES Limited partners will have the option of electing to receive their merger consideration in the form of dissenter debentures in lieu of common shares and cash. In order to receive dissenter debentures, a limited partner must: - deny consent to the applicable merger on a consent form returned to the solicitation agent no later than the expiration of the solicitation period; and - affirmatively elect to receive dissenter debentures on that consent form, indicating its specific agreement and consent to receive their merger consideration in the form of dissenter debentures in lieu of common shares and cash. The failure of a limited partner to comply with the procedures described above will have the effect of, and will be equivalent to, affirmatively waiving such limited partner's option to receive their merger consideration in the form of dissenter debentures. Limited partners who consent to the Transaction, abstain from consenting to the Transaction or fail to return a properly completed and signed consent form will not be eligible to receive dissenter debentures. A limited partner who denies consent to the Transaction is not required to elect to receive its merger consideration in the form of dissenter debentures. An election to receive dissenter debentures should only be made by a limited partner who wishes to receive its merger consideration in the form of dissenter debentures in lieu of common shares and cash. VOTING SHARES OR UNITS HELD IN "STREET NAME" Only a shareholder's or limited partner's broker may vote shares or units held in "street name." A broker may not vote a shareholder's shares or a limited partner's units without instructions from the shareholder or limited partner, as the case may be. Shareholders and limited partners should instruct their broker to vote their shares or units by following the directions they provide to their broker. If shareholders or limited partners do not provide their broker with instructions as to how to vote their shares or units, their broker will not be permitted to vote their shares or units, and the effect will be a vote against the Transaction. DISSENTERS' RIGHTS Lexington Shareholders. Lexington shareholders will not have dissenters' appraisal rights as a result of the mergers or the amendment of Lexington's Declaration of Trust. Limited Partners. Limited partners will not have dissenters' appraisal rights as a result of the mergers, but may elect to receive dissenter debentures as described above. NO RIGHTS TO INDEPENDENT APPRAISAL If you are a limited partner and your Net Partnership approves the Transaction, you will have no right to an independent valuation of your Net Partnership paid for by Lexington or by your general partners, even if you denied consent to the Transaction. 32 42 SUMMARY FINANCIAL INFORMATION The following summaries set forth financial information for Lexington and each of the Net Partnerships on a historical basis and, for Lexington, on a pro forma basis assuming the Transaction occurred on January 1, 2000 for income statement purposes and June 30, 2001 for balance sheet purposes. These summaries should be read in conjunction with, and are qualified in their entirety by, the historical financial statements and accompanying notes of Lexington and each of the Net Partnerships. These financial statements are included or incorporated by reference in this Joint Consent and Proxy Solicitation Statement/Prospectus. The historical financial information of Lexington and each of the Net Partnerships at December 31, 2000 and 1999 and for each of the years in the three year period ended December 31, 2000 has been derived from the historical financial statements of Lexington and each of the Net Partnerships audited by KPMG LLP, independent auditors. The reports of KPMG LLP with respect to the financial statements of Lexington and each of the Net Partnerships as of December 31, 2000 and 1999 and for each of the three years in the period ended December 31, 2000 are incorporated by reference in this Joint Consent and Proxy Solicitation Statement/Prospectus. The financial information as of June 30, 2001 and 2000 and for the six month periods then ended has been derived from the unaudited financial statements of Lexington and each of the Net Partnerships. In the opinion of the management of Lexington and the general partners of each of the Net Partnerships, the financial statements include all adjustments, which are all of a normal recurring nature, necessary to fairly present the information set forth in the statements. The results for the six month periods may not be indicative of the results to be expected for the full year. The financial statements of Lexington and each of the Net Partnerships as of December 31, 1998, 1997 and 1996 and for each of the years in the two year period ended December 31, 1997 were derived from Lexington's and each of the Net Partnership's audited financial statements. 33 43 LEXINGTON CORPORATE PROPERTIES TRUST SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED OPERATING DATA
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- PRO FORMA 1996 1997 1998 1999 2000 2000 ---------- ---------- ---------- ---------- ---------- ---------- (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OPERATING DATA: REVENUES: Rental...................... $ 31,244 $ 42,493 $ 62,846 $ 75,760 $ 76,824 $ 92,874 Equity in earnings of non- consolidated entities..... -- -- -- -- 1,851 2,900 Interest and other.......... 431 1,076 2,271 1,540 1,330 1,640 ---------- ---------- ---------- ---------- ---------- ---------- Total revenues.............. 31,675 43,569 65,117 77,300 80,005 97,414 ---------- ---------- ---------- ---------- ---------- ---------- EXPENSES: Interest.................... 12,818 16,644 23,055 29,099 29,581 34,560 Depreciation and amortization of real estate.................... 7,627 10,608 15,083 18,000 17,513 20,842 Amortization of deferred expenses.................. 619 876 987 991 1,497 1,887 General and administrative............ 3,125 3,644 4,518 4,687 4,902 6,026 Property operating.......... 1,330 922 857 1,865 1,504 1,504 Transactional expenses...... -- -- 559 -- -- -- Property arbitration litigation expense........ -- 168 -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total expenses.............. 25,519 32,862 45,059 54,642 54,997 64,819 ---------- ---------- ---------- ---------- ---------- ---------- Income before gain (loss) on sale of properties, minority interests and extraordinary items....... 6,156 10,707 20,058 22,658 25,008 32,595 Gain (loss) on sale of properties................ -- 3,517 (388) 5,127 2,959 -- ---------- ---------- ---------- ---------- ---------- ---------- Income before minority interests and extraordinary items....... 6,156 14,224 19,670 27,785 27,967 32,595 Minority interests.......... 690 2,442 3,933 6,438 6,015 5,870 Extraordinary items......... -- (3,189) -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Net income.................. $ 5,466 $ 8,593 $ 15,737 $ 21,347 $ 21,952 $ 26,725 ========== ========== ========== ========== ========== ========== Income Per Common Share -- Basic Before extraordinary items...................... $ 0.58 $ 0.61 $ 0.79 $ 1.11 $ 1.15 $ 1.03 Extraordinary item.......... -- $ (0.28) -- -- -- -- Net income.................. $ 0.58 $ 0.33 $ 0.79 $ 1.11 $ 1.15 $ 1.03 Weighted average common shares outstanding........ 9,392,727 11,444,589 16,835,414 16,979,925 16,900,039 23,445,039 Income Per Common Share -- Diluted Before extraordinary items...................... $ 0.56 $ 0.59 $ 0.78 $ 1.08 $ 1.10 $ 1.01 Extraordinary items......... -- $ (0.27) -- -- -- -- Net income.................. $ 0.56 $ 0.32 $ 0.78 $ 1.08 $ 1.10 $ 1.01 Weighted average common shares outstanding........ 10,897,011 11,639,683 21,983,876 24,945,267 24,714,219 29,379,475 SIX MONTHS ENDED JUNE 30, ------------------------------------ PRO FORMA 2000 2001 2001 ---------- ---------- ---------- (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) OPERATING DATA: REVENUES: Rental...................... $ 38,318 $ 38,734 $ 47,030 Equity in earnings of non- consolidated entities..... 633 1,416 1,832 Interest and other.......... 692 531 580 ---------- ---------- ---------- Total revenues.............. 39,643 40,681 49,442 ---------- ---------- ---------- EXPENSES: Interest.................... 14,655 15,344 17,223 Depreciation and amortization of real estate.................... 8,793 8,718 10,351 Amortization of deferred expenses.................. 673 756 903 General and administrative............ 2,598 2,457 3,173 Property operating.......... 768 714 714 Transactional expenses...... -- -- -- Property arbitration litigation expense........ -- -- -- ---------- ---------- ---------- Total expenses.............. 27,487 27,989 32,364 ---------- ---------- ---------- Income before gain (loss) on sale of properties, minority interests and extraordinary items....... 12,156 12,692 17,078 Gain (loss) on sale of properties................ 2,662 -- -- ---------- ---------- ---------- Income before minority interests and extraordinary items....... 14,818 12,692 17,078 Minority interests.......... 3,001 2,754 2,789 Extraordinary items......... -- (270) -- ---------- ---------- ---------- Net income.................. $ 11,817 $ 9,668 $ 14,289 ========== ========== ========== Income Per Common Share -- Basic Before extraordinary items...................... $ 0.63 $ 0.50 $ 0.55 Extraordinary item.......... -- $ (0.02) -- Net income.................. $ 0.63 $ 0.48 $ 0.55 Weighted average common shares outstanding........ 16,881,301 17,219,900 23,764,900 Income Per Common Share -- Diluted Before extraordinary items...................... $ 0.59 $ 0.48 $ 0.53 Extraordinary items......... -- $ (0.01) -- Net income.................. $ 0.59 $ 0.47 $ 0.53 Weighted average common shares outstanding........ 24,604,990 23,039,062 29,627,395
NOTE: CALCULATION OF PRO FORMA EARNINGS PER SHARE CAN BE FOUND ON PAGE F-7. HISTORICAL EARNINGS PER SHARE CALCULATIONS CAN BE FOUND IN ALL FORM 10-K AND 10-Q FILINGS. 34 44 LEXINGTON CORPORATE PROPERTIES TRUST SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED BALANCE SHEET AND OTHER DATA
DECEMBER 31, JUNE 30, ---------------------------------------------------- ------------------------------- PRO FORMA 1996 1997 1998 1999 2000 2000 2001 2001 -------- -------- -------- -------- -------- -------- -------- --------- (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) BALANCE SHEET DATA: Real estate, at cost, net.......... $289,326 $441,114 $609,717 $606,592 $584,198 $592,880 $577,040 $719,488 Investment in non-consolidated entities......................... -- -- -- 11,523 40,836 20,210 46,193 46,193 Cash and cash equivalents.......... 2,468 3,640 11,084 8,837 4,792 3,128 10,935 13,949 Restricted cash.................... 3,750 5,499 3,545 2,470 1,598 2,231 1,819 1,819 Other assets, net.................. 14,840 18,120 22,661 27,059 36,953 36,828 40,581 37,430 -------- -------- -------- -------- -------- -------- -------- -------- $310,384 $468,373 $647,007 $656,481 $668,377 $655,277 $676,568 $818,879 ======== ======== ======== ======== ======== ======== ======== ======== Mortgages and notes payable........ $187,740 $220,934 $354,281 $372,254 $387,326 $372,525 $398,569 $447,411 Origination fees payable, including accrued interest................. 5,636 5,885 5,849 6,781 6,703 6,701 6,671 6,671 Accounts payable and other liabilities...................... 1,816 6,479 7,352 6,168 6,473 6,475 5,041 7,821 Minority interests................. 22,533 28,240 74,381 66,303 64,812 65,890 58,834 59,144 Preferred shares................... -- 24,369 24,369 24,369 24,369 24,369 24,369 24,369 Common shares, with put options.... -- -- -- 3,809 3,809 3,809 3,809 3,809 Shareholders' equity............... 92,659 182,466 180,775 176,797 174,885 175,508 179,275 269,654 -------- -------- -------- -------- -------- -------- -------- -------- $310,384 $468,373 $647,007 $656,481 $668,377 $655,277 $676,568 $818,879 ======== ======== ======== ======== ======== ======== ======== ======== OTHER DATA: Net cash flows from operating activities....................... $ 14,975 $ 23,823 $ 32,008 $ 39,411 $ 40,803 $ 19,869 $ 21,172 $ 26,247 Net cash flows from investing activities....................... (16,955) (110,767) (111,080) (64,942) (38,549) (22,294) (9,558) (9,558) Net cash flows from financing activities....................... 1,859 88,116 86,516 23,284 (6,299) (3,284) (5,471) (8,714) Funds From Operations(A)........... $ 13,783 $ 21,315 $ 35,141 $ 40,652 $ 46,316 $ 22,450 $ 24,571 $ 29,631 Ratio of earnings to combined fixed charges and preferred dividends........................ 1.41 1.59 1.51 1.58 1.55 1.63 1.53 1.69 Cash dividends per common share.... $ 1.10 $ 1.16 $ 1.17 $ 1.20 $ 1.22 $ 0.60 $ 0.63 $ 0.63 CALCULATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS: EARNINGS: Income before extraordinary items............................ $ 5,466 $ 11,782 $ 15,737 $ 21,347 $ 21,952 $ 11,817 $ 9,938 $ 14,289 Add: Interest expense -- mortgage........... 12,818 16,644 23,055 29,099 29,581 14,655 15,344 17,223 Amortization debt cost........ 566 823 933 971 1,067 521 431 431 Less: Equity in earnings of less than 50% owned entities...... (13) (36) (52) (61) (1,428) (530) (1,496) (1,912) Add: Cash distributions from less than 50% owned entities....... 3 3 3 -- 810 495 2,156 2,156 -------- -------- -------- -------- -------- -------- -------- -------- Total.............................. $ 18,840 $ 29,216 $ 39,676 $ 51,356 $ 51,982 $ 26,958 $ 26,373 $ 32,187 ======== ======== ======== ======== ======== ======== ======== ======== FIXED CHARGES: Interest expense -- mortgage....... $ 12,818 $ 16,644 $ 23,055 $ 29,099 $ 29,581 $ 14,655 $ 15,344 $ 17,223 Capitalized interest expense....... -- -- -- -- 241 71 99 99 Preferred stock dividend........... -- 916 2,254 2,520 2,562 1,260 1,323 1,323 Amortization debt cost............. 566 823 933 971 1,067 521 431 431 -------- -------- -------- -------- -------- -------- -------- -------- Combined fixed charges............. $ 13,384 $ 18,383 $ 26,242 $ 32,590 $ 33,451 $ 16,507 $ 17,197 $ 19,076 ======== ======== ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges.......................... 1.41 1.59 1.51 1.58 1.55 1.63 1.53 1.69 ======== ======== ======== ======== ======== ======== ======== ========
--------------- (A) Lexington believes that funds from operations ("FFO") enhances an investor's understanding of Lexington's financial condition, results of operations and cash flows. Lexington believes that FFO is an appropriate measure of the performance of an equity REIT, and that it can be one measure of a REIT's ability to make cash distributions. FFO is defined in the October 1999 "White Paper", issued by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") as "net income (or loss) computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains (or losses) from sales of property, plus real estate depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures." Lexington's method of calculating FFO may be different from methods used by other REITs and accordingly is not comparable to such other REITs. FFO should not be considered an alternative to net income as an indicator of operating performance or to cash flows from operating activities as determined in accordance with GAAP, or as a measure of liquidity to other consolidated income or cash flow statement data as determined in accordance with GAAP. 35 45 NET 1 L.P. SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------------------ ----------------- 1996 1997 1998 1999 2000 2000 2001 ------- ------- ------- -------- ------- ------- ------- (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) INCOME STATEMENT DATA: Rental revenues..................... $ 2,707 $ 2,992 $ 3,265 $ 3,375 $ 4,774 $ 2,462 $ 2,863 Interest and other income........... 117 88 82 169 163 102 37 Interest expense.................... 388 469 510 764 1,605 750 810 Depreciation........................ 393 439 476 510 941 424 506 General and administrative.......... 496 317 474 455 447 183 247 Transaction costs................... -- -- 74 -- 400 -- -- Gain on sale of properties, net..... -- -- -- 3,371 -- -- -- ------- ------- ------- -------- ------- ------- ------- Net income.......................... $ 1,547 $ 1,855 $ 1,813 $ 5,186 $ 1,544 $ 1,207 $ 1,337 ======= ======= ======= ======== ======= ======= ======= Net income per unit(A).............. $46.39- $55.85- $54.82- $157.34- $46.97- $36.67- $40.77- $51.03 $61.00 $59.50 $169.87 $50.47 $39.49 $43.72 BALANCE SHEET DATA: Real estate, net.................... $20,575 $23,705 $23,229 $ 36,228 $43,852 $43,687 $43,349 Cash and cash equivalents........... 2,123 1,312 1,688 1,951 782 2,121 1,045 Restricted cash..................... -- -- -- 1,710 -- 1,644 -- Mortgage notes payable.............. 3,552 5,676 5,344 16,272 20,386 23,696 20,039 Partners' capital................... 19,508 19,792 20,034 23,649 23,622 24,070 24,173 Total assets........................ 23,179 25,663 25,534 40,921 46,355 48,369 45,915 Total liabilities................... 3,671 5,871 5,500 17,272 22,733 24,299 21,742 OTHER DATA: Net cash flows from operating activities........................ $ 2,013 $ 2,206 $ 2,279 $ 2,602 $ 2,656 $ 1,464 $ 1,450 Net cash flows from investing activities........................ -- (1,205) -- (336) (1,509) (137) -- Net cash flows from financing activities........................ (1,706) (1,812) (1,903) (2,003) (2,316) (1,157) (1,187) Change in cash and cash equivalents....................... 307 (811) 376 263 (1,169) 170 263 Distributions -- limited partners... 1,540 1,540 1,540 1,540 1,540 770 770 Distributions per unit -- limited partners.......................... 50.04 50.04 50.04 50.04 50.04 25.02 25.02 Book value per unit -- limited partners.......................... 639.80 648.84 656.54 771.64 770.80 785.06 788.35 CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES: Income before extraordinary items... $ 1,547 $ 1,855 $ 1,813 $ 5,186 $ 1,544 $ 1,207 $ 1,337 Add: Interest expense.................. 388 469 510 764 1,605 750 810 ------- ------- ------- -------- ------- ------- ------- Total............................... $ 1,935 $ 2,324 $ 2,323 $ 5,950 $ 3,149 $ 1,957 $ 2,147 ======= ======= ======= ======== ======= ======= ======= Fixed Charges: Interest on indebtedness including capitalized interest............ $ 388 $ 469 $ 510 $ 764 $ 1,605 $ 750 $ 810 ======= ======= ======= ======== ======= ======= ======= Ratio of earnings to fixed charges........................... 4.99 4.96 4.55 7.79 1.96 2.61 2.65
--------------- (A) Amounts vary depending upon the date on which a limited partner was admitted to the partnership. 36 46 NET 2 L.P. SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ------------------------------------------------- ----------------- 1996 1997 1998 1999 2000 2000 2001 ------- ------- -------- -------- ------- ------- ------- (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS) INCOME STATEMENT DATA: Rental revenues...................... $ 5,442 $ 5,934 $ 6,871 $ 10,086 $10,126 $ 4,990 $ 5,526 Interest and other income............ 471 149 92 248 541 274 140 Interest expense..................... 1,568 1,875 2,277 4,696 4,785 2,267 2,198 Depreciation......................... 994 1,074 1,238 2,049 2,049 968 1,037 Amortization of deferred expenses.... 143 136 154 187 383 102 147 General and administrative........... 900 634 744 775 1,011 394 549 Transaction costs.................... -- -- 74 -- 400 -- -- Gain on sale of properties, net...... -- -- 4,516 784 -- -- 480 ------- ------- -------- -------- ------- ------- ------- Net income........................... $ 2,308 $ 2,364 $ 6,992 $ 3,411 $ 2,039 $ 1,533 $ 2,215 ======= ======= ======== ======== ======= ======= ======= Net income per unit(A)............... $4.02- $4.20- $12.62- $6.24- $3.77- $2.82- $4.11- $5.23 $5.30 $15.55 $7.53 $4.48 $3.38 $4.85 BALANCE SHEET DATA: Real estate, net..................... $43,418 $49,722 $ 61,512 $ 75,957 $94,281 $95,352 $90,051 Cash and cash equivalents............ 4,125 2,181 518 566 777 1,192 1,519 Restricted cash...................... 100 -- 9,861 12,508 -- -- -- Mortgage notes payable............... 17,181 22,106 41,519 51,927 59,254 59,663 55,183 Partners' capital.................... 32,518 32,447 37,004 37,980 37,584 38,296 38,582 Total assets......................... 50,002 55,001 78,918 90,433 97,607 98,512 94,618 Total liabilities.................... 17,484 22,554 41,914 52,453 60,023 60,216 56,036 OTHER DATA: Net cash flows from operating activities......................... $ 3,444 $ 3,370 $ 3,452 $ 4,638 $ 3,929 $ 2,333 $ 2,625 Net cash flows from investing activities......................... -- (2,319) (21,887) (21,438) (7,865) (7,855) 3,673 Net cash flows from financing activities......................... (52) (2,995) 16,772 16,848 4,147 6,148 (5,556) Change in cash and cash equivalents........................ 3,392 (1,944) (1,663) 48 211 626 742 Distributions -- limited partners.... 2,386 2,386 2,386 2,386 2,386 1,193 1,193 Distributions per unit -- limited partners........................... 5.00 5.00 5.00 5.00 5.00 2.50 2.50 Book value per unit -- limited partners........................... 68.91 68.76 78.12 80.13 79.31 80.77 81.36 CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES: Income before extraordinary items.... $ 2,308 $ 2,364 $ 6,992 $ 3,411 $ 2,039 $ 1,533 $ 2,215 Add: Interest expense................... 1,568 1,875 2,277 4,696 4,785 2,267 2,198 Amortization of debt costs......... 143 136 154 187 383 102 147 ------- ------- -------- -------- ------- ------- ------- Income before gain on sale of real estate, net as adjusted............ $ 4,019 $ 4,375 $ 9,423 $ 8,294 $ 7,207 $ 3,902 $ 4,560 ======= ======= ======== ======== ======= ======= ======= Fixed Charges: Interest on indebtedness including capitalization interest.......... $ 1,568 $ 1,875 $ 2,277 $ 4,696 $ 4,785 $ 2,267 $ 2,198 Amortization of debt costs......... 143 136 154 187 383 102 147 ------- ------- -------- -------- ------- ------- ------- Combined fixed charges............... $ 1,711 $ 2,011 $ 2,431 $ 4,883 $ 5,168 $ 2,369 $ 2,345 ======= ======= ======== ======== ======= ======= ======= Ratio of earnings to fixed charges... 2.35 2.18 3.88 1.70 1.39 1.65 1.94
--------------- (A) Amounts vary depending upon the date on which a limited partner was admitted to the partnership. 37 47 RISK FACTORS Before you decide how to vote on the Transaction proposals, you should be aware that there are various risks involved in the Transaction. In addition to the other information included in this Joint Consent and Proxy Solicitation Statement/Prospectus, you should carefully consider the following list that summarizes the material risks related to the mergers. THE LIMITED PARTNERS' INVESTMENT, AFTER THE CLOSING DATE OF THE MERGERS, WILL BE SUBJECT TO PRICE FLUCTUATIONS. AS A RESULT OF THESE FLUCTUATIONS, THE FAIR MARKET VALUE OF THE MERGER CONSIDERATION AFTER THE TRANSACTION MAY NOT CORRESPOND TO THE ADJUSTED NET ASSET VALUE OF THE NET PARTNERSHIPS. The prices of the common shares will fluctuate after the Transaction with changes in market and economic conditions, the financial condition of Lexington and other factors that generally influence the market prices of securities, including the market perception of REITs in general. Also, it is possible that, within a short period of time after consummation of the Transaction or at other times, a significant number of shareholders, including former limited partners who receive common shares in the Transaction and the holders of any of Lexington's convertible securities, may seek to sell a relatively large number of such common shares with a potentially consequent adverse effect on the trading price. Such fluctuations may depress the market price of Lexington common shares independent of the financial performance of Lexington. For example, REIT stocks underperformed in the broader equity market in 1998 and 1999. The market conditions for REIT stocks generally could affect the market price of the Lexington common shares. The closing price of Lexington common shares on the New York Stock Exchange on September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, was $14.28 per share. As a result of these fluctuations, the fair market value of the merger consideration received by the limited partners in exchange for the Net Partnership investments may not correspond to the agreed upon adjusted net value of the Net Partnerships. THE NUMBER OF LEXINGTON COMMON SHARES WHICH WILL BE EXCHANGED FOR NET 1 UNITS AND NET 2 UNITS WILL BE DETERMINED BASED UPON THE AVERAGE CLOSING PRICE OF THOSE SHARES, SUBJECT TO A FIXED MAXIMUM AND MINIMUM. AS A RESULT, THE FAIR MARKET VALUE OF THE MERGER CONSIDERATION WHICH THE LIMITED PARTNERS WILL RECEIVE PER UNIT IN THE FORM OF LEXINGTON COMMON SHARES IS UNCERTAIN, AND MIGHT NOT EQUAL 50% OF THE ADJUSTED NET ASSET VALUE PER UNIT OF NET 1 AND NET 2, RESPECTIVELY. The minimum and maximum number of common shares offered as merger consideration is fixed. The number of common shares issuable in exchange for each Net 1 unit will be limited to a maximum of 29.3 shares (corresponding to an average closing price of $14.00 per common share) and a minimum of 25.6 common shares (corresponding to an average closing price of $16.00 per common share). The number of common shares issuable in exchange for each Net 2 unit will be limited to a maximum of 2.9 common shares (corresponding to an average closing price of $14.00 per common share) and a minimum of 2.6 common shares (corresponding to an average price of $16.00 per common share). If the average closing price for the common shares is less than $14.00 per share, limited partners of Net 1 will not be entitled to receive more than 29.3 common shares per unit and limited partners of Net 2 will not be entitled to receive more than 2.9 common shares per unit. As a result, the fair market value of the common shares offered to the limited partners might be less than 50% of the agreed upon adjusted net asset value of the Net Partnerships. Conversely, if the average closing price for the common shares is more than $16.00 per share, Lexington will nevertheless be required to issue no fewer than 25.6 common shares per unit to limited partners of Net 1 and 2.6 common shares per unit to limited partners of Net 2. As a result, the fair market value of the common shares offered by Lexington to the Net Partnerships might be more than 50% of the agreed upon adjusted net asset value of the Net Partnerships. As of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, the closing price of common shares was $14.28 per share. At that price, each unit of Net 1 and Net 2 would be exchangeable for 28.7 and 2.9 common shares, respectively. 38 48 IN CALCULATING THE TOTAL MERGER CONSIDERATION BEING OFFERED TO LIMITED PARTNERS, THE PARTIES AGREED TO DEDUCT AN ESTIMATE OF THE COSTS WHICH WOULD BE INCURRED BY THE NET PARTNERSHIPS IF THEY WERE TO LIQUIDATE, DESPITE THE FACT THAT THESE COSTS WILL NOT ACTUALLY BE INCURRED. The amount of the merger consideration being offered to each of the Net Partnerships is based upon the agreed upon adjusted net asset value of each of the Net Partnerships. In calculating the adjusted net asset value, the parties agreed to deduct from the agreed upon fair market value of the properties an amount equal to the assumed liquidation costs which would be incurred if the properties were being sold even though those costs will not actually be incurred as part of the Transaction. These costs were estimated to be $6 million. THE ASSESSMENTS AS TO THE VALUE OF THE NET PARTNERSHIPS' PROPERTY PORTFOLIOS WHICH FORMED THE BASIS ON WHICH THE MERGER CONSIDERATION WAS DETERMINED WERE BASED UPON A NUMBER OF ASSUMPTIONS THAT MAY OR NOT PROVE TO BE ACCURATE. The agreed upon merger consideration to be received by the limited partners was reached in part by a valuation process which considered a number of factors for the Net Partnerships' properties, which included tenant creditworthiness, comparable market rents, length and quality of leases, strategic importance of property to tenants, local economic conditions and estimated capitalization rates. This valuation process may not represent the true worth or realizable value of the Net Partnerships' properties. THE FAIR MARKET VALUE OF THE MERGER CONSIDERATION AS OF THE EFFECTIVE DATE OF THE MERGERS MAY NOT EQUAL THE AGREED UPON ADJUSTED NET ASSET VALUE OF THE NET PARTNERSHIPS. The calculation of the merger consideration will be based on the agreed upon adjusted net asset value of the Net Partnerships. It is likely that the dissenter debentures, if sold, would be at a discount to par. Therefore, the fair market value of the dissenter debentures is likely to be less than their principal amount. As a result of these factors, the fair market value of the merger consideration, as of the effective date of the mergers, might be less than the agreed upon adjusted net asset value of the Net Partnerships at such time. THE LIMITED PARTNERS MAY HAVE SUBSTANTIAL DIFFICULTY RESELLING THE DISSENTER DEBENTURES. Following the Transaction, there will be no public market for the dissenter debentures, and no market for the dissenter debentures is expected to develop, making it difficult for the holders of the dissenter debentures to sell them, with or without a substantial discount. THE DISSENTER DEBENTURES WILL BE SUBORDINATED TO CERTAIN OBLIGATIONS OF LEXINGTON'S CREDITORS. The dissenter debentures will represent senior subordinated indebtedness of Lexington, expressly subordinated, in right and priority of payment, to all senior indebtedness of Lexington, and will be effectively subordinated to the claims of creditors of Lexington's subsidiaries. As of June 30, 2001, on a pro forma basis, Lexington would have had aggregate liabilities to which the dissenter debentures were effectively subordinated, of approximately $447.4 million. In addition, payments on any dissenter debentures issued by Lexington in connection with the Transaction would be subordinated to any secured debt incurred by Lexington. Lexington may increase its level of secured or unsecured senior debt after the closing of the Transaction, further increasing the amount of indebtedness to which the dissenter debentures will be subordinated. FAILURE TO REALIZE THE ANTICIPATED BENEFITS OF THE TRANSACTION COULD HAVE A NEGATIVE IMPACT ON THE MARKET PRICE OF LEXINGTON COMMON SHARES. The general partners of the Net Partnerships believe that the Transaction will result in greater liquidity of investment for the limited partners, diversification of risk and cost savings. The Board of Trustees of Lexington believe that the Transaction will result in diversification of the shareholders' risk, increase the distributions to shareholders and improve Lexington's access to capital markets. While the general partners and the Board of Trustees believe the Transaction will produce these benefits, it is possible that the anticipated benefits of the Transaction might not be realized. The failure of the mergers to be accretive to Lexington's funds from 39 49 operations and cash flow may result in lower financial returns and reduced distributions to shareholders of Lexington. This could reduce the market price of the common shares of Lexington. AS A RESULT OF THE TRANSACTION, LIMITED PARTNERS AND LEXINGTON'S SHAREHOLDERS WILL BOTH HAVE THEIR RESPECTIVE OWNERSHIP AND VOTING INTERESTS DILUTED. Prior to the Transaction, the limited partners of each Net Partnership have 99% of the ownership and voting interest in their respective Net Partnerships, and Lexington's existing shareholders have 100% of the ownership and voting interest in Lexington. Upon consummation of the Transaction, the Net 1 and Net 2 limited partners are expected to have 3.4% and 5.3%, respectively, of the ownership and voting interest in Lexington, and Lexington's existing shareholders are expected to hold 91.3% of the ownership and voting interest in Lexington. Lexington is authorized to issue additional equity securities, and the sale of such securities following the Transaction may have the effect of diluting the earnings, cash flow and book value per common share. Additional common shares may also be issued by Lexington under its Dividend Reinvestment Plan. Any future issuance of common shares could adversely affect the market price of the common shares and further dilute the ownership interest of shareholders of Lexington. THE LIMITED PARTNERS OF THE NET PARTNERSHIPS AND THE EXISTING SHAREHOLDERS OF LEXINGTON ARE BEING ASKED TO GIVE THEIR CONSENT TO THE TRANSACTION WITHOUT KNOWING THE CAPITAL STRUCTURE OF LEXINGTON AFTER THE TRANSACTION. Lexington's shareholders and the limited partners are being asked for their consent to the Transaction without knowing the percentage of limited partners that will elect to receive dissenter debentures in lieu of the other merger consideration offered in the Transaction or the number of common shares the limited partners will receive in the Transaction, since the number of common shares that may be issued will be determined based on the average closing price. As a result, Lexington's shareholders and limited partners of the Net Partnerships will not know the dilution of their investment nor the debt level of the entity in which they have their investment prior to consenting to the Transaction. NO INDEPENDENT REPRESENTATIVE HAS BEEN RETAINED TO ACT ON BEHALF OF THE LIMITED PARTNERS OR LEXINGTON'S SHAREHOLDERS FOR PURPOSES OF NEGOTIATING OR STRUCTURING THE TERMS OF THE TRANSACTION. IF AN INDEPENDENT REPRESENTATIVE HAD BEEN RETAINED, THE TERMS OF THE TRANSACTION MAY HAVE BEEN MORE FAVORABLE TO THE LIMITED PARTNERS OR LEXINGTON'S SHAREHOLDERS. Neither the general partners nor Lexington's Board of Trustees retained an independent representative to act on behalf of the limited partners or Lexington's shareholders, respectively, in structuring and negotiating the terms and conditions of the Transaction. The Net Partnerships did not give any group of limited partners the power to negotiate the terms and conditions of the Transaction or to determine what procedures to use to protect the rights and interests of the limited partners. In addition, no investment banker, attorney, financial consultant or expert was engaged to represent the interests of the limited partners or Lexington's shareholders. The management of Lexington and the general partners of the Net Partnerships negotiated and structured all the terms and conditions of the Transaction. The general partners are controlled by Mr. Roskind. Mr. Roskind is the Chairman of the Board of Trustees, Co-Chief Executive Officer and a shareholder of Lexington. Independent representation may have resulted in more favorable merger terms to the limited partners or Lexington's shareholders. THE MERGERS ARE TAXABLE EVENTS FOR THE LIMITED PARTNERS. THE LIMITED PARTNERS MAY INCUR TAXES UPON CONSUMMATION OF THE MERGERS. The limited partners will realize taxable gain or loss in the mergers. The general partners have determined that a limited partner's estimated taxable gain for each Net 1 unit and each Net 2 unit would be approximately $40.76 and $4.87, respectively. This estimate assumes that the limited partner has held one Net 1 unit or one Net 2 unit since the inception of its Net Partnership and that the average closing price of Lexington common shares is $15.00, which is the midpoint of the range for determining the number of common shares to be issued. This estimate may or may not prove accurate and the underlying assumptions may or may not apply to 40 50 a limited partner. The limited partners will not receive cash, other than cash received as 50% of their merger consideration or in lieu of fractional shares, to pay any taxes due on any taxable gain. A limited partner's taxable gain per unit as described above is only an estimate and will vary by partner. The amount of a limited partner's taxable gain or loss will depend on whether the limited partner receives common shares and cash or elects to receive dissenter debentures. Based on recently issued, final Treasury regulations, a consenting limited partner that receives common shares and cash will be treated as selling its Net units. A limited partner that does not consent to sale treatment and elects to receive dissenter debentures will be allocated its share of taxable gain or loss from its respective Net Partnership, which will be deemed to sell its assets to Net 3 in a taxable transaction in exchange for all dissenter debentures elected by its limited partners. A limited partner that receives dissenter debentures should not recognize further gain or loss upon the liquidation of its respective Net Partnership. As discussed below, consenting and dissenting limited partners will be treated differently based on the recently issued, final Treasury regulations regarding partnership mergers. However, due to their recent and complex nature, there can be no assurance that the Internal Revenue Service will apply the regulations as described above. Limited partners should consult their own tax advisors concerning the tax consequences of the mergers to them. LIMITED PARTNERS MAY SELL SOME OR ALL OF THEIR COMMON SHARES TO PAY THE TAXES INCURRED BECAUSE OF THE TRANSACTION, POTENTIALLY LEADING TO A DECLINE IN THE MARKET PRICE OF THE COMMON SHARES. Even though limited partners are expected to receive cash which they may use to pay any tax liability for taxable gains resulting from the Transaction, the incurrence of such tax liability may induce limited partners to sell some or all of their common shares received in the Transaction and use the cash proceeds towards the payment of tax liability due to federal, state and local authorities. As a result, it is possible that a substantial number of common shares may be resold immediately after the Transaction, leading to a decline in the market price of the common shares. THE GENERAL PARTNERS OF THE NET PARTNERSHIPS ARE CONTROLLED BY E. ROBERT ROSKIND, WHO IS ALSO THE CO-CHIEF EXECUTIVE OFFICER AND A TRUSTEE OF LEXINGTON, AND THEREFORE HAVE CONFLICTS OF INTEREST IN RECOMMENDING THE TRANSACTION. The conflicts of interest involved in the Transaction include the following: - Mr. Roskind, the Chairman of the Board of Trustees and Co-Chief Executive Officer of Lexington, controls the general partners of the Net Partnerships. As a member of the Board of Trustees, an officer of Lexington and a controlling owner of the general partners, Mr. Roskind may have a different interest in the completion of the Transaction than the interests of the limited partners or those shareholders of Lexington that are not affiliated with the Net Partnerships. No independent representative has been retained to act on behalf of the limited partners for purposes of negotiating or structuring the terms of the Transaction. As a result, the terms of the mergers were not determined as a result of arm's length negotiations between two independent parties. - If the Transaction is consummated, the general partners of the Net Partnerships will receive operating partnership units in Net 3 in return for their contribution of general partnership interest in the Net Partnerships in a tax-deferred transaction. The receipt of these operating partnership units is tax-deferred to the general partners, whereas the Transaction is a taxable event for the limited partners. It is possible that, if the general partners had not been affiliated with Lexington, the terms of the Transaction, including the number of common shares that may be issued to the limited partners in the Transaction, might have been more advantageous to the limited partners. - Following the Transaction, Mr. Roskind will continue as Chairman of the Board of Trustees and Co-Chief Executive Officer of Lexington. As such, Mr. Roskind will be entitled to receive share options under Lexington's share option plan which may be in a greater amount than if the Transaction had not occurred. These share options may appreciate in value if the benefits of the Transaction are realized. 41 51 - Lexington will enter into an indemnification agreement with each of the general partners, which will provide indemnification protection to each of the general partners and their respective affiliates with respect to claims which could arise in connection with the proposed Transaction, whether or not the Transaction is consummated. When you consider the recommendation of the general partners, keep in mind that their interests may differ significantly from your interests with respect to the Transaction. THE FAIRNESS OPINIONS OF PRUDENTIAL SECURITIES AND COHEN & STEERS, AND THE APPRAISALS OF STANGER & CO., WERE PREPARED IN RELIANCE ON INFORMATION WHICH WAS PROVIDED BY LEXINGTON'S MANAGEMENT AND THE GENERAL PARTNERS, WITHOUT INDEPENDENT VERIFICATION. Prudential Securities' opinion as to the fairness of the merger consideration to Lexington's shareholders from a financial point of view, Cohen & Steers' opinions as to the fairness of the merger consideration to the limited partners from a financial point of view, and Stanger & Co.'s appraisals of the properties of the Net Partnerships each were prepared in reliance on financial and other information provided by Lexington's management and the general partners. This information was not independently verified by Prudential Securities or Cohen & Steers or Stanger & Co. Furthermore, Lexington's management has a conflict of interest in connection with the information it provided, because, as discussed above, Mr. Roskind is the Chairman of the Board of Trustees and Co-Chief Executive Officer of Lexington and also controls the general partners of the Net Partnerships, and the general partners have a conflict of interest in connection with the information they provided, because it affects the value of the consideration which they will receive in exchange for their general partnership interests. LEXINGTON COULD INCREASE ITS LEVERAGE, RESULTING IN INCREASED DEBT SERVICE REQUIREMENTS AND GREATER RISK OF DEFAULT ON ITS OBLIGATIONS. If the Transaction is consummated, and assuming that no limited partners elect to receive their merger consideration in the form of dissenter debentures, Lexington will incur additional indebtedness, substantially in the form of the mortgages payable of the Net Partnerships, of approximately $75.0 million as a result of this Transaction. Lexington's Declaration of Trust does not contain any limitation on the amount or percentage of indebtedness that Lexington may incur in the future. Accordingly, Lexington could become more highly leveraged, resulting in an increase in debt service requirements and an increased risk of default on its obligations which could adversely affect its financial condition and results of operations and its ability to pay distributions on the common shares and interest and principal on the dissenter debentures. Additionally, increases in Lexington's leverage may adversely affect the market price of Lexington common shares. The ratio of mortgages and notes payable to total assets of Lexington as of December 31, 1996 to December 31, 2000 and as of June 30, 2001 was 60.9%, 47.6%, 54.8%, 56.7%, 58.0% and 58.9%, respectively. While management does not anticipate substantially increasing the ratio of debt to total assets for Lexington in the future, management's plans and expectations may change with changes in market conditions and on account of other unanticipated events or factors. LEXINGTON'S ABILITY TO SERVICE THE DISSENTER DEBENTURES WILL DEPEND ON VARIOUS FACTORS, SOME OF WHICH ARE OUTSIDE THE CONTROL OF LEXINGTON. Lexington's ability to make interest and principal payments under the dissenter debentures will depend upon revenue received from properties, the operating expenses of Lexington, the interest expense incurred in its other borrowings, capital expenditures, general economic conditions and a number of other factors and circumstances. Some of these factors are beyond Lexington's control. INTEREST RATE FLUCTUATIONS WILL IMPACT THE PRICE OF LEXINGTON COMMON SHARES. It is likely that the public valuation of Lexington common shares will be based primarily on the earnings derived by Lexington from rental income with respect to the properties and not from the underlying appraised value of the properties themselves. As a result, interest rate fluctuations and capital market conditions can 42 52 affect the value of Lexington common shares. For instance, if interest rates rise, it is likely that the price of Lexington common shares will decrease because potential investors may require a higher dividend yield on Lexington common shares as market rates on interest-bearing securities, such as bonds, rise. LEXINGTON HAS INTEREST EXPOSURE FROM VARIABLE RATE INDEBTEDNESS WHICH MAY AFFECT LEXINGTON'S NET INCOME. Lexington has exposure to market risks relating to increases in interest rates due to its variable rate debt. An increase in interest rates may increase Lexington's costs of borrowing on existing variable rate indebtedness leading to a reduction in Lexington's net income. Specifically, Lexington maintains an unsecured credit facility and three mortgage notes encumbering three properties for which interest accrues at a variable rate. As of June 30, 2001, Lexington's variable rate indebtedness represented 9.5% of total mortgages and notes payable and had a weighted average interest rate of 7.0%. Had the weighted average interest rate been 100 basis points higher, Lexington's net income for the six months ended June 30, 2001 would have been reduced by $240,000. The level of Lexington's variable rate indebtedness, along with the interest rate associates with such variable rate indebtedness, may change in the future and materially affect Lexington's interest costs and net income. LEXINGTON MAY HAVE TO RAISE CASH ON UNATTRACTIVE TERMS TO SATISFY ONGOING INTEREST PAYMENT OBLIGATIONS WITH RESPECT TO THE DISSENTER DEBENTURE OBLIGATIONS. Lexington believes that it can satisfy its obligations to pay interest under the dissenter debentures from available resources, including cash reserves and operating revenues. However, if Lexington lacks sufficient funds to satisfy these obligations, it would need to access funds from other sources and could be required to sell one or more of its properties on unattractive terms. THE DISSENTER DEBENTURES WILL NOT BE SUBJECT TO A SINKING FUND. Lexington will not be required to set aside funds for a sinking fund, which is a device which could be used for the retirement or repayment of the dissenter debentures at any time prior to maturity. Lexington may not be able to provide for repayment of the dissenter debentures out of existing cash resources upon maturity, nor be able to refinance such indebtedness either on favorable terms or at all. Accordingly, the default risk with respect to the dissenter debentures may be greater. LEXINGTON'S GROWTH STRATEGY INVOLVES THE ACQUISITION AND DEVELOPMENT OF ADDITIONAL PROPERTIES. IF LEXINGTON IS UNABLE TO CARRY OUT ITS STRATEGY, ITS FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED AND DISTRIBUTIONS MAY BE REDUCED. Lexington's growth strategy is based on the acquisition and development of additional properties, including the properties to be acquired in the mergers and other acquisitions through co-investment programs. In the context of Lexington's business plan, "development" generally means an expansion or renovation of an existing property or the acquisition of a newly constructed property. Lexington typically provides a developer with a commitment to acquire a property upon completion of construction. In this manner, Lexington invests in newly developed properties but is insulated from any of the risks associated with development. Lexington's plan to grow through the acquisition and development of new properties could be adversely affected by trends in the real estate and financing businesses. Lexington cannot be sure that it will be able to implement its strategy because Lexington may have difficulty finding new properties, negotiating with new or existing tenants or securing acceptable financing. If Lexington is unable to carry out its strategy, its financial condition and results of operations could be adversely affected. Acquisitions of additional properties entail the risk that investments will fail to perform in accordance with expectations, including operating and leasing expectations. Redevelopment and new project development are subject to numerous risks, including risks of construction delays, cost overruns or force majeure that may increase project costs, new project commencement risks such as the receipt of zoning, occupancy and other 43 53 required governmental approvals and permits, and the incurrence of development costs in connection with projects that are not pursued to completion. Lexington anticipates that some of its acquisitions and developments will be financed using the proceeds of periodic equity or debt offerings, lines of credit or other forms of secured or unsecured financing that will result in a risk that permanent financing for newly acquired projects might not be available or would be available only on disadvantageous terms. If permanent debt or equity financing is not available on acceptable terms to refinance acquisitions undertaken without permanent financing, further acquisitions may be curtailed or cash available for distribution may be adversely affected. LIMITED PARTNERS WHO RECEIVE LEXINGTON COMMON SHARES OR DISSENTER DEBENTURES WILL CONTINUE TO HAVE THEIR INVESTMENT SUBJECT TO THE BUSINESS RISKS WHICH EQUITY PARTICIPANTS FACE IN THE BUSINESS OF OWNING AND DEVELOPING REAL ESTATE PROPERTIES. Like the limited partners' investments in the Net Partnerships, an investment in Lexington common shares or dissenter debentures is subject to the ongoing risks of investing in real property. In general, a downturn in the national or local economy, changes in the zoning or tax laws or the availability of financing could affect the performance and value of the properties. Also, because real estate is relatively illiquid, Lexington may not be able to respond promptly to adverse economic or other conditions by varying its real estate holdings. Also, properties currently held by Lexington or acquired by Lexington in the Transaction or subsequent to the Transaction: - may not operate at a profit; - may not perform to Lexington's expectations; - may not appreciate in value; - may depreciate in value; - may not ever be sold at a profit; - may result in the loss of a portion of the investment of Lexington's shareholders; and - may not result in dividends. The marketability and value of any properties will depend upon many factors beyond Lexington's control. Any of these factors, individually or in the aggregate, could have an adverse effect on the financial condition and results of operations of Lexington. UPON EXPIRATION OF CURRENT LEASES, LEXINGTON MAY NOT BE ABLE TO RENEW OR OTHERWISE ENTER INTO NEW LEASES ON FAVORABLE TERMS. The leases of Lexington's existing properties expire on dates ranging from 2002 to 2021. For example, approximately 0.9% of the leases (based on annualized rental rent) will expire in the year 2002, while 2.1% of the leases will expire in 2003 and 6.8% in 2005. Upon the expiration of a lease, Lexington may not enter into new leases at comparable lease rates, or without incurring additional expenses. The inability to renew or enter into new leases will reduce Lexington's cash available for distribution. LEXINGTON WILL ASSUME UNDISCLOSED PARTNERSHIP LIABILITIES WHICH MAY RESULT IN MATERIAL ADVERSE CONSEQUENCES TO ITS FINANCIAL POSITION. At the closing of the Transaction, Lexington effectively will assume each Net Partnerships' liabilities, including those that are (1) undisclosed and (2) disclosed but contingent liabilities for which the Net Partnership failed to provide adequate reserves. Undisclosed and/or contingent liabilities might include, among others, claims for cleanup or remediation of unknown environmental conditions, tenant or vendor claims for pre-merger activities, unpaid liabilities unintentionally omitted from the closing balance sheets, 44 54 claims for indemnification by the general partners and other indemnified parties for premerger events, and claims for undisclosed title defects. The satisfaction of any such liability could decrease Lexington's profits or decrease the value of the properties and therefore, decrease the value of Lexington's assets after the mergers. While the general partners have established reserves for contingent liabilities, such contingent liabilities are often difficult to accurately estimate and may be, along with undisclosed contingent liability, inherently impossible to estimate or quantify. The existence of any of such contingent liabilities could result in material adverse consequences to Lexington's financial position and decrease cash available for distribution. PERCEPTIONS IN THE MARKETPLACE THAT THE MERGERS ARE DILUTIVE TO THE SHAREHOLDERS OF LEXINGTON COULD ADVERSELY AFFECT THE PRICE OF COMMON SHARES. Limited partners who receive Lexington common shares, as well as current Lexington shareholders, will have their investment subject to the risk that the price of the common shares could be adversely affected if the mergers are perceived in the marketplace as dilutive or otherwise negative to the shareholders of Lexington. Although the Board of Trustees does not believe the Transaction to be dilutive, should investors perceive, for example, that the merger consideration paid in the Transaction is too high relative to the value of the Net Partnerships, demand for Lexington common shares could decrease, causing the market price of the common shares to fall. ON A PRO FORMA PER UNIT EQUIVALENT BASIS, THE MERGERS ARE IMMEDIATELY DILUTIVE TO BOTH NET INCOME AND BOOK VALUE OF THE NET PARTNERSHIPS. On a pro forma per unit equivalent basis, the mergers are immediately dilutive to both per unit net income and book value of the Net Partnerships. Specifically, the diluted pro forma net income per unit for the year ended December 31, 2000 is reduced for Net 1 by $19.35 - $22.85 to $27.62 per unit, and for Net 2 is reduced by $1.01 - $1.72 to $2.76 per unit, and the diluted pro forma net income per unit for the six months ended June 30, 2001 is reduced for Net 1 by $26.27 - $29.22 to $14.50 per unit, and for Net 2 is reduced by $2.66 - $3.40 to $1.45 per unit. The immediate dilution of book value as of June 30, 2001 for Net 1 is $71.84 per unit and for Net 2 is $9.80 per unit. ALTERNATIVES TO THE TRANSACTION COULD HAVE RESULTED IN HIGHER PROCEEDS THAN THE MERGER CONSIDERATION. If a Net Partnership approves its respective merger, its limited partners will forego alternatives to the merger, including continuing each Net Partnership pursuant to its existing partnership agreement or liquidating its portfolio of properties, allowing its limited partners to receive proceeds from the sale of the Net Partnerships' properties. Although the general partners believe the limited partners will receive greater consideration as a result of the Transaction than if the Net Partnerships were continued in their present form or liquidated, it is possible that a limited partner's share of liquidation proceeds could be higher than the amount realized from the consideration received in the mergers. FOLLOWING THE MERGERS, THE INVESTMENT OF THE LIMITED PARTNERS WILL NO LONGER HAVE PASS-THROUGH ENTITY TAX STATUS. Limited partners who become shareholders in Lexington will have changed their investment from a limited partnership interest in a pass-through entity for federal income tax purposes to an investment in the common shares or the dissenter debentures of a REIT. Limited partners who become shareholders of Lexington will be unable to deduct any losses realized by Lexington on their federal income tax returns. LIMITED PARTNERS WHO RECEIVE COMMON SHARES WILL BY SUBJECT TO SIGNIFICANTLY GREATER DISCRETION AFFORDED THE MANAGEMENT OF LEXINGTON. Lexington is a Maryland statutory real estate investment trust, and its Declaration of Trust does not restrict the types of investments it can make. As a result, Lexington may elect at any time to invest in properties that are different from those in which the Net Partnerships invested. 45 55 At present, Lexington's investment criteria are substantially the same as those of the Net Partnerships. However, Lexington's investment and financing policies and its policies with respect to all other activities, including its growth, debt, capitalization, distribution and operating policies, may be amended or revised at any time and from time to time at the discretion of Lexington's Board of Trustees. Lexington may change its investment strategy without the consent of its shareholders. Although Lexington has no present intention to change its current investment strategy, Lexington may, if it chooses, pursue a different investment strategy that may be riskier than ownership of triple-net lease properties. Lexington's financing policies and its policies with respect to all other activities, including its growth, debt, capitalization, distribution and operating policies, may be amended or revised at any time and from time to time at the discretion of Lexington's Board of Trustees. Any operating policy changes could adversely affect Lexington's financial condition or results of operations, or the market price of Lexington common shares. LEXINGTON'S FAILURE TO QUALIFY AS A REIT FOR TAX PURPOSES WOULD RESULT IN LEXINGTON'S TAXATION AS A CORPORATION AND THE REDUCTION OF FUNDS AVAILABLE FOR SHAREHOLDER DISTRIBUTION. Paul, Hastings, Janofsky & Walker LLP has given an opinion that Lexington operates in a manner that enables Lexington to meet the requirements for qualification as a REIT for federal income tax purposes and to continue to operate in this manner. A REIT generally is not subject to federal taxes at the corporate level on income it distributes to its shareholders, as long as it distributes at least 90% of its taxable income to its shareholders annually. In addition, the REIT must meet asset tests at the end of each calendar quarter. Lexington has not requested, and does not plan to request, a ruling from the Internal Revenue Service that it qualifies as a REIT. Limited partners should be aware, however, that Lexington's continued qualification as a REIT will depend on Lexington's management meeting various requirements that are discussed in more detail under the heading "FEDERAL INCOME TAX CONSIDERATIONS -- Taxation of Lexington" beginning on page 177. If Lexington fails to qualify as a REIT, it would be subject to federal income tax at regular corporate rates. In addition to these taxes, Lexington is subject to the federal alternative minimum tax and various state income taxes. Unless Lexington is entitled to relief under specific statutory provisions, it could not elect to be taxed as a REIT for four taxable years following the year during which it was disqualified. Therefore, if Lexington loses its REIT status, the funds available for distribution to Lexington shareholders would be reduced substantially for each of the years involved. IF LEXINGTON CANNOT MEET ITS REIT DISTRIBUTION REQUIREMENTS, IT MAY HAVE TO BORROW FUNDS OR LIQUIDATE ASSETS TO MAINTAIN ITS REIT STATUS. As a REIT, Lexington generally must distribute 90% of its taxable income to its shareholders annually. For the purposes of determining taxable income, Lexington may be required to include interest payments, rent and other items it has not yet received and exclude payments attributable to expenses that are deductible in a different taxable year. As a result, Lexington could have taxable income in excess of cash available for distribution. If this occurred, Lexington would have to borrow funds or liquidate some of its assets in order to maintain its REIT status. CHANGES IN THE TAX LAW COULD ADVERSELY AFFECT LEXINGTON'S REIT STATUS. Lexington's treatment as a REIT for federal income tax purposes is based on the tax laws that are currently in effect. Lexington is unable to predict any future changes in the tax laws that could adversely affect Lexington's status as a REIT. In the event that there is a change in the tax laws that prevents Lexington from qualifying as a REIT or that requires REITs generally to pay corporate level federal income taxes, Lexington may not be able to make the same level of distributions to its shareholders. 46 56 LEXINGTON MAY BE LIABLE FOR PROHIBITED TRANSACTION TAXES AND/OR PENALTIES. A violation of the REIT provisions, even where it does not cause failure to qualify as a REIT, may result in the imposition on Lexington of substantial taxes, such as the 100% tax that applies to net income from a prohibited transaction as defined in the Internal Revenue Code. Because the question of whether that type of violation occurs may depend on the facts and circumstances underlying a given transaction, these violations could inadvertently occur. To reduce the possibility of an inadvertent violation, the trustees intend to rely on the advice of legal counsel in situations where they perceive REIT provisions to be inconclusive or ambiguous. Nevertheless, Lexington could be subject to liabilities for violations of REIT provisions. THERE IS A CONCENTRATION OF OWNERSHIP OF LEXINGTON'S SHARES AMONG CERTAIN INVESTORS. SIGNIFICANT CONCENTRATIONS OF OWNERSHIP BY CERTAIN INVESTORS MAY ALLOW SUCH INVESTORS TO EXERT A GREATER INFLUENCE OVER LEXINGTON'S MANAGEMENT AND AFFAIRS. As of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, Lexington had outstanding 2,000,000 Class A Senior Cumulative Convertible Preferred Shares of Beneficial Interest to Five Arrows Realty, L.L.C., representing 8.2% of Lexington's total outstanding voting securities, or 7.6% on a pro forma basis following the Transaction, assuming that the average closing price of Lexington common shares is $15.00, which is the midpoint of the range for determining the number of common shares to be issued. The convertible preferred shares are convertible at any time into common shares on a one-to-one basis. As of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, E. Robert Roskind owned or controlled 327,078 common shares of Lexington and 1,408,590 operating partnership units which are currently convertible into common shares, as well as 253,750 options to purchase common shares representing 7.7% of all voting securities, or 7.1% on a pro forma basis following the Transaction, assuming that the average closing price of Lexington common shares is $15.00, which is the midpoint of the range for determining the number of common shares to be issued. Significant concentrations of ownership may allow such investors to exert a greater influence over Lexington's management and affairs. However, the only influence that Five Arrows Realty has, in addition to its voting power, is that it has the ability to name a trustee to the Board of Trustees of Lexington. DISTRIBUTIONS ARE SUBORDINATE TO DEBT PAYMENTS. Distributions to shareholders of Lexington will be subordinate to the scheduled payment of Lexington's indebtedness, including payments on the dissenter debentures. If Lexington has insufficient funds to pay its indebtedness, future distributions to shareholders will be suspended pending the payment of such debts and obligations. LEXINGTON AND THE NET PARTNERSHIPS WILL INCUR SIGNIFICANT TRANSACTION EXPENSES IN CONNECTION WITH THE TRANSACTION. Lexington and each Net Partnership will bear substantial costs and expenses incurred in connection with negotiating and consummating the Transaction, including the preparation and negotiation of definitive documents, which are expected to total approximately $3.3 million in the aggregate. The transactional expenses may constitute a significant burden and may diminish the value which is realized by the parties to the Transaction. INVESTMENT IN LEXINGTON MAY NOT BE SUITABLE UNDER ERISA AND INDIVIDUAL RETIREMENT ACCOUNT REQUIREMENTS. Fiduciaries of a pension, profit sharing or other employee benefit plan subject to ERISA should consider whether the investment in Lexington securities satisfies the diversification requirements of ERISA, whether the investment is prudent in light of possible limitations on the marketability, whether the investment would be an improper delegation of responsibility for plan assets and whether such fiduciaries have authority to acquire such securities under the appropriate governing instrument and Title I of ERISA. Also, fiduciaries of 47 57 an individual retirement account should consider that an IRA may only make investments that are authorized by the appropriate governing instrument. LEXINGTON, NET 1 OR NET 2 MAY BE LIABLE FOR LIQUIDATED DAMAGES IF THEY TERMINATE THE MERGER AGREEMENTS. In the event the merger agreements between Net 1 or Net 2 and Lexington are terminated, subject to certain exceptions described in the merger agreements, the terminating party may be required to pay a termination fee to the non-terminating party equal to 4.0% of the value of the consideration to be received by the holders of the Net 1 units (in the case of termination of the Net 1 merger agreement) or holders of the Net 2 units (in the case of termination of the Net 2 merger agreement), respectively, under the following circumstances: - the general partner of either Net Partnership or the Board of Trustees of Lexington accepts a proposal for an alternative acquisition transaction; - the general partner of either Net Partnership or the Board of Trustees of Lexington withdraws or adversely modifies their recommendation of the mergers; - the general partner of either Net Partnership or the Board of Trustees of Lexington makes any positive or neutral recommendation regarding any proposal for an alternative acquisition transaction; - the terminating party enters into any agreement which would result in an alternative acquisition transaction occurring; or - the general partner of either Net Partnership or the Board of Trustees of Lexington authorizes any of the actions specified above. The liquidated damages amounts for which the terminating party would be liable total $1.02 million (in the case of termination of the Net 1 merger agreement) or $1.58 million (in the case of termination of the Net 2 merger agreement). MARYLAND REIT LAW INCLUDES PROVISIONS WHICH MAY DISCOURAGE A CHANGE IN CONTROL OF MANAGEMENT OF LEXINGTON AND/OR ADVERSELY AFFECT THE MARKET PRICE OF LEXINGTON COMMON SHARES. Anti-takeover provisions of Maryland law could make it more difficult for a third party to acquire control of Lexington, even if a change in control would be beneficial to shareholders. These provisions could have the effect of delaying, deterring or preventing a change in the control of Lexington, could deprive the shareholders of an opportunity to receive a premium for their common shares as part of a sale of Lexington or may otherwise discourage a potential acquirer from attempting to obtain control of Lexington, which in turn could materially adversely affect the market price of the common shares. 48 58 THE MERGERS The following discussion describes the material aspects of the mergers and the terms of the merger agreements. Please note, however, that even though the following information describes all material provisions, the description provided below is a summary and does not set forth all the provisions of the merger agreements. For a complete description of the Transaction, you are encouraged to read the terms of the merger agreement applicable to your respective Net Partnership, which is attached as either Annex A-1 or Annex A-2 to this Joint Consent and Proxy Solicitation Statement/Prospectus. REASONS FOR THE TRANSACTION -- NET PARTNERSHIPS The primary objectives of each of the Net Partnerships are to: - protect the capital of the limited partners; - provide the limited partners with distributions from operating cash flow; - provide the limited partners with capital appreciation resulting from rising real property values over projected ten-year holding periods; and - provide tax benefits so that a portion of the cash distributions is sheltered from current income taxation. The general partners believe that the Net Partnerships have assembled portfolios of real properties that have been net-leased to a diverse and generally creditworthy tenant base. The Net Partnerships have also provided limited partners with quarterly distributions from operating cash flow. However, distributions have not increased over the terms of the Net Partnerships, as expected, but rather have declined since the peak in distribution levels during calendar years 1989 (Net 1) and 1990 (Net 2). The decline in distributions by both Net Partnerships can primarily be attributed to bankruptcy and other tenant credit problems which resulted in properties being re-leased at lower rent levels. The general partners also decided to establish larger reserves out of operating cash flow so that each Net Partnership would have sufficient liquidity to make capital improvements and fund re-tenanting costs if necessary. Each Net Partnership suffered a substantial decrease in net asset value from inception to December 31, 1993. In the case of Net 1, net asset value per unit declined to $712.48 per unit as of December 31, 1993 compared to an original unit cost of $1,000. In the case of Net 2, net asset value per unit declined to $65.58, per unit as of December 31, 1993 compared to an original unit cost of $100. In order to address these declines, in 1994, the general partners solicited the consent of limited partners to implement a limited growth plan for the Net Partnerships. This plan, which was approved by the limited partners, allowed the Net Partnerships to become more active real estate investors by increasing mortgage indebtedness, reinvesting sales proceeds and extending the anticipated life of the Net Partnerships. In spite of the recovery in the real estate markets and the general partners' attempts to establish a growth plan for the Net Partnerships, as a result of the Net Partnerships' limited financial flexibility, the general partners do not believe that the Net Partnerships in their current form will be able to achieve two of their primary objectives of protecting the capital invested by limited partners or delivering capital appreciation to limited partners. While the general partners expect that the Net Partnerships will have sufficient capital resources to satisfy their capital needs to operate the Net Partnerships, the general partners also believe that both Net Partnerships would benefit from a larger asset base and enhanced access to, and flexibility in, obtaining outside capital. Additional capital would provide the Net Partnerships with enhanced flexibility in refinancing balloon mortgages currently encumbering a number of the Net Partnerships' properties. Enhanced access to capital could also enable the Net Partnerships to become active real estate investors and acquire additional real property investments. Both Net Partnerships are currently restricted in their ability to borrow additional funds or raise equity to acquire additional properties. Neither Net Partnership has a line of credit or other borrowing source available to it from which funds can be drawn to facilitate balloon mortgage refinancings or to acquire additional real 49 59 property investments, and the general partners do not believe that obtaining a significant line of credit is practicable for either Net Partnership. In addition, both Net Partnerships are currently prohibited under the terms of their partnership agreements from raising additional capital through the sale of equity securities. Even if the Net Partnerships were to amend their partnership agreements to allow them to raise additional equity capital, the general partners do not believe that additional equity capital could be raised by either Net Partnership on favorable terms within their current organizational structure. Moreover, the general partners believe that the structure of the Net Partnerships is not responsive to the needs of limited partners, many of whom currently desire liquidity in their investments in the Net Partnerships, and that limited partners are burdened by cumbersome federal and state income tax rules and reporting obligations. Furthermore, many limited partners have been frustrated by the lack of capital appreciation and distribution growth from the Net Partnerships. REASONS FOR THE TRANSACTION -- LEXINGTON Lexington became a NYSE-listed REIT in October 1993. Since that time it has successfully grown its portfolio from $216 million of assets to $668 million in assets at December 31, 2000. More importantly, funds from operations have grown from $1.12 per share in 1993 to $1.76 in 2000, a compound annual growth rate of 6.7% and the average annual total return to shareholders has been approximately 16.4% through December 31, 2000. The Transaction will allow Lexington to continue to grow in a way that management believes is beneficial to shareholders. Lexington believes that the Transaction will have a positive impact on the factors that affect the market price of its common shares. These factors include, but are not limited to: - portfolio quality and diversification; - market capitalization - long term growth rate of funds from operations and cash available for dividends; and - reduction of perceived conflicts of interest. Lexington believes that the Transaction will improve its portfolio diversification and overall quality, grow its market capitalization and enhance growth in funds from operations and dividends. Moreover, the Transaction will complete the consolidation of entities controlled by E. Robert Roskind and The LCP Group, L.P. into Lexington, thereby reducing perceived conflicts of interest. In addition, Lexington believes that the Transaction provides a substantial growth opportunity for Lexington that will not be dilutive to shareholders. Further, Lexington already manages the Net Partnerships. As a result, Lexington believes that it is better positioned to underwrite the acquisition than it would be if it did not manage the properties owned by the Net Partnerships. BACKGROUND OF THE TRANSACTION In 1996, the general partners began to consider alternatives for the Net Partnerships that would build on the 1994 growth plan and enhance their capital raising capacity and investment flexibility to better position the Net Partnerships to achieve their original investment objectives. The general partners evaluated three possible strategic alternatives: - continuation of the Net Partnerships; - liquidation of the Net Partnerships; and - a combination of the Net Partnerships with a publicly traded REIT specializing in net-lease investments. The general partners believed that a continuation or liquidation of the Net Partnerships was less desirable than a combination with a publicly traded REIT specializing in net-lease investments and would subject the limited partners to greater risk. 50 60 The general partners believed that in a liquidation there would be uncertainty regarding the prices certain properties could be sold for and whether they could be sold at all. Accordingly, there would be a risk that a significant portion of rental payments on the unsold properties would be used to pay ongoing partnership operating expenses, thereby reducing distributions to limited partners as a percentage of rental revenue. The general partners also believed that the combination with another entity would be superior because it would provide the Limited Partners not only with liquidity but with the ability to choose when to sell their investment. A combination with an existing larger company was deemed more advantageous for the limited partners than a continuation of the Net Partnerships due to such larger entity's (i) greater flexibility in accessing capital for growth, (ii) greater portfolio diversification available in a larger company, (iii) greater liquidity in their investment; (iv) greater financial strength, and (v) likelihood of greater distributions. The general partners believed that a combination of the Net Partnerships with a publicly traded net-lease investment company would, if structured in an equitable and efficient manner, be most beneficial to the limited partners by providing them both an opportunity to invest in a larger, more diversified net-lease portfolio and an opportunity for liquidity. A net-lease investment company is a real estate company that focuses on acquiring net-leased properties. A net lease is a lease under which the tenant is generally responsible for paying property operating costs. To this end, the general partners began informal discussions with Lexington regarding a potential transaction. E. Robert Roskind and affiliates are the stockholders of the general partners of the Net Partnerships. Although Mr. Roskind is also Chairman of Lexington's Board of Trustees and its Co-Chief Executive Officer, he did not represent Lexington in any aspect of negotiations or discussions between the parties. T. Wilson Eglin, President and Chief Operating Officer of Lexington, represented Lexington with the approval of the Board of Trustees. Mr. Roskind represented the Net Partnerships. Lexington and the general partners are different parties. Mr. Roskind and Mr. Eglin evaluated a transaction in which the limited partners would have received Lexington common shares in exchange for their limited partnership interests and reviewed the merits of such a transaction as they related to the limited partners and Lexington's shareholders. Mr. Eglin discontinued the talks upon determining that the transaction would likely be dilutive to Lexington's shareholders, subsequent to which the general partners continued implementing their investment strategy for the Net Partnerships. Following the discontinuation of the merger discussions with Lexington in 1996, the general partners studied the financial statements and portfolios of publicly traded net-lease companies including Trinet Corporate Realty Trust, Realty Income Corporation, Captec Net Lease Realty, Inc. and Commercial Net Lease Realty, Inc. This review was undertaken with a view toward understanding the investment strategies, tenant credit quality, portfolio composition, funds from operations and dividend growth, and management strength of these companies. The general partners continued to believe that a combination with Lexington would be beneficial because Lexington had the most similar investment strategy and portfolio composition compared to the Net Partnerships, superior tenant credit quality and general purpose real estate compared to the other companies, and an established record of growth in funds from operations and dividends. In early 1998, Mr. Roskind recommenced discussions with Mr. Eglin concerning a potential combination. At the time, Lexington common shares were trading at a premium to its net asset value. As a result, both Mr. Roskind and Mr. Eglin believed that a transaction could be structured using Lexington common shares as the merger consideration, which would meet the general partner's criteria and not be dilutive to Lexington's shareholders. However, in July 1998, the market price of Lexington common shares and that of other publicly traded real estate companies began to decline. Mr. Eglin discontinued discussion when it was determined that the potential transaction would be dilutive to Lexington's shareholders. On November 11, 1998, Mr. Roskind met with Mr. Eglin to discuss the terms under which Lexington would be prepared to make an all cash offer for the Net Partnerships. Because of the diverse property types in their portfolios, including convenience stores and gas stations, Mr. Roskind believed that an offer to purchase the portfolios by Lexington or another party would likely be at a discount to net asset value. On November 17, 1998, Mr. Eglin met with Mr. Roskind and verbally proposed that Lexington acquire the limited and general partnership interests for $64.2 million, subject to raising the required capital by selling 4.76 million Lexington 51 61 common shares at a price of $13.50 per share. Mr. Roskind advised Mr. Eglin that the general partners would not consider an offer subject to such a financing contingency. In September 1999, Mr. Eglin again approached Mr. Roskind and suggested transaction structures that could address the general partners' criteria for fair consideration, greater dividends and safety of principal in an entity that would continue to have a net-lease-oriented investment strategy. On September 7, 1999, Lexington retained Prudential Securities Incorporated to assist it in analyzing the Net Partnerships and structuring the Transaction and to provide an opinion as to the fairness of the Transaction to Lexington. Lexington and the Net Partnerships had, from time to time in the past, bought and sold properties from and to each other. See "CONFLICTS OF INTEREST -- Related Party Transactions/Prior Dealings" on page 79. In September 1999, Lexington sold two properties to Net 1, despite the ongoing discussions between them regarding the potential merger transaction. These sales were consummated, despite the possibility that Lexington would reacquire those properties in the potential merger transaction because Net 1 had previously sold other properties and needed to acquire properties in order to defer its taxable gain under Section 1031 of the Internal Revenue Code. The properties purchased from Lexington met the Section 1031 requirements, and the general partner believed that aborting the acquisitions would have had negative tax consequences for the limited partners of Net 1. On November 10, 1999, Mr. Eglin met with Mr. Roskind in order to discuss whether a transaction involving common shares would be possible. With Lexington shares trading at a discount to net asset value, this proposal would have valued the Net Partnerships at a corresponding discount to their net asset value. Although this transaction would have provided liquidity, portfolio diversification and greater distributions to the limited and general partners, the general partners were not willing to consider a transaction that was based on a discounted net asset value. On February 9, 2000, Mr. Eglin met with Mr. Roskind in order to discuss a transaction in which Lexington would have acquired the limited and general partnership interests in exchange for a new class of common or preferred shares. This transaction would have provided the benefits of portfolio diversification and greater distributions but without the liquidity available from Lexington common shares. Mr. Roskind advised Mr. Eglin that any proposal would have to include 50% common shares or cash so that limited partners could have the benefit of liquidity. On May 24, 2000, Lexington's Board of Trustees discussed the possibility of a transaction involving the Net Partnerships and the advantages and disadvantages of a potential merger and generally concluded that such a transaction would be beneficial. On May 27, 2000, Mr. Eglin made a proposal to Mr. Roskind and after further negotiations, the parties agreed in principle to the idea of structuring a transaction involving common shares and convertible subordinated debentures and began negotiating a non-binding term sheet setting forth the general outlines of the Transaction. As part of this decision to move forward with the Transaction, the general partners and Lexington agreed that any transaction involving Lexington acquiring the Net Partnerships would have to be based upon the net asset value of the Net Partnerships and be accretive to Lexington's funds from operations per share. The term sheet was entered into on July 11, 2000. Under the terms of the term sheet agreed to by the parties on July 11, 2000, it was contemplated that Lexington would issue merger consideration totaling $64.2 million, with $24.0 million issued to Net 1 and $40.2 million issued to Net 2. In valuing the properties and arriving at the merger consideration of $64.2 million, Lexington considered numerous factors relating to the properties owned by the Net Partnerships and the proposed transaction including, but not limited to, (i) the terms of the leases of the Net Partnerships' properties, (ii) projected and current cash flows, (iii) tenant credit quality, (iv) rents per square foot compared to Lexington's estimate of market; (v) the potential impact of the proposed transaction on Lexington's balance sheet, funds from operations and dividend coverage, (vi) the terms of the underlying mortgage debt, and (vii) the information contained in the appraisals by Robert A. Stanger & Co., Inc. Based on its review of the foregoing factors, Lexington reached the following conclusions. The properties owned by the Net Partnerships had a weighted average lease term of approximately nine years, compared to a weighted average lease term of eight years in Lexington's portfolio. Lexington projected that the current cash flows of the Net Partnerships would exceed dividends and interest payments payable on the merger 52 62 consideration by approximately $500,000. In addition, Lexington believed that the average tenant credit strength in the Net Partnerships' portfolio was comparable to Lexington's. In its analysis, Lexington believed that the net rents per square foot in the Net Partnerships' portfolio were on average 5% above market and that the Net Partnership's mortgage debt, which bears interest at approximately 8% per annum, on average, represented a market rate. Moreover, Lexington considered the potential negative impact of significantly increasing its indebtedness as a result of the transaction. As of June 30, 2000, Lexington's total debt was $372.5 million, or 56.9% of gross assets. In connection with the Transaction, Lexington estimated that it would be adding debt of between $109.8 million and $141.6 million, or 77% to 99% of the total transaction value, raising Lexington's leverage ratio to between 61.6% and 65.5% of gross assets on a pro forma basis. The merger consideration would consist of: (a) $642,000 of operating partnership units issued to the general partners; (b) up to $63.5 million (but not less than $31.78 million) of Lexington's 8% convertible subordinated debentures due 2012; and (c) the balance of the merger consideration in the form of Lexington common shares. The number of Lexington common shares issuable would be determined based upon an average twenty day trading price, subject to a lower pricing limit of $11.00 per share and an upper pricing limit of $13.00 per share. The convertible subordinated debentures were to be convertible by the holder into common shares at $14.50 per share after five years. Lexington could have redeemed these securities with cash or common shares after five years, subject to the common shares trading above $14.50 per share. On July 6, 2000, the general partners retained Cohen & Steers to render to the general partners of each Net Partnership an opinion as to the fairness, from a financial point of view, of the consideration to be received by the partners of the Net Partnerships. Following execution of the term sheet, both the general partners and Lexington conducted extensive due diligence of the properties owned by each of Lexington, Net 1 and Net 2, and began drafting merger agreements and this Joint Consent and Proxy Solicitation Statement/Prospectus. Upon being retained by the general partners, Cohen & Steers was provided with a summary of the proposed transaction. Beginning on July 6, 2000, Cohen & Steers reviewed the proposed transaction and projected operating results of the Net Partnerships and Lexington, conducted due diligence on Lexington's properties, leases and financial statements, studied the liquidation and going concern alternatives for the Net Partnerships and performed a series of valuations, including a theoretical valuation of the convertible debt securities that constituted half of the proposed merger consideration. On October 10, 2000, Cohen & Steers informed the general partners that, based on the terms of the convertible subordinated debentures provided for in the July 11, 2000 term sheet, the theoretical value of the convertible subordinated debentures was significantly below their principal value due to terms, including conversion price, conversion features, coupon rate and maturity, which when taken as a whole, were less favorable than the terms of other comparable securities. Moreover, Cohen & Steers suggested that the allocation of the merger consideration between the Net Partnerships was not consistent with the relative values of each Net Partnership. The general partners inquired of Cohen & Steers as to potential modifications that could be made to the originally proposed terms of the convertible subordinated debentures in order to increase their theoretical value and thereby bring the aggregate value of the merger consideration in line with the general partners' expectations. In response to that inquiry, Cohen & Steers explained to the general partners that the theoretical value of the convertible subordinated debentures could be increased by, for example, decreasing the conversion price, increasing the coupon rate, decreasing maturity, decreasing the non-convertibility period, or any combination of those changes. Following these discussions with Cohen & Steers, the general partners informed Lexington that the Net Partnerships would not enter into the merger agreements unless Lexington improved its offer in order to address the concerns raised by Cohen & Steers. During its due diligence of the Net Partnerships, Lexington received financial information from the general partners regarding the properties and the Net Partnerships, and Lexington independently researched market rents and reviewed each property to determine the probability of renewal at the expiration of the base term of the lease. Based on this information, Lexington determined 53 63 that long-term cash flows and capital appreciation prospects for the Net Partnerships' properties were marginally greater than previously projected and that, therefore, it would be able to improve its offer. The primary reasons Lexington agreed to increase its offer were (i) its determination, based on its due diligence, that rents per square foot in the Net Partnerships' portfolio were, on average, at market rate levels, (ii) its belief that the average interest rates on the Net Partnerships' mortgages could be refinanced at maturity at interest rates twenty-five points lower than existing rates, and (iii) its belief that the sublease of the Rancho Bernardo, California property owned by Net 1 by Cymer, Inc. improved tenant credit quality and increased the probability of a lease renewal on that property. During October 2000, Mr. Roskind and Mr. Eglin negotiated revisions to the terms of the proposed transaction which would address the concerns raised by Cohen & Steers regarding coupon, conversion price and timing, and maturity. As a result of these negotiations, Lexington improved its original offer by increasing in equal measure the value of the common shares to be issued and the principal amount of the convertible subordinated debentures to be issued. In addition, the terms of the convertible subordinated debentures were changed as follows: (i) the interest rate was increased from 8% per annum to 8.5% per annum, (ii) the conversion price was lowered from $14.50 to $14.00, (iii) the maturity date was reduced from twelve years to eight years, and (iv) the conversion date was reduced from five years to four years. The general partners informed Cohen & Steers of these changes, and, upon considering these revisions, Cohen & Steers determined that, when taken as a whole, these changes had the effect of increasing the theoretical value of the convertible securities and the overall merger consideration, and therefore adequately addressed their earlier concerns. The resulting merger consideration agreed to by the parties was as follows: (a) $650,000 of operating partnership units issued to the general partners; (b) up to $64.35 million (but not less than $32.175 million) of Lexington's 8.5% convertible subordinated debentures due 2009; and (c) the balance of the merger consideration in the form of common shares. On October 24, 2000, Mr. Eglin and Mr. Roskind agreed in principle on these revisions, and the revised terms are the terms of the Transaction as reflected in this Joint Consent and Proxy Solicitation Statement/ Prospectus. On October 30, 2000, the general partners met with Cohen & Steers to review their analysis of the Transaction. The general partners determined that they had negotiated a transaction that would be fair from a financial point of view. On October 31, 2000, a special meeting of the Board of Trustees of Lexington was held to consider the proposed transaction. At this meeting, senior management of Lexington and Prudential Securities made detailed presentations to the Board of Trustees concerning all material aspects of the proposed transaction, including the financial terms. Mr. Roskind recused himself from the proceedings. On November 9, 2000 Cohen & Steers met with the general partners and rendered its fairness opinion to the Net Partnerships. On November 10, 2000, another special meeting of the Board of Trustees of Lexington was held to consider the terms of the proposed merger agreement and to further evaluate the financial terms of the Transaction. At this meeting, senior management and Lexington's legal advisors, Paul, Hastings, Janofsky & Walker LLP, provided the trustees with additional information concerning the terms of the merger agreement, this Joint Consent and Proxy Solicitation Statement/Prospectus and the financial terms of the proposed merger, and Prudential Securities rendered its fairness opinion. At this meeting, the Board of Trustees of Lexington, excluding Mr. Roskind, who recused himself from the proceedings, approved the Transaction. On November 13, 2000, Lexington and the Net Partnerships entered into the merger agreements, and Net 3 and the general partners entered into the contribution agreements with respect to the contribution of their general partnership interests to Net 3. 54 64 On June 30, 2001, Mr. Roskind contacted Mr. Eglin to discuss revising the merger consideration in order to provide greater liquidity to the limited partners. Based on conversations with several limited partners of the Net Partnerships, Mr. Roskind believed that a transaction involving cash and common shares would be viewed more favorably by the limited partners than the previously agreed upon transaction. Due to favorable conditions in the capital markets and an increase in Lexington's common share price, Mr. Eglin believed that Lexington could pay a portion of the merger consideration in cash without diluting Lexington's shareholders. As a result, Mr. Eglin agreed to ask Lexington's Board of Trustees to revise Lexington's offer to provide for cash instead of the convertible subordinated debentures. On July 9, 2001, Mr. Eglin, on behalf of Lexington, offered to revise the terms of the transaction. Under the new proposal limited partners would receive cash of $32,175,000 instead of convertible subordinated debentures, with the balance continuing to be paid in Lexington common shares. The number of common shares issuable would be determined based upon an average twenty-day trading price, subject to a lower pricing limit of $14.00 per share and an upper pricing limit of $16.00 per share. The general partner would receive its pro rata 1% share, valued at $650,000, in operating partnership units subject to the same share pricing limits. Mr. Eglin believed that the revised transaction would be favorable to Lexington because it would involve issuing fewer shares and add less debt to Lexington's balance sheet. On July 13, 2001, Mr. Eglin and Mr. Roskind agreed in principle on these revisions, and the revised terms are the terms of the transaction as reflected in this Joint Consent and Proxy Solicitation Statement/ Prospectus. On July 16, 2001, a meeting of the Board of Trustees of Lexington was held and the revised terms of the transaction were reviewed and approved. On the same day, the general partners met with Cohen & Steers to review their analysis of the revised transaction terms, and on July 19, 2001, Cohen & Steers rendered its fairness opinions to the general partners based on the forms of the amendments to the previously executed merger agreements. The general partners determined that they had negotiated a transaction that would be fair from a financial point of view. On July 19, 2001, Lexington and the Net Partnerships entered into amendments to the merger agreements, and Net 3 and the general partners of the Net Partnerships entered into amendments to the contribution agreements with respect to the contribution of their general partnership interests to Net 3. On July 30, 2001, Prudential Securities delivered its fairness opinion to the Board of Trustees, stating that, as of that date, the merger consideration was fair to the shareholders of Lexington from a financial point of view. THE BOARD OF TRUSTEES' REASONS AND RECOMMENDATIONS FOR THE MERGER The Board of Trustees of Lexington, including the independent trustees, believe that the terms of the merger agreements are fair from a financial point of view to Lexington's shareholders and are in the best interests of Lexington and its shareholders. Accordingly, the entire Board of Trustees, other than E. Robert Roskind who did not vote because of his affiliation with the Net Partnerships, has unanimously approved the merger agreements and the issuance of the merger consideration, and recommends that Lexington's shareholders vote for approval of the merger agreements and the issuance of the merger consideration. In negotiating and agreeing to the terms and conditions of the mergers, the Board of Trustees has acted solely on behalf of Lexington. In conducting its negotiations in connection with the mergers, the Board of Trustees owed a fiduciary duty only to the shareholders of Lexington, whose interests in connection with the mergers conflict with those of the limited partners. The Board of Trustees' determination as to the fairness of the mergers are directed only to the Lexington shareholders and not to the limited partners. In reaching its decision, the Board of Trustees consulted with Lexington's management and considered many factors. In addition, the Board of Trustees consulted with Prudential Securities, which was engaged by Lexington to render an opinion to Lexington as to the fairness of the merger consideration, from a financial point of view, to be paid by Lexington. 55 65 The following are the principal reasons why and how the Board of Trustees made their determinations. The Board of Trustees did not assign any relative weight to these reasons. - Analysis of Net Partnerships. The Board of Trustees received and reviewed presentations from, and had discussions with, executive officers of Lexington and Prudential Securities regarding the business, real estate assets, financial, accounting and due diligence with respect to the Net Partnerships, as well as the terms and conditions of the merger agreements. These presentations and discussions all supported the mergers. - Fairness of Merger Consideration. The Board of Trustees has concluded that the merger consideration is a fair price from the viewpoint of Lexington and its shareholders. The Board of Trustees received and approved the Prudential Securities fairness opinion that the consideration to be paid by Lexington in the mergers is fair, from a financial point of view, to Lexington as of the date of such opinion, based upon and subject to matters stated in that opinion. - Increase in Cash Flow and Funds From Operations. Based on its analysis of the pro forma financial statements included in this Joint Consent and Proxy Solicitation Statement/Prospectus, forecasts and projections prepared by Lexington's management and their analysis of the operating history and potential of Lexington and the Net Partnerships, the Board of Trustees believes that the mergers should help increase Lexington's cash flow and funds from operations. As a result, the Board of Trustees believes there is greater potential for increased distributions to Lexington shareholders and for appreciation in the price of the Lexington common shares than there would be without the mergers. Based on its analysis, the Board of Trustees believes the mergers will be accretive to Lexington's funds from operations and cash flow primarily because of the operational advantages Lexington has over each of the Net Partnerships. - Risk Diversification. The combination of the portfolio of properties owned by the Net Partnerships with Lexington's existing portfolio of properties would diversify the shareholders' investment over a larger number of properties. This diversification will reduce the dependence of the shareholders' investment upon the performance of, and the exposure to the risks associated with, the portfolio of properties currently owned by Lexington. Moreover, the Board of Trustees believes that Lexington's administrative costs, as a percentage of total assets, should decrease in the future because of efficiencies of scale realized as its investment portfolio increases in size. - Greater Access to Capital. As of June 30, 2001, on a pro forma basis, the mergers will substantially increase Lexington's total capitalization and increase its assets from approximately $677 million to approximately $819 million. The Board of Trustees believes Lexington's increased size will increase the attractiveness of Lexington to potential investors. The Board of Trustees believe that, following the Transaction, Lexington will have improved access to capital markets for future growth as a result of the larger total equity market capitalization of the combined entity. - Knowledge of Properties. Lexington previously owned six of the properties currently owned by the Net Partnerships and manages the Net Partnership's portfolio of properties. As a result of Lexington's knowledge of, and familiarity with, the Net Partnerships' assets, the Board of Trustees of Lexington believes that Lexington will be able to quickly and effectively assimilate the Net Partnerships' properties into its portfolio of properties. IN RECOMMENDING APPROVAL OF THE MERGERS, THE BOARD OF TRUSTEES OF LEXINGTON ALSO CONSIDERED THE FOLLOWING NEGATIVE ASPECTS OF THE TRANSACTION, AMONG OTHERS: - Failure to Realize Benefits. The anticipated benefits of the Transaction might not be fully realized. - The Value of the Properties Held by the Net Partnerships May Be Less Than the Merger Consideration. The amount of the merger consideration is based upon the agreed upon adjusted net asset value of the Net Partnerships. Lexington and the general partners reached this agreed upon adjusted net asset value after an evaluation of all the available information as to the assets, liabilities, costs and other factors 56 66 which impact the valuation of the Net Partnerships. If any of these factors are not accurate, the agreed upon adjusted net asset value of the Net Partnerships may not reflect their actual value. - Increase in Leverage. If the Transaction is consummated, Lexington will assume and incur substantial indebtedness in the form of the mortgages payable of the Net Partnerships and the dissenter debentures. This increased leverage could adversely affect Lexington's financial condition and results of operations, the market price of its common shares and its ability to make distributions. - Fixed Minimum Number of Common Shares. The minimum number of common shares to be exchanged as merger consideration is fixed. If the average price for the common shares during the 20 day period prior to, but not including, the closing date of the mergers is more than $16.00 per share, Lexington will nevertheless be obligated to issue to the limited partners of the Net Partnerships the same number of common shares per unit as it would have been obligated had the average price been $16.00 per share. - Transaction Costs. Lexington will bear significant costs, estimated to be approximately $2.01 million, in connection with consummating the Transaction. - Smaller Percentage Ownership Interest. Shareholders will have a smaller percentage ownership and voting interest in Lexington. The current shareholders voting percentage will be reduced to 91.3% following consummation of the Transaction. - Dilution of Ownership Interest. There is a risk of dilution of Lexington's current shareholders in the event the merger consideration exceeds the fair market value of the Net Partnerships. The Board of Trustees believes that the benefits and advantages of the mergers outweigh the negative factors and risks. THE GENERAL PARTNERS' REASONS AND RECOMMENDATIONS FOR THE MERGER The general partners believe that the terms and conditions of the mergers are fair to and in the best interests of the respective limited partners. The general partners approved the merger agreements and recommend that the limited partners consent to the approval and adoption of their respective merger agreement and amendment of their agreement of limited partnership. The determinations of the general partners are directed only to the limited partners of the Net Partnerships and not to Lexington's shareholders. The following are the principal reasons why and how the general partners made their determination as to which no relative weight was assigned. - Analysis of Lexington and the Merger Agreements. The general partners analyzed the business, real estate assets and financial condition of Lexington, as well as the terms and conditions of the merger agreements. These analyses and discussions supported the mergers. The general partners believed, based on their analyses and methodology, that the merger consideration represents a fair estimate of the value of the Net Partnerships. The general partners concluded that an investment in Lexington will be accretive to Lexington common shares, including common shares issued to the limited partners in the mergers. - Comparison of Alternative Transactions. The general partners reviewed the value of the consideration to be received by limited partners if their respective Net Partnership was acquired by Lexington, and the general partners compared it to the consideration that limited partners might have received if they continued their investment in that Net Partnership without change or if that Net Partnership had been liquidated. The general partners concluded that the likely value of the merger consideration would be higher than the value of the consideration limited partners would have received if the general partners had elected either of those other alternatives. - Cohen & Steers Fairness Opinions. The general partners retained Cohen & Steers to render a fairness opinion regarding the fairness, from a financial point of view, of the merger consideration. Cohen & 57 67 Steers rendered fairness opinions to the effect that, as of the date of such opinions, the merger consideration is fair, from a financial point of view, to the limited partners. - Greater Liquidity for Limited Partners. The general partners believe that following the Transaction the limited partners will have greater liquidity of investment, since the common shares will trade on the New York Stock Exchange. Currently, the limited partners' ability to sell their units is limited because the units are not listed on an exchange. - Risk Diversification. By combining the Net Partnerships with Lexington, the mergers will create an investment portfolio substantially larger and more diversified than the portfolio of the individual Net Partnerships, thus reducing the limited partners' exposure to economic downturns in any particular region or type of property. The general partners determined that the combination of the properties owned by the Net Partnerships with Lexington's existing properties result in a reduction of the limited partners' current dependence upon the performance of, and the exposure to the risks associated with, the particular group of properties currently owned by the Net Partnerships. As of June 30, 2001, Net 1, Net 2 and Lexington have ownership interests in 9, 15, and 73 properties, respectively. - Greater Access to Capital. The general partners believe that, following the Transaction, Lexington will have improved access to capital markets for future growth as a result of the larger total equity market capitalization of the combined entity. If the Transaction is consummated, Lexington will control assets having a historical value of approximately $819 million. The general partners believe that Lexington's capital base makes it a more attractive candidate for the services of investment banking firms, financial institutions, institutional lenders and others interested in placing large amounts of capital. - Cost Savings. The combination of the Net Partnerships under the ownership of Lexington will result in administrative cost savings. As separate legal entities with different investors, each of the Net Partnerships must segregate its assets and liabilities to avoid commingling, conduct operations independently and maintain separate books and records for the preparation of financial statements, tax returns, investor information and, as required, reports and filings to be made to various governmental regulatory agencies. The general partners, therefore, believe that, by combining the Net Partnerships into a single ownership entity, the mergers should eliminate much of the duplication in reporting, filing and other administrative services, simplifying administration of the consolidated entities. - Dissenters' Option. The general partners considered that limited partners have the opportunity to vote for or against the merger of their respective Net Partnership. If they vote against the Transaction, they will have the right to elect to receive their merger consideration in the form of dissenter debentures in lieu of common shares and cash. - No Further Schedule K-1s. The general partners believe that the mergers will result in simplified tax administration for most limited partners. Shareholders will receive Form 1099-DIV to report their distributions from Lexington. Form 1099-DIV is substantially easier to understand than the more complicated Schedule K-1 prepared for the reporting of the financial results of the Net Partnerships. In recommending the mergers, the general partners also considered the following negative aspects of the Transaction, among others: - Taxable Transaction. The limited partners will realize taxable gain or loss in the mergers. Limited partners receiving common shares and cash will be able to liquidate their common shares and use the cash proceeds towards the payment of any taxes due on any taxable gain. - Transaction Costs. The Net Partnerships will bear significant costs, estimated to be approximately $0.63 million each, in connection with consummating the Transaction. - Failure to Realize Benefits. The anticipated benefits of the mergers might not be fully realized. - Increase in Leverage. If the Transaction is consummated, Lexington will incur substantial indebtedness. This increased leverage could adversely affect Lexington's financial condition and results of 58 68 operations, the market price of its common shares and its ability to make distributions or payments on the dissenter debentures. - Fluctuations in the Value of the Merger Consideration. The prices at which the common shares may trade, upon resale, will fluctuate following the mergers, and may not correspond to 50% of the fair market value of the Net Partnerships. - Fixed Maximum Number of Common Shares. The maximum number of common shares to be exchanged as merger consideration is fixed. If the average closing price is less than $14.00 per share, limited partners will not be entitled to receive any more common shares per unit than they would have received had the average price been $14.00 per share. - Smaller Percentage Ownership Interest. Limited partners will have a smaller percentage ownership and voting interest in Lexington following consummation of the Transaction than they currently have in their respective Net Partnership. The voting interests of holders of Net 1 units and Net 2 units in Lexington following consummation of the Transaction will be 3.4% and 5.3%, respectively. - Dilution to Net Income and Book Value. On a pro forma per unit equivalent basis, the mergers are immediately dilutive to both per unit net income and book value of the Net Partnerships. Specifically, the diluted pro forma net income per unit for the year ended December 31, 2000 is reduced for Net 1 by $19.35 - $22.85 to $27.62 per unit, and for Net 2 is reduced by $1.01 - $1.72 to $2.76 per unit, and the diluted pro forma net income per unit for the six months ended June 30, 2001 is reduced for Net 1 by $26.27 - $29.22 to $14.50 per unit, and for Net 2 is reduced by $2.66 - $3.40 to $1.45 per unit. The immediate dilution of book value as of June 30, 2001 for Net 1 is $71.84 per unit and for Net 2 is $9.80 per unit. - No Independent Representation. The general partners considered the fact that they did not retain an unaffiliated representative to negotiate on behalf of the Net Partnerships, either individually or together, or on behalf of the limited partners, in the mergers. In light of the wide variety of factors, both positive and negative, considered by the general partners, the general partners were not able to quantify or otherwise assign relative weights to the specific factors considered in making their determination. The general partners believe the negative factors considered were not sufficient, either individually or collectively, to outweigh the possible benefits considered by the general partners in their deliberations relating to the mergers. The general partners also believe that the Transaction has been structured so as to be procedurally fair to the limited partners. The limited partners have not had independent representation during the course of the merger discussions. In determining not to engage an independent representative for the limited partners, the general partners were faced with the conflicts of interest with respect to the Net Partnerships and limited partners discussed elsewhere in this Joint Consent and Proxy Solicitation Statement/Prospectus. See "CONFLICTS OF INTEREST" beginning on page 78 and "RISK FACTORS" beginning on page 38. The general partners believe that the absence of independent representation of the Net Partnerships is mitigated by the Net Partnerships similarity to Lexington regarding their investments and financial condition and their longstanding relationship with Lexington. The Net Partnerships have the same investment objectives as Lexington, their properties are generally located in the same markets and are of similar size and quality. The general partners were responsible for acquiring each Net Partnership's properties and are familiar with each property, its condition and its local market. The properties of each Net Partnership are under triple net leases to the same type of tenants with similar credit risks as those of Lexington. As of June 30, 2001, Net 1, Net 2 and Lexington derived 27%, 40% and 63% of their revenue from investment grade tenants, respectively. 59 69 The general partners also believe that limited partners interests are protected because: - the general partners thoroughly analyzed the Transaction and its alternatives; - the general partners had available to them the appraisal report of Stanger & Co. with respect to 22 of the 25 properties owned by the Net Partnerships, and the 2000 appraisal reports of Stanger & Co. were within 1.5% and 0.8% of the agreed upon fair market property values for Net 1 and Net 2, respectively; - the general partners retained Cohen & Steers to render a fairness opinion to each of the Net Partnerships; - the Transaction requires approval of a majority in interest of the limited partners in both Net Partnerships; and - limited partners who deny consent to the Transaction have the option of electing to receive their merger consideration in the form of dissenter debentures in lieu of common shares and cash. The general partners, therefore, believe that all of these factors have enabled them to adequately evaluate, negotiate and determine a fair value for their respective Net Partnership in a manner consistent with their fiduciary duty to the limited partners. THE MERGER CONSIDERATION LIMITED PARTNERS. Holders of Net 1 units and Net 2 units will be entitled to receive, per unit, 50% of the agreed upon adjusted net asset value of their respective Net Partnership in the form of Lexington common shares, with the remaining 50% of the agreed upon adjusted net asset value payable in the form of cash. Assuming that no limited partners elect to receive their merger consideration in the form of dissenter debentures, and assuming further that the average closing price of Lexington common shares is $15.00, which is the midpoint of the range for determining the number of common shares to be issued: - holders of units in Net 1 would receive for each unit they own 27.3 common shares representing a value of $410.19 based on the average closing price plus $410.19 in cash. In the aggregate, the limited partners of Net 1 would receive a total of 841,500 common shares representing a value of $12,622,500 based on the average closing price plus $12,622,500 in cash, in exchange for their 99.0% interests in Net 1; and - holders of units in Net 2 would receive for each unit they own 2.7 common shares representing a value of $40.98 based on the average closing price plus $40.98 in cash. In the aggregate, the limited partners of Net 2 would receive a total of 1,303,500 common shares representing a value of $19,552,500 based on the average closing price plus $19,552,500 in cash, in exchange for their 99.0% interests in Net 2. Notwithstanding the foregoing, limited partners who deny consent to the Transaction may elect to receive dissenter debentures in lieu of the merger consideration described above. GENERAL PARTNERS. The general partner of each Net Partnership owns a 1% capital interest in its Net Partnership. If the Transaction is approved, the general partner of each Net Partnership will receive, in return for contributing its general partnership interest, operating partnership units in Net 3 with an aggregate value equal to 1% of the agreed upon adjusted net asset value of its respective Net Partnership, which will entitle the general partners to receive the same distributions which limited partners will be entitled to receive as holders of common shares. However, the general partners may not redeem their units for Lexington common shares prior to the fifth anniversary of their issuance. The number of units to be issued to the general partners will be determined based upon the number of common shares for which those units would be redeemable at the same average closing price that will be used to determine the number of common shares to be issued to the limited partners. The general partners will receive their operating partnership units in a tax-deferred transaction while the merger consideration to be received by the limited partners will be taxable. Neither the general partners nor their respective affiliates will receive any special compensation in connection with the Transaction. 60 70 The contribution of the general partnership interest of the general partner of each Net Partnership requires the approval of a majority of the units of the respective Net Partnership. As part of their consent to the Transaction, the limited partners are being asked to approve the transfer of the general partnership interests of Net 1 and Net 2 to Net 3. The common shares for which the general partners may redeem their units may not be sold upon or after such redemption except pursuant to a valid registration statement or an exemption from registration under the Securities Act of 1933. By contrast, the common shares to be received by the limited partners will be freely tradable immediately upon issuance. Lexington has agreed to provide registration rights to the general partners as holders of units, upon request, in order to facilitate sales of common shares received in redemption. TERMS OF THE COMMON SHARES Amount........................ The number of common shares will be based upon an average of their closing prices during a 20 day period prior to, but not including, the closing date of the mergers as follows: - for the limited partners of Net 1, the number of common shares to be exchanged for each unit will be limited to a maximum of 29.3 shares and a minimum of 25.6 shares. At the closing price of common shares as of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/ Prospectus, was $14.28, the number of common shares to be exchanged for each unit would be 28.7 shares. - for the limited partners of Net 2, the number of common shares to be exchanged for each unit will be limited to a maximum of 2.9 shares and a minimum of 2.6 shares. At the closing price of common shares as of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, was $14.28, the number of common shares to be exchanged for each unit would be 2.9 shares. The maximum limits above correspond to an average price of $14.00 per share of the common shares and the minimum to an average price of $16.00 per share of the common shares. Terms......................... Holders of common shares are entitled to receive dividends on their common shares to be distributed at the discretion of the Board of Trustees of Lexington. Such dividends payments will be made out of assets legally available for distribution. Holders will also be entitled to share ratably in the assets of Lexington legally available for distribution to its shareholders in the event of its liquidation, dissolution and winding-up after payment of, or adequate provision for, all known debts and liabilities of Lexington. Each outstanding common share entitles the holder to one vote on all matters submitted to a vote of shareholders, including voting in the election of trustees. Holders of common shares have no conversion, sinking fund or redemption rights, or preemptive rights to subscribe for any securities of Lexington. Listing....................... The common shares trade on the New York Stock Exchange. 61 71 Information................... Lexington furnishes its shareholders with annual reports containing consolidated financial statements and an opinion on these financial statements expressed by an independent public accounting firm. TERMS OF THE DISSENTER DEBENTURES Principal Amount.............. Up to $20.0 million, subject to waiver by Lexington. The exact principal amount of the dissenter debentures will be determined at the closing of the Transaction based upon the number of units held by limited partners who elect to receive dissenter debentures and will be subject to the waiver by Lexington of the limit on the amount of dissenter debentures to be issued. Interest...................... 8.5% per annum, on a day-to-day basis, based upon a 365-day year and actual days elapsed, from the closing of the Transaction. Interest will be paid semi-annually in cash in arrears. Repayment of Principal........ Principal on the dissenter debentures is due in one installment on the eighth anniversary of the closing of the Transaction; provided, however, that 80% of the net proceeds of any taxable sale or refinancing of the assets previously owned by either Net Partnership, as applicable, will be used to prepay the dissenter debentures. Prepayment.................... Prepayable in whole or in part at any time. Seniority..................... Expressly subordinated in right and priority of payment to all institutional indebtedness of Lexington outstanding on the closing of the Transaction and any other indebtedness of Lexington issued in the future which is not, by its terms, expressly subordinated to the dissenter debentures. The dissenter debentures are also senior in right and priority of payment to Lexington's existing Class A Senior Cumulative Convertible Preferred Shares and to all other classes of Lexington's capital shares currently authorized or authorized in the future. Remedies...................... If an event of default occurs and is continuing, holders of dissenter debentures will have the following remedies: - the rate of interest on the dissenter debentures will increase to 10.0%, provided that if such event of default is cured or waived, the rate of interest will be reduced, from the date of such cure or waiver, to 8.5%; - automatic acceleration with respect to bankruptcy defaults; and - acceleration upon vote by majority of holders upon non-bankruptcy defaults. COMPARISON OF COMMON SHARES AND CASH VERSUS DISSENTER DEBENTURES In order to assist the limited partners in deciding whether to approve the merger of their respective Net Partnership with Lexington and whether to elect to receive common shares and cash or dissenter debentures, summarized below are the material advantages and disadvantages of owning common shares versus receiving and holding dissenter debentures and the material advantages and disadvantages of receiving cash versus owning dissenter debentures. The summary below first compares the advantages of owning the common shares versus the dissenter debentures and then compares the advantages of receiving cash versus owning the dissenter debentures. 62 72 THE ADVANTAGES OF OWNING THE COMMON SHARES VERSUS DISSENTER DEBENTURES INCLUDE: - The common shares will be freely transferable and listed on the New York Stock Exchange. Limited partners who receive common shares will have the opportunity to liquidate, at their convenience, all or any portion of the common shares that they hold. There will be no public market for the dissenter debentures, and it is unlikely that an active market will develop. - Lexington shareholders may take advantage of growth opportunities, including those resulting from Lexington's ability to raise additional funds through equity or debt financing. Holders of dissenter debentures will not participate in benefits of growth opportunities, including increased dividends and equity value. - Shareholders will be entitled to participate in the dividends and distributions made by Lexington on its common shares. This means that holders of common shares will be entitled to receive dividends and distributions based on their percentage ownership interest of the outstanding common shares. Holders of dissenter debentures will only be entitled to receive interest on, and, at maturity, principal of, the dissenter debentures. - Unlike a holder of dissenter debentures, shareholders will be entitled to vote on matters presented at shareholder meetings and will be entitled to other customary shareholders' rights. - Lexington may redeem the dissenter debentures at any time, in whole or in part, at the face amount of the dissenter debentures, with no prepayment penalty or premium. THE ADVANTAGES OF OWNING DISSENTER DEBENTURES VERSUS COMMON SHARES INCLUDE: - The dissenter debentures have a fixed interest rate and the holders of the dissenter debentures can expect to receive the entire amount of their principal at maturity. The return on a shareholder's investment will depend on the performance of Lexington and the market for the common shares. - The market price for the common shares may fluctuate with changes in market and economic conditions, the financial condition of Lexington and other factors that generally influence the market prices of equity securities. These fluctuations may significantly affect liquidity and market prices independent of the financial performance of Lexington. The dissenter debentures evidence a contractual obligation of Lexington to pay the entire principal amount to the holder. The principal amount of the dissenter debentures and the interest payable to each dissenter will be fixed at the closing of the Transaction and will not fluctuate based on Lexington's financial performance. - A shareholder's right to receive distributions is subordinated to the principal and interest payments payable with respect to all debt obligations of Lexington. This means that prior to making any distribution to holders of common shares, Lexington must pay the interest and, at maturity, the principal owed with respect to the dissenter debentures and its other debt obligations. Thus, to the extent that Lexington does not have sufficient cash to make a distribution after it makes the required principal and interest payments on the dissenter debentures and payments on other debt obligations, holders of common shares will not receive a distribution. - In the event Lexington is liquidated or dissolved, holders of the dissenter debentures will have superior rights to the holders of the common shares upon the distribution of Lexington's assets. The funds from liquidation will be applied to the payment of all the outstanding principal and accrued interest on the dissenter debentures before any distributions may be made to the holders of the common shares. As a result, after all required payments are made to the holders of the dissenter debentures, there may be insufficient funds to make any distributions to the holders of common shares. - Shareholders' percentage ownership interest in Lexington may be diluted at any time. Dilution could occur upon the issuance of additional equity securities, including securities that have priority to cash flow generated from Lexington's operations and to liquidation proceeds derived from the sale of Lexington's assets. The interests of the dissenter debentures will not be diluted by the issuance of additional equity securities. 63 73 - The dissenter debentures provide that 80% of the taxable net proceeds of any sale or refinancing of the assets previously owned by Net 1 or Net 2, as applicable, will be used to prepay the dissenter debentures. However, Lexington historically has disposed of its properties in non-taxable exchange transactions which limits the potential benefits of this requirement. THE ADVANTAGES OF RECEIVING CASH VERSUS OWNING DISSENTER DEBENTURES INCLUDE: - Limited partners who receive cash may be able to obtain a return on that cash that is greater than the fixed 8.5% return on the dissenter debentures. THE ADVANTAGES OF OWNING DISSENTER DEBENTURES VERSUS RECEIVING CASH INCLUDE: - Limited partners who receive cash may be unable to obtain a return on that cash equal to the fixed 8.5% return on the dissenter debentures. METHODOLOGY USED TO DETERMINE MERGER CONSIDERATION In order to determine the merger consideration, Lexington and the Net Partnerships considered utilizing a number of different methodologies, each of which involved a comparison of Lexington and the Net Partnerships with respect to the following: - net asset value; - historical market value and trading activity; - distribution levels; and - liquidation and going concern values. After reviewing these factors, Lexington and the Net Partnerships agreed to calculate the merger consideration based on their agreed upon estimate of the net asset value of the Net Partnership less estimated liquidation costs. The general partners believed that net asset value was a fair method of valuing the Net Partnerships because it is primarily based on objective balance sheet data. While the fair market value of the Net Partnerships' properties, which was one of the factors used to determine adjusted net asset value, was derived without taking into account third party appraisals, it was, nonetheless, supported by those appraisals. Moreover, net asset value has been reported to the limited partners on an annual basis since the inception of each Net Partnership. Although other methods could have been used to establish the merger consideration, the general partners believed it was important to present the Transaction to the limited partners utilizing a valuation measure they are familiar with. Lexington and the general partners agreed that any transaction involving Lexington acquiring the Net Partnerships would have to be based upon the net asset value of the Net Partnerships and be accretive to Lexington's funds from operations per share. CALCULATION OF AGREED UPON ADJUSTED NET ASSET VALUE The agreed upon adjusted net asset value of each Net Partnership was determined by subtracting (1) the Net Partnership's mortgage notes payable that are estimated to be outstanding at June 30, 2001, which was the originally anticipated closing date of the Transaction, including estimated mortgage assumption fees and repayment fees, if any, based primarily upon the scheduled amortization through June 30, 2001 of all mortgages outstanding as of June 30, 2000, all other liabilities at June 30, 2000, estimated mortgage assumption fees and estimated costs associated with liquidating such Net Partnership's properties from (2) the agreed upon fair market value of the Net Partnership's properties as of June 30, 2000. Lexington derived a fair market value for each of the Net Partnership's properties as described below. 64 74 Based on the foregoing formula, the calculation of the agreed upon adjusted net asset value, as of June 30, 2000, for each of the Net Partnerships is summarized below ($000's):
NET 1 NET 2 ------- -------- Agreed upon fair market value of the Net Partnerships' properties as of June 30, 2000............................ $46,750 $101,562 LESS: Projected liabilities....................................... 19,435 57,846 Estimated liquidation costs................................. 1,815 4,216 Agreed upon adjusted net asset value Units and general partnership interest.................... 25,500 39,500 Units only................................................ 25,245 39,105
The adjusted net asset values derived by Lexington were agreed to by the general partners, based, in part, on the fact that the fair market property values were supported by the conclusions reached by Robert A. Stanger & Co., Inc. in its 1999 appraisals, even though the general partners did not use the appraisals in their determination of such fair market property values. However, the parties recognized that the 1999 appraisal did not include all of the properties owned by the Net Partnerships at the time the parties entered into the merger agreement. Therefore, each merger agreement required the respective Net Partnership to obtain updated appraisals as of December 31, 2000, and provided that, if the conclusions reached in the 2000 appraisals varied from the agreed upon fair market property values by more than 5%, either Lexington or the respective Net Partnership would have the right to terminate the merger agreement. The 2000 appraisals of Stanger & Co. were within 1.5% and 0.8% of the agreed upon fair market property value for Net 1 and Net 2, respectively. The parties have agreed that the sale by Net 2 of the Earth City, MO property, which was the only change in either Net 1 or Net 2's property portfolio after June 30, 2000, did not require any modification to Net 2's adjusted net asset value because the net proceeds from the sale were used by Net 2 to repay debt, and therefore Net 2's corresponding agreed upon fair market property value and projected liabilities were reduced by identical amounts. Each component of the agreed upon adjusted net asset value was determined as follows: PROPERTY VALUE. Based upon Lexington's estimate as to the value of each of the Net Partnerships portfolios which were subsequently agreed to by the general partners, Lexington derived its value in accordance with the underwriting criteria Lexington typically uses in establishing purchase prices when it makes new property investments. Lexington analyzed each property owned by the Net Partnerships and reviewed: - each property's location within their respective submarkets; - each lease with respect to its term, rental rate increases, corporate guarantees and property maintenance provisions; - the present and anticipated conditions in the markets where the Net Partnership's properties are located; and - the prospects for selling or releasing the properties on favorable terms in the event of a vacancy. Lexington also evaluated each tenant's financial strength, growth prospects and competitive position within its respective industry and each property's strategic importance and function within each tenant's operations or distribution systems. In addition, Lexington considered the potential effect of the Transaction on its funds from operations, cash flows and long-term capital appreciation. After giving weight to these factors, the anticipated closing date and reviewing the characteristics of the Net Partnership's properties compared to other properties acquired by Lexington, Lexington valued the properties at $148.3 million. This value was derived by capitalizing projected rental revenue at a 10.2% blended rate, consistent with the implied going-in capitalization rates in Stanger & Co.'s 1999 appraisals. Projected rental revenue is estimated rental revenue for the year 2001 under the leases currently in place, assuming 100% occupancy without any allowance for 65 75 vacancy or reserves. Where, as in the case of the Net Partnerships, rental revenue is generated under net leases, rental revenue is synonymous with net operating income. PROJECTED LIABILITIES. Projected liabilities are the estimated mortgages payable outstanding at June 30, 2001 (which was the originally anticipated closing date of the Transaction) based upon the scheduled amortization of all mortgage notes payable outstanding at June 30, 2000 ($74.9 million) plus all other liabilities (primarily accrued interest) as shown on respective balance sheets of the Net Partnerships as of June 30, 2000 ($1.2 million) and estimated mortgage assumption costs ($1.2 million). Unlike the mortgages and other liabilities that are deducted for purposes of determining liquidation value and are calculated as of June 30, 2000, the "projected liabilities" estimated for purposes of determining the adjusted net asset value reflect the reduced amount of mortgages and other liabilities that are anticipated to be outstanding as of the originally anticipated closing date of the Transaction. The following table details the assumptions used in calculating projected liabilities ($000's):
NET 1 NET 2 ------- ------- Estimated mortgages payable................................. $18,477 $56,406 Estimated mortgage assumption and repayment fees............ 355 887 Accrued interest payable.................................... 165 213 Other liabilities........................................... 438 340 ------- ------- $19,435 $57,846 ======= =======
ESTIMATED LIQUIDATION COSTS. Liquidation costs are estimated costs that the Net Partnerships would incur if they were to sell their properties. These differ from transaction expenses, which are estimated costs arising from the transaction, such as legal, accounting and advisory fees, printing expenses, and solicitation costs. Estimated liquidation costs include brokerage commissions, legal fees, transfer taxes, title insurance and due diligence costs. They are good faith estimates made by the general partners based upon their experience in buying and selling net-leased properties. These seller-borne costs are not reflected in the appraised values provided by Stanger & Co. Liquidation costs are subtracted from net asset value in order to approximate the amount which the Net Partnerships would have received had they liquidated as of June 30, 2000. The parties agreed that it would be fair to adjust the agreed upon fair market property value in this manner. The liquidation costs estimated for purposes of determining the adjusted net asset value are the same as the liquidation costs used to determine liquidation value. TRANSACTION EXPENSES Net 1, Net 2 and Lexington will each be responsible for and bear one-third of the aggregate costs and expenses incurred by all of them at any time in connection with pursuing, negotiating or consummating the Transaction other than the fees and expenses of Prudential Securities and Cohen & Steers. Lexington will bear 100% of the fees and expenses of Prudential Securities and Net 1 and Net 2 will each bear 50% of the fees and expenses of Cohen & Steers. Lexington will enter into an indemnification agreement with each of the general partners that will provide indemnification protection to each of the general partners and their respective affiliates with respect to claims which could arise in connection with the proposed Transaction, whether or not the Transaction is consummated. 66 76 Lexington and the general partners estimate that the expenses of the Transaction applicable to each of the Net Partnerships and Lexington will total approximately $3.3 million as follows ($000):
LEXINGTON NET 1 NET 2 --------- ----- ----- Legal Expenses.............................................. $ 300 $275 $275 Accounting Expenses......................................... 80 60 60 Fairness Opinions and Valuations............................ 1,225 183 183 Proxy Solicitation.......................................... 50 35 35 Printing.................................................... 50 50 50 Listing Fees................................................ 40 -- -- Miscellaneous............................................... 265 25 25 ------ ---- ---- TOTAL....................................................... $2,010 $628 $628 ====== ==== ====
ANTICIPATED ACCOUNTING TREATMENT Lexington will account for the mergers as a purchase in accordance with Accounting Principles Board Opinion No. 16 "Business Combinations." The financial statements of Lexington will reflect the combined operations of Lexington and the Net Partnerships from the effective time of the mergers. NO FRACTIONAL COMMON SHARES No fractional common shares will be issued by Lexington in the Transaction. Each limited partner who would otherwise be entitled to fractional common shares will receive cash having an amount equal to the value of such fractional shares, based on the average closing price of the common shares during the 20 day period prior to, but not including, the closing date of the mergers. ALTERNATIVES TO THE TRANSACTIONS THAT THE GENERAL PARTNERS CONSIDERED In determining whether to accept and recommend the Transaction, the general partners considered the following two principal alternatives to the Transaction that could have been pursued by each Net Partnership: (1) continuation of each Net Partnership pursuant to its existing limited partnership agreement; and (2) liquidation of each Net Partnership. In analyzing these alternatives, the general partners: (1) reviewed the advantages and disadvantages of each alternative; and (2) compared the amount of the merger consideration with the value of the continuation and liquidation alternatives. SUMMARY OF VALUATION ALTERNATIVES The valuation estimates described below were prepared by the general partners based upon the information available to the general partners at the time the estimates were computed. Subsequent to preparing these estimates, and in connection with their recommendation that the limited partners approve the Transaction, the general partners also considered the fairness opinions given by Prudential Securities to Lexington and by Cohen & Steers to the Net Partnerships. The analysis performed by Prudential Securities and Cohen & Steers are summarized below under the heading "FAIRNESS OPINIONS" beginning on page 80. However, neither Prudential Securities nor Cohen & Steers gave any opinion with respect to the alternatives considered by the general partners. Furthermore, the general partners considered the appraisals provided by Stanger & Co., but only with respect to the valuation of the Net Partnerships' properties. The 67 77 appraisals of Stanger & Co. are summarized below under the heading "APPRAISALS" beginning on page 103. The estimated values assigned to each Net Partnership under the various alternatives are subject to significant uncertainties. These uncertainties exist because the comparative estimated values are based upon a number of estimates, variables and assumptions made by the general partners. In addition, varying market conditions affect these valuation estimates. Therefore, no assurance can be given that the estimated values will be realized. Actual realized values, moreover, may be higher or lower than the estimates of such values. While each of the general partners believes it has a reasonable basis for the assumptions made, it is unlikely that all of the assumptions employed by the general partners will prove to be accurate in all material respects. Some assumptions used by the general partners as to future events have been selected to simplify the analysis and may not approximate the actual experience of each of the Net Partnerships. The following table summarizes the results of the general partners' comparative analysis of the alternatives based on a per $1,000 original investment:
PER $1,000 ORIGINAL INVESTMENT ------------------------------------------------------------- TOTAL MERGER ESTIMATED GOING- ESTIMATED NET PARTNERSHIP CONSIDERATION(1) CONCERN VALUE(2) LIQUIDATION VALUE(3) --------------- ---------------- ----------------- -------------------- Net 1........................... $820.38 $637.96 - $706.24 $751.17 Net 2........................... $819.52 $723.35 - $801.18 $762.77
--------------- (1) Based upon the agreed upon adjusted net asset value, which is the estimated value of each Net Partnership's properties at June 30, 2000 less estimated liquidation costs, an estimate of mortgage notes payable at June 30, 2001 (which was the originally anticipated closing date of the Transaction) based primarily upon the scheduled amortization of all mortgages outstanding at June 30, 2000, estimated mortgage assumption fees and repayment fees, and all other liabilities outstanding at June 30, 2000. (2) Based upon a discounted cash flow approach utilizing a range of discount rates from 13.5% to 15%. (3) Based upon estimated value of each Net Partnership's properties less estimated liquidation costs, mortgage assumption fees and repayment fees, if any, and stated liabilities at June 30, 2000. The general partners assumptions, utilized in connection with both the "Continuation" and "Liquidation" alternatives described in the sections that follow, relate, among other things, to: - projections as to each Net Partnership's future income, expenses, cash flow and other significant financial matters; - the capitalization rates that would likely be used by prospective buyers if each Net Partnership's assets were liquidated; - appropriate discount rates applied to expected cash flows in computing the present value of the cash flows that may be received with respect to each Net Partnership; and - selling costs and other expenses, costs, offsets and contingencies attributable to the sale of assets and liquidation of each of the Net Partnerships. CONTINUATION BENEFITS AND DISADVANTAGES OF CONTINUATION ALTERNATIVE Continuing each Net Partnership without change would have the following effects, some of which the limited partners might perceive as benefits: - Continue Original Investment. The limited partners would not be subject to the risks associated with the ongoing operations of Lexington and its investment strategy. Instead, each of the Net Partnerships would remain a separate entity, with its own assets and liabilities, and would pursue its current investment objectives consistent with the guidelines, restrictions and safeguards contained in its limited partnership agreement. 68 78 - Not Dependent on Lexington's Performance. Each Net Partnership's performance would not be affected by the performance of Lexington and the other Net Partnership. - Liquidation. Eventually, each Net Partnership would liquidate its holdings and distribute the proceeds received in liquidation in accordance with the terms of the Net Partnership's limited partnership agreement. - No Change in Voting Rights or Operating Policies. There would be no change in the nature of the limited partners' voting rights and no change in the Net Partnerships' operating policies. - No Transaction Expenses. The Net Partnerships would not incur their respective share of the expenses of the Transaction. - Continuance of Passive Activity Losses. The limited partners would continue to have the ability to offset income from their investment in the Net Partnerships with passive activity losses from the limited partners' other investments. - No Immediate Federal Income Taxation. A limited partner would not be subject to any immediate federal income taxation that will otherwise be incurred by it as a consequence of the Transaction if it is a tax paying individual or entity. However, the general partners believe that maintaining the Net Partnerships as separate entities would have the following disadvantages: - Inability to Protect Capital Investment and Realize Capital Appreciation. As a result of the Net Partnerships' dependence on a limited number of tenants, the Net Partnerships are susceptible to significant revenue declines if tenants experience credit difficulties. Moreover, the Net Partnerships have limited financial flexibility to take advantage of growth opportunities. Accordingly, the general partners do not believe that the Net Partnerships would be able to achieve two of their primary objectives: protecting the capital invested by limited partners and delivering capital appreciation to limited partners. - Smaller Distributions. As a smaller entity with limited capital resources, the general partners believe that, over time, distributions from the Net Partnerships will be lower as a percentage of rental revenues than distributions made by Lexington. This is because the general partners set aside reserves out of operating cash flow. Lexington's reserve requirements are much lower as a result of its greater financial flexibility and portfolio diversification. Moreover, the cash flow disruption resulting from a vacancy is more material to the Net Partnerships than it would be to a larger company with broader portfolio diversification. - Limited Liquidity. The limited partners' ability to sell their units would continue to be limited, since the units are not listed on an exchange and there is no established public trading market or public market valuation for the units. The common shares issued in the Transaction will be listed on the New York Stock Exchange. - Less Diversification. Each Net Partnership's portfolio of properties would be less diversified and therefore the loss of a major tenant or an economic downturn in the region where a property is located would have a greater impact on each Net Partnership's ability to make distributions than it would on Lexington following the Transaction. - No Cost Savings. Each Net Partnership will continue to incur administrative expenses which could be reduced by the Transaction. For example, because each Net Partnership is subject to SEC reporting requirements, they will continue to be obligated to comply with SEC filing requirements. - Management Fee. Each Net Partnership would continue to be managed externally and, as a result, would continue to pay a management fee. 69 79 VALUATION OF CONTINUATION ALTERNATIVE An examination of the continuation option entails an analysis of the going-concern value for each of the Net Partnerships, assuming that each such Net Partnership continues as currently constituted and limited partners continue to receive quarterly distributions from operations as determined by the general partners. In deriving the going concern valuations, the general partner used a discounted cash flow analysis on each individual property. The analyses involved many assumptions, which the general partners made based upon their in-depth knowledge of the properties, their tenants and the individual markets in which each is located. The most significant of the assumptions are detailed below. In calculating the per unit valuations the general partner calculated the amount, per $1,000 of original investment, that each limited partner would receive as provided for in the limited partnership agreement: - Leases with inflation adjustments -- An annual inflation rate of 2% is assumed. - Leases with percentage rent provisions -- Tenant sales figures grow at a range of 2% to 3% annually. The Net 1 property in Sumter, SC leased to Wal-Mart is assumed to be vacant in 2001, with the tenant still obligated for base rent; however, percentage rents will no longer be realized. - Leases that expire prior to 2011 -- All tenants are expected to renew at estimated market rents at renewal date. - Vacant Property in Earth City, Missouri -- Released April 1, 2001 at $3.00 per square foot compared to $2.50 for previous lease. - Reserves -- An annual reserve of $0.20 per square foot is provided for tenant improvements and leasing commissions. - Debt maturities -- All maturing mortgages are assumed to be refinanced at an 8.5% interest rate, 20-year amortization schedule, 10-year maturity with a 1% refinancing cost. - Operating costs -- Increase at 2.75% per annum. - Liquidation -- Assumes all properties are sold in 2011, utilizing a 10% capitalization rate on projected or contract rents, a 3% cost of sale and 1% mortgage assumption fees. This capitalization rate is based upon the general partners' experience and detailed knowledge of the properties. Based on their experience in valuing and acquiring net-lease properties, the general partners believed that a 10% capitalization rate was reasonable. - Discount rates -- The general partners applied to projected cash flows and projected residual values discount rates which ranged from 13.50% to 15.00%. These discount rates are based upon the general partners' experience and detailed knowledge of the properties. Based on their experience in valuing and acquiring net-lease properties, the general partners believed that a range of discount rates from 13.50% to 15.00% was reasonable. Based upon these assumptions the general partners derived a going concern value for each Net Partnership, per $1,000 of original investment, based upon a range of discount rates as follows:
DISCOUNT RATE NET 1 NET 2 ------------- ------- ------- 13.50% $706.24 $801.18 14.00% $682.48 $774.10 14.50% $659.73 $748.17 15.00% $637.96 $723.35
LIQUIDATION BENEFITS AND DISADVANTAGES OF LIQUIDATION ALTERNATIVE Another alternative to the Transaction is for each Net Partnership to dissolve and liquidate by selling its properties and other assets, repaying its existing liabilities not assumed by the buyer, including prepayment 70 80 and yield maintenance penalties or mortgage assumption fees and distributing the net sales proceeds to the limited partners as well as to the general partners in accordance with the distribution provisions of its limited partnership agreement. The primary advantage of this alternative would be to provide liquidity to limited partners as properties are sold, based upon the net liquidation proceeds received from the sale of each Net Partnership's assets. The general partners do not believe that liquidation would be as beneficial to the limited partners as the Transaction, for the following reasons: - Less Favorable Price. The general partners believe that an aggressive liquidation of individual properties could result in significant discounts from appraised values, while a gradual disposition would likely involve higher administrative costs and greater uncertainty, either of which would reduce the portion of net sales proceeds available for distribution to the limited partners. The Net Partnerships might not be able to liquidate all of their assets for an extended period of time. This could result in the Net Partnerships continuing to have fixed costs but fewer assets from which to satisfy such costs. - Inability to Return Entire Investment. The general partners believe they could not return the limited partners' entire investment if they were to currently implement the liquidation alternative. VALUATION OF LIQUIDATION ALTERNATIVE The general partners estimated the liquidation value of each Net Partnership as described below:
NET 1 NET 2 ---------- ---------- ($000'S EXCEPT ON UNIT DATA AND FOOTNOTES) Appraised value(a).......................................... $ 46,750 $101,562 Brokerage fees(b)........................................... (1,403) (3,047) Legal fees(c)............................................... (315) (560) Reports -- due diligence(d)................................. (45) (80) Transfer taxes(e)........................................... (52) (529) -------- -------- Subtotal.................................................... 44,935 97,346 Mortgages and interest payable(f)........................... (20,794) (59,354) Other Liabilities(g)........................................ (438) (340) Loan assumption fees(h)..................................... (355) (887) -------- -------- Estimated liquidation proceeds.............................. $ 23,348 $ 36,765 -------- -------- Limited partners proceeds................................... $ 23,115 36,397 Limited partnerships units outstanding...................... 30,772 477,167 Liquidation value per $1,000 of original investment......... $ 751.17 $ 762.77 ======== ========
--------------- (a) The appraised value is based upon property appraisals performed by Stanger & Co. for 22 of the 25 properties owned by the Net Partnerships as of December 31, 1999. The purchase prices (including transaction costs) of the remaining 3 properties, all of which were purchased in 2000, were used. (b) The assumed brokerage fee is 3.0% of the sales price. (c) Legal fees assumed to be $35,000 per property. (d) Estimated at $5,000 per property. (e) Estimated based upon the rates in effect at June 30, 2000 for each state in which a property is located. (f) As stated in the June 30, 2000 Form 10-Q for each Net Partnership, less mortgage balloon payments made in July 2000. (g) As stated in the June 30, 2000 Form 10-Q for each Net Partnership. 71 81 (h) Assumed to be 1.5% of mortgage notes payable. In the event mortgages would be pre-paid, the resulting yield maintenance penalties would be greater. CONCLUSION The general partners reached the conclusions as to the superiority of the Transaction over the continuation alternative and the liquidation alternative, noting that some elements of their analysis were subject to uncertainty. In comparing the estimated potential value of the merger consideration with the estimated potential values of the alternatives to the mergers, the general partners have noted that: - it is not possible to assign a specific value to the units of each Net Partnership or to predict accurately the prices at which the Lexington common shares will trade in the market following the Transaction; - there are similar difficulties in establishing the value to limited partners of the alternatives to the Transaction, with such values also dependent upon a number of market conditions not susceptible to precise determination and - the assumptions used by the general partners in establishing values for the alternatives to the Transaction may not prove to be accurate, and such consideration may have a value higher or lower than the values estimated by the general partners. Notwithstanding the uncertainties in estimating the value of each of the Net Partnerships and the Lexington common shares, the general partners believe the available information suggests that the approval of the Transaction is the more attractive alternative for limited partners. CONSEQUENCES IF MERGERS NOT CONSUMMATED If the mergers are not consummated, each Net Partnership will continue to operate as a separate legal entity, with its own assets and liabilities, and with no change in its investment objectives, policies and restrictions. THE MERGER AGREEMENT The following is a summary of the material terms and provisions of the merger agreements. To understand the merger agreements fully, you should read carefully read the merger agreements, which are attached as Annex A-1 and Annex A-2, respectively, to this Joint Consent and Proxy Solicitation Statement/ Prospectus. CONVERSION OF SHARES Under the merger agreements, at the time of the mergers, the units will be converted to the right to receive the merger consideration described in "THE MERGERS -- The Merger Consideration" beginning on page 60. EXCHANGE OF CERTIFICATES Mellon Investor Services LLC will act as transfer agent in the mergers and will exchange the units in the Net Partnerships for the merger consideration. Promptly following the mergers, Lexington will cause Mellon to mail to each Net Partnership limited partner who requested and possesses a certificate or certificates which before the mergers represented outstanding units, materials which will specify that Mellon will only deliver merger consideration upon the delivery of the unit certificates to Mellon. Instructions for use in surrendering the unit certificates in exchange for the merger consideration will also be included. After the mergers, each limited partner holding unit certificates must surrender their certificates to Mellon in order to receive the merger consideration in the mergers. The unit certificate surrendered must be transferable as Mellon may reasonably require. Neither 72 82 Lexington nor Mellon will be liable to any former limited partner for any amount properly delivered to a public official under applicable abandoned property, escheat or similar laws. Most limited partners never requested certificates representing their units. Limited partners that never requested a certificate and do not possess a unit certificate do not have to surrender any certificate to obtain the merger consideration. Until unit certificates are surrendered after the mergers, holders of unit certificates will earn but will not be paid dividends or other distributions declared after the mergers on common shares or interest on the dissenter debentures for which their units have been transferred. When the unit certificates are surrendered, any unpaid dividends or other distributions will be paid, without interest, and any accrued but unpaid interest will be paid, without any additional interest. After the mergers, there will be no transfers on the unit registry of the units. If unit certificates are presented after the mergers, they will be canceled and exchanged for merger consideration. If a unit certificate has been lost, stolen or destroyed, Mellon will issue merger consideration to the owner of the lost, stolen or destroyed unit certificate after it has received appropriate evidence as to its loss, theft or destruction and appropriate evidence as to its ownership by the claimant. Mellon may require a limited partner who lost his or her unit certificate to post bond as insurance against any claim that may be made against Lexington with respect to the certificate. EFFECTIVE TIME OF THE MERGERS The mergers will become effective upon the filing of a certificate of merger with the Secretary of State of the State of Delaware or at a later time which Lexington and the general partners will have agreed upon and designated in their filings in accordance with applicable law. Lexington and each of the Net Partnerships have the right, acting unilaterally, so long as they have not willfully and materially breached the merger agreement, to terminate the merger agreement should the mergers not be consummated by the close of business on December 31, 2001. REPRESENTATIONS AND WARRANTIES The merger agreements contain representations and warranties of Lexington and Net 3 and the Net Partnerships to each other as to: - the organization, standing and power of each party and its subsidiaries to carry on their business as now being conducted; - the authority to enter into and consummate the merger agreements and all other related documents; - the due execution and delivery of the merger agreements and that they constitute the valid and binding agreement and obligations of each party; - absence of any conflicts that may arise as a result of the execution and delivery of the agreements with any charter documents, other agreements or transactions of the parties; - the filings, consents, approvals, and authorizations needed to consummate the Transaction; - the capitalization of each party; - the ownership of their subsidiaries and any other interests in any corporations, partnerships, joint ventures, business trust or any other entities; - availability of SEC documents filed in connection with public offerings of their securities since 1995 prior to the closing of the Transaction and that to the best of each parties knowledge they are true in all material respects, and that the financial statements contained in those filings have been prepared according to generally accepted accounting principle; - each parties actual knowledge that there are no material litigations pending against them; 73 83 - the absence any material changes in how each party has conducted its business prior to the date of the merger agreements; - each party and its subsidiaries compliance with all federal and state tax laws; - the validity and accuracy of the books of account and other financial records of each party and their subsidiaries; - the ownership interest of each of the respective parties properties; - environmental matters; - labor matters; - the absence of any obligation of each party to pay any finder's fee, brokerage or agent's commissions or other like payments in connection with the negotiations leading to the merger agreements; - each party having no convertible securities the terms of which require any anti-dilution adjustments by reason of the consummation of the Transaction; and - other contracts, commitments and developmental rights of each party. The merger agreements also contain additional representations and warranties by Lexington to the Net Partnerships as to the validity of the issuance and delivery by Lexington of the common shares and the dissenter debentures. The merger agreements further contain additional representations and warranties by each of the Net Partnerships to Lexington as to any related party transactions of the Net Partnerships and their affiliates. CONDITIONS TO CONSUMMATION OF THE MERGERS The respective obligations of Lexington and the Net Partnerships to effect the mergers are subject to the satisfaction of specific conditions, including the following: - the listing of the common shares on the New York Stock Exchange prior to or concurrently with the consummation of the Transaction; - the approval of (1) the merger of Net 1 into Net 3 by the holders of a majority of the Net 1 units and (2) the merger of Net 2 into Net 3 by the holders of a majority of the Net 2 units; - the approval of the issuance of the common shares by the holders of a majority of the common shares and the Lexington convertible preferred shares voting on an as-converted basis, voting as a single class; - the receipt, from any advisor who had previously given a fairness opinion to either of the Net Partnerships or Lexington, of a bring-down fairness opinion, which is an opinion that a fairness opinion given at an earlier date remains valid, taking into account any changed circumstances, if requested by whichever party received the original opinion; - the absence of any legal restraints or prohibitions preventing completion of the Transaction; - the receipt by each of Lexington and the Net Partnerships of an opinion of counsel to each of Net 1 and Net 2, on the one hand, and to Lexington, on the other hand, as to various tax and REIT matters including the continuing status of Lexington as a REIT following completion of the Transaction; - the receipt of any requisite third-party approvals; - the receipt of all necessary state securities laws or "Blue Sky" permits or approvals required to carry out the Transactions and no stop order with respect to any of the foregoing shall be in effect; - subject to waiver by Lexington, the absence of limited partners electing to receive dissenter debentures with an aggregate principal amount in excess of $20 million; and 74 84 - the closing of the mergers of each Net Partnership concurrently with the closing of the merger of the other Net Partnership. Consummation of the mergers is also subject to the satisfaction or waiver of other customary conditions specified in the merger agreements. The parties may waive one or more of the foregoing conditions to the mergers except that if that waiver involves a material change to the terms of the mergers, the parties must resolicit proxies or consents from the waiving party's shareholders or limited partners, as applicable. CONDUCT OF BUSINESS PENDING THE MERGER During the period from the date of each merger agreement to its effective date, the parties have agreed to carry on their respective business in the usual, regular and ordinary course in substantially the same manner as previously conducted. In addition, the parties have agreed to use commercially reasonable efforts to preserve intact their respective current business organizations, goodwill and ongoing business. The parties also agreed, except as disclosed to the other party or in limited circumstances specified in the merger agreement, that they shall: - use their reasonable efforts, and shall cause each of their respective subsidiaries to use their reasonable efforts, to preserve intact their business organizations and goodwill and keep available the services of their respective officers and employees; - confer on a regular basis with one or more representatives of the other to report material operational matters and any proposals to engage in material transactions; - promptly deliver to the other true and correct copies of any report, statement or schedule filed with the SEC; and - promptly notify the other of any material emergency or other material change in the condition, financial or otherwise, of the business, properties, assets or liabilities, or any material governmental complaints, investigations or hearings or communications indicating that the same may be contemplated, or the breach in any material respect of any representation, warranty, covenant or agreement contained in the merger agreement. Prior to the effective time of the mergers and except as otherwise disclosed in the merger agreements, each Net Partnership, respectively, has agreed that, unless Lexington has consented in writing, it would conduct its operations according to its usual, regular and ordinary course in substantially the same manner as previously conducted, and it would not - amend its respective limited partnership agreement; - issue any units or other interests in such Net Partnership, make any distribution other than in accordance with past practice, effect any recapitalization or other similar transaction, except pursuant to the exercise of options, warrants, conversion rights and other contractual rights existing on the date of the merger agreement and disclosed pursuant to such merger agreement; - grant, confer or award any option, warrant, conversion right or other right not existing on the date hereof to acquire any units; - sell or otherwise dispose of: (A) any properties of such Net Partnership; or (B) any other assets which are material, individually or in the aggregate, other than in the ordinary course of business, except that each Net Partnership may distribute out any excess cash prior to consummation of its respective merger; or - make any loans, advances or capital contributions to, or investments in, any other person. 75 85 Prior to the effective time of the mergers and except as otherwise disclosed in the merger agreements, Lexington agreed that, unless the respective Net Partnership consents in writing, Lexington would conduct its operations according to its usual, regular and ordinary course in substantially the same manner as previously conducted, and it would not - amend its Declaration of Trust except as contemplated by the merger agreements; - issue any of its capital shares, share dividend, recapitalization or other similar transaction, except pursuant to the exercise of options, warrants, conversion rights and other contractual rights existing on the date of the merger agreements and disclosed pursuant to such merger agreements; - grant, confer or award any option, warrant, conversion right to or other right not existing on the date hereof to acquire any of its capital shares; - sell or otherwise dispose of any of its properties or any of its capital stock of or interests in any of its subsidiaries, except in the ordinary course of business; or - make any loans, advances or capital contributions to, or investments in, any other person other than in connection with the sale of properties, except in the ordinary course of business. ALTERNATIVE PROPOSALS Prior to the effective time, each Net Partnership has agreed that it will: - immediately cease and terminate any existing discussions or negotiations with any other parties with respect to any alternative transaction; and - notify Lexington immediately if any inquiries or proposals are received by a party with respect to an alternative transaction. However, nothing contained in the merger agreements prohibits the general partners from furnishing information to, or entering into discussions with or negotiations with, any person or entity that makes an unsolicited bona fide acquisition proposal, if, and only to the extent that: (A) the general partners determine in good faith that action is required for it to comply with fiduciary duties to limited partners, respectively, imposed by law as advised by counsel; (B) prior to furnishing any information to or entering into discussions or negotiations with, such person or entity, that party provides written notice to the other party to the effect that it is furnishing information to, or entering into discussions with, that person or entity; and (C) subject to any confidentiality agreement with that person or entity, that party keeps the other party to the respective merger agreement informed of the terms of any such discussions, proposals or negotiations. TERMINATION TERMINATION BY MUTUAL CONSENT. Each merger agreement may be terminated and the respective merger may be abandoned at any time prior to the effective time, before or after the approval of the agreement by the limited partners of a Net Partnership or the shareholders of Lexington by the mutual written consent of Lexington and the Net Partnership. TERMINATION BY EITHER LEXINGTON OR A NET PARTNERSHIP. Each merger agreement may be terminated and the respective merger may be abandoned: - By either Lexington or the respective Net Partnership, if the respective merger is not consummated by December 31, 2001; - By Lexington or the respective Net Partnership, if the approval of the limited partners of that Net Partnership is not obtained as required under the relevant merger agreement; - By Lexington or the respective Net Partnership, if the approval of the shareholders of Lexington is not obtained as required under the relevant merger agreement; 76 86 - By either Lexington or the respective Net Partnership, upon any event which has a material adverse effect, as defined in the merger agreement, on either party's ability to perform its obligation under the relevant merger agreement; - By either Lexington or the respective Net Partnership, if there has been a breach by the other of any representation or warranty contained in the relevant merger agreement, which is not cured within 30 days after written notice of that breach is given to the breaching party by the non-breaching party; - By either Lexington or the respective Net Partnership, if there has been a material breach of any of the covenants or agreements set forth in the relevant merger agreement by the other, which is not curable or, if curable, is not cured within 30 days after written notice of that breach is given to the breaching party by the non-breaching party; - By the respective Net Partnership, if the respective general partner determines that termination is required by reason of a superior proposal being made; - By Lexington, if the independent trustees determine that termination is required by reason of an alternative acquisition proposal being made; or - By Lexington or the respective Net Partnership, if the 2000 appraisals of Stanger & Co. are greater than 105% or less than 95% of the deemed value of the properties as previously agreed upon by the parties. - By either Lexington or the respective Net Partnership, if a governmental, regulatory or administrative agency or commission shall have issued an order or decree to terminate. TERMINATION FEES PAYABLE BY THE NET PARTNERSHIPS. Each of the Net Partnerships must pay a termination fee to Lexington equal to 4% of the value of the merger consideration to be received by the general partners and limited partners of that Net Partnership if its respective merger agreement is terminated in any of the following circumstances: - the respective Net Partnership accepts, selects or recommends a superior proposal for an alternative proposal, pursuant to its fiduciary obligations; - the respective Net Partnership withdraws or adversely modifies its recommendation of its respective merger; - the respective Net Partnership makes any positive or neutral recommendation regarding any proposal for any superior proposal, pursuant to its fiduciary obligations; - the respective Net Partnership enters into any agreement which would result in the consummation such a superior proposal; or - the general partner of the respective Net Partnership authorizes any of the above. TERMINATION FEES PAYABLE BY LEXINGTON. Lexington must pay a termination fee to each of the Net Partnerships equal to 4% of the value of the merger consideration to be received by the general partners and limited partners of the Net Partnerships if the merger agreements are terminated in any of the following circumstances: - Lexington accepts a proposal for an alternative acquisition transaction including merger, sale or similar transaction which would preclude the Transaction from occurring; - the Board of Trustees withdraws or adversely modifies its recommendation; - the Board of Trustees makes any positive or neutral recommendation regarding any proposal for an alternative acquisition transaction; - Lexington enters into any agreement which would result in an alternative acquisition transaction occurring; or - the Board of Trustees of Lexington authorizes any of the above. 77 87 EXTENSION; WAIVER At any time prior to the effective time, either party, by action taken by the Lexington's Board of Trustees or the general partners, as applicable, may, to the extent legally allowed: - extend the time for the performance of any of the obligations or other acts of the other party to the merger agreement; - waive any inaccuracies in the representations and warranties made to the other party in the merger agreement or in any document delivered pursuant to the merger agreement; and - waive compliance with any of the agreements or conditions for the benefit of the other party contained in the merger agreement. Any agreement on the part of a party hereto to any extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of that party. CONFLICTS OF INTEREST A number of conflicts of interest are inherent in the relationships among the general partners, the Net Partnerships and Lexington. AFFILIATED GENERAL PARTNERS The general partner of each Net Partnership has an independent obligation to assess whether the terms of the Transaction are fair and equitable to the limited partners of its Net Partnership without regard to whether the Transaction is fair and equitable to any of the other participants. The general partners of the Net Partnerships are affiliates of Lexington. While the general partners have sought faithfully to discharge their obligations to their Net Partnership, there is an inherent conflict of interest in serving in a similar capacity with respect to the Net Partnerships. Mr. Roskind controls the general partners of the Net Partnerships. He is also the Chairman of the Board of Trustees, Co-Chief Executive Officer and a significant shareholder of Lexington. If the Transaction is consummated, the general partners of the Net Partnerships will receive operating partnership units in Net 3 in return for contributing their general partnership interest in the Net Partnerships in a tax-deferred transaction. Upon consummation of the mergers, based on his ownership position as of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, and assuming that the average closing price of Lexington common shares is $15.00, which is the midpoint of the range for determining the number of common shares to be issued, and that no limited partners elect to receive their merger consideration in the form of dissenter debentures, Mr. Roskind will beneficially own approximately 7.1% of the current voting securities on a fully-diluted basis, consisting of approximately: - 327,078 common shares of Lexington; - 1,535,323 operating partnership units, 1,408,590 of which currently are convertible into common shares; and - 253,750 options to purchase common shares. In determining the terms and conditions of the mergers on behalf of the Net Partnerships, these relationships caused Mr. Roskind and each general partner to have conflicts of interest. Mr. Roskind has an inherent financial interest in consummating the mergers. The terms and conditions of the mergers might have been structured differently by persons not having a financial interest in the mergers, or the mergers may not have proceeded at all. Following the Transaction, Mr. Roskind will continue as Chairman of the Board of Trustees and Co-Chief Executive of Lexington. As such, Mr. Roskind will be entitled to receive stock options under Lexington's stock option plan which may appreciate in value if the benefits of the Transaction are realized. 78 88 As an officer and shareholder of Lexington, Mr. Roskind would benefit, along with the other Lexington shareholders, to the extent that Lexington issues a lesser number of common shares in the Transaction. In the event a Net Partnership rejects the merger proposal, Mr. Roskind would also expect to benefit from the continuation of Lexington's management of that Net Partnership and from administrative fees and reimbursements that would continue to be paid to Lexington. In addition, Mr. Roskind's proportionate interest in Lexington on a fully-diluted basis will be diluted by an amount proportionately related to the number of common shares issued in the Transaction. Mr. Roskind's proportionate ownership of the current voting securities on a fully-diluted basis of Lexington will be reduced from 7.7% before the mergers to 7.1% after the mergers, assuming that the average closing price of Lexington common shares is $15.00, which is the midpoint of the range for determining the number of common shares to be issued, and that no limited partners elect to receive their merger consideration in the form of dissenter debentures. While the Net Partnerships engaged Cohen & Steers to render their fairness opinions and Stanger & Co., an independent real estate appraisal firm, to appraise the Net Partnerships' properties, no formal procedures were put in place to minimize the potential conflicts of interest between Mr. Roskind and the Net Partnerships or as between individual Net Partnerships. No independent representative has been retained to act on behalf of the limited partners for purposes of negotiating or structuring the terms of the Transaction. It is possible that, if the general partners had not been affiliated with Lexington, the terms of the Transaction, including the number of common shares issued to the limited partners in the Transaction, would have been more advantageous to the limited partners. Limited partners should consider these conflicting interests of Mr. Roskind and Lexington. RELATED PARTY TRANSACTIONS/PRIOR DEALINGS Lexington and the Net Partnerships have, from time to time in the past, bought and sold properties from and to each other. Of the nine properties owned by Net 1, three, which are located in Phoenix, AZ, San Diego, CA and Henderson, NC, were purchased from Lexington. Of the fifteen properties owned by Net 2, three, which are located in Plymouth, MI, Columbia, SC and Jacksonville, AL, were purchased from Lexington. If the Transaction is consummated, Lexington will reacquire these properties, and the acquisition price may effectively be at a discount to the original acquisition price paid by the Net Partnerships. In September 1999, Lexington sold two properties to Net 1. These sales were consummated, despite the ongoing discussions between the parties at that time regarding a potential merger transaction, because Net 1 had previously sold other properties and needed to acquire properties in order to defer its taxable gain under Section 1031 of the Internal Revenue Code. The properties purchased from Lexington met the Section 1031 requirements, and the general partners believed that aborting the acquisitions would have had negative tax consequences for the limited partners of Net 1. The table below summarizes all transactions between Lexington and, as applicable, Net 1 or Net 2 for the six months ended June 30, 2001 and the years ended December 31, 2000 and 1999.
PURCHASES FROM AND SALES TO LEXINGTON ------------------------------------------------------------ ENTITY PROPERTY AMOUNT TRANSACTION DATE ------ ---------------- ----------- ----------- ----- Net 1 San Diego, CA $ 8,605,000 Purchased 09/99 Net 1 Phoenix, AZ 11,390,000 Purchased 09/99 Net 1 Henderson, NC 7,750,000 Purchased 05/00 Net 2 Bristol, PA 8,610,000 Sold 12/99 Net 2 Jacksonville, AL 2,135,000 Purchased 06/99 Net 2 Columbia, SC 4,750,000 Purchased 08/99 Net 2 Plymouth, MI 7,815,000 Purchased 05/00
79 89
BROKERAGE FEES PAID TO LEXINGTON -------------------------------------------- ENTITY PROPERTY AMOUNT DATE ------ ----------------- -------- ----- Net 1 Various $ 87,500 06/99 (Autozone) Net 2 Ocala, FL 195,000 01/99 Net 2 Various, TX (NCS) 54,250 01/99 Net 2 Bristol, PA 87,750 03/99 Net 2 Hampton, VA 119,600 03/00
MANAGEMENT FEES/OVERHEAD REIMBURSEMENT PAID TO LEXINGTON --------------------------------------------------------- ENTITY AMOUNT DATE ------ ------------------- ---------------- Net 1 $197,522 1999 Net 2 308,946 1999 Net 1 199,726 2000 Net 2 250,628 2000 Net 1 148,312 06/01 Net 2 206,294 06/01
THE INDEPENDENT TRUSTEES Four of the seven members of Lexington's Board of Trustees are independent trustees. See "INFORMATION ABOUT LEXINGTON -- Board of Trustees -- Independent Trustees" on page 136. The independent trustees of Lexington have sought to honor faithfully their fiduciary duties to Lexington and its shareholders. None of the independent trustees has any financial interest in any Net Partnership or the general partners of any Net Partnership, and the independent trustees owe no fiduciary duties to the limited partners. The general partners and the independent trustees have endeavored to ameliorate conflicts of interest between Mr. Roskind and Lexington through the engagement of Prudential Securities to render a fairness opinion regarding the merger consideration with respect to Lexington. However, because no independent trustee devotes a major portion of his time to Lexington's affairs, the independent trustees have had to rely on the management and staff of Lexington for information, data and analysis regarding Lexington and the Net Partnerships. Because the management and staff of Lexington are under the control of Mr. Roskind, in his capacity as Lexington's Co-Chief Executive Officer, the views and considerations of Mr. Roskind could have, to some extent, influenced the information and analysis of Lexington's management and staff, and thus the independent trustees. LEXINGTON'S OWNERSHIP OF UNITS OF LIMITED PARTNERSHIP OF THE NET PARTNERSHIPS Lexington held, as of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, approximately 540 limited partnership units of Net 1, (representing approximately 1.8% of the outstanding units) and 15,782 limited partnership units of Net 2 (representing approximately 3.3% of the outstanding units). Lexington intends to consent to the Transaction with respect to these units. FAIRNESS OPINIONS GENERAL Set forth below is a summary description of the fairness opinions which were delivered in connection with the Transaction. Also included is a discussion of the various financial analyses each of the fairness opinion-givers used in rendering their opinions. 80 90 The general partners and Lexington received fairness opinions with respect to both the merger agreements and the subsequent amendments. Set forth below are summaries of each of the fairness opinions delivered in connection with the Transaction as reflected in the amended merger agreements. Prudential Securities and Cohen & Steers have, in some cases, used different assumptions for purposes of their respective analyses and therefore may have reached different conclusions with respect to aspects of their analyses even though each of them ultimately concluded that the merger consideration is fair from a financial point of view. PRUDENTIAL SECURITIES FAIRNESS OPINION On July 30, 2001, Prudential Securities delivered its written opinion to the Board of Trustees of Lexington, stating that, as of that date, the merger consideration was fair to the shareholders of Lexington from a financial point of view. This opinion is subject to all of the assumptions, limitations and qualifications described in Prudential Securities' opinion. The Board of Trustees did not give any special instructions to or impose any limitations on Prudential Securities in connection with its analysis of the fairness of the merger consideration or the preparation of its fairness opinion. A copy of the Prudential Securities fairness opinion, which sets forth the assumptions made, matters considered and limits on the review undertaken, is attached to this Joint Consent and Proxy Solicitation Statement/Prospectus as Annex B and is incorporated herein by reference. The summary below is qualified in its entirety by reference to the full text of the Prudential Securities fairness opinion. Lexington shareholders are urged to read the Prudential Securities fairness opinion in its entirety. Because Prudential Securities was engaged by, and its fairness opinion was delivered to, the Board of Trustees of Lexington, the purpose of Prudential Securities' analysis was to determine whether the consideration being paid by Lexington for the Net Partnerships was fair from a financial point of view from the perspective of Lexington's shareholders, rather than from the perspective of the Net Partnerships. For purposes of its fairness opinion, Prudential Securities considered the merger consideration to be paid by Lexington for the Net Partnerships to represent the sum of the common shares and cash to be paid to the limited partners, and the total indebtedness of the Net Partnerships as of March 31, 2001 adjusted for the subsequent sale of property. THE PRUDENTIAL SECURITIES FAIRNESS OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE MERGER CONSIDERATION TO THE SHAREHOLDERS OF LEXINGTON FROM A FINANCIAL POINT OF VIEW. THE PRUDENTIAL SECURITIES FAIRNESS OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE MEETING OR AS TO ANY OTHER ACTION SUCH SHAREHOLDER SHOULD TAKE REGARDING THE MERGERS. In conducting its analysis and arriving at its written fairness opinion dated July 30, 2001, Prudential Securities reviewed all information and considered all financial data and other factors that it deemed relevant under the circumstances, including, among others, the following: - the Agreement and Plan of Merger dated November 13, 2000, and the Amendment to the Agreement and Plan of Merger dated July 19, 2001; - historical financial and operating data of Lexington that was publicly available, including, but not limited to: - Lexington's annual reports on Form 10-K for the three fiscal years ended December 31, 2000, 1999 and 1998; - Lexington's quarterly report on Form 10-Q for the quarter ended March 31, 2001; and - Lexington's proxy statement for the annual meeting of shareholders held on May 23, 2001; - historical financial and operating data of the Net Partnerships that was publicly available, including, but not limited to: 81 91 - the Net Partnerships' annual reports on Form 10-K for the three fiscal years ended December 31, 2000, 1999 and 1998; and - the Net Partnerships' quarterly reports on Form 10-Q for the quarter ended March 31, 2001; - other information relating to the Net Partnerships, including, but not limited to, forecasts of the future financial performance of the Net Partnerships for the fiscal years ending December 31, 2001, 2002, 2003, 2004, and 2005 prepared by the general partners of the Net Partnerships; - other information relating to Lexington, including, but not limited to: - forecasts of the future financial performance of Lexington for the fiscal years ending December 31, 2001, 2002, 2003, and 2004 prepared by the management of Lexington; and - a schedule of future investment projects, acquisitions and dispositions; - publicly available financial, operating and stock market data concerning companies engaged in businesses that Prudential Securities deemed comparable to Lexington or the Net Partnerships, or otherwise relevant to Prudential Securities' inquiry; - the financial terms of recent comparable transactions that Prudential Securities deemed relevant; - the historical stock prices and trading volumes of Lexington common shares; and - other financial studies, analyses and investigations as Prudential Securities deemed appropriate. The financial forecasts provided to Prudential Securities included, among other things, projected funds from operations, or FFO, figures for 2001 and 2002. The FFO projections for those years, as described below in the discussion of Prudential Securities' Comparable Company analysis, were taken into account by Prudential Securities in performing its analyses. However, Prudential Securities did not give any significant weight to the other financial projections provided to it by the general partners of the Net Partnerships and by the management of Lexington. Prudential Securities assumed, with Lexington's consent, that the mergers will be effected in accordance with the terms set forth in the Agreement and Plan of Merger dated as of November 13, 2000, as amended on July 19, 2001. Prudential Securities met with the senior management of Lexington and the general partners of the Net Partnerships to discuss the following: - their respective operations and historical financial statements; - the prospects for their respective businesses; - their estimates of their respective businesses' future financial performance; - the financial impact of the mergers on Lexington and the Net Partnerships, respectively; and - other matters that Prudential Securities deemed relevant. Lexington's management and the Net Partnerships' general partners provided Prudential Securities with financial and other information, as well as forecasts of the future financial performance of Lexington and the Net Partnerships. In connection with its review and analysis, and in arriving at its fairness opinion, Prudential Securities: - relied on the accuracy and completeness of the financial and other information provided by Lexington's management and the Net Partnerships' general partners, without independent verification; - did not perform or obtain any independent valuation or appraisal of any of the assets or liabilities of Lexington or the Net Partnerships; - assumed that the forecasts of the future financial performance of Lexington and the Net Partnerships provided by Lexington's management and the Net Partnerships' general partners, and the assumptions 82 92 and bases of these forecasts, represented the best currently available estimates and judgments of Lexington's management and the Net Partnerships' general partners; - assumed that the mergers qualified as tax-free reorganizations within the meaning of Section 368(a) of the Internal Revenue Code; - based its fairness opinion on the economic, financial and market conditions as they existed and could be evaluated on July 30, 2001; and - did not address: - the relative merits of the mergers or alternative business strategies which may have been available to Lexington; - the prices at which Lexington common shares will actually trade following consummation of the mergers; or - the fairness of the consideration to be paid to any limited partners electing to receive the dissenter debentures. The Prudential Securities fairness opinion and its presentation to the Board of Trustees of Lexington were among the many factors considered by the Board of Trustees in determining to recommend approval of the merger agreement and the mergers. Consequently, the analyses of Prudential Securities described below should not be viewed as determinative of the opinion of the Board of Trustees with respect to the merger consideration. The merger consideration was not determined on the basis of any recommendation by Prudential Securities. In arriving at its fairness opinion, Prudential Securities performed a variety of financial analyses. The summary below is not and is not intended to be a complete description of the analyses performed by Prudential Securities. The preparation of a fairness opinion is a complex process involving the determination of the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances. Therefore, a fairness opinion is not necessarily susceptible to partial analysis or summary description. Prudential Securities believes that its analyses must be considered as a whole and that selecting portions of its fairness opinion or certain factors considered by Prudential Securities, without consideration of all analyses and factors, could create an incomplete view of the evaluation process underlying the preparation of the fairness opinion. In addition, Prudential Securities made numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Lexington and the Net Partnerships. Any estimates contained in Prudential Securities' analyses are not necessarily indicative of actual values or future results. Actual values or future results may be significantly more or less favorable than these analyses suggest. Additionally, estimates of the values of businesses and securities are not and are not intended to be appraisals, and may not necessarily reflect the prices at which such businesses or securities may be sold. Accordingly, these analyses and estimates are inherently subject to substantial uncertainty. Subject to the foregoing, the following is a summary of the material financial analyses presented by Prudential Securities to the Board of Trustees in connection with its fairness opinion. COMPARABLE COMPANY ANALYSIS Prudential Securities compared selected financial ratios for the Net Partnerships with the corresponding financial ratios for the companies listed below. Each of these companies is engaged in the acquisition, operation and management of triple net lease properties and Prudential Securities considered each of them to be reasonably comparable to the Net Partnerships for purposes of its analysis. 83 93
COMPANY NAME EXCHANGE TICKER ------------ -------- ------ - Commercial Net Lease Realty............................... NYSE NNN - Franchise Finance Corp. of America........................ NYSE FFA - Lexington Corporate Properties Trust...................... NYSE LXP - Realty Income Corporation................................. NYSE O - US Restaurant Properties, Inc............................. NYSE USV
For each comparable company, Prudential Securities considered market trading multiples as a function of both historical and projected funds from operations. The projected funds from operations, or FFO, per share for the comparable companies were obtained from reports of First Call, a data service that monitors and publishes a compilation of earnings estimates produced by selected research analysts regarding companies of interest to institutional investors, as of July 27, 2001. The estimates published by First Call were not prepared in connection with the mergers or at Prudential Securities' request and may or may not prove to be accurate. The trading multiples of the comparable companies were based on closing stock prices on July 27, 2001. Prudential Securities' calculations resulted in the following relevant ranges for the comparable companies: - a range of equity market value as a multiple of actual 2000 FFO per share of 8.5x to 11.6x, with a mean of 9.8x; - a range of equity market value as a multiple of projected 2001 FFO per share of 8.1x to 13.0x, with a mean of 9.9x; and - a range of equity market value as a multiple of projected 2002 FFO per share of 7.6x to 10.4x, with a mean of 8.8x. Prudential Securities applied these multiples to the Net Partnerships' actual 2000 FFO, and to the projected 2001 and 2002 FFO provided by the general partners of the Net Partnerships. Using these FFO amounts, and after adding the indebtedness of the Net Partnerships as of March 31, 2001, adjusted for the subsequent sale of property, Prudential Securities arrived at: - a range of implied consideration of $141.3 million to $165.3 million, with a mean of $151.8 million, based on the Net Partnerships' actual 2000 FFO; - a range of implied consideration of $151.7 million to $197.4 million, with a mean of $168.6 million, based on the Net Partnerships' projected 2001 FFO; and - a range of implied consideration of $146.8 million to $173.0 million, with a mean of $158.1 million, based on the Net Partnerships' projected 2002 FFO. The following table summarizes the results of this comparable company analysis performed by Prudential Securities: COMPARABLE COMPANY ANALYSIS(1)
IMPLIED VALUATION COMPARABLE MULTIPLES OF NET PARTNERSHIPS ---------------------- ------------------------ REVENUES(2) FFO(2) HIGH LOW MEAN DEBT HIGH LOW MEAN ----------- ------ ------ ----- ----- ----- ------ ------ ------ ($ IN MILLIONS) 2000 ACTUAL.......... $15.6 $7.8 11.6x 8.5x 9.8x $75.7 $165.3 $141.3 $151.8 2001 PROJECTED....... $15.9 $9.4 13.0x 8.1x 9.9x $75.7 $197.4 $151.7 $168.6 2002 PROJECTED....... $15.8 $9.4 10.4x 7.6x 8.8x $75.7 $173.0 $146.8 $158.1
--------------- (1) Comparable companies analyzed included Commercial Net Lease Realty, Franchise Finance Corp. of America, Lexington Corporate Properties Trust, Realty Income Corporation and U.S. Restaurant Properties, Inc. (2) Financial projections provided by the general partners of the Net Partnerships. 84 94 Reviewing the results of the comparable company analysis, Prudential Securities observed that the agreed upon merger consideration is less than the ranges of consideration implied by each of these comparable company analyses. None of the comparable companies is identical to the Net Partnerships. Accordingly, a complete analysis of the results of the comparable company analysis cannot be limited to a quantitative review of such results. Rather, such a complete analysis would involve complex judgments concerning differences in financial and operating characteristics of the comparable companies and other factors that could affect the public valuations of the comparable companies and the Net Partnerships. PRECEDENT TRANSACTIONS ANALYSIS Prudential Securities analyzed the consideration paid in several recent real estate portfolio transactions considered by Prudential Securities to be reasonably similar to the mergers. Prudential Securities computed the capitalization rates from these transactions, as determined by the target portfolio's net operating income, or NOI, for the latest twelve months, and the purchase price paid, based upon publicly available information for these transactions. In its analysis, Prudential Securities considered the following recent office and industrial portfolio transactions:
DATE TOTAL ACQUIROR TARGET COMPLETED PURCHASE PRICE -------- ------ --------- --------------- ($ IN MILLIONS) Lend Lease Real Estate American Industrial 5/14/01 $292.2 Investments Properties Portfolio Long Island Industrial First Industrial Realty Trust 12/05/00 $169.6 Investors, Inc. Portfolio CalWest Industrial Pacific Gulf Properties Ind. 11/22/00 $852.9 Properties, LLC Portfolio SL Green Realty Corporation Reckson NYC Office Portfolio 5/24/99 $ 84.5 Prentiss Properties Trust Newport National Corporation 2/5/98 $ 90.4 Properties Equity Office Properties Wright Runstad Properties 12/17/97 $625.0 Trust Kilroy Realty Corporation Allen Group Portfolio 11/7/97 $ 87.1 Glenborough Realty Trust Inc. Advance Properties 9/15/97 $103.0 Glenborough Realty Trust Inc. T. Rowe Price Properties 9/15/97 $146.8
85 95 In addition, the following recent retail portfolio transactions were considered by Prudential Securities:
DATE TOTAL ACQUIROR TARGET COMPLETED PURCHASE PRICE -------- ------ --------- --------------- ($ IN MILLIONS) Weingarten Realty Investors Burham Pacific Properties, 4/02/01 $ 289.1 Inc. Kimco Realty Corp. Center Trust, Inc. 11/27/00 $ 160.6 BPP Retail, LLC AMB Property Corp. Portfolio 12/1/99 $ 560.3 Regency Realty Corporation Pacific Retail Trust 2/28/99 $1,156.9 Properties Kranzco Realty Trust German Investors Properties 10/1/98 $ 89.1 Konover Property Trust Konover & Associates South 9/16/98 $ 79.9 Properties Kimco Realty Corp. Metropolitan Life Ins. Co. 7/1/98 $ 167.5 Portfolio Excel Realty Trust AIG Baker Shopping Portfolio 7/1/98 $ 168.5 Malan Realty Investors, Inc. Sandor Development Co. 6/13/98 $ 33.7 Properties Konover Property Trust Rodwell/Kane Properties 3/23/98 $ 57.1 Regency Realty Corporation Midland Group Portfolio 5/18/98 $ 172.3
Prudential Securities' calculations resulted in a range of capitalization rates (latest twelve months NOI to purchase price) of 7.1% to 11.4%, with a mean of 9.2%. Applying these capitalization rates to the Net Partnerships' latest twelve months NOI resulted in a range of implied consideration of $132.2 million to $211.4 million, with a mean of $163.9 million, based on the Net Partnerships' latest twelve months NOI. The results of the precedent transactions analysis may be summarized as follows: PRECEDENT TRANSACTIONS ANALYSIS
IMPLIED VALUATION OF CAPITALIZATION RATES NET PARTNERSHIPS -------------------- ------------------------ NOI HIGH LOW MEAN HIGH LOW MEAN ----- ----- ---- ----- ------ ------ ------ ($ IN MILLIONS) Latest Twelve Months............ $15.0 11.4% 7.1% 9.2% $211.4 $132.2 $163.9
Prudential Securities observed that the merger consideration is within the range implied by its analysis of the precedent transactions and was less than the mean of the consideration implied by that analysis. None of the target portfolios in any of these precedent transactions was directly comparable to the portfolios of the Net Partnerships, and none of these transactions was directly comparable to the mergers. Most notably, in none of the precedent transactions was the portfolio comprised of 100% triple net lease properties. Furthermore, it was impossible to determine the percentage of each portfolio comprised of triple net leases, if any, from publicly available information about the precedent transactions. Due to these factors, the range of valuations resulting from the precedent transactions analysis was relatively large. Accordingly, undue weight should not be placed on the results of this analysis. A complete analysis of the results of this analysis cannot be limited to a quantitative review of such results. Rather, such a complete analysis would involve complex judgments concerning differences in financial and operating characteristics of the target portfolios and applicable transactions, as well as other factors that might affect the consideration paid for each of the target portfolios and for the Net Partnerships. ASSET VALUE ANALYSIS Prudential Securities analyzed the Net Partnerships' combined asset value in relation to the merger consideration. The gross real estate asset value was determined on the basis of information provided by the 86 96 general partners of the Net Partnerships, including the appraisals performed by Stanger & Co. for properties owned by the Net Partnerships as of December 31, 2000. The appraisals performed by Stanger & Co. were not prepared in connection with the mergers or at Prudential Securities' request. Prudential Securities did not perform or obtain any independent valuation of any of the Net Partnerships' assets. In conducting its asset value analysis, Prudential Securities adjusted the real estate valuation that resulted from these appraisals by its own estimate of the current values of the non-real estate assets and liabilities of the Net Partnerships as of March 31, 2001. This analysis indicated an asset value of $151.1 million for the Net Partnerships. The results of the asset value analysis may be summarized as follows:
($ IN MILLIONS) Stanger & Co. Appraised Properties.......................... $145.7 Net Working Capital......................................... $ 5.4 ------ ADJUSTED ASSET VALUE........................................ $151.1
Prudential Securities noted that the adjusted asset value resulting from this analysis was greater than the merger consideration. LIQUIDATION VALUE ANALYSIS Prudential Securities analyzed the Net Partnerships' combined liquidation value in relation to the merger consideration. The liquidation value was based on the adjusted asset value as set forth above adjusted for disposition costs related to the sale of the real estate assets. Reflecting the fact that the adjusted real estate value generally assumes the assets are not sold under distress, Prudential Securities assumed an orderly liquidation of the Net Partnerships' assets would occur over a one-year period. Because the sales proceeds would not be available immediately but rather as real estate assets were sold over this one-year period, sales proceeds were discounted using a range of discount rates from 11.0% to 13.0% to determine the net present value of the estimated proceeds. This range of discount rates was determined after examining an estimated weighted average cost of capital to Lexington and market conditions. This analysis indicated a range of liquidation values from $138.1 million to $139.3 million for the Net Partnerships. The following table summarizes the results of Prudential Securities' liquidation analysis:
DISCOUNT RATE ------------------------ 11.0% 12.0% 13.0% ------ ------ ------ ($ IN MILLIONS) Adjusted Asset Value....................................... $151.1 $151.1 $151.1 Less: Sales Cost........................................... $ (4.4) $ (4.4) $ (4.4) ------ ------ ------ Sale Proceeds.............................................. $146.8 $146.8 $146.8 Liquidation Present Value.................................. $139.3 $138.7 $138.1
Prudential Securities observed that the merger consideration was greater than the range of discounted liquidation values resulting from its liquidation analysis. 87 97 CONCLUSION The following table summarizes the results of the various analyses performed by Prudential Securities in arriving at its fairness opinion: SUMMARY INFORMATION
IMPLIED VALUATION ANALYSIS HIGH LOW MEAN -------------------------- ------ ------ ------ ($ IN MILLIONS) Comparable Company 2000 Actual FFO.......................................... $165.3 $141.3 $151.8 2001 Estimated FFO....................................... $197.4 $151.7 $168.6 2002 Estimated FFO....................................... $173.0 $146.8 $158.1 Precedent Transaction (LTM NOI)............................ $211.4 $132.2 $163.9 Asset Value................................................ NA NA $151.1 Liquidation Present Value.................................. $139.3 $138.1 $138.7 TOTAL MERGER CONSIDERATION(1).............................. $140.7
--------------- (1) The total merger consideration as of the date on which Prudential Securities delivered its fairness opinion to the Board of Trustees of Lexington based on March 31, 2000 financial statements adjusted for the subsequent sale of property. QUALIFICATIONS, RELATIONSHIPS AND COMPENSATION OF PRUDENTIAL SECURITIES Lexington selected Prudential Securities to provide a fairness opinion because: - it is a nationally recognized investment banking firm engaged in the valuation of businesses and their securities in connection with mergers and acquisitions and for other purposes; - it has substantial experience in transactions similar to the mergers; and - it was already familiar with Lexington. Lexington and Prudential Securities entered into an engagement letter, pursuant to which Lexington: - paid a retainer fee of $300,000 to Prudential Securities upon execution of the engagement letter; - paid an advisory fee of $400,000 to Prudential Securities upon delivery of an earlier Prudential Securities fairness opinion in connection with the original terms of the Agreement and Plan of Merger dated November 1, 2000; - paid an advisory fee of $400,000 to Prudential Securities upon delivery of the Prudential Securities fairness opinion in connection with the amended merger agreement; - will pay an additional fee of $75,000 to Prudential Securities upon completion of the mergers; - will reimburse Prudential Securities for its reasonable out-of-pocket expenses arising in connection with the mergers or the engagement; and - will indemnify Prudential Securities and related persons of Prudential Securities against specific liabilities, including liabilities under securities laws, arising in connection with the mergers or the engagement. This arrangement was recommended by Prudential Securities and agreed to by Lexington. Prudential Securities will update its fairness opinion if Lexington requests that it does so. There have not been, and are not expected to be, any significant events which would or could alter the fairness determination of Prudential Securities at this time. However, if the Board of Trustees of Lexington believes that there have been any event or events which individually or cumulatively may have altered the basis for Prudential 88 98 Securities' fairness determination, Lexington would have the ability to cause Prudential Securities to update its fairness opinion and either confirm or disaffirm its prior determination as to the fairness of the merger consideration, from a financial point of view, to the shareholders of Lexington. In the past two years, Prudential Securities has not received any other compensation from Lexington, its affiliates or the Net Partnerships. Prudential Securities has in the past, however, provided investment banking and other financial advisory services to Lexington and may continue to do so. Prudential Securities has received, and may receive, customary fees for the rendering of these services. In the ordinary course of business, Prudential Securities may actively trade the Lexington common shares for its own account and for the accounts of customers, and accordingly, may at any time hold a long or short position in such securities. OPINION OF COHEN & STEERS CAPITAL ADVISORS LLC FOR NET 1 L.P. On July 19, 2001, Cohen & Steers Capital Advisors LLC delivered to the general partner of Net 1 L.P. its written opinion that, as of the date of that opinion, the merger consideration was fair, from a financial point of view, to the limited partners of Net 1. Because Cohen & Steers was engaged by, and its fairness opinion was delivered to the general partners of the Net Partnerships, the purpose of Cohen & Steers' analysis was to determine whether the consideration being paid by Lexington for the Net Partnerships was fair, from a financial point of view from the perspective of the limited partners, rather than from the perspective of Lexington or its shareholders. For purposes of this fairness opinion, Cohen & Steers assumed that the merger consideration to be paid to the limited partners of Net 1 would be: - 27.346 Lexington common shares, with a market value of $410.19 per limited partnership unit; and - $410.19 in cash. Cohen & Steers' opinion is based on the closing price of Lexington common shares of $15.00 per share as of July 13, 2001, the last business day prior to the oral presentation of the opinion made to the general partner of Net 1 on July 16, 2001. The closing price of Lexington common shares on July 18, 2001, the day prior to the delivery of the written opinion to the general partner of Net 1 on July 19, 2001, was $15.11. The number of Lexington common shares to be issued will be recalculated based upon the average closing price during the 20 day period prior to, but not including, the closing date of the mergers. The number of shares issuable in exchange for each limited partnership interest will be limited to a maximum of 29.30 shares and a minimum of 25.64 shares. The maximum and minimum shares issued correspond to an average price of $14.00 and $16.00 per Lexington common share, respectively. Net 1 did not retain Cohen & Steers to act as a financial advisor, nor did Cohen & Steers advise Net 1 in connection with the merger. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant quantitative and qualitative methods of financial analysis, and the application of those methods to the particular circumstances. Therefore, a fairness opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion, Cohen & Steers considered the results of all its analyses as a whole and did not attribute any particular weight to any analysis or factor considered by it. Subject to the matters summarized in its opinion, the judgments made by Cohen & Steers as to its analysis and the factors considered by it caused Cohen & Steers to be of the opinion that, as of the date of its opinion, the merger consideration to be received in exchange for each partnership unit was fair, from a financial point of view. Cohen & Steers' analysis must be considered as a whole and considering any portion of such analyses or of the factors considered, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying Cohen & Steers' opinion. The full text of Cohen & Steers' written opinion, which describes the assumptions made, valuation techniques used, matters considered and limitations on the scope of review undertaken by Cohen & Steers is attached as Annex C to this document. The following is only a summary of Cohen & Steers' opinion and is not a substitute for the full text of the opinion. We urge the Net 1 limited partners to read Cohen & Steers' 89 99 opinion carefully and in its entirety. Cohen & Steers has consented to the references to Cohen & Steers and its opinion in this document and to the attachment of Cohen & Steers' opinion as an annex to this document. Cohen & Steers' opinion is directed to the general partner and relates only to the fairness, as of the date of its opinion, of the Net 1 merger consideration to the limited partners from a financial point of view. Cohen & Steers' opinion is directed only to the limited partners as a class and does not address: - the fairness of the merger consideration to any individual limited partner; - the fairness of any alternative consideration involved in the merger; - the consideration to be received in the merger by limited partners who elect to receive dissenter debentures; - whether the value of the merger consideration, as per the form of the amendment to the executed merger agreement, is the same as, more, or less than the merger consideration contemplated by the executed merger agreement; or - the merits of the underlying decision by the Net 1 general partner to engage in the merger. Cohen & Steers' opinion was provided at the request of and for the information of Net 1's general partner, for the purpose of evaluating the Net 1 merger consideration. This opinion does not constitute a recommendation to any limited partners to vote in favor of the merger, and should not be relied upon for such purpose. In arriving at its opinion, Cohen & Steers, among other things: - reviewed publicly available financial statements and other business and financial information of both Net 1 and Lexington; - reviewed internal financial and operating data, including financial forecasts prepared by the general partner of Net 1 for Net 1 and by the management of Lexington for Lexington; - discussed the past and current operations and financial condition and the prospects of both Net 1 and Lexington, with the general partner of Net 1 and senior management of Lexington; - reviewed the form of the amendment to the merger agreement and assumed that the amendment to the merger agreement which Cohen & Steers reviewed would conform in all material respects to the amendment to the merger agreement as executed and delivered; - performed various financial analyses, as Cohen & Steers deemed appropriate, using valuation techniques, including: - the application of the public trading multiples of triple-net REITs reasonably comparable to Net 1, to the financial results of Net 1; - a discounted cash flow analysis of Net 1's projected future free cash flows; - an analysis of the net asset value of Net 1; - an analysis with respect to the liquidation of Net 1's portfolio assets; - a review of the reported prices and trading activity of Lexington common shares; and - conducted such other financial studies, analyses and financial investigations as Cohen & Steers deemed appropriate. In its review and analysis and in formulating its opinion, Cohen & Steers: - assumed and relied upon the accuracy and completeness of all information furnished or otherwise communicated to Cohen & Steers, without independent verification; - relied upon the assurance of Net 1 that it was not aware of any information or facts that would make the information provided to it materially incomplete or misleading; 90 100 - assumed, at the direction of Net 1's general partner, that at the closing of the merger, Lexington will have duly registered the common shares to be received by the Net 1 limited partners with the Securities and Exchange Commission; - assumed that Lexington will have duly listed the common shares to be received by the Net 1 limited partners for trading on the New York Stock Exchange, and that all other material conditions to the closing of the merger will have been satisfied; - was not requested to, and therefore did not, independently verify the accuracy or completeness of any information furnished by Net 1 or Lexington or any publicly available information which it reviewed in arriving at its opinion; - did not undertake a physical inspection of any properties or make an independent valuation or appraisal of any assets or liabilities, contingent or otherwise, of Net 1; - expressed no opinion about the estimated value of Net 1, as indicated by the historical appraisals of Net 1's properties furnished by Net 1, although Cohen & Steers did review and consider these appraisals; - was not engaged to, and therefore did not, review any legal, accounting or tax aspects of the merger; - assumed, at the direction of Net 1's general partner and Lexington's management, that the financial and operating forecasts reviewed by Cohen & Steers were reasonably prepared on a basis reflecting the best current estimates and good faith judgments of the general partner of Net 1 and the management of Lexington as to their anticipated future financial condition and operating results; and - expressed no opinion with respect to those forecasts. The financial and operational projections of Net 1's general partner are as follows:
FOR THE YEAR ENDING DECEMBER 31, -------------------------------- 2001 2002 2003 2004 2005 ---- ---- ---- ---- ---- ($ IN MILLIONS) Revenues............................................ $5.0 $4.9 $4.7 $3.9 $5.6 EBITDA(1)........................................... 4.6 4.5 4.3 3.4 5.1 Funds from Operations (FFO)(2)...................... 3.0 2.9 2.8 2.1 3.8 Funds Available for Distribution (FAD)(3)........... 2.8 2.8 2.8 1.8 3.1
--------------- (1) EBITDA is defined as earnings before interest, taxes, depreciation and amortization. (2) Funds from operations are defined as net income, computed in accordance with generally accepted accounting principles, excluding gains or losses from the sale of property, plus depreciation and amortization and any pro rata funds from operations from unconsolidated joint ventures. (3) Funds available for distribution are derived by subtracting non-cash rent and maintenance capital expenditures/replacement reserves from funds from operations. Cohen & Steers' opinion was necessarily based upon financial, economic, monetary, market, regulatory and other conditions, including the financial condition of Lexington, as they existed and could be assessed by Cohen & Steers as of the date of its fairness opinion. Cohen & Steers did not express any opinion as to: - the value of Lexington common shares after being issued to the limited partners of Net 1 pursuant to the merger; or - the price at which Lexington common shares will trade following the merger. Cohen & Steers disclaimed any undertaking or obligation to advise any person of any change in any fact or matter affecting Cohen & Steers' opinion which may come or be brought to its attention after the date of the Cohen & Steers opinion unless specifically requested by Net 1 to do so. 91 101 In requesting the Cohen & Steers fairness opinion, the general partner of Net 1 did not give any special instructions to Cohen & Steers or impose any restrictions or limitations on the scope of the investigations that Cohen & Steers deemed necessary to render its fairness opinion. Cohen & Steers' opinion does not constitute a recommendation as to any action any limited partner of Net 1 should take in connection with the merger agreement, the merger or any aspect of the merger. The limited partners should not rely on the Cohen & Steers' opinion in deciding whether to vote in favor of the merger or to take, or refrain from taking, any other action. Cohen & Steers expressed no opinion or recommendation with respect to the desirability of pursuing any alternative to the merger. Cohen and Steers expressed no opinion as to whether the value of the merger consideration, as contemplated by the form of the amendment to the executed merger agreement, is the same as, more, or less than the merger consideration contemplated by the executed merger agreement. In rendering its opinion, Cohen & Steers was not engaged as an agent or fiduciary of the general partner or the limited partners, or of any other third party. Cohen & Steers' opinion related solely to the fairness, from a financial point of view, of the Net 1 merger consideration to be received by the Net 1 limited partners. Cohen & Steers expressed no opinion as to the structure, terms or effects of any other aspect of the transactions contemplated by the merger agreement or any of the agreements or instruments delivered in executing the merger. The following is a summary of the material financial analyses performed by Cohen & Steers in arriving at its opinion. No company or business used in such analyses as a comparison is identical to Net 1 or Lexington, nor is any evaluation of the results of such analyses entirely mathematical. Rather, those analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies or businesses being analyzed. Any estimates contained in Cohen & Steers' analyses are not necessarily indicative of actual values or predictive of future results or values. Actual values, and future results and values, may be significantly more or less favorable than those contained in the analyses. In addition, analyses relating to the value of businesses or securities are not appraisals and do not reflect the prices at which businesses or companies may actually be sold in the future. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty. ANALYSES OF SELECTED COMPARABLE PUBLICLY TRADED COMPANIES Cohen & Steers compared selected financial ratios for Net 1 with the corresponding financial ratios of publicly traded companies that are engaged primarily in the ownership, management, operations and acquisition of triple-net leased properties and that are reasonably comparable to Net 1. In determining the appropriate comparable companies, Cohen & Steers considered a variety of factors, including business focus, property portfolio composition and market capitalization. These companies included:
COMPANY NAME EXCHANGE TICKER ------------ -------- ------ - Captec Net Lease Realty................................... NASDAQ CRRR - Commercial Net Lease Realty............................... NYSE NNN - W.P. Carey & Co. LLC...................................... NYSE WPC - Franchise Finance Corporation............................. NYSE FFA - HRPT Properties Trust..................................... NYSE HRP - Lexington Corporate Properties Trust...................... NYSE LXP - Realty Income Corporation................................. NYSE O - US Restaurant Properties.................................. NYSE USV
For each of the comparable companies, Cohen & Steers calculated trading multiples as a function of projected funds from operations and earnings before interest, taxes, depreciation and amortization, or EBITDA, as provided by the general partner of Net 1. Funds from operations are defined as net income, computed in accordance with generally accepted accounting principles, excluding gains or losses from the sale of property, plus depreciation and amortization and any pro rata funds from operations from unconsolidated joint ventures. 92 102 Projected funds from operations per share estimates for the comparable companies were obtained from First Call, an on-line data service that compiles earnings estimates developed by research analysts. Net 1's projected EBITDA and funds from operations were derived from projections provided to Cohen & Steers by the general partner of Net 1. The trading multiples were based on closing stock prices on July 13, 2001. Applying the comparable company multiples described above to Net 1's latest quarter annualized EBITDA and funds from operations, and to Net 1's actual 2000 and projected 2001 and 2002 funds from operations results in a range of per unit values for Net 1 that are summarized in the following table.
COMPARABLE MULTIPLES IMPLIED PER LP UNIT VALUES ENTERPRISE VALUE/MARKET -------------------- ----------------------------- VALUE OF EQUITY MULTIPLES LOW HIGH MEAN LOW HIGH MEAN ------------------------- ---- ----- ----- ------- --------- ------- Latest Quarter Annualized EBITDA(1)................................ 8.6x 12.0x 10.4x $592.25 $1,055.33 $844.09 Funds from Operation(2).................. 6.3x 11.3x 8.7x $580.35 $1,050.45 $808.64 Projected Funds from Operations CY 2001(2)............................... 6.9x 12.6x 9.0x $672.31 $1,227.40 $877.65 CY 2002(2)............................... 6.6x 10.2x 8.4x $638.01 $ 993.87 $812.23 ------- --------- ------- OVERALL MEAN............................... $620.73 $1,081.76 $835.65 ------- --------- -------
--------------- (1) Based on multiple of Enterprise Value less net debt (2) Based on multiple of Market Value of Equity Cohen & Steers noted that the estimated market value of the Net 1 merger consideration fell within the range of high and low implied per limited partnership unit values. DISCOUNTED CASH FLOW ANALYSIS Cohen & Steers performed a discounted cash flow analysis of Net 1 by calculating the present value, as of June 30, 2001, of the projected unleveraged cash flows of Net 1 for the period from July 1, 2001 to December 31, 2005, based upon projections provided by Net 1's general partner. Free cash flows are defined as EBITDA net of non-cash rent and estimated maintenance capital expenditures and replacement reserves. The discounted cash flow analysis of Net 1 was determined by adding: - the present value of the projected free cash flows of Net 1 for its portfolio of properties over the period from July 2001 to December 2005, and - the present value of the estimated future value of the portfolio at the end of 2005; and then subtracting: - the net debt outstanding of Net 1, as of June 30, 2001; and - at the direction of the general partner, subsequent material changes to the balance sheet, including: - the cash dividend distribution made on July 31, 2001 to the general and limited partners of Net 1, and - the final distribution of cash outstanding to the general and limited partners anticipated at closing of the Transaction as contemplated under the merger agreement. The range of estimated future portfolio values at the end of the projection period was calculated by applying terminal multiples to the projected calendar year 2005 EBITDA. Estimated free cash flows and future portfolio values were discounted to present value using a range of discount rates. This discount rate range is representative of Net 1 and its comparable peer group's weighted average cost of capital. The present value of Net 1's projected cash flows and future portfolio value was then multiplied by the limited partners' 99.0% share of Net 1's discounted present value and divided by the number of limited partnership units 93 103 outstanding at June 30, 2001, in order to derive the discounted cash flow value per limited partnership unit. The relevant ranges are summarized in the following table.
DISCOUNTED CASH FLOW ANALYSIS LOW HIGH MEAN ----------------------------- ------- ------- ------- Range of Discount Rates................................. 11.0% 13.0% 12.0% Range of Terminal Multiples of EBITDA................... 9.25x 10.25x 9.75x Range of Implied per LP Unit Values..................... $655.41 $849.74 $750.03
Cohen & Steers noted that the estimated market value of the Net 1 merger consideration was above the high, low and mean per limited partnership unit values. NET ASSET VALUE ANALYSIS Cohen & Steers calculated the net asset value of Net 1 using projections provided by Net 1's general partner. In doing so, Cohen & Steers applied a range of capitalization rates to Net 1's projected property net operating income for the twelve months ended June 30, 2002. Net operating income is defined as property revenues less property expenses. The resulting gross real estate value was added to the gross value of Net 1's other assets, including cash, and reduced by Net 1's mortgage notes payable and other liabilities. At the direction of the general partner, Cohen & Steers further adjusted the Net 1 asset value to reflect subsequent material changes to the June 30, 2001 balance sheet, including: - the cash dividend distribution made on July 31, 2001 to the general and limited partners of Net 1; and - the final distribution of cash outstanding to the general and limited partners anticipated at closing of the Transaction as contemplated under the merger agreement. The resulting net asset value was then multiplied by the limited partners' 99.0% share of the net assets and divided by the number of limited partnership units outstanding at June 30, 2001 to derive the net asset value per limited partnership unit. The relevant ranges are summarized in the following table.
NET ASSET VALUE ANALYSIS LOW HIGH MEAN ------------------------ ------- ------- ------- Range of Capitalization Rates........................... 9.8% 10.8% 10.3% Range of Implied per LP Unit Values..................... $580.77 $720.72 $650.74
Cohen & Steers noted that the estimated market value of the Net 1 merger consideration fell within the range of high and low per limited partnership unit values and exceeded the mean per limited partnership unit value. NET LIQUIDATION VALUATION ANALYSIS Cohen & Steers calculated the liquidation value of Net 1 using projections provided by Net 1's general partner. In doing so, Cohen & Steers applied a range of capitalization rates to Net 1's projected property net operating income for the twelve months ended June 30, 2002. Net operating income is defined as property level revenues less property level expenses. The resulting gross real estate value was added to the gross value of Net 1's other assets, including cash, and reduced by Net 1's mortgage notes payable, other liabilities and estimated ordinary portfolio liquidation costs. Ordinary portfolio liquidation costs, including typical brokerage fees, legal fees, the cost of due diligence reports, property transfer taxes and loan assumption fees, were provided to Cohen & Steers by Net 1's general partner. At the direction of the general partner, Cohen & Steers further adjusted the Net 1 asset value to reflect subsequent material changes to the June 30, 2001 balance sheet, including: - the cash dividend distribution made on July 31, 2001 to the general and limited partners of Net 1; and - the final distribution of cash outstanding to the general and limited partners anticipated at closing of the Transaction as contemplated under the merger agreement. 94 104 The resulting net liquidation value was then multiplied by the limited partners' 99.0% share of the net liquidated assets and divided by the number of limited partnership units outstanding at June 30, 2001 to derive the net liquidation value per limited partnership unit. The relevant ranges are summarized in the following table.
LIQUIDATION VALUE ANALYSIS LOW HIGH MEAN -------------------------- ------- -------- ------- Range of Capitalization Rates.......................... 9.8% 10.8% 10.3% Range of Implied per LP Unit Values.................... $532.79 $669.250 $601.02
Cohen & Steers noted that the estimated market value of the Net 1 merger consideration fell within the range of high and low per limited partnership unit values and exceeded the mean per limited partnership unit value. SUMMARY OF VALUATION ANALYSES The results of the various valuation analyses performed by Cohen & Steers in rendering its fairness opinion are summarized in the following table.
SUMMARY OF ANALYSIS LOW HIGH MEAN ------------------- ------- --------- ------- Comparable Publicly Traded Companies................... $580.35 $1,227.40 $835.65 Discounted Cash Flow Analysis.......................... $655.41 $ 849.74 $750.03 Net Asset Value Analysis............................... $580.77 $ 720.72 $650.74 Net Liquidation Value Analysis......................... $532.79 $ 669.25 $601.02 Market Value of Net 1 Merger Consideration(1).......... $820.38 TOTAL NET 1 MERGER CONSIDERATION(2).................... $820.38
--------------- (1) Based upon an estimated market valuation of 100% of face value of the common shares and cash consideration being offered to the limited partners. The common shares were valued using the then prevailing market price of $15.00 as of the close of business on July 13, 2001. (2) Assumes that the average closing price of common shares during the 20 day period prior to, but not including, the closing date of the mergers is within the "collar" of $14.00 and $16.00 per share. The total merger consideration is based on the sum of the market value of the common shares and the cash consideration being offered to the limited partners. The number of common shares which will actually be received by limited partners will be based upon the average closing price. SHARE TRADING HISTORY Based upon publicly available information, Cohen & Steers reviewed the average trading prices for Lexington common shares for the each of the prior 20, 30, 60, 90, 120 and 180-day periods ending July 13, 2001. The following table sets forth these average trading prices.
PERIOD ENDING JULY 13, 2001 --------------------------- 20-day...................................................... $14.74 30-day...................................................... $14.51 60-day...................................................... $13.90 90-day...................................................... $13.58 120-day..................................................... $13.40 180-day..................................................... $12.79
Cohen & Steers observed that the latest closing price for Lexington common shares, which was $15.00 per share, was above the average trading price during the 20, 30, 60, 90, 120 and 180-day periods. In addition, Cohen & Steers observed that the 20 and 30-day average trading ranges were at or above $14.00 per share, which is the low end of the of the fixed price range of the merger consideration. 95 105 QUALIFICATIONS, RELATIONSHIPS AND COMPENSATION OF COHEN & STEERS Cohen & Steers is an investment banking firm regularly engaged in the valuation of businesses and their securities in connection with mergers, acquisitions, public and private capital raising and valuations for corporate and other purposes. Cohen & Steers did not perform any financial advisory services in connection with its engagement or the merger. To date, Net 1 has paid Cohen & Steers aggregate fees of $100,000 related to fairness opinions rendered by Cohen & Steers to the Net 1 general partner on November 9, 2000 and $62,500 related to fairness opinions rendered by Cohen & Steers to the Net 1 general partner on July 19, 2001. Net 1 has agreed to reimburse Cohen & Steers for certain expenses and liabilities in connection with its engagement. Net 1 has also agreed to indemnify Cohen & Steers, its directors, officers, employees and affiliates against certain liabilities, including liabilities under federal securities laws. The fees for Cohen & Steers' opinion was not conditioned upon the conclusion reached by Cohen & Steers as to the fairness of the merger consideration, or upon the ultimate consummation of the merger. Except as expressly set forth above, Net 1 imposed no limitation on the nature and scope of, or methodologies and procedures used in, Cohen & Steers' financial analyses. This arrangement was recommended by Cohen & Steers and agreed to by the general partner of Net 1. In the past two years, Cohen & Steers has performed no other work for, or received any other fees from, Net 1, Lexington or any of its affiliates. There have not been, and are not expected to be, any significant events which would or could alter the fairness determination of Cohen & Steers at this time. However, if the general partner believes that there have been any event or events which individually or cumulatively may have altered the basis for Cohen & Steers' fairness determination, Net 2 would have the ability to cause Cohen & Steers to update its fairness opinion and either confirm or disaffirm its prior determination as to the fairness of the Transaction to Net 1. OPINION OF COHEN & STEERS CAPITAL ADVISORS LLC FOR NET 2 L.P. On July 19, 2001, Cohen & Steers Capital Advisors LLC delivered to the general partner of Net 2 L.P. its written opinion that, as of the date of that opinion, the merger consideration was fair, from a financial point of view, to the limited partners of Net 2. Because Cohen & Steers was engaged by, and its fairness opinion was delivered to the general partners of the Net Partnerships, the purpose of Cohen & Sterns' analysis was to determine whether the consideration being paid by Lexington for the Net Partnerships was fair, from a financial point of view from the perspective of the limited partners, rather than from the perspective of Lexington or its shareholders. For purposes of this fairness opinion, Cohen & Steers assumed that the merger consideration to be paid to the limited partners of Net 2 would be: - 2.732 Lexington common shares, with a market value of $40.98 per limited partnership unit; and - $40.98 in cash. Cohen & Steers' opinion is based on the closing price of Lexington common shares of $15.00 per share as of July 13, 2001, the last business day prior to the oral presentation of the opinion made to the general partner of Net 2 on July 16, 2001. The closing price of Lexington common shares on July 18, 2001, the day prior to the delivery of the written opinion to the general partner of Net 2 on July 19, 2001, was $15.11. The number of Lexington common shares to be issued will be recalculated based upon the average closing price during the 20 day period preceding, but not including, the closing date of the merger. The number of shares issuable in exchange for each limited partnership interest will be limited to a maximum of 2.93 shares and a minimum of 2.56 shares. The maximum and minimum shares issued correspond to an average price of $14.00 and $16.00 per Lexington common share, respectively. Net 2 did not retain Cohen & Steers to act as a financial advisor, nor did Cohen & Steers advise Net 2 in connection with the merger. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant quantitative and qualitative methods of financial analysis, and the application of those methods to the particular circumstances. Therefore, a fairness opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion, Cohen & Steers considered the results of all its 96 106 analyses as a whole and did not attribute any particular weight to any analysis or factor considered by it. Subject to the matters summarized in its opinion, the judgments made by Cohen & Steers as to its analysis and the factors considered by it caused Cohen & Steers to be of the opinion that, as of the date of its opinion, the merger consideration to be received in exchange for each partnership unit was fair, from a financial point of view. Cohen & Steers' analysis must be considered as a whole and considering any portion of such analyses or of the factors considered, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying Cohen & Steers' opinion. The full text of Cohen & Steers' written opinion, which describes the assumptions made, valuation techniques used, matters considered and limitations on the scope of review undertaken by Cohen & Steers is attached as Annex C to this document. The following is only a summary of Cohen & Steers' opinion and is not a substitute for the full text of the opinion. We urge the Net 2 limited partners to read Cohen & Steers' opinion carefully and in its entirety. Cohen & Steers has consented to the references to Cohen & Steers and its opinion in this document and to the attachment of Cohen & Steers' opinion as an annex to this document. Cohen & Steers' opinion is directed to the general partner and relates only to the fairness, as of the date of its opinion, of the Net 2 merger consideration to the limited partners from a financial point of view. Cohen & Steers' opinion is directed only to the limited partners as a class and does not address: - the fairness of the merger consideration to any individual limited partner; - the fairness of any alternative consideration involved in the merger; - the consideration to be received in the merger by limited partners who elect to receive dissenter debentures; - whether the value of the merger consideration, as per the form of the amendment to the executed merger agreement, is the same as, more, or less than the merger consideration contemplated by the executed merger agreement; or - the merits of the underlying decision by the Net 2 general partner to engage in the merger. Cohen & Steers' opinion was provided at the request of and for the information of Net 2's general partner, for the purpose of evaluating the Net 2 merger consideration. This opinion does not constitute a recommendation to any limited partners to vote in favor of the merger, and should not be relied upon for such purpose. In arriving at its opinion, Cohen & Steers, among other things: - reviewed publicly available financial statements and other business and financial information of both Net 2 and Lexington; - reviewed internal financial and operating data, including financial forecasts prepared by the general partner of Net 2 for Net 2 and by the management of Lexington for Lexington; - discussed the past and current operations and financial condition and the prospects of both Net 2 and Lexington, with the general partner of Net 2 and senior management of Lexington; - reviewed the form of the amendment to the merger agreement and assumed that the amendment to the merger agreement which Cohen & Steers reviewed would conform in all material respects to the amendment to the merger agreement as executed and delivered; - performed various financial analyses, as Cohen & Steers deemed appropriate, using valuation techniques, including: - the application of the public trading multiples of triple-net REITs reasonably comparable to Net 2, to the financial results of Net 2; - a discounted cash flow analysis of Net 2's projected future free cash flows; - an analysis of the net asset value of Net 2; 97 107 - an analysis with respect to the liquidation of Net 2's portfolio assets; - a review of the reported prices and trading activity of Lexington common shares; - conducted such other financial studies, analyses and financial investigations as Cohen & Steers deemed appropriate. In its review and analysis and in formulating its opinion, Cohen & Steers: - assumed and relied upon the accuracy and completeness of all information furnished or otherwise communicated to Cohen & Steers, without independent verification; - relied upon the assurance of Net 2 that it was not aware of any information or facts that would make the information provided to it materially incomplete or misleading; - assumed, at the direction of Net 2's general partner, that at the closing of the merger, Lexington will have duly registered the common shares to be received by the Net 2 limited partners with the Securities and Exchange Commission; - assumed that Lexington will have duly listed the common shares to be received by the Net 2 limited partners for trading on the New York Stock Exchange, and that all other material conditions to the closing of the merger will have been satisfied; - was not requested to, and therefore did not, independently verify the accuracy or completeness of any information furnished by Net 2 or Lexington or any publicly available information which it reviewed in arriving at its opinion; - did not undertake a physical inspection of any properties or make an independent valuation or appraisal of any assets or liabilities, contingent or otherwise, of Net 2; - expressed no opinion about the estimated value of Net 2, as indicated by the historical appraisals of Net 2's properties furnished by Net 2, even although Cohen & Steers did review and consider these appraisals; - was not engaged to, and therefore did not, review any legal, accounting or tax aspects of the merger; - assumed, at the direction of Net 2's general partner and Lexington's management, that the financial and operating forecasts reviewed by Cohen & Steers were reasonably prepared on a basis reflecting the best current estimates and good faith judgments of the general partner of Net 2 and the management of Lexington as to their anticipated future financial condition and operating results; and - expressed no opinion with respect to those forecasts. The financial and operational projections of Net 2's general partner are as follows:
FOR THE YEAR ENDING DECEMBER 31, ----------------------------------------- 2001 2002 2003 2004 2005 ----- ----- ----- ----- ----- ($ IN MILLIONS) Revenues................................... $10.2 $10.9 $10.7 $10.8 $10.8 EBITDA(1).................................. 9.4 10.0 9.9 10.0 10.0 Funds from Operations (FFO)(2)............. 5.0 5.8 5.8 6.0 6.1 Funds Available for Distribution (FAD)(3)................................. 3.9 4.9 4.8 5.3 5.5
--------------- (1) EBITDA is defined as earnings before interest, taxes, depreciation and amortization. (2) Funds from operations are defined as net income, computed in accordance with generally accepted accounting principles, excluding gains or losses from the sale of property, plus depreciation and amortization and any pro rata funds from operations from unconsolidated joint ventures. (3) Funds available for distribution are derived by subtracting non-cash rent and maintenance capital expenditures/replacement reserves from funds from operations. 98 108 Cohen & Steers' opinion was necessarily based upon financial, economic, monetary, market, regulatory and other conditions, including the financial condition of Lexington, as they existed and could be assessed by Cohen & Steers as of the date of its fairness opinion. Cohen & Steers did not express any opinion as to: - the value of Lexington common shares after being issued to the limited partners of Net 2 pursuant to the merger; or - the prices at which Lexington common shares will trade following the merger. Cohen & Steers disclaimed any undertaking or obligation to advise any person of any change in any fact or matter affecting Cohen & Steers' opinion which may come or be brought to its attention after the date of the Cohen & Steers opinion unless specifically requested by Net 2 to do so. In requesting the Cohen & Steers fairness opinion, the general partner of Net 2 did not give any special instructions to Cohen & Steers or impose any restrictions or limitations on the scope of the investigations that Cohen & Steers deemed necessary to render its fairness opinion. Cohen & Steers' opinion does not constitute a recommendation as to any action any limited partner of Net 2 should take in connection with the merger agreement, the merger or any aspect of the merger. The limited partners should not rely on the Cohen & Steers' opinion in deciding whether to vote in favor of the merger or to take, or refrain from taking, any other action. Cohen & Steers expressed no opinion or recommendation with respect to the desirability of pursuing any alternative to the merger. Cohen and Steers expressed no opinion as to whether the value of the merger consideration, as contemplated by the form of the amendment to the executed merger agreement, is the same as, more, or less than the merger consideration contemplated by the executed merger agreement. In rendering its opinion, Cohen & Steers was not engaged as an agent or fiduciary of the general partner or the limited partners, or of any other third party. Cohen & Steers' opinion related solely to the fairness, from a financial point of view, of the Net 2 merger consideration to be received by the Net 2 limited partners. Cohen & Steers expressed no opinion as to the structure, terms or effects of any other aspect of the transactions contemplated by the merger agreement or any of the agreements or instruments delivered in executing the merger. The following is a summary of the material financial analyses performed by Cohen & Steers in arriving at its opinion. No company or business used in such analyses as a comparison is identical to Net 2 or Lexington, nor is any evaluation of the results of such analyses entirely mathematical. Rather, those analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies or businesses being analyzed. Any estimates contained in Cohen & Steers' analyses are not necessarily indicative of actual values or predictive of future results or values. Actual values, and future results and values, may be significantly more or less favorable than those contained in the analyses. In addition, analyses relating to the value of businesses or securities are not appraisals and do not reflect the prices at which businesses or companies may actually be sold in the future. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty. ANALYSES OF SELECTED COMPARABLE PUBLICLY TRADED COMPANIES Cohen & Steers compared selected financial ratios for Net 2 with the corresponding financial ratios of publicly traded companies that are engaged primarily in the ownership, management, operations and acquisition of triple-net leased properties and that are reasonably comparable to Net 2. In determining the appropriate comparable companies, Cohen & Steers considered a variety of factors, including business focus, property portfolio composition and market capitalization. These companies included:
COMPANY NAME EXCHANGE TICKER ------------ -------- ------ - Captec Net Lease Realty................................... NASDAQ CRRR - Commercial Net Lease Realty............................... NYSE NNN - W.P. Carey & Co., LLC..................................... NYSE WPC - Franchise Finance Corporation............................. NYSE FFA
99 109
COMPANY NAME EXCHANGE TICKER ------------ -------- ------ - HRPT Properties Trust..................................... NYSE HRP - Lexington Corporate Properties Trust...................... NYSE LXP - Realty Income Corporation................................. NYSE O - US Restaurant Properties.................................. NYSE USV
For each of the comparable companies, Cohen & Steers calculated trading multiples as a function of projected funds from operations and earnings before interest, taxes, depreciation and amortization, or EBITDA, as provided by the general partner of Net 2. Funds from operations are defined as net income, computed in accordance with generally accepted accounting principles, excluding gains or losses from the sale of property, plus depreciation and amortization and any pro rata funds from operations from unconsolidated joint ventures. Projected funds from operations per share estimates for the comparable companies were obtained from First Call, an on-line data service that compiles earnings estimates developed by research analysts. Net 2's projected EBITDA and funds from operations were derived from projections provided to Cohen & Steers by the general partner of Net 2. The trading multiples were based on closing stock prices on July 13, 2001. Applying the comparable company multiples described above to Net 2's latest quarter annualized EBITDA and funds from operations, and to Net 2's actual 2000 and projected 2001 and 2002 funds from operations results in a range of per unit values for Net 2 that are summarized in the following table.
COMPARABLE MULTIPLES IMPLIED PER LP UNIT VALUES ENTERPRISE VALUE/MARKET ---------------------- --------------------------- VALUE OF EQUITY MULTIPLES LOW HIGH MEAN LOW HIGH MEAN ------------------------- ---- ----- ----- ------ ------- ------ Latest Quarter Annualized EBITDA(1)....................... 8.6x 12.0x 10.4x $57.93 $123.81 $93.76 Funds from Operation(2)......... 6.3x 11.3x 8.7x $63.19 $114.38 $88.05 Projected Funds from Operations CY 2001(2)...................... 6.9x 12.6x 9.0x $72.45 $132.26 $94.58 CY 2002(2)...................... 6.6x 10.2x 8.4x $71.84 $111.91 $91.46 ------ ------- ------ OVERALL MEAN...................... $57.93 $132.26 $91.96 ------ ------- ------
--------------- (1) Based on multiple of Enterprise Value less net debt (2) Based on multiple of Market Value of Equity Cohen & Steers noted that the estimated market value of the Net 2 merger consideration fell within the range of high and low implied per limited partnership unit values. DISCOUNTED CASH FLOW ANALYSIS Cohen & Steers performed a discounted cash flow analysis of Net 2 by calculating the present value, as of June 30, 2001, of the projected unleveraged cash flows of Net 2 for the period from July 1, 2001 to December 31, 2005, based upon projections provided by Net 2's general partner. Free cash flows are defined as EBITDA net of non-cash rent and estimated maintenance capital expenditures and replacement reserves. The discounted cash flow analysis of Net 2 was determined by adding: - the present value of the projected free cash flows of Net 2 for its portfolio of properties over the period from July 2001 to December 2005, and - the present value of the estimated future value of the portfolio at the end of 2005; and then subtracting: - the net debt outstanding of Net 2, as of June 30, 2001; and 100 110 - at the direction of the general partner, subsequent material changes to the balance sheet, including: -- the cash dividend distribution made on July 31, 2001 to the general and limited partners of Net 2, and -- the final distribution of cash outstanding to the general and limited partners anticipated at closing of the Transaction as contemplated under the merger agreement. The range of estimated future portfolio values at the end of the projection period was calculated by applying terminal multiples to the projected calendar year 2005 EBITDA. Estimated free cash flows and future portfolio values were discounted to present value using a range of discount rates. This discount rate range is representative of Net 2 and its comparable peer group's weighted average cost of capital. The present value of Net 2's projected cash flows and future portfolio value was then multiplied by the limited partners' 99.0% share of Net 2's discounted present value and divided by the number of limited partnership units outstanding at June 30, 2001, in order to derive the discounted cash flow value per limited partnership unit. The relevant ranges are summarized in the following table.
DISCOUNTED CASH FLOW ANALYSIS LOW HIGH MEAN ----------------------------- ------ ------ ------ Range of Discount Rates.................................... 11.0% 13.0% 12.0% Range of Terminal Multiples of EBITDA...................... 9.75x 10.75x 10.25x Range of Implied per LP Unit Values........................ $64.58 $90.15 $77.04
Cohen & Steers noted that the estimated market value of the Net 2 merger consideration fell within the range of high and low implied per limited partnership unit values and exceeded the overall mean implied per limited partnership unit value. NET ASSET VALUE ANALYSIS Cohen & Steers calculated the net asset value of Net 2 using projections provided by Net 2's general partner. In doing so, Cohen & Steers applied a range of capitalization rates to Net 2's projected property net operating income for the twelve months ended June 30, 2002. Net operating income is defined as property revenues less property expenses. The resulting gross real estate value was added to the gross value of Net 2's other assets, including cash, and reduced by Net 2's mortgage notes payable and other liabilities. At the direction of the general partner, Cohen & Steers further adjusted the Net 2 asset value to reflect subsequent material changes to the June 30, 2001 balance sheet, including: - the cash dividend distribution made on July 31, 2001 to the general and limited partners of Net 2; and - the final distribution of cash outstanding to the general and limited partners anticipated at closing of the Transaction as contemplated under the merger agreement. The resulting net asset value was then multiplied by the limited partners' 99.0% share of the net assets and divided by the number of limited partnership units outstanding at June 30, 2001 to derive the net asset value per limited partnership unit. The relevant ranges are summarized in the following table.
NET ASSET VALUE ANALYSIS LOW HIGH MEAN ------------------------ ------ ------ ------ Range of Capitalization Rates.............................. 9.3% 10.3% 9.8% Range of Implied per LP Unit Values........................ $73.50 $92.82 $83.16
Cohen & Steers noted that the estimated market value of the Net 2 merger consideration fell within the range of high and low per limited partnership unit values. NET LIQUIDATION VALUATION ANALYSIS Cohen & Steers calculated the liquidation value of Net 2 using projections provided by Net 2's general partner. In doing so, Cohen & Steers applied a range of capitalization rates to Net 2's projected property net operating income for the twelve months ended June 30, 2002. Net operating income is defined as property 101 111 level revenues less property level expenses. The resulting gross real estate value was added to the gross value of Net 2's other assets, including cash, and reduced by Net 2's mortgage notes payable, other liabilities and estimated ordinary portfolio liquidation costs. Ordinary portfolio liquidation costs, including typical brokerage fees, legal fees, the cost of due diligence reports, property transfer taxes and loan assumption fees, were provided to Cohen & Steers by Net 2's general partner. At the direction of the general partner, Cohen & Steers further adjusted the Net 2 asset value to reflect subsequent material changes to the June 30, 2000 balance sheet, including: - the cash dividend distribution made on July 31, 2001 to the general and limited partners of Net 2; and - the final distribution of cash outstanding to the general and limited partners anticipated at closing of the Transaction as contemplated under the merger agreement. The resulting net liquidation value was then multiplied by the limited partners' 99.0% share of the net liquidated assets and divided by the number of limited partnership units outstanding at June 30, 2001 to derive the net liquidation value per limited partnership unit. The relevant ranges are summarized in the following table.
LIQUIDATION VALUE ANALYSIS LOW HIGH MEAN -------------------------- ------ ------ ------ Range of Capitalization Rates.............................. 9.3% 10.3% 9.8% Range of Implied per LP Unit Values........................ $65.73 $84.57 $75.15
Cohen & Steers noted that the estimated market value of the Net 2 merger consideration fell within the range of high and low per limited partnership unit values and exceeded the mean per limited partnership unit value. SUMMARY OF VALUATION ANALYSES The results of the various valuation analyses performed by Cohen & Steers in rendering its fairness opinion are summarized in the following table.
SUMMARY OF ANALYSIS LOW HIGH MEAN ------------------- ------ ------ ------ Comparable Publicly Traded Companies....................... $57.93 $132.26 $91.96 Discounted Cash Flow Analysis.............................. $64.58 $90.15 $77.04 Net Asset Value Analysis................................... $73.50 $92.82 $83.16 Net Liquidation Value Analysis............................. $65.73 $84.57 $75.15 Market Value of Net 2 Merger Consideration(1).............. $81.95 TOTAL NET 2 MERGER CONSIDERATION(2)........................ $81.95
--------------- (1) Based upon an estimated market valuation of 100% of face value of the common shares and cash consideration being offered to the limited partners. The common shares were valued using the then prevailing market price of $15.00 as of the close of business on July 13, 2001. (2) Assumes that the average closing price of common shares during the 20 day period prior to, but not including, the closing date of the mergers is within the "collar" of $14.00 and $16.00 per share. The total merger consideration is based on the sum of the market value of the common shares and the cash consideration being offered to the limited partners. The number of common shares which will actually be received by limited partners will be based upon the average closing price. 102 112 SHARE TRADING HISTORY Based upon publicly available information, Cohen & Steers reviewed the average trading prices for Lexington common stock for the each of the prior 20, 30, 60, 90, 120 and 180-day periods ending July 13, 2001. The following table sets forth these average trading prices.
PERIOD ENDING JULY 13, 2001 --------------------------- 20-day...................................................... $14.74 30-day...................................................... $14.51 60-day...................................................... $13.90 90-day...................................................... $13.58 120-day..................................................... $13.40 180-day..................................................... $12.79
Cohen & Steers observed that the latest closing price for Lexington common shares, which was $15.00 per share, was above the average trading price during the 20, 30, 60, 90, 120 and 180-day periods. In addition, Cohen & Steers observed that the 20 and 30-day average trading ranges were at or above $14.00 per share, which is the low end of the of the fixed price range of the merger consideration. QUALIFICATIONS, RELATIONSHIPS AND COMPENSATION OF COHEN & STEERS Cohen & Steers is an investment banking firm regularly engaged in the valuation of businesses and their securities in connection with mergers, acquisitions, public and private capital raising and valuations for corporate and other purposes. Cohen & Steers did not perform any financial advisory services in connection with its engagement or the merger. To date, Net 2 has paid Cohen & Steers aggregate fees of $100,000 related to fairness opinions rendered by Cohen & Steers to the Net 2 general partner on November 9, 2000 and $62,500 related to fairness opinions rendered by Cohen & Steers to the Net 2 general partner on July 19, 2001. Net 2 has agreed to reimburse Cohen & Steers for certain expenses and liabilities in connection with its engagement. Net 2 has also agreed to indemnify Cohen & Steers, its directors, officers, employees and affiliates against certain liabilities, including liabilities under federal securities laws. The fees for Cohen & Steers' opinion was not conditioned upon the conclusion reached by Cohen & Steers as to the fairness of the merger consideration, or upon the ultimate consummation of the merger. Except as expressly set forth above, Net 2 imposed no limitation on the nature and scope of, or methodologies and procedures used in, Cohen & Steers' financial analyses. This arrangement was recommended by Cohen & Steers and agreed to by the general partner of Net 2. In the past two years, Cohen & Steers has performed no other work for, or received any other fees from, Net 2, Lexington or any of its affiliates. There have not been, and are not expected to be, any significant events which would or could alter the fairness determination of Cohen & Steers at this time. However, if the general partner believes that there have been any event or events which individually or cumulatively may have altered the basis for Cohen & Steers' fairness determination, Net 2 would have the ability to cause Cohen & Steers to update its fairness opinion and either confirm or disaffirm its prior determination as to the fairness of the Transaction to Net 2. APPRAISALS Since 1990 for Net 1 and 1991 for Net 2, the Partnership Agreements of each of the Net Partnerships have required the general partners to obtain an annual independent appraisal of the Net Partnership's properties and to prepare an appraisal of the net asset value of a unit. The purpose of the appraisals is to assist limited partners who are subject to ERISA to fulfill their reporting requirements under ERISA. 103 113 In connection with this annual requirement, the general partner engaged an independent appraiser, Robert A. Stanger & Co., Inc., to appraise the portfolios of real properties owned by Net 1 and Net 2 as of December 31, 1999. Those 1999 appraisals: - were not obtained in connection with the Transaction; - were conducted on a limited scope basis; - involved site visits and concurrent local market research for only a sample of the properties; and - did not include the three properties acquired by the Net Partnerships in 2000. Stanger & Co. was again engaged by the Net Partnerships to appraise the portfolios of real properties owned by Net 1 and Net 2 as of December 31, 2000. This appraisal is referred to as the 2000 Portfolio Appraisal. The 2000 Portfolio Appraisal, which contains a description of the assumptions and qualifications made, matters considered and limitations on the review and analysis, is set forth in Annex D and should be read in its entirety. The material assumptions, qualifications and limitations to the 2000 Portfolio Appraisal are described below. Stanger & Co. has previously appraised the portfolios of Net 1 and Net 2 for the purpose of annual reporting by the Net Partnerships in each year from 1995 through 1999. Experience of Stanger & Co. Since its founding in 1978, Stanger & Co. has provided information, research, appraisal, investment banking and consulting services to clients throughout the United States, including major New York Stock Exchange firms and insurance companies and over seventy companies engaged in the management and operation of partnerships and real estate investment trusts. The investment banking activities of Stanger & Co. include financial advisory services, asset and securities valuations, industry and company research and analysis, litigation support and expert witness services, and due diligence investigations in connection with both publicly registered and privately placed securities transactions. Stanger & Co., as part of its investment banking business, is regularly engaged in the valuation of businesses, their securities and/or their assets in connection with mergers, acquisitions, reorganizations and for estate, tax, corporate and other purposes. Stanger & Co.'s valuation practice principally involves partnerships and real estate investment trusts, their securities, and the assets typically held through partnerships, such as real estate, oil and gas reserves, cable television systems and equipment leasing assets. The Net Partnerships selected Stanger & Co. to provide the 2000 Portfolio Appraisal because of its experience and reputation in connection with real estate partnerships, real estate investment trusts, real estate assets, mergers and acquisitions, and its familiarity with the properties. 1999 PORTFOLIO APPRAISALS Based on the valuation methodology described below, Stanger & Co. estimated the value of the portfolio of properties owned by each Net Partnership as of December 31, 1999 as follows:
REAL ESTATE PORTFOLIO VALUE PARTNERSHIP CONCLUSION ----------- --------------- Net 1....................................................... $39,000,000(1) Net 2....................................................... $81,460,000(2)
--------------- (1) Does not include one property, which was acquired in 2000 and therefore not appraised, at a purchase price, including transaction costs, of $7,750,000. (2) Does not include two properties, which were acquired in 2000 and therefore not appraised, at an aggregate purchase price, including transaction costs, of $20,102,000. As described more fully under "Income Approach", the value of each portfolio was determined utilizing the income approach to valuation. The net operating income from the portfolio properties was discounted to present value utilizing the operating cash flow discount rate. The reversion value of the portfolio properties was 104 114 estimated by dividing the net operating income at the end of the holding period by the reversion capitalization rate. This reversion value was then discounted to present value utilizing the reversion value discount rate and was added to the discounted present value of net operating income to arrive at a final estimate of the value of the portfolio properties. The following table contains the valuation parameters used by Stanger & Co. in connection with its determination of the total estimated portfolio values for Net 1 and Net 2. The reader should note that dividing the portfolio's estimated net operating income, the so-called "going-in net operating income", by the going-in capitalization rate shown in the table below produces the appraised portfolio values, which have been rounded. SUMMARY OF APPRAISAL VALUATION PARAMETERS (1999 PORTFOLIO APPRAISALS)
NET 1 NET 2 PORTFOLIO(1) PORTFOLIO(2) ------------ ------------ Going-In Net Operating Income.............................. $ 4,040,809 $ 8,284,303 Operating Cash Flow Discount Rate.......................... 11.1% 10.6% Reversion Value Discount Rate.............................. 11.7% 11.7% Reversion Capitalization Rate.............................. 10.5% 11.0% Reversion Value............................................ $44,606,018 $98,846,019 Holding Period............................................. 8 years 14 years Going-In Capitalization Rate............................... 10.4% 10.2%
--------------- (1) Does not include one property, which was acquired in 2000 and therefore not appraised in 1999. (2) Does not include two properties, which were acquired in 2000 and therefore not appraised in 1999. 2000 PORTFOLIO APPRAISAL SUMMARY OF METHODOLOGY. At the request of the Net Partnerships, Stanger & Co. evaluated each Net Partnership's portfolio of real estate on a limited scope basis utilizing the income approach to valuation. Appraisers typically use up to three approaches in valuing real property: - the cost approach; - the income approach; and - the sales comparison approach. The type and age of a property, lease terms, market conditions and the quantity and quality of data affect the applicability of each approach in a specific appraisal situation. The value estimated by the cost approach incorporates separate estimates of the value of the unimproved site and the value of improvements, less observed physical wear and tear and functional or economic obsolescence. The income approach estimates a property's capacity to produce income through an analysis of the rental stream, operating expenses, net income and estimated residual value. Net income may then be processed into a value through either direct capitalization or discounted cash flow analysis, or a combination of these two methods. The sales comparison approach involves a comparative analysis of the subject property with other similar properties that have sold recently or that are currently offered for sale in the market. Due to the type of real estate assets held by the Net Partnerships and the nature of lease terms, Stanger & Co. was engaged to value the portfolios of properties based solely on the income approach, utilizing a discounted cash flow analysis as encumbered by current lease contracts. The cost and sales comparison approaches were considered to be less reliable than the income approach given the primary criteria used by buyers of the type of property appraised in the 2000 Portfolio Appraisal. 105 115 In conducting the 2000 Portfolio Appraisal, representatives of Stanger & Co. reviewed and relied upon, without independent verification, information supplied by the property managers, general partners and the Net Partnerships, including, but not limited to: - lease abstracts and information relating to the creditworthiness of tenants; - financial schedules of current lease rates, income, expenses, capital expenditures, reserve requirements, cash flow and related financial information; - property descriptive information and rentable square footage, information relating to the condition of each property, including any deferred maintenance, capital budgets, status of ongoing or newly planned property additions, reconfigurations, improvements and other factors affecting the physical condition of the property improvements; and - information relating to renewal and purchase options. Representatives of Stanger & Co. also performed site inspections of all of the properties owned by Net 1 and Net 2 during October through December 2000. In the course of these site visits, those representatives inspected the physical facilities of the properties and gathered information on the local market, the subject property and the tenant. Where necessary, information gathered during the site visits was supplemented by information provided by management, telephonic surveys and reviews of published information. In addition, Stanger & Co. discussed with management of the properties and/or the Net Partnerships: - the condition of each property, including any deferred maintenance, renovations, reconfigurations and other factors affecting the physical condition of the improvements; - competitive conditions in net lease property markets; - tenant credit trends affecting the properties; - certain lease terms; and - historical and anticipated lease revenues and expenses. Stanger & Co. also reviewed: - historical operating statements and year 2000 and 2001 operating budgets for the Net Partnerships and/or the properties; and - the acquisition criteria and parameters used by real estate investors, utilizing published information and information derived from interviews with buyers, owners and managers of net lease properties. INCOME APPROACH. Stanger & Co. estimated the value of each portfolio of properties based on the income approach to valuation. Specifically, the discounted cash flow method was used to determine the value of the properties based upon the leases that encumber the properties. The value indicated by the income approach represents the amount an investor would probably pay for the expectation of receiving the net cash flow from the property during the subject lease term and the proceeds from the ultimate sale of the property. In applying the discounted cash flow method, pro forma statements of operations for each property reflecting the leases which currently encumber the properties were utilized. Rental revenues were developed for each property based on the terms of existing leases and, in the case of the one vacant property, market conditions. Where lease terms included percentage rent provisions, available sales data were reviewed and sales levels were estimated based on escalation factors reflecting current anticipated inflation and criteria used by property buyers. Percentage rents were then calculated based on lease provisions relating to sales break points and percentage participations. Property management fees equal to 1% were factored into the analysis. Where unreimbursed costs, a capital expense reserve, deferred maintenance or extraordinary capital expenditures were required, the cash flows (and value) were adjusted accordingly. Expenses relating solely to investor reporting and accounting were excluded from the analysis. 106 116 Lease renewal options were analyzed based on escalated current market rental rates. Where estimated market rental rates at the time of a renewal option materially exceeded the contractual lease renewal rate, the renewal option was assumed to be exercised and a renewal-probability weighted value was determined. The reversion value of the property to be realized upon sale was estimated based on the current economic rental rate which would be reasonable for the subject property, escalated until lease termination at a rate indicative of current expectations in the marketplace. Reversion value is the estimated real estate value at the end of the assumed holding periods averaging 8 years for the Net 1 portfolio and 12 years for the Net 2 portfolio. By contrast, liquidation value is an estimate of the value that could be realized upon an immediate or near-term sale of real estate. The market rate net income of the property in the twelve months following the sale was then capitalized using a reversion capitalization rate averaging 10.3% for the Net 1 portfolio and 10.8% for the Net 2 portfolio to determine the reversion value of the property. Where a property was deemed to have reached the limit of functional utility and useful life at the time of final lease expiration, the reversion value was determined based on escalated land value. Net proceeds of the sale were determined by deducting costs of sale, including brokerage commissions, legal and other closing costs, estimated at 5%. For properties on which the tenant holds a contractual purchase option, the terms of the option were reviewed and reversion values were adjusted if appropriate. In the case of the Net 1 and Net 2 portfolios, no adjustments for purchase options were deemed appropriate. Two different discount rates, an operating cash flow discount rate and a reversion value discount rate, were then applied to the operating cash flow projections and the reversion values, respectively, as set forth below. The selection of the appropriate operating cash flow discount rate for determining the present value of future operating cash flow streams from each net leased property was based on such factors as the creditworthiness of the tenant, the length of the lease term, the general interest rate environment and, to a lesser extent, the condition and location of the property. Specifically, Stanger & Co. reviewed the corporate debt ratings of each tenant/guarantor, if any, issued by such nationally recognized statistical ratings organizations as Standard & Poor's Corporation and/or Moody's Investors Service, Inc. For tenants or guarantors without a credit rating by a rating agency, Stanger & Co. conducted an analytical review of the financial statements of the tenants/guarantors under the subject leases, focusing primarily on the balance sheet, profit and loss statement, cash flow statement and management's discussion of capital resources and liquidity. Each tenant's or guarantor's financial strength was evaluated in determining the tenant's ability to fulfill the lease obligation. Stanger & Co. then reviewed the interest rate environment as of the date of the 2000 Portfolio Appraisal, including yields-to-maturity among corporate bonds based on various maturities and credit ratings. This analysis was conducted to arrive at a base discount rate, determined by the marketplace, to reflect the risk of holding corporate debt with credit quality commensurate with the tenant's or guarantor's creditworthiness and a term approximately equal to the remaining lease term for each property. Premiums were then added to the base discount rate to reflect real estate and, where appropriate, above-market lease rate risk to arrive at the operating cash flow discount rate utilized. The resulting operating cash flow discount rate averaged 10.8% for the Net 1 portfolio and 10.5% for the Net 2 portfolio. Reversion value discount rates applied to the reversion value of the real estate upon sale were based on acquisition criteria and parameters for various property types, such as industrial property, retail property, and office property, in use in the marketplace by real estate investors, after adjusting for individual property related factors. The resulting reversion value discount rate averaged 11.6% for the Net 1 portfolio and 11.8% for the Net 2 portfolio. Finally, the discounted present value of the cash flow stream from operations and the discounted present value of net proceeds from property sale were aggregated for each property to arrive at the appraised value of the properties. The resulting property values were then summed to determine a total estimated portfolio value. The following table contains the valuation parameters used by Stanger & Co. in connection with its determination of the total estimated portfolio values for Net 1 and Net 2. The reader should note that dividing 107 117 the portfolio's estimated net operating income, the so-called "going-in net operating income", by the going-in capitalization rate shown in the table below produces the appraised portfolio values, which have been rounded. SUMMARY OF APPRAISAL VALUATION PARAMETERS (2000 PORTFOLIO APPRAISALS)
NET 1 NET 2 PORTFOLIO PORTFOLIO ----------- ------------ Going-In Net Operating Income............................. $ 4,916,980 $ 10,493,599 Operating Cash Flow Discount Rate......................... 10.8% 10.5% Reversion Value Discount Rate............................. 11.6% 11.8% Reversion Capitalization Rate............................. 10.3% 10.8% Reversion Value........................................... $55,771,795 $125,832,323 Holding Period............................................ 8 years 12 years Going-In Capitalization Rate.............................. 10.4% 10.3%
CONCLUSION AS TO VALUE. Based on the valuation methodology described above, Stanger & Co. estimated the value of the portfolio of properties owned by each Net Partnership as follows:
REAL ESTATE PORTFOLIO VALUE PARTNERSHIP CONCLUSION ----------- --------------- Net 1....................................................... $ 47,470,000 Net 2....................................................... $102,375,000(1)
--------------- (1) Includes one property, which was sold in 2001, at a sale price, before transaction costs, of $4,175,000. ASSUMPTIONS, LIMITATIONS AND QUALIFICATIONS OF THE 2000 PORTFOLIO APPRAISAL. The appraisal report has been prepared on a limited scope, summary basis in conformity with the departure provisions of the Uniform Standards of Professional Appraisal Practice. As such, the report differs from a self-contained appraisal report in that: - the data is limited to the summary data and conclusions presented; and - the cost and market approaches were excluded and the conclusions are based upon the income approach. Stanger & Co. utilized certain assumptions to determine the appraised value of the portfolios. See Annex D for a complete description of the assumptions, limiting conditions and qualifications applicable to the 2000 Portfolio Appraisal. The 2000 Portfolio Appraisal represents Stanger & Co.'s opinion of the value of the portfolios of properties owned by Net 1 and Net 2 as of December 31, 2000 in the context of the information available on such date. Events occurring after the valuation date and before the closing of the Transaction could affect the properties or the assumptions used in preparing the 2000 Portfolio Appraisal. Stanger & Co. has no obligation to update the 2000 Portfolio Appraisal on the basis of subsequent events. In connection with the preparation of the 2000 Portfolio Appraisal, Stanger & Co. was not engaged to, and consequently did not, prepare a written report or compendium of its analysis for internal or external use by the Net Partnerships beyond the analysis set forth in Annex D. COMPENSATION AND MATERIAL RELATIONSHIPS. The Net Partnerships paid Stanger & Co. an aggregate fee of $150,000 for preparing the 2000 Portfolio Appraisal. In addition, Stanger & Co. is entitled to reimbursement for reasonable legal, travel and out-of-pocket expenses incurred in making site visits and preparing the 2000 Portfolio Appraisal, subject to an aggregate maximum of $21,000 and is entitled to indemnification against certain liabilities, including certain liabilities under federal securities laws. The fee was negotiated 108 118 between the Net Partnerships and Stanger & Co. and payment thereof is not dependent upon completion of the Transaction. The Net Partnerships previously engaged Stanger & Co. to appraise the portfolios of the Net Partnerships annually from 1995 through 1999. During the past two years the Net Partnerships have paid Stanger & Co. aggregate fees of approximately $224,000. COMPARISON OF OWNERSHIP OF UNITS, COMMON SHARES AND DISSENTER DEBENTURES The information below highlights a number of the significant differences between the Net Partnerships and Lexington relating to, among other things: - form of organization; - investment objectives; - policies and restrictions; - asset diversification; - capitalization; - management structure; - compensation; - fees; and - investor rights. Following the above is a comparison of a number of legal rights associated with the ownership of units, common shares and dissenter debentures. Lexington has included these comparisons to assist the limited partners in understanding how their investment will be changed if, as a result of the Transaction, their units are exchanged for common shares and cash or dissenter debentures. This discussion is only a summary and does not constitute a complete discussion of these matters, and Lexington strongly encourages the limited partners to carefully review the balance of this Joint Consent and Proxy Solicitation Statement/Prospectus and their limited partnership agreements for additional important information. 109 119 FORM OF ORGANIZATION
NET PARTNERSHIP LEXINGTON --------------- --------- Net 1 is a limited partnership formed on Lexington is a Maryland statutory real estate August 25, 1987 under the Delaware Revised investment trust formed under the Maryland Uniform Limited Partnership Act of the State REIT Law. Lexington is a self-managed and of Delaware for the purpose of investing self-administered real estate investment primarily in existing commercial properties trust that acquires, owns and manages a that are triple net leased to corporations or geographically diverse portfolio of net other entities. The partnership agreement was leased office, industrial and retail amended and restated on September 30, 1994 to properties. Lexington's predecessor was enable Net 1 to make additional real estate organized in October 1993 and merged into investments. Net 1's term expires on December Lexington on December 31, 1997. 31, 2027. Net 2 L.P. is a limited partnership formed on November 9, 1988 under the Delaware Revised Uniform Limited Partnership Act of the State of Delaware for the purpose of investing primarily in existing commercial properties that are triple net leased to corporations or other entities. The partnership agreement was amended and restated on June 13, 1994 to enable Net 2 to make additional real estate investments. Net 2's term expires on December 31, 2028.
BUSINESS AND PROPERTY DIVERSIFICATION
NET PARTNERSHIP LEXINGTON --------------- --------- NET 1 -- The investment portfolio of Net 1 Assuming the Net Partnerships are acquired by consists of 9 properties as of June 30, 2001. Lexington, Lexington will own an interest through its operating partnerships, in a NET 2 -- The investment portfolio of Net 2 portfolio of 97 properties. consists of 15 properties as of June 30, 2001.
As a result of the Transaction, and through additional investments that may be made by Lexington from time to time, Lexington intends to maintain an investment portfolio substantially larger and more diversified than the assets of either Net Partnership individually. The larger portfolio will diversify the limited partners' investment over a broader group of properties in multiple market segments and will reduce the dependence of the limited partners' investment upon the performance of, and the exposure to the risks associated with, any particular group of properties currently owned by either Net Partnership. BORROWING POLICIES
NET PARTNERSHIP LEXINGTON --------------- --------- The Net Partnerships are restricted in the Lexington's principal source of capital for amount and nature of borrowings. growth has been the public and private equity markets, selective secured indebtedness, its NET 1 unsecured credit facility and issuance of operating partnership units. Lexington's The general partner may, for the purpose of By-Laws contain no restrictions on the level acquiring additional properties, obtain of indebtedness. purchase money financing, and mortgage the additional property purchased with such Lexington's current $35 million unsecured financing up to a maximum amount of 75% of credit facility, which is scheduled to expire the purchase price of each additional in March 2004, has made available funds to property. finance acquisitions and meet short-term working capital requirements. As of June 30, NET 2 2001, there were no borrowings outstanding. The general partner may, at any time, incur indebtedness to refinance loans entered into on behalf of Net 2 to refinance fees paid and expenses paid for services rendered in connection with the organization
110 120
NET PARTNERSHIP LEXINGTON --------------- --------- of Net 2. The general partner may also cause Net 2 to incur indebtedness or mortgage properties of Net 2 in order to finance the acquisition of additional properties. In connection with such acquisitions, the general partner may obtain purchase money financing up to a maximum of 75% of the purchase price of each additional property.
Lexington should have broader business opportunities than the Net Partnerships and will have access to financing opportunities that are currently not accessible to the Net Partnerships. Inherent in several of the additional financing opportunities are certain risks which do not exist for the Net Partnerships, and we encourage the limited partners to review "RISK FACTORS" beginning on page 38, for a detailed description of such risks. OTHER INVESTMENT RESTRICTIONS
NET PARTNERSHIP LEXINGTON --------------- --------- The limited partnership agreements of the Net Neither Lexington's Declaration of Trust nor Partnerships each contain restrictions on the its By- Laws impose any restrictions upon the reinvestment in the Net Partnership of cash types of investments that may be made by available for distribution from operations Lexington, except that under the Declaration (although they permit reinvestment of cash of Trust, the Board of Trustees is prohibited available for distribution from capital from taking any action that would terminate transactions). In addition, the purchase or Lexington's status as a REIT unless a lease of any real property must be supported majority of the members of the Board of by an appraisal report of an independent Trustees vote to terminate such status. appraiser of properties, and the transfer of partnership interests in exchange for Lexington's Declaration of Trust and By-Laws property or the securities of other issuers do not impose any restrictions upon the vote is prohibited. to terminate such status. Lexington's Declaration of Trust and By- Laws do not The Net Partnerships are generally not impose any restrictions on dealings between authorized to raise additional equity capital Lexington and its trustees, officers and for new investments, absent amendments to affiliates. Maryland REIT Law, however, their partnership agreements. provides that if the fact of the common trusteeship or interest is disclosed or known: - to the Board of Trustees, and the Board of Trustees approves the contract or transaction by the affirmative vote of a majority of disinterested trustees, even if the disinterested trustees constitute less than a quorum; or - to shareholders entitled to vote, and the contract or transaction is approved by a majority of the votes cast by the shareholders entitled to vote, other than the votes of shares owned of record by the interested director or corporation, firm, or other entity, then a contract between Lexington and any of its trustees or affiliates will not be voidable solely because of these relationships. In addition, a contract between Lexington and any of its trustees or affiliates will not be void or voidable if they are fair and reasonable to the trust. In addition, Lexington has adopted a policy that requires that all contracts and transactions between Lexington and
111 121
NET PARTNERSHIP LEXINGTON --------------- --------- trustees, officers or affiliates thereof must be approved by the affirmative unanimous vote of the disinterested trustees.
MANAGEMENT CONTROL
NET PARTNERSHIP LEXINGTON --------------- --------- The general partners of the Net Partnerships The Board of Trustees directs the management are, subject to policies and restrictions set of Lexington's business and affairs, subject forth in the limited partnership agreements, to restrictions contained in Lexington's generally vested with the exclusive right and Declaration of Trust and By-Laws and power to conduct the business and affairs of applicable law. The Board of Trustees are the Net Partnerships and may appoint, elected at each annual meeting of the contract or otherwise deal with any person, shareholders. The policies adopted by the including employees of the Net Partnerships' Board of Trustees may be altered or affiliates, to perform any acts or services eliminated without a vote of the for the Net Partnerships necessary or shareholders. Accordingly, except for their appropriate for the conduct of the business vote in the elections of trustees, in and affairs of the Net Partnerships. Limited establishing stock option plans and approving partners have no right to participate in the mergers, shareholders have no control over management and control of the Net the ordinary business policies of Lexington. Partnerships except on limited matters that may be submitted to a vote of the limited partners under the terms of the partnership agreement. Under each Net Partnership's part- nership agreement, limited partners have the right to remove the respective general partners by a majority vote in interest, with or without cause.
FIDUCIARY DUTIES
NET PARTNERSHIP LEXINGTON --------------- --------- The Net Partnerships are limited partnerships Under the Maryland REIT Law, the trustees organized under the laws of Delaware. Under must perform their duties in good faith, in a Delaware law, the general partners are manner that they reasonably believe to be in accountable as fiduciaries to the Net the best interests of Lexington and with the Partnerships and owe the Net Partnerships and care of an ordinarily prudent person under their respective limited partners a duty of similar circumstances. Trustees of Lex- loyalty and a duty of care, and are required ington who act in such a manner generally to exercise good faith and fair dealing in will not be liable by reason of being or conducting the affairs of the Net having been a trustee of Lexington. Partnerships. The duty of care requires that the Net Partnerships' general partners deal fairly and with complete candor toward the limited partners. The duty of loyalty generally requires that the general partners not have any business or other interests that are adverse to the interests of the Net Partnerships. The duty of loyalty also re- quires that all transactions between the general partners and the Net Partnerships be fair in the manner in which the transactions are effected and in the amount of the consideration received by the general partners.
112 122 MANAGEMENT'S LIABILITY AND INDEMNIFICATION
NET PARTNERSHIP LEXINGTON --------------- --------- Under Delaware law, the general partners are Lexington's Declaration of Trust provides liable for the repayment of Net Partnership that the liability of Lexington's trustees obligations and debts, unless limitations and officers to Lexington and its upon such liability are expressly stated in shareholders for money damages is limited to the document or instrument evidencing the the fullest extent permitted under the obligation. For example, a loan structured as Maryland REIT Law. The Declaration of Trust a non-recourse obligation. Each Net and the Maryland REIT Law provide broad Partnership's partnership agreement generally indemnification to trustees and officers, provides that the general partners will not whether serving Lexington or, at its request, be held liable for any costs arising out of any other entity. Under the Maryland REIT their action or inaction that the general Law, however, Lexington may not indemnify for partners reasonably believed to be in the an adverse judgment in a suit brought by or best interests of their respective Net in the right of Lexington. Lexington's Partnership, except that they will be liable By-Laws require, as a condition to advancing for any costs which arise from their own indemnification expenses, that Lexington fraud, negligence, misconduct or other breach obtain: of fiduciary duty. In cases in which the general partners are indemnified, any - a written affirmation by the trustee or indemnity is payable only from the assets of officer of his good faith belief that he has the respective Net Partnership. met the standard of conduct necessary for indemnification by Lexington as authorized by the By-Laws; and - a written statement by or on his behalf to repay the amount paid or reimbursed by Lexington if it shall ultimately be determined that the standard of conduct was not met.
ANTI-TAKEOVER PROVISIONS
NET PARTNERSHIP LEXINGTON --------------- --------- For each Net Partnership, a change in Lexington's Declaration of Trust and By-Laws management may be effected only by the contain a number of provisions that may have removal of its general partner. See the effect of delaying or discouraging a "Management Control" above for a discussion change in control of Lexington, even if the regarding the removal of the general part- change in control might be in the best ners of a Net Partnership. In addition, the interests of shareholders. These provisions partnership agreements of the Net include, among others, Partnerships restrict transfers of the limited partners' units. An assignee of units - authorized capital stock that may be may not become a substitute limited partner, classified and issued as a variety of equity unless the general partners consent to such securities in the discretion of the Board substitution. of Trustees, including securities having superior voting rights to the common shares, - restrictions on transfer of common shares to persons who have acquired more than 9.8% of common shares, - a requirement that trustees be removed only for cause and only by a vote of shareholders holding at least 80% of all of the shares entitled to be cast for the election of trustees, and - ownership limitations designed to protect Lexington's status as a REIT under the Internal Revenue Code. See "FEDERAL INCOME TAX CONSEQUENCES -- Taxation of Lexington" beginning on page 177.
113 123 SALE
NET PARTNERSHIP LEXINGTON --------------- --------- Each Net Partnership's partnership agreement Under Lexington's Declaration of Trust, a allows the sale of all, or substantially all, sale of assets may be effected by Board of of the assets of the respective Net Trustees subject to any applicable provisions Partnership with the consent of the limited of Maryland REIT Law, which can include partners holding a majority of the varying levels of shareholder consent. outstanding units.
MERGER
NET PARTNERSHIP LEXINGTON --------------- --------- Under the Delaware Revised Uniform Limited Under the Maryland REIT Law, the Board of Partnership Act, a merger must be approved by Trustees is required to obtain approval of limited partners owning more than 50% of the the shareholders by the affirmative vote of outstanding units, as well as the general 50% of all the votes entitled to be cast on partner. the matter in order to merge or consolidate Lexington with another entity not at least 90% controlled by it.
DISSOLUTION
NET PARTNERSHIP LEXINGTON --------------- --------- Each Net Partnership may be dissolved with Under the Maryland REIT Law, the Board of the consent of the limited partners holding a Trustees is required to obtain approval of majority of the outstanding units. the shareholders by the affirmative vote of two-thirds of all votes entitled to be cast in order to dissolve Lexington.
AMENDMENTS
NET PARTNERSHIP LEXINGTON --------------- --------- Each Net Partnership's partnership agreement Generally, amendments to Lexington's permits amendment of most of its provisions Declaration of Trust must be approved by the with the consent of limited partners holding Board of Trustees and by holders of a a majority of the outstanding units. majority of the outstanding common shares entitled to be voted. The general partner may amend a partnership agreement without the consent of the limited partners: - to effect changes of a ministerial nature that do not materially and adversely affect the rights of the limited partners; - to give effect to the admission of substituted limited partners; - to add to the representations, duties, or obligations of the general partner or surrender any right or power granted to the general partner, in either case, for the benefit of the limited partners; - to cure any ambiguity or to correct or supplement any provision of the partnership agreement; - to conform the terms of the partnership agreement with any regulations issued under section 704(b) of the Internal Revenue Code; - to preserve the respective Net Partnership's status
114 124
NET PARTNERSHIP LEXINGTON --------------- --------- as a limited partnership; - to comply with requirements of the SEC or state securities commissioners; - to change the name of the Net Partnership; and - to prevent the Net Partnership's assets from being treated as "plan assets" within the meaning of ERISA or to prevent the Net Partnership from being treated as a publicly traded limited partnership under the Internal Revenue Code.
COMPENSATION AND FEES
NET PARTNERSHIP LEXINGTON --------------- --------- Under the partnership agreements, the general Lexington will pay all management expenses, partners of the Net Partnerships and their including salaries and other compensation affiliates are entitled to receive fees in payable to employees of Lexington, but as an connection with managing the affairs of each internally-advised REIT, Lexington will not Net Partnership. The partnership agreements otherwise pay a portion of net cash flow or also provide that the general partners are to allocations to management, except to the be reimbursed for their expenses for services extent they are entitled to such as a result performed for each Net Partnership, such as of owning common shares. Management expenses legal, accounting, transfer agent, data will reduce the funds available for processing and duplicating services. The distribution by Lexington. general partners are also entitled to receive a percentage of the net cash available for distribution to the partners of the Net Partnership. As holders of operating partnership units in Net 3, the general partners will receive distributions based upon their ownership of the operating partnership units. During the years ended December 31, 1998, 1999 and 2000, the aggregate amounts accrued or actually paid by the Net Partnerships to the general partners are shown below under "Historical" and the estimated amounts of compensation that would have been paid had the Transaction been in effect for the years presented are shown below under "Pro Forma":
COMPENSATION PAYABLE TO THE GENERAL PARTNERS OF THE NET PARTNERSHIPS
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED ------------------------------ JUNE 30, 1998 1999 2000 2001 -------- -------- -------- ---------- HISTORICAL: General Partner Distributions..................... $ 80,000 $ 80,000 $ 80,000 $ 40,000 Asset Management Fees............................. $ 98,000 $129,000 $ 71,000 -- -------- -------- -------- -------- Total Historical.................................. $178,000 $209,000 $151,000 $ 40,000 PRO FORMA: Cash Distributions on Units(1)(2)................. $148,278 $152,080 $154,614 $ 79,842
115 125 --------------- (1) Pro forma cash distributions are calculated as follows:
YEAR ENDED DECEMBER 31, SIX MONTHS ------------------------------ ENDED JUNE 1998 1999 2000 30, 2001 -------- -------- -------- ---------- Class A units -- $650,000 at $15 per unit equals 43,333 units..................... $ 50,700 $ 52,000 $ 52,866 $27,300 Operating partnership units issued to affiliates of Mr. Roskind for their interest in management contract of Net Partnership -- 83,400 units............. $ 97,578 $100,080 $101,748 $52,542 -------- -------- -------- ------- $148,278 $152,080 $154,614 $79,842
Distributions per unit in 1998, 1999, 2000 and 2001 were $1.17, $1.20, $1.22 and $0.63, respectively (2) As an officer of Lexington, Mr. Roskind received a salary of $250,000, $300,000 and $300,000 in 1998, 1999 and 2000, respectively, bonuses of $133,000, $158,000 and $302,297 in 1998, 1999 and 2000, respectively, options to purchase 100,000, 75,000 and 280,000 common shares in 1998, 1999 and 2000, respectively, and a restricted share award of $242,500 and $180,000 in 1999 and 2000, respectively. MANAGEMENT FEES
NET PARTNERSHIP LEXINGTON --------------- --------- Each Net Partnership is authorized to enter The officers and trustees of Lexington will into a management agreement governing its receive compensation for their services as management. Management fees must not exceed described in "INFORMATION ABOUT the lesser of LEXINGTON -- Management" beginning on page 134. 1. market rates in the same geographic area, or 2. in the case of: (a) each net lease, each lease of property with an existing occupant and each extension or renewal of any of such leases, an annual fee of 1% of the gross annual rent payable in respect of such leases; (b) all other leases, an annual fee of 3% of the gross annual rent payable; or (c) each lease of property which is obtained by the property manager, an initial leasing fee equal to 3% of the gross annual rent payable by the lessee under such lease over the first five years of the term of such lease, such fee to be payable to the property manager in equal installments over the first five full years of such lease. For purposes of computation of the management fee only, a net lease is any lease which both has an original term equal to ten years or longer and which provides that the tenant pay all costs and cost increases for real estate taxes, insurance and maintenance.
116 126 REAL ESTATE DISPOSITION FEE
NET PARTNERSHIP LEXINGTON --------------- --------- None. None.
DISTRIBUTIONS OF CASH FROM CAPITAL TRANSACTIONS
NET PARTNERSHIP LEXINGTON --------------- --------- Each partnership agreement provides for the None. Distributions made by Lexington to its payment to the general partners of a portion shareholders will be based solely on the of distributable net sales proceeds following profitability of Lexington and will not be the payments to the limited partners of based on asset dispositions. preferred returns and returns of capital required by the partnership agreements. Each partnership agreement provides a formula by which net sales proceeds are to be distributed among the partners prior to dissolution. Both Net 1 and Net 2 have only made distributions to limited partners from operating cash flows and not from capital transactions.
REIMBURSEMENT OF EXPENSES
NET PARTNERSHIP LEXINGTON --------------- --------- Each Net Partnership's partnership agreement Lexington's expenses will be paid from its provides that operating expenses (which, in revenues as expenses are incurred. general, are those expenses relating to the administration of the Net Partnership) will be reimbursed to the general partners as follows: 1. an allowance for the non-accountable expense for all organization and offering expenses of the Net Partnership as defined in the partnership agreement; 2. the actual cost to the general partner or its affiliates of goods and materials used for or by the Net Partnership and obtained from unaffiliated parties; and 3. the actual cost to the general partner or its affiliates in performing administrative services necessary to the prudent operation of the Net Partnership, such as legal, accounting, and data processing; provided, however, that the amounts charged by the Net Partnership for services performed shall not exceed the lesser of: (a) the actual cost of such services; or (b) 90% of the amount which the Net Partnership would be required to pay to independent parties for comparable services in the same geographic location.
117 127 REVIEW OF INVESTOR LISTS
NET PARTNERSHIP LEXINGTON --------------- --------- Under the Net Partnerships' partnership Under the Maryland REIT Law, a shareholder agreements, a limited partner, at its own must hold at least 5% of the outstanding expense and upon reasonable request, is common shares, and have done so for at least entitled to obtain a list of the other six months, before it has the right to limited partners in the limited partner's Net request a list of shareholders. A share- Partnership. holder of Lexington meeting this requirement may, upon written request and during normal business hours, inspect and, at Lexington's expense, copy the list of Lexington's shareholders.
The following discussion describes the investment attributes and legal rights associated with the limited partners' ownership of units, dissenter debentures and common shares. NATURE OF INVESTMENT
UNITS COMMON SHARES DISSENTER DEBENTURES ----- ------------- -------------------- The units entitle limited The common shares constitute The dissenter debentures are partners to their pro rata equity interests in subordinated to all other share of cash distributions Lexington. Shareholders are institutional indebtedness of made to the limited partners. entitled to a pro rata share Lexington outstanding on the The partnership agreement for of any dividends or dis- closing date and any other each Net Partnership tributions paid, if, when and indebtedness of Lexington specifies how cash available as declared by the Board of issued in the future which is for distribution is to be Trustees. As a REIT, not, by its terms, expressly shared among the general Lexington must distribute at subordinated to the dissenter partner and the limited least 90% of its taxable debentures. Final maturity is partners. The distributions income excluding capital 8 years from the date of payable by a Net Partnership gains. Any taxable income issuance. Interest accrues to its partners are not fixed including capital gains not 8.5% per annum based upon a in amount and depend upon the distributed will be subject 365 day year and actual days operating results and net to corporate income tax. elapsed and will be paid sales or proceeds available semi-annually in arrears. from the disposition of assets.
ADDITIONAL EQUITY/POTENTIAL DILUTION
UNITS COMMON SHARES DISSENTER DEBENTURES ----- ------------- -------------------- Since the Net Partnerships At the discretion of the There are no restrictions on are not authorized to issue Board of Trustees, Lexington Lexington's authority to additional equity, there can may issue additional equity grant secured debt be no dilution of securities, including common obligations, such as mort- distributions to the limited shares and shares which may gages, liens or other partners. be classified as one or more security interests in classes or series of common Lexington's real and personal or preferred shares and may property. Such security contain preferences su- interests, if granted, would perior to the common shares. permit the holders thereof to The issuance of additional have a priority claim against equity securities by such collateral in the event Lexington will result in the of Lexington's default under dilution of the shareholders' the secured obligations. percentage ownership interest Also, such secured in Lexington. obligations would have payment priority over the dissenter debentures and other unsecured indebtedness of Lexington.
118 128 LIABILITY OF INVESTORS
UNITS COMMON SHARES DISSENTER DEBENTURES ----- ------------- -------------------- Under the partnership Under Maryland REIT Law, Investors will have no agreement and Delaware law, shareholders will not be personal liability for the the limited partners' personally liable for the debts and obligations of liability for the Net debts or obligations of Lexington. Partnerships' debts is Lexington. generally limited to the amount of the limited partners' investment in the Net Partnership, together with an interest in undistributed income, if any.
VOTING RIGHTS
UNITS COMMON SHARES DISSENTER DEBENTURES ----- ------------- -------------------- Generally, the limited Lexington is managed and con- None. partners of the Net trolled by a Board of Partnerships have voting Trustees elected by the rights only on significant shareholders at the annual Net Partnership transactions. meeting of Lexington. The Such voting rights relate to Maryland REIT Law requires the Net Partnership's that major transactions, dissolution, selling all or including most amendments to substantially all of its Lexington's Declaration of assets, certain types of Trust, may not be consummated amendments to the partnership without the approval of agreement and the general shareholders. Shareholders partners' removal. have one vote for each common share.
LIQUIDITY
UNITS COMMON SHARES DISSENTER DEBENTURES ----- ------------- -------------------- The units are relatively The common shares will be While the dissenter illiquid. The trading volume freely transferable and debentures will be freely of the units in the resale listed on the New York Stock transferable, Lexington will market is limited and the Exchange. The common shares not list them on any ex- prices at which they trade currently trade on the New change, there will be no are generally not equal to York Stock Exchange. public market for them, and their net book value. it is unlikely that an active market for them will develop. Holders should be prepared to hold the dissenter de- bentures until maturity.
119 129 EXPECTED DISTRIBUTIONS AND PAYMENTS
UNITS COMMON SHARES DISSENTER DEBENTURES ----- ------------- -------------------- The Net Partnerships make Lexington intends to make Holders of dissenter discretionary quarterly quarterly dividend and debentures will be entitled distributions. Amounts distribution payments to its to receive only the principal distributed to limited shareholders. The amount of and interest payments. partners are derived from such dividends and Holders will not participate their respective pro rata distributions will be in any profits derived from share of cash flow from established by the Board of operations of any of operations or cash flow from Trustees, taking into account Lexington's assets, includ- sales or financings as deter- the cash needs of Lexington, ing properties acquired as mined by the general partner. funds from operations, the part of the Transaction. market price for the common shares and the requirements of the Internal Revenue Code for qualification as a REIT. Under the Internal Revenue Code, Lexington is required to distribute at least 90% of REIT taxable income. See "FEDERAL INCOME TAX CONSE- QUENCES -- Taxation of Lex- ington" beginning on page 177.
TAXATION OF TAXABLE INVESTORS
UNITS COMMON SHARES DISSENTER DEBENTURES ----- ------------- -------------------- The Net Partnerships, as As a REIT, Lexington Interest payments made on the partnerships for federal generally is permitted to dissenter debentures will income tax purposes, are not deduct distributions to its constitute portfolio income subject to tax, but limited shareholders, which effec- that cannot be offset by partners must report the tively eliminates the "passive losses" from other limited partners' allocable corporate level of taxation. investments. During January share of partnership income Dividends received by of each year, holders of dis- and loss on the limited Lexington shareholders senter debentures will partners' tax return, whether constitute portfolio income, receive from Lexington IRS or not cash distributions are which cannot be offset by Form 1099-INT to show the made to limited partners. In- "passive losses" from other interest payments made by come from the limited investments. Shareholders Lexington during the prior partners' Net Partnership will receive from Lexington calendar year. generally constitutes Form 1099-DIV to show "passive income" to limited dividend payments made by partners, which can generally Lexington during the calendar be offset by "passive losses" year. from the limited partners' other investments. Generally, by February 15th of each year, limited partners receive an annual Schedule K-1 with respect to informa- tion about the Net Partnership for inclusion on the limited partners' federal income tax returns. Limited partners must file state income tax returns and incur state income tax in most states in which the limited partners' Net Partnership has properties.
120 130 TAXATION OF TAX-EXEMPT INVESTORS
UNITS COMMON SHARES DISSENTER DEBENTURES ----- ------------- -------------------- Tax-exempt investors will be Dividends received by Interest income received by taxable on any unrelated tax-exempt investors will not tax- exempt investors will business taxable income be characterized as unrelated not be characterized as allocated to them from the business taxable income so unrelated business taxable Net Partnerships. Tax-exempt long as the tax-exempt income so long as the tax- investors should consult investor does not hold its exempt investor does not hold their own tax advisors as to common shares subject to its dissenter debentures the types of income that may acquisition indebtedness. subject to acquisition be characterized as unrelated indebtedness. business taxable income to them.
OTHER PROPOSALS AMENDMENT TO LEXINGTON'S DECLARATION OF TRUST The Board of Trustees unanimously recommends that Lexington's shareholders approve the proposal to amend Lexington's Declaration of Trust to increase the number of common shares which Lexington has authority to issue from 40,000,000 common shares to 80,000,000 common shares. For a complete description of the proposed amendment, you are encouraged to read the complete text of the Articles of Amendment, a copy of which is attached as Annex A-5 to this Joint Consent and Proxy Solicitation Statement/Prospectus. As of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, Lexington had approximately 4.8 million common shares authorized but unissued, taking into account the number of common shares that (i) were issued and outstanding as of that date, (ii) were issuable by Lexington upon exercise of outstanding common share options or upon conversion of outstanding securities convertible into common shares, including Lexington's preferred shares and units of limited partnership of Lexington's operating partnership subsidiaries, (iii) have been repurchased and retired by Lexington, and (iv) may be issued or issuable in connection with the Transaction, assuming that the average closing price of Lexington common shares is $15.00, which is the midpoint of the range for determining the number of common shares to be issued, and that no limited partners elect to receive their merger consideration in the form of dissenter debentures. The Board of Trustees believes that it is important to have a sufficient number of authorized but unissued common shares available to provide for the future raising of capital, for use in connection with acquisitions and for other general business purposes. Raising the number of authorized common shares to 80,000,000 will provide Lexington with the flexibility to provide for such circumstances. The terms of any such shares, including dividends or distributions, conversion prices, voting rights, redemption prices, maturity dates and similar matters will be determined by the Board of Trustees. Further issuance of common shares could have a dilutive effect on shareholders' voting and economic interests in Lexington. Furthermore, issuance of newly authorized common shares could be used by the Board of Trustees to delay or hinder a hostile acquisition proposal. The submission of this proposal is not part of any plan by Lexington's Board of Trustees or management to engage in any transaction which would require the approval of this proposed increase. Approval of this amendment to the Declaration of Trust requires approval by the holders of a majority of common shares entitled to vote thereon by person or by proxy at the Meeting. As a result, any common shares not affirmatively voted (whether by abstention, non-vote or otherwise) will have the same effect as a vote against the proposal. THE BOARD OF TRUSTEES RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THIS AMENDMENT. 121 131 VOTING PROCEDURES VOTING PROCEDURES FOR LEXINGTON SHAREHOLDERS A special meeting of Lexington's shareholders will be held on November 28, 2001 at 10 a.m., New York time at . The purpose of this meeting is to consider and vote upon: - the proposal to approve and adopt the mergers of Net 1 and Net 2, respectively, into Net 3, a controlled subsidiary of Lexington; and - the proposal to approve and adopt the amendment of Lexington Declaration of Trust to increase the total number of authorized shares. Shareholders may vote at the meeting by attending the meeting and voting in person, by completing the enclosed proxy card and returning it in the enclosed envelope or by faxing it to the transfer agent as directed below. Proxies will be received, tabulated and certified as to time of receipt and vote by Mellon Investor Services LLC, which has been designated as Lexington's transfer agent. Proxies should be returned to Mellon at 44 Wall Street, 7th Floor, New York, NY 10005, Attention: Lexington Proxies, or faxed to Mellon at (917) 320-6295. Faxed proxies will be accepted until the polls close on the date of the special meeting. The period during which proxies will be solicited pursuant to this Joint Consent and Proxy Solicitation Statement/Prospectus will commence on the date this Joint Consent and Proxy Solicitation Statement/ Prospectus and other solicitation materials are first distributed to the shareholders of Lexington and will continue until the polls close on the date of the special meeting or any subsequent date to which the meeting may be adjourned. Lexington's Board of Trustees reserves the right, with requisite shareholder vote, to extend the proxy solicitation period for Lexington, even if a quorum has been obtained under Lexington's By-Laws. Each Lexington shareholder not attending the special meeting of shareholders of Lexington is requested to complete, date and sign the accompanying proxy and return it to Mellon for receipt, in original or by facsimile, before the expiration of the solicitation period. Each shareholder is asked to approve or disapprove each of the mergers and the amendment of Lexington's Declaration of Trust with respect to all common shares held by such shareholder in Lexington. Abstentions are shares that abstain from voting on the Transaction, and will have the same effect as votes against the Transaction. Only a shareholder's broker may vote shares held in "street name." A broker may not vote a shareholder's shares without instructions from the shareholder. Shareholders should instruct their broker how to vote their shares. If a shareholder does not provide its broker with such instructions, the broker will not be permitted to vote their shares. Such broker non-votes will have the same effect as votes against the Transaction. Shareholders may revoke their proxy by: - delivering to the Secretary of Lexington, before the taking of the vote at the shareholder meeting, a written notice of revocation bearing a later date than the date of the proxy or a later-dated proxy relating to the same shares; or - attending the meeting and voting in person. Shareholders will not have any dissenters' appraisal rights by reason of the mergers. If the shareholders have any questions regarding the Transaction, they should call Mellon toll free at (800) 279-1247. CONSENT PROCEDURES FOR LIMITED PARTNERS This Joint Consent and Proxy Solicitation Statement/Prospectus, together with the accompanying transmittal letter, dissenters election form and limited partner consent form constitute the solicitation materials being distributed to the limited partners for the purpose of obtaining their consent to the Transaction. 122 132 Each limited partner is requested to complete, date and sign the accompanying consent form and return it, before the expiration of the solicitation period to Morrow & Co., Inc., which has been designated as the Net Partnership's solicitation agent, at 445 Park Avenue, New York, New York 10022, Attn: William P. Smith, or by fax to Morrow at (212) 754-8300. Each limited partner must consent, deny consent, or abstain from consenting to the Transaction with respect to all units held by such limited partner in a Net Partnership. The consent solicitation period will commence upon delivery of the solicitation materials to limited partners, and will continue until the later of 12:00 midnight, New York time, on November 27, 2001, unless the general partners extend the consent solicitation period. The general partners reserve the right, with requisite limited partner consent, to extend the consent solicitation period for a particular Net Partnership if sufficient consents have not been received by that date. However, under no circumstances will the consent solicitation period be extended beyond December 31, 2001. Any consent form received by Morrow prior to 12:00 midnight, New York time, on the last day of the consent solicitation period will be effective provided that such consent form has been properly completed and signed. Limited partners who have invested in more than one Net Partnership will receive two copies of this Joint Consent and Proxy Solicitation Statement/Prospectus and two consent forms, one for each Net Partnership. Because each Net Partnership will separately consider whether or not to consent to the Transaction, limited partners must complete one consent form for each Net Partnership in which they hold units. If the Net Partnerships approve the Transaction, limited partners will receive common shares and cash if they: - consented to the Transaction; - abstained from consenting to the Transaction; - did not return a properly completed and signed consent form by the end of the consent solicitation period; or - denied consent to the Transaction but did not affirmatively elect to receive dissenter debentures. If the Net Partnerships approve the Transaction, limited partners will receive dissenter debentures only if they denied consent to the Transaction and affirmatively elected to receive dissenter debentures in the manner described below. A limited partner that abstains from consenting or does not submit a consent form before the end of the consent solicitation period will be deemed to have denied consent to the Transaction, but may not elect to receive dissenter debentures. A limited partner that submits a properly signed consent form before the end of the consent solicitation period but does not indicate whether or not it consents to the Transaction will be deemed to have consented to the Transaction. Limited partners may withdraw or revoke their consent form at any time before the earlier of either November 27, 2001 or the date on which consents representing more than 50% of the outstanding units are received by their Net Partnership. Consents may be revoked by delivering to the solicitation agent a written notice of revocation or by calling the solicitation agent toll free at (877) 807-8896. Only a limited partner's broker may consent or deny consent for units held in "street name." A broker may not consent or deny consent for a limited partner's units without instructions from that limited partner. Limited partners should instruct their broker whether to consent or deny consent. If a limited partner does not provide its broker with such instructions, the broker will not be permitted to consent or deny consent on behalf of that limited partner's units, and the effect will be the same as denying consent to the Transaction. A consent by a limited partner to a Net Partnership's participation in the Transaction will constitute a consent by that limited partner to all actions by its respective Net Partnership necessary to consummate the Transaction, including any required amendments to the partnership agreements. Any limited partner that consents to the Transaction and any limited partner that denies consent to the Transaction but receives common shares and cash will be deemed to have consented to the treatment of the merger of its respective Net Partnership as a direct sale of its units to Net 3 for tax purposes. Limited partners that deny consent and 123 133 affirmatively elect to receive dissenter debentures will not be deemed to consent to treatment of, and may not treat, the merger of its respective Net Partnership as a direct sale of its units to Net 3 for tax purposes. If the Transaction is approved by the Net Partnerships, limited partners that deny consent to the Transaction will not have any: - dissenters' appraisal rights by reason of the mergers, but may receive dissenter debentures if they properly elect to receive dissenter debentures, as described above, or - right to an independent valuation of their respective Net Partnership at the expense of Lexington or the general partners. If the limited partners have any questions regarding the Transaction, including questions about the exchange rate or the number of consents received, they should call Morrow toll free at (877) 807-8896. RECORD DATE; VOTES REQUIRED LEXINGTON. Only holders of shares of record at the close of business on October 12, 2001 will be entitled to notice of and to vote at the Lexington meeting of shareholders. Each of the mergers and the amendment of Lexington's Declaration of Trust will be approved if Lexington receives the affirmative vote, in person or by proxy, of a majority of the outstanding shares entitled to vote at the Lexington meeting. The holders of a majority of the shares entitled to vote, present in person or by proxy, will constitute a quorum for purposes of the Lexington meeting of shareholders. As of the record date for the meeting, there were common shares and 2,000,000 preferred shares outstanding and entitled to vote. The members of the Board of Trustees and executive officers of Lexington and their affiliates beneficially owned, as of the record date common shares and 2,000,000 preferred shares, which represented approximately % of the outstanding shares. THE NET PARTNERSHIPS. Only limited partners of record at the close of business on October 12, 2001 will be entitled to consent or deny consent to the Transaction. The Transaction will only be approved upon: - the affirmative consent of the holders of a majority of the outstanding units of each Net Partnership, and - the approval of the general partners. The general partners have approved the Transaction. As of June 30, 2001, the following number of units were held of record by the number of limited partners indicated below:
NUMBER OF NUMBER OF NUMBER OF UNITS LIMITED UNITS HELD FOR APPROVAL OF NET PARTNERSHIP PARTNERS OF RECORD TRANSACTION --------------- --------- ---------- --------------- Net 1.......................................... 1,341 30,772 15,387 Net 2.......................................... 1,881 477,167 238,584
Lexington held, as of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, approximately 540 limited partnership units of Net 1 (representing approximately 1.8% of the outstanding units) and 15,782 limited partnership units of Net 2 (representing approximately 3.3% of the outstanding units). Lexington intends to consent to the Transaction with respect to these units. Limited partners are entitled to consent or deny consent for each unit held. Accordingly, the number of units entitled to consent or deny consent with respect to the Transaction is equivalent to the number of units held of record at the record date. PROCEDURES FOR LIMITED PARTNERS TO RECEIVE DISSENTER DEBENTURES In order to receive dissenter debentures, a limited partner must: - deny consent to the applicable merger on a consent form returned to Morrow & Co. by the end of the consent solicitation period; and 124 134 - affirmatively elect to receive dissenter debentures on that consent by indicating form its specific agreement and consent to receive dissenter debentures in lieu of common shares and cash in the Transaction. The failure of a limited partner to comply with these procedures will have the effect of, and will be equivalent to an affirmative waiver of that limited partner's option to receive dissenter debentures. Limited partners who consent to the Transaction or fail to return a completed and signed consent form will not be eligible to receive dissenter debentures. A limited partner that denies consent to the Transaction will not be required to elect to receive dissenter debentures. An election to receive dissenter debentures should only be made by limited partners who wish to receive dissenter debentures in lieu of common shares and cash. INVESTOR LISTS Under Rule 14a-7 of the Securities Exchange Act of 1934, as amended, the Net Partnerships are required, upon a limited partner's written request, to provide: - a statement of the approximate number of limited partners in the limited partner's Net Partnership, and - the estimated cost of mailing a proxy statement, form of proxy or other similar communication to the Net Partnership's limited partners. In addition, the limited partner has the right, at the general partner's option, to have its Net Partnership either: - mail copies of any consent statement, consent form or other soliciting materials to be furnished to the limited partners at the limited partner's expense; or - deliver to limited partners, within five business days of the receipt of the request, a reasonably current list of the names, addresses and units held by the limited partners of its Net Partnership. The right to receive the list of limited partners is subject to the limited partner's obligation to reimburse the reasonable expenses incurred by its respective Net Partnership in performing any of the acts described above. 125 135 INFORMATION ABOUT LEXINGTON GENERAL Lexington is a self-managed and self-administered REIT that acquires, owns and manages a geographically diverse portfolio of net leased office, industrial and retail properties. Lexington's predecessor was organized in October 1993 and merged into Lexington on December 31, 1997. A REIT is an entity which has elected to be taxed as a REIT under the Internal Revenue Code and generally owns or provides financing for real estate, offers the benefits of a diversified portfolio under professional management and pays quarterly distributions to investors of at least 90% of its taxable income. Lexington also provides investment advisory and asset management services to third parties, including the Net Partnerships. As of June 30, 2001, Lexington's real property portfolio consisted of interests in 73 properties, located in 29 states, including warehousing, distribution and manufacturing facilities, office buildings and retail properties, consisting of an aggregate 13.1 million net rentable square feet of space. Of these 73 properties, 71 are currently leased, and 68 are subject to triple net leases, which are generally characterized as leases in which the tenant bears all, or substantially all, of the costs and cost increases for real estate taxes, insurance and ordinary maintenance. The leases on two of the remaining properties provide for operating expense stops which limit the increase in operating expenses to Lexington. Lexington manages its real estate and credit risk through geographic, industry, tenant and lease maturity diversification. As June 30, 2001 the ten largest tenants/guarantors, which occupy 17 properties, represented 56.0% of rental revenues for the past twelve months:
% OF NUMBER OF RENTAL TENANT/GUARANTOR PROPERTIES REVENUES PROPERTY TYPE ---------------- ---------- -------- ------------------- Kmart Corporation............................ 1 11.6 Industrial Northwest Pipeline Corp...................... 1 11.4 Office Exel Logistics, Inc (NFL plc)................ 4 6.3 Industrial Honeywell, Inc............................... 3 5.3 Office Vartec Telecom, Inc.......................... 1 4.5 Office Circuit City Stores.......................... 3 4.5 Office(1)/Retail(2) Boeing North America Services, Inc. ......... 1 3.3 Office Artesyn North America, Inc. ................. 1 3.3 Office Avnet, Inc................................... 1 3.2 Office Hartford Fire Insurance Company.............. 1 2.6 Office -- ---- Totals.................................. 17 56.0% == ====
RECENT DEVELOPMENTS PUBLIC OFFERING. In July 2001, Lexington conducted an underwritten public offering of 4,000,000 common shares under the terms and conditions of an underwriting agreement entered into on July 26, 2001 between Lexington, on the one hand, and First Union Securities, Inc., CIBC World Market Corp., A.G. Edwards & Sons, Inc., and Raymond James & Associates, Inc. In addition, under the underwriting agreement, Lexington granted the underwriters a 30 day option to purchase up to an additional 600,000 common shares to cover overallotments. On August 17, 2001, the underwriters exercised this option with respect to 400,000 common shares, and the sale of these common shares closed on August 22, 2001. Lexington received net proceeds from this offering of $57,720,000, and an additional $5,644,000 from the underwriters exercise of their overallotment option. Lexington intends to use up to $32,175,000 of the net proceeds to fund the cash portion of the merger consideration being offered in the Transaction, if it is completed, and approximately $13.0 million to fund the balance of its capital commitment to its joint venture investment with the Comptroller of the State of New York as trustee for the Common Retirement Fund. The 126 136 balance of the net proceeds, if any, will be used for general business purposes, including additional investments and repayment of debt. See "-- Redemption of Debt" below. REDEMPTION OF DEBT. On August 3, 2001, Lexington redeemed an outstanding $25 million 8% Exchangeable Redeemable Secured Note held by Merrill Lynch Global Allocation Fund, Inc. for an aggregate payoff amount, including a prepayment premium and accrued interest, of approximately $28.6 million. OBJECTIVES AND STRATEGY Lexington's primary objectives are to increase funds from operations, cash available for distribution per share to its shareholders, and net asset value per share. In an effort to achieve these objectives, Lexington's management focuses on: - effectively managing assets through lease extensions, revenue enhancing property expansions, opportunistic property sales and redeployment of assets, when advisable; - acquiring portfolios and individual net lease properties from third parties, completing sale/leaseback transactions, acquiring build-to-suit properties and opportunistically using its operating partnership units to effect acquisitions; - entering into strategic co-investment programs which generate higher equity returns than direct investments due to acquisition and asset management fees and, in some cases, increased leverage levels; - providing management and advisory services to institutional investors in order to generate advisory fee revenue; and - matching debt maturities to lease expirations and increasing Lexington's access to capital to finance property acquisitions and expansions. INTERNAL GROWTH; EFFECTIVELY MANAGING ASSETS TENANT RELATIONS AND LEASE COMPLIANCE. Lexington maintains close contact with its tenants in order to understand their future real estate needs. Lexington monitors the financial, property maintenance and other lease obligations of its tenants through a variety of means, including periodic reviews of financial statements and physical inspections of the properties. Lexington performs annual inspections of those properties where it has an ongoing obligation with respect to the maintenance of the property and for all properties during each of the last three years immediately prior to a scheduled lease expiration. Bi-annual physical inspections are undertaken for all other properties. EXTENDING LEASE MATURITIES. Lexington seeks to extend its leases in advance of their expiration in order to maintain a balanced lease rollover schedule and high occupancy levels. Since February 1994, Lexington has entered into lease extensions of three years or more on 18 of its properties. As of the date of this Joint Consent and Proxy Solicitation Statement/Prospectus, the scheduled lease maturities for the remainder of 2001 and each of the next four years are as follows:
CURRENT % OF NUMBER OF ANNUAL RENT ANNUALIZED LEASES ($000'S) RENT --------- ----------- ---------- 2001................................................ 0 $ -- -- 2002................................................ 2 777 0.9 2003................................................ 1 1,900 2.1 2004................................................ 0 -- -- 2005................................................ 5 6,119 6.8 --- ------ --- 8 $8,796 9.8 === ====== ===
127 137 REVENUE ENHANCING PROPERTY EXPANSIONS. Lexington undertakes selective expansions of its properties based on tenant requirements. Lexington believes that selective property expansions can provide it with attractive rates of return and actively seeks such opportunities. As of June 30, 2001, Lexington has committed to fund 40% of a $10.5 million expansion of an existing property that is owned with a partner. The expansion, which is estimated to be completed by October 2001, will be leased by the tenant for eight years at a weighted average rental rate of 18.5% of expected construction costs. PROPERTY SALES AND REDEPLOYMENT OF ASSETS. Lexington may determine to sell a property if it deems such disposition to be in Lexington's best interest. During the years ended December 31, 2000 and 1999, Lexington sold three and seven properties, respectively for $19.6 million and $63.9 million, respectively, resulting in $3.0 million and $5.1 million in gains, respectively. EXTERNAL GROWTH; STRATEGIES FOR ACQUISITIONS AND INCREASING ASSETS UNDER MANAGEMENT FOCUSED ACQUISITION PARAMETERS. Lexington seeks to enhance its net lease property portfolio through acquisitions of general purpose, efficient, well-located properties in growing markets. Management has diversified Lexington's portfolio by geographic location, tenant industry segment, lease term expiration and property type with the intention of providing steady internal growth with low volatility. Management believes that such diversification should help insulate Lexington from regional recession, industry specific downturns and price fluctuations by property type. Prior to effecting any acquisitions, management analyzes the: - property's design, construction quality, efficiency, functionality and location with respect to the immediate sub-market, city and region; - lease integrity with respect to term, rental rate increases, corporate guarantees and property maintenance provisions; - present and anticipated conditions in the local real estate market; and - prospects for selling or releasing the property on favorable terms in the event of a vacancy. Management also evaluates each potential tenant's financial strength, growth prospects, competitive position within its respective industry and a property's strategic location and function within a tenant's operations or distribution systems. Management believes that its comprehensive underwriting process is critical to the assessment of long-term profitability of any investment by Lexington. OPERATING PARTNERSHIP STRUCTURE. Lexington has three operating partnership subsidiaries, Lepercq Corporate Income Fund L.P., Lepercq Corporate Income Fund II L.P. and Net 3. Lexington is the sole shareholder of Lex GP-1, Inc., a Delaware corporation, which is the 1% general partner of the operating partnership subsidiaries. Lexington is also the sole shareholder of Lex LP-1, Inc., a Delaware corporation. As of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, Lex LP-1, Inc. held an approximately 75.1% and 67.7% limited partnership interest in Lepercq Corporate Income Fund L.P. and Lepercq Corporate Income Fund II L.P., respectively and a 99.0% limited partnership interest in Net 3. 128 138 The operating partnership structure enables Lexington to acquire properties by issuing to a seller, as a form of consideration, operating partnership units. As of June 30, 2001, the operating partnership units are redeemable as follows:
YEAR NO. OF UNITS ---- ------------ At any time................................................. 4,864,595 2002........................................................ 83,400 2003........................................................ 17,901 2004........................................................ 87,796 2005........................................................ 29,384 2006........................................................ 208,766 --------- Total....................................................... 5,291,842 =========
Management believes that this structure facilitates Lexington's ability to raise capital and to acquire portfolio and individual properties by enabling Lexington to structure transactions which may defer tax gains for a contributor of property while preserving Lexington's available cash for other purposes, including the payment of dividends and distributions. As of June 30, 2001, Lexington has used operating partnership units as a form of consideration in connection with the acquisition of 22 properties. ACQUISITIONS OF PORTFOLIO AND INDIVIDUAL NET LEASE PROPERTIES. Lexington seeks to acquire portfolio and individual properties that are leased to creditworthy tenants under long-term net leases. Management believes there is significantly less competition for the acquisition of property portfolios containing a number of net leased properties located in more than one geographic region. Management also believes that Lexington's geographic diversification, acquisition experience and access to capital will allow it to compete effectively for the acquisition of such net leased properties. SALE/LEASEBACK TRANSACTIONS. Lexington seeks to acquire portfolio and individual net lease properties in sale/leaseback transactions. Lexington selectively pursues sale/leaseback transactions with creditworthy sellers/tenants with respect to properties that are integral to the sellers'/tenants' ongoing operations. BUILD-TO-SUIT PROPERTIES. Lexington may also acquire, after construction has been completed, "build-to-suit" properties that are entirely pre-leased to their intended corporate users before construction. As a result, Lexington does not assume the risk associated with the construction phase of a project. STRATEGIC JOINT VENTURE CO-INVESTMENTS In 1999, Lexington entered into a joint venture agreement with The Comptroller of the State of New York as trustee of the Common Retirement Fund, or "CRF." The joint venture entity, Lexington Acquiport Company, LLC, or "LAC," acquires high quality office and industrial real estate properties that are net leased to investment and non-investment grade single tenant users. Lexington and CRF have committed to make equity contributions to LAC of up to $50 million and $100 million, respectively, of which Lexington and CRF have funded approximately $37 million and $76 million, respectively, as of June 30, 2001. Property acquisitions will be additionally funded through the use of up to $278 million in non-recourse mortgages. Through June 30, 2001, LAC has made investments in eight properties for $284 million. In 1999, Lexington also formed a joint venture for the purpose of owning a property that is net leased to Blue Cross/Blue Shield of South Carolina. Lexington has a 40% interest in the joint venture and as of June 30, 2001, Lexington has committed to fund 40% of a $10.5 million expansion of an existing property that is owned with a partner. The expansion, which is estimated to be completed by October 2001, will be leased by the tenant for eight years at a weighted average rental rate of 18.5% of expected construction costs. In 2000, Lexington Realty Advisors, Inc. entered into an advisory and asset management agreement to invest and manage $50 million of equity on behalf of a private investment fund. The investment program could, depending on leverage utilized, acquire up to $150 million in single tenant, net-leased office, industrial and retail properties in the United States. Lexington Realty Advisors, Inc. will earn acquisition fees (90 basis 129 139 points of total acquisition costs), annual asset management fees (30 basis points of gross asset value) and a promoted interest of 16% of the return in excess of an internal rate of return of 10% earned by the private investment fund. REVENUE ENHANCEMENT FROM ADVISORY SERVICES In connection with the joint venture with CRF, Lexington's affiliate, Lexington Realty Advisors, Inc. has entered into a management agreement with LAC whereby Lexington Realty Advisors, Inc. will perform services, for a fee, relating to the acquisition and management of the LAC investments. Lexington Realty Advisors will receive a fee of 75 basis points of cost for acquisition services and 2% of rent collected annually for management services of the LAC investments. Lexington Realty Advisors, Inc. has also entered into a management agreement with respect to the Blue Cross/Blue Shield joint venture with terms similar to the management agreement with LAC. MATCHING INDEBTEDNESS TO LEASE EXPIRATIONS AND INCREASING ACCESS TO CAPITAL MATCHING INDEBTEDNESS TO LEASE EXPIRATIONS. Lexington seeks to enter into mortgage loans with maturities that generally match the terms of the corresponding leases. This allows Lexington to reduce the risk associated with refinancing its indebtedness. INCREASING ACCESS TO CAPITAL. Management is constantly pursuing opportunities to increase Lexington's access to public and private capital in order to achieve maximum operating flexibility. As of June 30, 2001, balloon payments through 2005, are scheduled as follows:
WEIGHTED BALLOON AVERAGE AMOUNT INTEREST RATE -------- ------------- ($000'S) 2001........................................................ $ 1,000 9.50% 2002........................................................ 10,624 7.46% 2003........................................................ -- -- 2004........................................................ 42,360 7.57% 2005........................................................ 67,711 7.88% -------- ---- $121,695 7.75% ======== ====
Lexington's variable rate unsecured credit facility bears interest at 150-250 basis points over Lexington's option of 1, 3 or 6 month LIBOR, depending upon the level of Lexington's indebtedness, and is scheduled to mature in March 2004. As of June 30, 2001, there were no outstanding borrowings under this facility. As a result of Lexington's financing activities, the weighted average interest rate on Lexington's outstanding indebtedness has been reduced from approximately 8.17% as of December 31, 1997 to approximately 7.67% as of June 30, 2001. COMMON SHARE REPURCHASE Lexington's Board of Trustees authorized the repurchase of up to 2.0 million common shares and/or operating partnership units. As of June 30, 2001, Lexington has repurchased 1.43 million common shares/units at an average price of $10.53, all of which have been retired. COMPETITION There are numerous commercial developers, real estate companies, financial institutions and other investors with greater financial resources than Lexington has that compete with Lexington in seeking properties for acquisition and tenants who will lease space in its properties. Due to its focus on net-lease properties located throughout the United States, and because most competitors are locally and/or regionally focused, Lexington does not encounter the same competitors in each region of the United States. Lexington's 130 140 competitors include other REITs, financial institutions, insurance companies, pension funds, private companies and individuals. This competition may result in Lexington paying higher prices for properties it wishes to purchase or leasing its properties to tenants under terms and conditions less favorable to Lexington than anticipated or desired. INVESTMENT POLICIES REAL ESTATE INVESTMENTS. Lexington seeks to acquire and manage a diversified portfolio of real estate and other assets and may reinvest proceeds from its sale of properties or other capital transactions. SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE ACTIVITIES AND OTHER ISSUERS. Lexington may, in the future, invest in securities of entities engaged in real estate activities or securities of other issuers, in certain instances, for the purpose of exercising control over such entities. Lexington may acquire all or substantially all of the securities or assets of REITs or similar entities where such investments would be consistent with its investment policies. In any event, Lexington does not intend that its investments in such securities will require it to register as an "investment company" under the Investment Company Act of 1940, as amended, and Lexington would divest itself of such securities before any such registration would be required. JOINT VENTURES AND WHOLLY-OWNED SUBSIDIARIES. Lexington may, in, the future, enter into additional joint ventures, general partnerships or other participations with real estate developers, owners and others for the purpose of obtaining an equity interest in a particular property or properties in accordance with Lexington's investment policies. Such investments would permit Lexington to own interests in large properties without unduly restricting diversification, thereby increasing flexibility in the structuring of Lexington's portfolio. OFFERING SECURITIES IN EXCHANGE FOR PROPERTY. Lexington may offer common shares, operating partnership units or other Lexington securities in exchange for a property. REPURCHASING OR REACQUIRING ITS OWN SHARES. Lexington may purchase or repurchase common shares from any person for such consideration as the Board of Trustees may determine in its reasonable discretion, whether more or less than either the original issuance price of such common shares or the then current trading price of such common shares. FINANCING POLICIES ISSUANCE OF ADDITIONAL SECURITIES. Lexington's Board of Trustees may, in its discretion, issue additional equity securities. The issuance of additional equity interests may result in the dilution of the interests of the Lexington shareholders at the time of such issuance. ISSUANCE OF SENIOR SECURITIES. Lexington may, at any time, issue securities senior to the common shares, upon such terms and conditions as may be determined by the Board of Trustees. BORROWING POLICY. Lexington may, at any time, borrow, on a secured or unsecured basis, funds to finance its business, and in connection therewith execute, issue and deliver promissory notes, commercial paper, notes, debentures, bonds and other debt obligations which may be either convertible into common shares or other equity interests, or issued together with warrants, in order to acquire common shares or other equity interests. MISCELLANEOUS POLICIES OWNERSHIP RESTRICTIONS. Lexington's Declaration of Trust, unless specifically waived, prohibits any one shareholder from owning greater than 9.8% of any class of its outstanding shares. COMPANY CONTROL. The Board of Trustees has exclusive control over Lexington's business and affairs subject only to the restrictions in Lexington's Declaration of Trust and By-Laws. Shareholders have the right to elect members of the Board of Trustees. The trustees are accountable to Lexington as fiduciaries and are required to exercise good faith and integrity in conducting Lexington's affairs. 131 141 ENVIRONMENTAL MATTERS Under various federal, state and local environmental laws, statutes, ordinances, rules and regulations, an owner of real property may be liable for the costs of removal or redemption of certain hazardous or toxic substances at, on, in or under such property, as well as certain other potential costs relating to hazardous or toxic substances. These liabilities may include government fines and penalties and damages for injuries to persons and adjacent property. Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence or disposal of such substances. Although Lexington's tenants are primarily responsible for any environmental damage and claims related to the leased premises, in the event of the bankruptcy or inability of the tenant of such premises to satisfy any obligations with respect to such environmental liability, Lexington may be required to satisfy such obligations. In addition, Lexington, as the owner of such properties, may be held liable for any such damages or claims irrespective of the provisions of any lease. From time to time, in connection with the conduct of Lexington's business, and prior to the acquisition of any property from a third party or as required by Lexington's financing sources, Lexington authorizes the preparation of Phase I environmental reports with respect to its properties. Based upon such environmental reports and management's ongoing review of its properties, as of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, Lexington's management is not aware of any environmental condition with respect to any of Lexington's properties which management believes would be reasonably likely to have a material adverse effect on Lexington. Lexington cannot be certain, however, that it will not be exposed to material liability in the future resulting from; - the discovery of environmental conditions, the existence or severity of which were previously unknown; - changes in law; - the conduct of tenants; or - activities relating to properties in the vicinity of Lexington's properties. 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 or may otherwise adversely affect the operations of Lexington's tenants, which would adversely affect Lexington's financial condition and results of operations, including funds from operations. EMPLOYEES As of June 30, 2001, Lexington had 27 employees. INDUSTRY SEGMENTS Lexington operates in one industry segment, investment in single tenant, net leased real property throughout the United States. PRICE RANGE OF THE LEXINGTON COMMON SHARES AND DISTRIBUTION HISTORY The common shares have been traded on the NYSE under the symbol "LXP" since October 1993. On November 11, 2000, the last full trading day prior to the execution and delivery of the merger agreements and the public announcement thereof, the closing price of the Lexington common shares on the NYSE was $10.8125 per share. On July 19, 2001, the last full trading day prior to the execution and delivery of the amendments to the merger agreements and the public announcement thereof, the closing price was $15.19 per share. As of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, the closing price was $14.28 per share. The following 132 142 table sets forth the quarterly high and low sales prices per share reported on the NYSE and the distributions paid by Lexington with respect to the periods indicated.
PRICE ----------------- QUARTER ENDED HIGH LOW DISTRIBUTION ------------- ------- ------- ------------ 1995 First Quarter....................................... $ 9.500 $ 8.625 $0.27 Second Quarter...................................... 11.000 9.125 0.27 Third Quarter....................................... 11.375 10.000 0.27 Fourth Quarter...................................... 11.250 9.625 0.27 1996 First Quarter....................................... $12.125 $10.500 $0.27 Second Quarter...................................... 12.375 11.125 0.27 Third Quarter....................................... 13.375 11.500 0.28 Fourth Quarter...................................... 15.000 12.125 0.28 1997 First Quarter....................................... $15.000 $12.125 $0.29 Second Quarter...................................... 14.500 12.125 0.29 Third Quarter....................................... 15.750 13.813 0.29 Fourth Quarter...................................... 16.813 13.750 0.29 1998 First Quarter....................................... $16.375 $14.250 $0.29 Second Quarter...................................... 15.250 13.750 0.29 Third Quarter....................................... 14.625 10.813 0.29 Fourth Quarter...................................... 13.250 11.000 0.30 1999 First Quarter....................................... $12.875 $ 9.875 $0.30 Second Quarter...................................... 12.000 10.500 0.30 Third Quarter....................................... 12.875 10.875 0.30 Fourth Quarter...................................... 11.250 8.813 0.30 2000 First Quarter....................................... $11.625 $ 9.000 $0.30 Second Quarter...................................... 11.313 9.938 0.30 Third Quarter....................................... 12.250 11.063 0.31 Fourth Quarter...................................... 11.938 10.688 0.31 2001 First Quarter....................................... $13.438 $11.813 $0.31 Second Quarter...................................... 15.550 12.750 0.32 Third Quarter....................................... 15.480(1) 13.150(1) 0.32
--------------- (1) Through September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus. 133 143 MANAGEMENT TRUSTEES AND EXECUTIVE OFFICERS OF LEXINGTON The following sets forth information relating to the executive officers and trustees of Lexington, each of whom is elected annually, holding office until the next annual meeting of shareholders or until his successor has been duly elected and qualified: E. Robert Roskind Age 56 Mr. Roskind has served as Chairman of the Board of Trustees and Co-Chief Executive Officer of Lexington since October 1993. He founded The LCP Group, L.P., a real estate advisory firm, in 1973 and has been its Chairman since 1976. The LCP Group, L.P. has been the general partner of various limited partnerships with which Lexington has had prior dealings. He is also the general partner of a variety of entities that are general partners of various partnerships that hold net leased real properties or interests in real property. Mr. Roskind received his B.S. in 1966 from the University of Pennsylvania and is a 1969 Harlan Fiske Stone Graduate of the Columbia Law School. He has been a member of the Bar of the State of New York since 1970. He is on the Board of Directors of Clarion CMBS Value Fund, Inc. Richard J. Rouse Age 55 Mr. Rouse has served as Co-Chief Executive Officer and as a trustee of Lexington since October 1993. He served as President of Lexington from October 1993 to April 1996, and since April 1996 has served as Vice Chairman of the Board of Trustees. Mr. Rouse graduated from Michigan State University in 1968 and received his M.B.A. in 1970 from the Wharton School of Finance and Commerce of the University of Pennsylvania. T. Wilson Eglin Age 37 Mr. Eglin has served as Chief Operating Officer of Lexington since October 1993 and as a trustee since May 1994. He served as Executive Vice President from October 1993 to April 1996, and since April 1996 has served as the President. Mr. Eglin received his B.A. from Connecticut College in 1986. Patrick Carroll Age 37 Mr. Carroll has served as Chief Financial Officer of Lexington since May 1998 and as Treasurer since January 1999. Prior to joining Lexington, Mr. Carroll was, from 1993 to 1998, a Senior Manager in the real estate unit of Coopers & Lybrand L.L.P., a public accounting firm, serving both publicly and privately held real estate entities with a focus on due diligence and public equity/ debt offerings. Mr. Carroll received his B.B.A. from Hofstra University in 1986 and his M.S. in Taxation from C.W. Post in 1991, and is a Certified Public Accountant. Stephen C. Hagen Age 59 Mr. Hagen has served as Senior Vice President of Lexington since October 1996. Mr. Hagen had been associated with The LCP Group, L.P. from 1995 to 1996. Mr. Hagen received his B.S. from the University of Kansas in 1965 and his M.B.A. in 1968 from the Wharton School of Finance and Commerce of the University of Pennsylvania. Paul R. Wood Age 41 Mr. Wood has served as Vice President, Chief Accounting Officer and Secretary of Lexington since October 1993. Mr. Wood received his B.B.A. from Adelphi University in 1982 and is a Certified Public Accountant. 134 144 Janet M. Kaz Age 37 Ms. Kaz has served as Vice President of Lexington since May 1995 and as an Asset Manager since October 1993. Ms. Kaz received her B.A. from Muhlenberg College in 1985. Philip L. Kianka Age 44 Mr. Kianka has served as Vice President of Asset Management of Lexington since 1997. Prior to joining Lexington, Mr. Kianka served as a Vice President and Senior Asset Manager at Merrill Lynch Hubbard, Inc., a real estate division of Merrill Lynch & Co., Inc., from 1985 through 1997. In connection with his responsibilities with Merrill Lynch Hubbard, Inc., Mr. Kianka was involved in real estate acquisitions, development and asset management for a national portfolio of diversified properties. Mr. Kianka received his B.A. from Clemson University in 1978 and his M.A. from Clemson University in 1981. George Wilson Age 40 Mr. Wilson has served as Vice President of Lexington since December 2000 and as an Asset Manager since May 1999. Prior to joining Lexington, Mr. Wilson was the Asset Manager for American Real Estate Partners, L.P., a publicly traded net lease real estate partnership, from 1994 to 1999. He received his B.A. from Columbia College in 1983 and his M.S. in Real Estate Development from Columbia University in 1986. Natasha Roberts Age 34 Ms. Roberts has served as Vice President of Acquisitions of Lexington since 1997. Prior to joining Lexington, Ms. Roberts worked for Net Lease Partners Realty Advisors, a real estate advisory firm and an affiliate of Mr. Roskind, from January 1995 to January 1997 and as a licensed real estate broker from February 1992 to January 1995. Brendan P. Mullinix Age 27 Mr. Mullinix has served as a Vice President of Lexington since February 2000 and as a member of the acquisitions department since October 1996. He received his B.A. from Columbia University in 1996. Carl D. Glickman Age 75 Mr. Glickman has served as a trustee since May 1994. He has been President of The Glickman Organization, a real estate development and management firm, since 1953. He is on the Board of Directors of Alliance Tire & Rubber Co., Ltd., Bear Stearns Companies, Inc., Jerusalem Economic Corporation Ltd. and OfficeMax Inc., as well as numerous private companies. Geoffrey Dohrmann Age 50 Mr. Dohrmann has served as a trustee since August 2000. Mr. Dohrmann is Co-Founder, Chairman and Chief Executive Officer of Institutional Real Estate, Inc., a real estate-oriented publishing and consulting company. Mr. Dohrmann also belongs to the advisory boards for the National Real Estate Index, The Journal of Real Estate Portfolio Management and Center for Real Estate Enterprise Management. He is also a fellow of the Homer Hoyt Institute and holds the Certified Financial Planner (CFP) and Counselors of Real Estate (CRE) designations. John D. McGurk Age 58 Mr. McGurk has served as a trustee since January 1997, as the designee of Five Arrows Realty Securities, L.L.C. As of September 18, 2001, which was the latest practicable date prior to the printing of this prospectus, Five Arrows was the holder of 8.2% of 135 145 the voting shares of Lexington. He is the founder and President of Rothschild Realty, Inc., the advisor to Five Arrows. Prior to starting Rothschild Realty, Inc. in 1981, Mr. McGurk served as a Regional Vice President for The Prudential Insurance Company of America, where he oversaw its New York City real estate loan portfolio, equity holdings, joint ventures and projects under development. Mr. McGurk is a member of the Urban Land Institute, Pension Real Estate Association, Real Estate Board of New York and the National Real Estate Association, and is a member of the Trustee Committee of the Caedmon School. Seth M. Zachary Age 49 Mr. Zachary has served as a trustee since November 1993. Since 1987, he has been a partner in the law firm of Paul, Hastings, Janofsky & Walker LLP, counsel to Lexington. BOARD OF TRUSTEES GENERAL. Lexington operates under the direction of its Board of Trustees, the members of which are accountable to Lexington as fiduciaries. Lexington currently has seven trustees. It may have no fewer than three trustees. Trustees are elected annually, and each trustee holds office until the next annual meeting of shareholders or until his successor has been duly elected and qualified. Trustees annually appoint the officers of Lexington to serve until the next annual meeting of shareholders. There is no limit on the number of times that a trustee may be elected to office. Although the number of trustees may be increased or decreased as discussed above, a decrease shall not have the effect of shortening the term of any incumbent director. Any trustee may resign at any time and may be removed for cause only by the shareholders upon the affirmative vote of at least 80% of all the shares of common shares outstanding and entitled to vote in the election of the trustees. The notice of a shareholders' meeting at which such vote will be taken shall indicate that the purpose, or one of the purposes, of such meeting is to determine if a director shall be removed. INDEPENDENT TRUSTEES. Four of Lexington's current trustees are not employees of Lexington and qualify as "independent" under the rules of the New York Stock Exchange. The independent trustees are Messrs. Glickman, Dohrmann, McGurk and Zachary. Lexington has no obligation under its Declaration of Trust or any applicable law to have or to continue to have any independent trustees. COMMITTEES OF THE BOARD OF TRUSTEES. Pursuant to Lexington's Declaration of Trust, the Board of Trustees may establish committees as it deems appropriate. Currently, Lexington has an Audit Committee which consists of Messrs. Glickman, McGurk and Dohrmann. The Audit Committee makes recommendations concerning the engagement of independent public accountants, reviews the plans and results of the audit engagement, with the independent public accountants, approves professional services provided by the independent public accountants, reviews the independence of the independent public accountants, considers the range of audit and non-audit fees and reviews the adequacy of Lexington's internal accounting controls. In addition to the Audit Committee, Lexington has a Compensation Committee which consists of Messrs. McGurk, Zachary and Dohrmann. The Compensation Committee advises the Board of Trustees on all matters pertaining to compensation programs and policies, establishes guidelines for employee incentive and benefits programs, reviews such programs on a continuous basis and makes specific recommendations to the Board of Trustees relating to officers' salaries and all incentive awards. Lexington also has an Executive Committee, which consists of Messrs. Roskind, Glickman and McGurk, two of whom are independent. The Executive Committee has the authority to acquire, dispose of and finance investments for Lexington, execute contracts and agreements, including those related to the borrowing of money by Lexington, and generally exercise all other powers of the Board of Trustees, except for those which require action by all the trustees or the independent trustees, under the Declaration of Trust or the By-Laws of Lexington, or under applicable law. 136 146 The Board of Trustees may, from time to time, establish other committees in order to facilitate Lexington's management. The Board of Trustees does not have a nominating committee, and the entire Board of Trustees performs the function of such committee. SUMMARY OF CASH AND OTHER COMPENSATION. The following table sets forth the summary compensation paid to the Chairman of the Board of Trustees and Co-Chief Executive Officer and the other four highest paid executive officers of Lexington for the calendar years 2000, 1999 and 1998. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------------------------------- NUMBER OF ANNUAL COMPENSATION SECURITIES LONG TERM -------------------------------- RESTRICTED UNDERLYING INCENTIVE OTHER ANNUAL SHARE OPTIONS PLAN ALL OTHER FISCAL YEAR SALARY BONUS COMPENSATION AWARDS GRANTED LIMITED COMPENSATION NAME AND PRINCIPAL POSITION ENDED ($) ($)(1) ($) ($)(2) ($)(3) PARTNERS($) ($)(4) --------------------------- ----------- ------- ------- ------------ ---------- ---------- ----------- ------------ E. Robert Roskind......... 12/31/00 300,000 309,297 -- 180,000 280,000 -- 835 Chairman of the Board of 12/31/99 300,000 158,000 -- 242,500 75,000 -- 720 Trustees and Co-Chief 12/31/98 250,000 133,000 -- -- 100,000 -- 720 Executive Officer Richard J. Rouse.......... 12/31/00 225,000 233,915 -- 126,000 190,000 -- 835 Vice Chairman and Co- 12/31/99 200,000 108,000 -- 169,750 45,000 -- 720 Chief Executive Officer 12/31/98 175,000 95,500 -- -- 34,500 -- 720 T. Wilson Eglin........... 12/31/00 240,000 249,200 -- 126,000 161,250 -- 835 President and Chief 12/31/99 225,000 120,500 -- 169,750 45,000 -- 720 Operating Officer 12/31/98 200,000 108,000 -- -- 34,500 -- 720 Patrick Carroll........... 12/31/00 190,000 198,700 -- 72,000 65,000 -- 835 Chief Financial Officer and 12/31/99 175,000 78,000 -- 97,000 30,000 -- 720 Treasurer(5) 12/31/98 112,727 72,000 -- -- 50,000 -- 720 Stephen C. Hagen.......... 12/31/00 165,000 107,182 -- 36,000 50,000 -- 835 Senior Vice President 12/31/99 150,000 68,000 -- 48,500 15,000 -- 720 12/31/98 120,000 54,000 -- -- 25,000 -- 720
--------------- (1) Bonus amounts include amounts contributed at the election of Lexington pursuant to Lexington's plan established under Section 401(k) of the Internal Revenue Code of 1986, as amended, and year-end awards at the discretion of the Compensation Committee of the Board of Trustees. (2) Restricted share awards vest ratably over 5 years and were valued at the fair market value of the common shares on the date of grant. (3) Options to acquire common shares at exercise prices equal to the fair market value on the grant dates. (4) Amount represents the dollar value of life insurance premiums paid by Lexington during the applicable fiscal year with respect to the life of the named executive officer. (5) Mr. Carroll became Chief Financial Officer of Lexington on May 4, 1998 and Treasurer effective January 1999. 137 147 SHARE OPTIONS. The following table sets forth information concerning share options granted during the fiscal year ended December 31, 1999 to each of the executive officers named in the Summary Compensation Table. Since its inception, Lexington has not granted any share appreciation or dividend equivalent rights. OPTION GRANTS IN FISCAL YEAR 2000
INDIVIDUAL GRANTS POTENTIAL REALIZABLE ----------------------------------------------------------------- VALUE AT ASSUMED PERCENTAGE {ANNUAL RATES OF NUMBER OF (%) OF TOTAL SHARE {PRICE SECURITIES OPTIONS APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OR OPTION TERM OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION --------------------- NAME GRANTED FISCAL 2000 ($/SHARE) DATE 5%($) 10%($) ---- ---------- ------------- ----------- ---------------------- -------- ---------- E. Robert Roskind............. 280,000 33.67% 10.37% 01/03/05; 05/25/05 803,600 1,772,400 Richard J. Rouse.............. 190,000 22.85% 10.01% 01/03/05; 05/25/05 526,300 1,160,900 T. Wilson Eglin............... 161,250 19.39% 9.81% 01/03/05; 05/25/05 436,988 965,888 Patrick Carroll............... 65,000 7.82% 9.06% 01/03/05 161,850 356,850 Stephen C. Hagen.............. 50,000 6.01% 9.06% 01/03/05 124,500 274,500
Option Exercises/Value of Unexercised Options. The following table sets forth information concerning the exercise of share options during the fiscal year ended December 31, 2000 by each of the executive officers named in the Summary Compensation Table, and the year-end value of unexercised options held by such persons. SHARE OPTION EXERCISES IN FISCAL YEAR 2000 AND FISCAL YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED IN-THE-MONEY SHARES FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END ACQUIRED ON VALUE --------------------------------- --------------------------------- NAME EXERCISE(#) REALIZED($) EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE($) UNEXERCISABLE($) ---- ----------- ----------- -------------- ---------------- -------------- ---------------- E. Robert Roskind..... -- -- 379,210 212,500 212,513 210,938 Richard J. Rouse...... -- -- 248,652 132,000 150,638 210,938 T. Wilson Eglin....... -- -- 301,216 132,000 138,297 210,938 Patrick Carroll....... -- -- 31,250 113,750 45,703 137,109 Stephen C. Hagen...... -- -- 55,000 45,000 35,156 105,469
COMPENSATION OF TRUSTEES Each non-employee trustee, with the exception of Mr. McGurk, receives an annual fee of $20,000 for service as a trustee. In addition, such trustees receive $1,000 for each meeting of the Board of Trustees or any committee thereof attended by the trustee and reimbursement for expenses incurred in attending such meetings. Pursuant to the 1994 Outside Director Stock Plan, as amended, each non-employee trustee was required to receive not less than 50% of such trustee's fees in common shares at an amount per share equal to 95% of the fair market value of one common share as of the date of purchase. Pursuant to Lexington's 1998 Share Option Plan, non-employee trustees, with the exception of Mr. McGurk, automatically are granted each year, on January 1, non-qualified share options to purchase, after a one-year holding period, 5,000 common shares at an exercise price equal to the fair market value of the common shares on the date of the grant. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee consisted of Messrs. Dohrmann, McGurk and Zachary. None of such persons are or have been executive officers of Lexington. Mr. Zachary is a partner of Paul, Hastings, Janofsky & Walker LLP, which is the general counsel to Lexington. 138 148 REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF TRUSTEES For the fiscal year ended December 31, 2000, all matters concerning executive compensation for the Co-Chief Executive Officers and other executive officers were considered and acted upon by the Compensation Committee of the Board of Trustees. COMPENSATION PHILOSOPHY. Lexington's compensation program for executive officers is based upon a desire to achieve both its short- and long-term business goals and strategies with a view to enhancing shareholder value. To achieve its goals, Lexington recognizes that its compensation program must attract, retain and motivate qualified and experienced executive officers and that its compensation program should align the financial interests of its executive officers with those of its shareholders. In 2000, Lexington retained an independent third party to assist in determining the reasonableness and competitiveness of its compensation program for its executive officers. COMPENSATION OF EXECUTIVE OFFICERS OTHER THAN THE CO-CHIEF EXECUTIVE OFFICERS. In approving the annual salary for Messrs. Eglin, Carroll and Hagen, the Board of Trustees considered several factors, including the scope of the individual's responsibilities, cost of living, the historical financial results of Lexington and the anticipated financial performance of Lexington. The compensation determination for each individual was largely subjective and no specific weight was given to any particular factor. In addition to their base salaries, these executive officers of Lexington receive discretionary bonuses tied to their individual performances and the overall performance of Lexington. The Board of Trustees has established specific performance goals for the payment of discretionary bonuses based on the per share growth in funds from operations, cash available for distributions and funds available for distributions coupled with total annual shareholder return. COMPENSATION OF CO-CHIEF EXECUTIVE OFFICERS. As with the other executive officers, the Board of Trustees determined the annual salaries for the Co-Chief Executive Officers based upon a number of factors and criteria, including the historical financial results of Lexington, the anticipated financial performance of Lexington and the requirements of such Co-Chief Executive Officers. The compensation determination for each of the Co-Chief Executive Officers was largely subjective, and no specific weight was given to any particular factor. The Co-Chief Executive Officers of Lexington are also eligible to receive discretionary bonuses tied to their individual and overall performances. The Board of Trustees has established specific performance goals for the payment of discretionary bonuses which are the same as those for the other executive officers. 2000 SHARE OPTION PLAN. Lexington believes that providing executive officers with opportunities to acquire significant equity stakes in its growth and prosperity through the grant of share options will enable Lexington to attract and retain qualified and experienced executive officers. Share options represent a valuable portion of the compensation program for Lexington's executive officers. Share options may be awarded to executive officers at the time they join Lexington and periodically after that. The exercise price of share options has been tied to the fair market value of Lexington common shares on the date of the grant and the options will only have value as the value of Lexington common shares increases. Grants of share options to executive officers generally are made by the Compensation Committee upon the recommendation of senior management and are based upon the level of each executive officer's position with Lexington, an evaluation of the executive officer's past and expected future performance and the number of outstanding and previously granted options. FIDUCIARY RESPONSIBILITY The trustees are accountable to Lexington and its shareholders as fiduciaries and must perform their duties in good faith, in a manner believed to be in the best interests of Lexington and its shareholders and with the level of care, including reasonable inquiry, that an ordinarily prudent person in a like position would use under similar circumstances. Lexington's Declaration of Trust provides that, to the fullest extent permitted by Maryland law, no trustee or officer of Lexington shall be personally liable to Lexington or its shareholders for monetary damages. The Declaration of Trust provides that Lexington will indemnify its trustees and officers, whether serving Lexington or, at its request, any other entity, to the full extent permitted by Maryland law, including the advance of expenses and Lexington will also indemnify other employees and agents, whether 139 149 serving Lexington or at its request any other entity, to such extent as shall be authorized by the Board of Trustees, Lexington's By-Laws, or permitted by law. EMPLOYMENT AGREEMENTS Lexington has entered into severance agreements with Messrs. Roskind, Rouse, Eglin, Carroll, Hagen and Wood. The Transaction, however, will not trigger the change of control provisions of the agreements which provide the officers with payments based upon a multiple of annual compensation upon a change of control of Lexington. SHARE OWNERSHIP OF PRINCIPAL SECURITY HOLDERS, TRUSTEES AND EXECUTIVE OFFICERS The following table indicates, as of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus: - the number of common shares and preferred shares beneficially owned by: - each person known by Lexington to own in excess of five percent of the outstanding common shares or preferred shares, - each trustee and each executive officer named in the Summary Compensation Table above; and - all trustees and officers as a group; and - the percentage such shares represent of the total outstanding common shares, preferred shares, operating partnership units convertible into common shares and voting shares. As of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, the total shares outstanding 22,288,984 common shares and 2,000,000 preferred shares. All shares were owned on such date with sole voting and investment power unless otherwise indicated.
BENEFICIAL OWNERSHIP OF SHARES(1) ---------------------- PERCENT OF CLASS COMMON PREFERRED ---------------------------------- NAME OF BENEFICIAL OWNER SHARES SHARES COMMON PREFERRED VOTING SHARES ------------------------ --------- --------- ------ --------- ------------- Five Arrows Realty Securities L.L.C...... -- 2,000,000(2) -- 100.00% 8.23% c/o Rothschild Realty, Inc. 1251 Avenue of the Americas New York, NY 10020. E. Robert Roskind........................ 1,989,418(3) -- 8.31% -- 7.67% c/o Lexington Corporate Properties Trust 355 Lexington Avenue New York, NY 10017 Richard J. Rouse......................... 408,146(4) -- 1.81% -- 1.66% T. Wilson Eglin.......................... 355,451(5) -- 1.58% -- 1.45% Patrick Carroll.......................... 113,647(6) -- * -- * Stephen C. Hagen......................... 99,468(7) -- * -- * Carl D. Glickman......................... 171,056(8) -- * -- * Geoffrey Dohrmann........................ 1,982 -- * -- * John D. McGurk........................... -- 2,000,000(9) -- 100.00% 8.23% c/o Rothschild Realty, Inc. 1251 Avenue of the Americas New York, NY 10020 Seth M. Zachary.......................... 47,089(10) -- * -- * All trustees and executive officers as a group (10 persons)(11)................. 3,216,751 2,000,000 13.08% 100.000% 19.62%
140 150 --------------- * Represents beneficial ownership of less than 1.0% (1) For purposes of this table, a person is deemed to have "beneficial ownership" of any shares as of a given date which such person has the right to acquire within 60 days after such date. For purposes of computing the percentage of outstanding shares held by each person named above on a given date, any security which such person or persons has the right to acquire within 60 days after such date is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (2) These shares are convertible into 2,000,000 common shares, subject to adjustment, at any time. (3) Includes: - 1,408,590 limited partnership units held by Mr. Roskind and entities controlled by Mr. Roskind in Lepercq Corporate Income Fund L.P. and Lepercq Corporate Income Fund II L.P., each of which is a subsidiary of Lexington, which are currently convertible, on a one-for-one basis, for common shares; - 9,000 common shares owned of record by The LCP Group, L.P.; - options to purchase 253,750 common shares. (4) Includes: - 86,702 limited partnership units held by Mr. Rouse in Lepercq Corporate Income Fund L.P. and Lepercq Corporate Income Fund II L.P., which are exchangeable, on a one-for-one basis, for common shares; - options to purchase 148,750 common shares; and - 65,500 common shares which secure a note issued by Mr. Rouse. (5) Includes: - options to purchase 187,338 common shares; and - 65,500 common shares which secure a note issued by Mr. Eglin. (6) Includes options to purchase 73,611 common shares. (7) Includes options to purchase 83,750 common shares. (8) Includes options to purchase 22,500 common shares. (9) Includes 2,000,000 Preferred Shares owned beneficially and of record by Five Arrows Realty Securities L.L.C. Mr. McGurk, among others, has been appointed by Rothschild Investors as a manager of Five Arrows. Mr. McGurk is also the designee of Five Arrows to Lexington's Board of Trustees. Mr. McGurk disclaims beneficial ownership of all such Preferred Shares. (10) Includes options to purchase 22,500 common shares. (11) Section 16(a) of the Securities Exchange Act of 1934, as amended, requires Lexington's trustees and executive officers to file initial reports of ownership and reports of changes in ownership of common shares and other equity securities with the Securities and Exchange Commission and the New York Stock Exchange. Trustees and executive officers are required to furnish Lexington with copies of all Section 16 (a) forms they file. Based on a review of the copies of such reports furnished to Lexington and written representations from Lexington's trustees and executive officers that no other reports were required, Lexington believes that during the 1999 fiscal year Lexington's trustees and executive officers complied with all Section 16(a) filing requirements applicable to them. DESCRIPTION OF CAPITAL SHARES The description of Lexington's capital shares set forth below does not purport to be complete and is qualified in its entirety by reference to Lexington's Declaration of Trust and By-Laws, copies of which are incorporated by reference as exhibits to this Registration Statement. See "AVAILABLE INFORMATION" on page i. 141 151 AUTHORIZED CAPITAL Lexington has an aggregate of 40,000,000 authorized common shares, 40,000,000 excess shares and 10,000,000 preferred shares available for issuance under its Declaration of Trust. If the amendment to Lexington's Declaration of Trust is approved by its shareholders, the number of authorized common shares will be increased to 80,000,000. See "OTHER PROPOSALS" on page 121. Two million of the preferred shares have been designated Class A Senior Cumulative Preferred Shares. Such shares may be issued from time to time by Lexington in the discretion of the Board of Trustees in order to raise additional capital, acquire assets, redeem or retire debt or for any other business purpose. In addition, the undesignated preferred shares may be issued in one or more additional classes with such designations, preferences and relative participating, optional or other special rights, including, without limitation, preferential dividend or voting rights and rights upon liquidation, as shall be fixed by the Board of Trustees. The Board of Trustees is also authorized to classify and reclassify any unissued capital shares by setting or changing, in any one or more respects, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such capital shares. Such authority includes, subject only to the provisions of the Declaration of Trust, authority to classify or reclassify any unissued capital shares into a class or classes of preferred shares, preferences shares, special shares or other shares, and to divide and reclassify shares of any class into one or more series of such class. The issuance of Preferred Shares, or the exercise by the Board of Trustees of such rights to classify or reclassify shares, could have the effect of deterring individuals or entities from making tender offers for the common shares or seeking to change incumbent management. DESCRIPTION OF COMMON SHARES Under the Declaration of Trust, Lexington has authority to issue 40,000,000 common shares. Under the Maryland REIT Law, shareholders generally are not responsible for the trust's debts or obligations. As of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus, Lexington had issued and outstanding 22,288,984 common shares and had reserved for possible issuance upon redemption of operating partnership units an aggregate of 5,268,299 common shares. Unless held by affiliates of Lexington, all of the common shares and any common shares issued upon redemption of operating partnership units are tradable without restriction under the Securities Act either pursuant to this Joint Consent and Proxy Solicitation Statement/Prospectus, pursuant to registration rights granted by Lexington or otherwise. No prediction can be made as to the effect, if any, that future sales of common shares, or the availability of shares for future sale, will have on the market price prevailing from time to time. Sales of substantial amounts of common shares, or the perception that such sales could occur, could adversely affect the prevailing market price of the shares. DESCRIPTION OF PREFERRED SHARES Under the Declaration of Trust, Lexington has authority to issue 10,000,000 preferred shares, 2,000,000 of which, designated as Class A Senior Cumulative Convertible Preferred Shares, are outstanding as of the date of this Joint Consent and Proxy Solicitation Statement/Prospectus, as described below. Preferred shares may be issued from time to time, in one or more series, as authorized by the Board of Trustees of Lexington. Prior to the issuance of shares of each series, the Board of Trustees is required by the Maryland REIT Law and the Declaration of Trust to fix for each series, subject to the provisions of the Declaration of Trust regarding excess shares, the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption, as are permitted by Maryland REIT Law. The Board of Trustees could authorize the issuance of preferred shares with terms and conditions that could have the effect of discouraging a takeover or other transaction that holders of common shares might believe to be in their best interests or in which holders of some, or a majority, of the common shares might receive a premium for their shares over the then current market price of such common shares. 142 152 TERMS OF CLASS A SENIOR CUMULATIVE CONVERTIBLE PREFERRED SHARES The convertible preferred shares, which are convertible at any time at the option of the holder into common shares on a one-for-one basis at $12.50 per share, subject to adjustment, are entitled to quarterly distributions equal to the greater of: (a) $0.295 per share; or (b) the product of 1.05 multiplied by the per share quarterly distribution on common shares. The convertible preferred shares may be redeemed by Lexington after December 31, 2001 at a 6% premium over the liquidation preference of $12.50 per share, plus accrued and unpaid dividends, with such premium declining to zero on or after December 31, 2011. Each convertible preferred share is entitled to one vote and holders are entitled to vote on all matters submitted to a vote of holders of outstanding common shares. Lexington additionally has entered into agreements with Five Arrows, providing, among other things, for demand and piggyback registration rights with respect to such shares and the right to designate a member or members of the Board of Trustees of Lexington. Five Arrows' designee, John D. McGurk, is currently serving as a member of Lexington's Board of Trustees. ANTI-TAKEOVER PROVISIONS OF MARYLAND LAW The Maryland REIT Law contains provisions that may be deemed to have an anti-takeover effect and that may delay, defer or prevent a change in control of Lexington or other transaction that a Lexington shareholder might consider in its best interest, including a transaction that might result in a premium over the market price for the common shares. Maryland law provides that a Maryland corporation may not engage in any "business combination" with any "interested shareholder." An "interested shareholder" is defined, in essence, as any person owning beneficially more than 10% of the outstanding voting stock of a Maryland corporation. Unless an exemption applies, Lexington may not engage in any business combination with an interested shareholder for a period of five years after the interested shareholder became an interested shareholder, and after that may not engage in a business combination unless it is recommended by the Board of Trustees and approved by the affirmative vote of at least (1) 80% of the votes entitled to be cast by the holders of all outstanding voting stock of Lexington, and (2) 66 2/3% of the votes entitled to be cast by all holders of outstanding shares of voting stock other than voting stock held by the interested shareholder. The voting requirements do not apply at any time to business combinations with an interested shareholder or its affiliates if approved by the Board of Trustees of Lexington prior to the time the interested shareholder first became an interested shareholder. Additionally, if the business combination involves the receipt of consideration by the shareholders in exchange for Lexington common shares, the voting requirements do not apply if certain "fair price" conditions are met. Maryland law also provides for the elimination of the voting rights of any person who makes a control share acquisition except to the extent that the acquisition is exempt or is approved by at least 66 2/3% of all votes entitled to be cast on the matter, excluding shares of capital stock owned by the acquirer or by officers or trustees who are employees of the acquirer. A control share acquisition is the direct or indirect acquisition by any person of ownership of, or the power to direct the exercise of voting power with respect to, shares of voting stock that would, if aggregated with all other voting stock owned by a person, entitle that person to exercise voting power in electing trustees within one of the following ranges of voting power: (1) 10% or more but less than 33 1/3%; (2) 33 1/3% or more but less than a majority; or (3) a majority of voting power. A person who has made or proposes to make a control share acquisition, upon satisfaction of specific conditions including an undertaking to pay expenses, may compel the Board of Trustees to call a special meeting of shareholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, Lexington may itself present the question at any shareholders meeting. If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as permitted by the statute, then, subject to certain conditions and limitations, Lexington may redeem any or all of the control shares, except those for which voting rights have previously been approved, for fair value determined, without regard to voting rights, as of the date of the last control share acquisition or of any meeting of shareholders at which the voting rights of these shares are considered and not approved. If voting rights for control shares are 143 153 approved at a shareholders meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, all other shareholders may exercise appraisal rights. The fair value of the stock as determined for purposes of appraisal rights may not be less than the highest price per share paid in the control share acquisition, and certain limitations and restrictions otherwise applicable to the exercise of dissenters' rights do not apply in the context of a control share acquisition. The control share acquisition statute does not apply to stock acquired in a merger, consolidation or share exchange if Lexington is a party to the transaction, or to acquisitions approved or exempted by the Declaration of Trust of Lexington. These provisions could adversely affect the market price of the common shares. TRANSFER AGENT The transfer agent and registrar for the common shares is Mellon Investor Services LLC. REAL ESTATE PORTFOLIO As of June 30, 2001, Lexington owned or had interests in approximately 13.1 million square feet of rentable space in 73 office, industrial and retail properties. Lexington's properties were, as of June 30, 2001, 100% leased. The number of properties, historical revenues, percentage of rental revenues for the past twelve months, square footage and square footage mix of Lexington's portfolio is as follows:
HISTORICAL PERCENTAGE OF SQUARE NUMBER OF REVENUES HISTORICAL FOOTAGE PERCENT OF TYPE OF PROPERTY PROPERTIES ($000'S) REVENUE(1) (000'S) SQUARE FOOTAGE ---------------- ---------- ---------- ------------- ------- -------------- Office........................ 28 $52,095 59% 5,186 40% Industrial.................... 24 25,643 29% 6,400 49% Retail........................ 21 10,539 12% 1,536 11% -- ------- --- ------ --- Total....................... 73 $88,277 100% 13,122 100% == ======= === ====== ===
--------------- (1) Reflects Lexington's proportionate ownership interest in its joint venture investments. Lexington's properties are generally subject to triple net leases. In situations in which Lexington is responsible for roof and structural repairs, Lexington performs annual inspections of the properties. Lexington's properties in Palm Beach Gardens, Florida, Lake Mary, Florida and Fishers, Indiana are subject to leases in which Lexington is responsible for a portion of the real estate taxes, utilities and general maintenance. Lexington's tenants are diversified across a variety of industries, including banking, computer and software services, health and fitness, general purpose retailing, manufacturing, insurance and warehousing, and have a weighted average credit strength of investment grade quality. A substantial portion of Lexington's income consists of base rent under long-term leases. As of June 30, 2001, the average remaining term under Lexington's leases was approximately 7.8 years with 50 leases containing scheduled rent increases, 5 leases containing an increase based upon the Consumer Price Index and one lease containing a percentage rent clause. The remaining leases contain no rent increase provisions. Lexington has 11 properties accounting for $15.6 million of annualized rental revenue that are subject to long term ground leases where a third party owns and has leased the underlying land to Lexington. In each of these situations, the rental payments made by Lexington to the landowner are passed on to Lexington's tenant as a portion of the Tenant's rental payments to Lexington. At the end of these long-term ground leases, unless extended, the land, together with all improvements on the land, revert to the landowner. These ground leases, including renewal options, expire at various dates from 2028 through 2074. REAL ESTATE HOLDINGS The tables on the following pages sets forth certain information relating to Lexington's real property portfolio, including joint venture properties, as of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus ($000's except per 144 154 share data). All of the properties listed have been fully leased by tenants for the last five years, or since the date of purchase by Lexington or its joint venture entities if purchased within the last five years, with the exception of the Memphis, Tennessee property, which was not leased from February 1998 to October 1999, and the rental properties in Columbia, Maryland and Brownsville, Texas, which are currently vacant. 145 155 146 LEXINGTON CORPORATE PROPERTIES TRUST PROPERTY CHART
---------------------------------------------------------------------------------------------------------- LAND NET TENANT YEAR CONSTRUCTED/ AREA RENTABLE PROPERTY LOCATION (GUARANTOR) REDEVELOPED (ACRES) SQUARE FEET ---------------------------------------------------------------------------------------------------------- OFFICE ------------------------------ 3615 North 27th Avenue Bank One, Arizona, N.A. 1960 & 1979 10.26 179,280 Phoenix, AZ 1301 California Circle Stevens-Arnold, Inc. 1985 6.34 100,026 Milpitas, CA (BICC Public Ltd. Co.) 200 Southington Hartford Fire Insurance Co. 1983 12.40 153,364 Executive Boulevard South Southington, CT 19019 No. 59th Avenue Honeywell, Inc. 1985 51.79 252,300 Glendale, AZ 401 Elm Street Lockheed Martin Corp. 1960 & 1988 36.94 126,000 Marlborough, MA (Honeywell, Inc.) 12000 Tech Center Drive Kelsey-Hayes Company (Tech I) 1987 & 1988 5.72 80,230 Livonia, MI 2300 Litton Lane Fidelity Corporate 1987 24.00 81,744 Hebron, KY Real Estate, LLC(2) 2211 South 47th Street Avnet, Inc. 1997 11.33 176,402 Phoenix, AZ 160 Clairemont Avenue Allied Holdings, Inc. 1983 2.98 112,248 Decatur, GA ------------------------------ ----------------------------------------- BASE LEASE TERM AND ANNUAL RENTS PER NET RENTABLE RENEWAL PROPERTY LOCATION SQUARE FOOT OPTIONS ------------------------------ ----------------------------------------- OFFICE ------------------------------ 3615 North 27th Avenue 11/30/88-11/30/03 5 year(1) Phoenix, AZ 12/01/98-11/30/03: $10.60 1301 California Circle 12/10/85-12/10/05 5 year(9) Milpitas, CA 12/01/00-05/31/03: $25.56 06/01/03-12/10/05: $28.92 200 Southington 09/01/91-12/31/05 5 year(1) Executive Boulevard South 01/01/95-12/31/05: $14.12 Southington, CT 19019 No. 59th Avenue 07/16/86-07/15/06 5 year(2) Glendale, AZ 07/16/96-07/15/01: $7.50 07/16/01-07/15/06: $8.00 401 Elm Street 07/22/97-12/17/06 5 year(6) Marlborough, MA 07/22/97-12/17/01: $13.26 12/18/01-12/17/06: 75% of cumulative increase in CPI 12000 Tech Center Drive 05/01/97-04/30/07 5 year(2) Livonia, MI 05/01/99-04/30/02: $7.91 05/01/02-04/30/05: $8.75 05/01/05-04/30/07: $9.25 2300 Litton Lane 05/01/97-04/30/07 5 year(2) Hebron, KY 05/01/97-04/30/02: $9.50 05/01/02-04/30/07: $11.00 2211 South 47th Street 05/11/00-11/14/07 5 year(2) Phoenix, AZ 05/11/00-10/31/00: $12.11 11/01/00-10/31/03: $13.24 11/01/01-10/31/06: $14.47 11/01/06-11/14/07: $15.81 160 Clairemont Avenue 01/01/98-12/31/07 5 year(2) Decatur, GA 01/01/00-12/31/07: $13.05 Rent increases 2.75% annually
156 147
---------------------------------------------------------------------------------------------------------- LAND NET TENANT YEAR CONSTRUCTED/ AREA RENTABLE PROPERTY LOCATION (GUARANTOR) REDEVELOPED (ACRES) SQUARE FEET ---------------------------------------------------------------------------------------------------------- 13651 McLearen Road Boeing North American 1987 10.39 159,664 Herndon, VA Services, Inc. 2210 Enterprise Drive Fleet Mortgage Group, Inc. 1998 16.53 177,747 Florence, SC 295 Chipeta Way Northwest Pipeline Corp.(1) 1982 19.79 295,000 Salt Lake City, UT 421 Butler Farm Road Nextel Communications of the 2000 7.81 56,515 Hampton, VA Mid-Atlantic, Inc. 9950 Mayland Drive Circuit City Stores, Inc.(1) 1990 19.71 288,562 Richmond, VA ------------------------------ ----------------------------------------- BASE LEASE TERM AND ANNUAL RENTS PER NET RENTABLE RENEWAL PROPERTY LOCATION SQUARE FOOT OPTIONS ------------------------------ ----------------------------------------- 13651 McLearen Road 05/31/99-05/30/08 5 year(2) Herndon, VA 05/31/00-05/30/01: $13.74 05/31/01-05/30/02: $15.50 05/31/02-05/30/03: $15.89 05/31/03-05/30/04: $16.28 05/31/04-05/30/05: $16.69 05/31/05-05/30/06: $17.11 05/31/06-05/30/07: $17.54 05/31/07-05/30/08: $17.98 2210 Enterprise Drive 06/10/98-06/30/08 5 year(2) Florence, SC 06/10/98-06/30/03: $8.55 07/01/03-06/30/08: $9.84 295 Chipeta Way 10/01/82-09/30/09 9 year(1) Salt Lake City, UT 10/01/97-09/30/09: $29.06 10 year(1) subject to a CPI adjustment on a portion of the rent. 421 Butler Farm Road 01/15/00-01/14/10 5 year(2) Hampton, VA 01/15/00-01/14/01: $11.60 01/15/01-01/14/02: $11.83 01/15/02-01/14/03: $12.07 01/15/03-01/14/04: $12.31 01/15/04-01/14/05: $12.56 01/15/05-01/14/06: $12.81 01/15/06-01/14/07: $13.07 01/15/07-01/14/08: $13.33 01/15/08-01/14/09: $13.60 01/15/09-01/14/10: $13.87 9950 Mayland Drive 02/28/90-02/28/10 10 year(4) Richmond, VA 03/01/00-02/28/10: $9.91 5 year(1)
157 148
---------------------------------------------------------------------------------------------------------- LAND NET TENANT YEAR CONSTRUCTED/ AREA RENTABLE PROPERTY LOCATION (GUARANTOR) REDEVELOPED (ACRES) SQUARE FEET ---------------------------------------------------------------------------------------------------------- 10419 North 30th Street Time Customer Service, Inc. 1986 14.38 132,981 Tampa, FL (Time, Inc.) 4200 RCA Boulevard The Wackenhut Corp.(5) 1996 7.70 127,855 Palm Beach Gardens, FL 250 Rittenhouse Circle Jones Apparel Group, Inc.(4) 1982 15.63 255,019 Bristol, PA 180 Rittenhouse Circle Jones Apparel Group, Inc. 1998 4.73 96,000 Bristol, PA 250 Turnpike Road Honeywell Consumer Products 1984 9.83 57,698 Southborough, MA 1600 Viceroy Drive VarTec Telecom, Inc. 1986 8.17 249,452 Dallas, TX ------ ---------- OFFICE SUBTOTAL 296.43 3,158,087 ------ ---------- INDUSTRIAL ------------------------------ 6950 Greenwood Parkway Allegiance Healthcare Corp.(1) 1990 10.15 123,924 Bessemer, AL (Baxter International, Inc.) 567 South Riverside Drive Crown Cork & Seal Co., Inc. 1970 & 1976 5.80 146,000 Modesto, CA ------------------------------ ----------------------------------------- BASE LEASE TERM AND ANNUAL RENTS PER NET RENTABLE RENEWAL PROPERTY LOCATION SQUARE FOOT OPTIONS ------------------------------ ----------------------------------------- 10419 North 30th Street 04/01/87-07/31/10 5 year(2) Tampa, FL 08/01/00-07/31/01: $9.67 08/01/01-07/31/02: $9.94 08/01/02-07/31/03: $10.21 08/01/03-07/31/04: $10.49 08/01/04-07/31/05: $10.78 08/01/05-07/31/06: $11.07 08/01/06-07/31/07: $11.38 08/01/07-07/31/08: $11.69 08/01/08-07/31/09: $12.01 08/01/09-07/31/10: $12.34 4200 RCA Boulevard 02/15/96-02/28/11 5 year(3) Palm Beach Gardens, FL 12/01/97-02/28/11: $17.80 250 Rittenhouse Circle 03/26/98-03/25/13 5 year(2) Bristol, PA 03/26/98-03/26/03: $4.51 03/27/03-03/26/08: $4.96 03/27/08-03/25/13: $5.46 180 Rittenhouse Circle 08/01/98-07/31/13 None Bristol, PA 08/01/00-07/31/01: $8.49 08/01/01-07/31/13: Rent increases 3% per year 250 Turnpike Road 10/01/95-09/30/15 5 year(4) Southborough, MA 10/01/00-09/30/05: $7.49 Increase based upon CPI every five years 1600 Viceroy Drive 09/04/97-09/30/15 5 year(2) Dallas, TX 09/01/00-08/31/03: $12.81 09/01/03-08/31/07: $13.81 09/01/07-09/30/15: $14.81 INDUSTRIAL ------------------------------ 6950 Greenwood Parkway 09/01/91-09/01/01 5 year(2) Bessemer, AL 09/01/91-09/01/01: $3.81 567 South Riverside Drive 09/26/86-09/25/01 5 year(1) Modesto, CA 09/26/96-09/25/01: $2.04
158 149
---------------------------------------------------------------------------------------------------------- LAND NET TENANT YEAR CONSTRUCTED/ AREA RENTABLE PROPERTY LOCATION (GUARANTOR) REDEVELOPED (ACRES) SQUARE FEET ---------------------------------------------------------------------------------------------------------- 109 Stevens Street Unisource Worldwide, Inc. 1958 & 1969 6.97 168,800 Jacksonville, FL 222 Tappan Drive North The Gerstenslager Company 1970 26.57 296,720 Mansfield, OH (Worthington Industries) 904 Industrial Road Tenneco Automotive Operating 1968 & 1972 20.00 195,640 Marshall, MI Company, Inc. 1601 Pratt Avenue Tenneco Automotive Operating 1979 8.26 53,600 Marshall, MI Company, Inc. 4425 Purks Road Lear Technologies, LLC 1989 & 1998 12.00 183,717 Auburn Hills, MI (Lear Corporation) (General Motors Corp.) 245 Salem Church Road Exel Logistics Inc. 1985 12.52 252,000 Mechanicsburg, PA (NFC plc) 6 Doughton Road Exel Logistics Inc. 1989 24.38 330,000 New Kingstown, PA (NFC plc) 34 East Main Street Exel Logistics Inc. 1981 9.66 179,200 New Kingstown, PA (NFC plc) 450 Stern Street Johnson Controls, Inc. 1996 20.10 111,160 Oberlin, OH 12025 Tech Center Drive Kelsey-Hayes Company 1987 & 1988 9.18 100,000 Livonia, MI (Tech II) One Spicer Drive Dana Corp. 1983 & 1985 20.95 148,000 Gordonsville, TN ------------------------------ ----------------------------------------- BASE LEASE TERM AND ANNUAL RENTS PER NET RENTABLE RENEWAL PROPERTY LOCATION SQUARE FOOT OPTIONS ------------------------------ ----------------------------------------- 109 Stevens Street 10/01/87-09/30/02 None Jacksonville, FL 10/01/97-09/30/02: $2.25 222 Tappan Drive North 10/01/99-05/31/05 5 year(3) Mansfield, OH 10/01/99-05/31/05: $2.27 904 Industrial Road 08/18/87-08/17/05 None Marshall, MI 08/18/00-08/17/03: $3.00 08/18/03-08/17/05: $3.10 1601 Pratt Avenue 08/18/87-08/17/05 None Marshall, MI 08/18/00-08/17/03: $3.00 08/18/03-08/17/05: $3.10 4425 Purks Road 07/23/98-07/22/06 None Auburn Hills, MI 07/23/98-07/22/02: $7.21 07/23/02-07/22/06: $7.63 245 Salem Church Road 11/15/91-11/30/06 5 year(2) Mechanicsburg, PA 12/01/00-11/30/03: $4.01 12/01/03-11/30/06: $4.38 6 Doughton Road 11/15/91-11/30/06 5 year(2) New Kingstown, PA 12/01/00-11/30/03: $4.12 12/01/03-11/30/06: 34 East Main Street 11/15/91-11/30/06 5 year(2) New Kingstown, PA 12/01/00-11/30/03: $3.68 12/01/03-11/30/06: $4.02 450 Stern Street 12/23/96-12/22/06 5 year(2) Oberlin, OH 12/23/00-12/22/01: $5.27 Annual increase of 3x CPI, but not more than 4.5% 12025 Tech Center Drive 05/01/97-04/30/07 5 year(2) Livonia, MI 05/01/99-04/30/02: $9.16 05/01/02-04/30/05: $9.75 05/01/05-04/30/07: $10.25 One Spicer Drive 01/01/84-08/31/07 5 year(2) Gordonsville, TN 08/01/99-07/31/02: $2.26 4 year, 08/01/02-07/31/05: $2.33 11 months(1) 08/01/05-08/31/07: $2.40
159 150
---------------------------------------------------------------------------------------------------------- LAND NET TENANT YEAR CONSTRUCTED/ AREA RENTABLE PROPERTY LOCATION (GUARANTOR) REDEVELOPED (ACRES) SQUARE FEET ---------------------------------------------------------------------------------------------------------- 541 Perkins Jones Road Kmart Corp. 1982 103.00 1,700,000 Warren, OH 3350 Miac Cove Road Mimeo.com, Inc.(3) 1987 10.92 141,359 Memphis, TN 3102 Queen Palm Drive Time Customer Service, Inc. 1986 15.02 229,605 Tampa, FL (Time, Inc.) 6345 Brackbill Boulevard Exel Logistics, Inc. 1985 & 1991 29.01 507,000 Mechanicsburg, PA (NFC plc) 2280 Northeast Drive Ryder Integrated Logistics, 1996 & 1997 25.70 276,480 Waterloo, IA Inc. (Ryder Systems, Inc.) 3501 West Avenue H Michaels Stores, Inc. 1998 37.18 431,250 Lancaster, CA ------------------------------ ----------------------------------------- BASE LEASE TERM AND ANNUAL RENTS PER NET RENTABLE RENEWAL PROPERTY LOCATION SQUARE FOOT OPTIONS ------------------------------ ----------------------------------------- 541 Perkins Jones Road 10/01/82-09/30/07 5 year(10) Warren, OH 10/01/98-09/30/02: $4.95 10/01/02-09/30/07: $5.51 3350 Miac Cove Road 11/01/99-10/31/09 None Memphis, TN 11/01/99-10/31/02: $5.00 11/01/02-10/31/04: $5.00 11/01/04-10/31/09: $5.50 3102 Queen Palm Drive 08/01/87-07/31/10 5 year(2) Tampa, FL 08/01/00-07/31/01: $3.90 08/01/01-07/31/02: $4.01 08/01/02-07/31/03: $4.12 08/01/03-07/31/04: $4.23 08/01/04-07/31/05: $4.35 08/01/05-07/31/06: $4.47 08/01/06-07/31/07: $4.59 08/01/07-07/31/08: $4.72 08/01/08-07/31/09: $4.85 08/01/09-07/31/10: $4.98 6345 Brackbill Boulevard 10/29/90-03/19/12 10 year(2) Mechanicsburg, PA 3/20/97-03/19/02: $3.49 3/20/02-03/19/07: $4.02 3/20/07-03/19/12: greater of $4.62 or fair market rent as specified in lease 2280 Northeast Drive 08/01/97-07/31/12 5 year(3) Waterloo, IA 08/01/97-07/31/02: $3.22 08/01/02-07/31/07: $3.61 08/01/07-07/31/12: $4.04 3501 West Avenue H 06/19/98-06/18/13 5 year(3) Lancaster, CA 06/19/98-06/18/03: $3.24 06/19/03-06/18/08: $3.31 06/19/08-06/18/13: $3.39
160 151
---------------------------------------------------------------------------------------------------------- LAND NET TENANT YEAR CONSTRUCTED/ AREA RENTABLE PROPERTY LOCATION (GUARANTOR) REDEVELOPED (ACRES) SQUARE FEET ---------------------------------------------------------------------------------------------------------- 7150 Exchequer Drive Corporate Express Office 1998 5.23 65,043 Baton Rouge, LA Products, Inc. (CEX Holdings, Inc.) 324 Industrial Park Road SKF USA, Inc. 1996 21.13 72,868 Franklin, NC ------ ---------- INDUSTRIAL SUBTOTAL 433.73 5,712,366 ------ ---------- RETAIL ------------------------------ 4450 California Street Mervyn's 1976 11.00 122,000 Bakersfield, CA (Dayton Hudson Corp.) 24100 Laguna Hills Mall Federated Department Stores, 1974 11.00 160,000 Laguna Hills, CA Inc.(1) 7111 Westlake Terrace The Home Depot USA, Inc.(1) 1980 7.61 95,000 Bethesda, MD 6910 S. Memorial Highway Toys "R" Us, Inc.(1) 1981 4.44 43,123 Tulsa, OK 12535 SE 82nd Avenue Toys "R" Us, Inc.(1) 1981 5.85 42,842 Clackamas, OR 18601 Alderwood Mall Blvd. Toys "R" Us, Inc.(1) 1981 3.64 43,105 Lynnwood, WA 5917 S. La Grange Road Bally Total Fitness Corp. 1987 2.73 25,250 Countryside, IL 1160 White Horse Road Physical Fitness Centers of 1987 2.87 31,750 Voorhees, NJ Philadelphia, Inc. (Bally Total Fitness Corp.) ------------------------------ ----------------------------------------- BASE LEASE TERM AND ANNUAL RENTS PER NET RENTABLE RENEWAL PROPERTY LOCATION SQUARE FOOT OPTIONS ------------------------------ ----------------------------------------- 7150 Exchequer Drive 11/01/98-10/31/13 5 year(3) Baton Rouge, LA 11/01/98-10/31/01: $5.02 11/01/01-10/31/04: $5.32 11/01/04-10/31/07: $5.64 11/01/07-10/31/10: $5.98 11/01/10-10/31/13: $6.34 324 Industrial Park Road 12/23/96-12/31/14 10 year(3) Franklin, NC 01/01/00-12/31/02: $4.67 01/01/03-12/31/14: CPI every 3 years RETAIL ------------------------------ 4450 California Street 02/23/77-12/31/02 5 year(5) Bakersfield, CA 01/01/78-12/31/02: $3.34 24100 Laguna Hills Mall 02/01/76-01/31/06 8 year(1) Laguna Hills, CA 02/01/80-01/31/06: $4.23 15 year(2) 6 year(1) 7111 Westlake Terrace 05/01/81-04/30/06 10 year(1) Bethesda, MD 05/01/96-04/30/06: $8.13 5 year(3) 6910 S. Memorial Highway 06/01/81-05/31/06 5 year(5) Tulsa, OK 02/01/98-05/31/01: $8.26 06/01/01-05/31/06: $8.40 12535 SE 82nd Avenue 06/01/81-05/31/06 5 year(5) Clackamas, OR 02/01/98-05/31/01: $9.74 06/01/01-05/31/06: $9.91 18601 Alderwood Mall Blvd. 06/01/81-05/31/06 5 year(5) Lynnwood, WA 02/01/98-05/31/01: $9.03 06/01/01-05/31/06: $9.18 5917 S. La Grange Road 07/13/87-07/12/07 5 year(2) Countryside, IL 07/13/97-07/12/02: $22.73 07/13/02-07/12/07: $26.14 1160 White Horse Road 07/14/87-07/13/07 5 year(2) Voorhees, NJ 07/14/97-07/13/02: $22.45 07/14/02-07/13/07: $25.82
161 152
---------------------------------------------------------------------------------------------------------- LAND NET TENANT YEAR CONSTRUCTED/ AREA RENTABLE PROPERTY LOCATION (GUARANTOR) REDEVELOPED (ACRES) SQUARE FEET ---------------------------------------------------------------------------------------------------------- 5801 Bridge Street Champion Fitness IV, Inc. 1977 & 1987 3.66 24,990 DeWitt, NY (Bally Total Fitness Corp.) 2655 Shasta Way Fred Meyer, Inc. 1986 13.90 178,204 Klamath Falls, OR 7272 55th Street Circuit City Stores, Inc. 1988 3.93 45,308 Sacramento, CA 6405 South Virginia St. Comp USA, Inc. 1988 2.72 31,400 Reno, NV 5055 West Sahara Avenue Circuit City Stores, Inc. 1988 2.57 36,053 Las Vegas, NV 4733 Hills & Dales Road Scandinavian Health Spa, Inc. 1987 3.32 37,214 Canton, OH (Bally Total Fitness Holding Corp.) Fort Street Mall Liberty House, Inc.(1) 1980 1.22 85,610 King St. Honolulu, HI 7055 Highway 85 South Wal-Mart Stores, Inc. 1985 8.61 81,911 Riverdale, GA Highway 101 Fred Meyer, Inc. 1986 8.81 118,179 Newport, OR 9580 Livingston Road GFS Realty, Inc. 1976 10.60 107,337 Oxon Hill, MD (Giant Food, Inc.) ------------------------------ ----------------------------------------- BASE LEASE TERM AND ANNUAL RENTS PER NET RENTABLE RENEWAL PROPERTY LOCATION SQUARE FOOT OPTIONS ------------------------------ ----------------------------------------- 5801 Bridge Street 08/19/87-08/18/07 5 year(2) DeWitt, NY 08/19/97-08/18/02: $17.78 08/19/02-08/18/07: $20.45 2655 Shasta Way 03/10/88-03/31/08 10 year(3) Klamath Falls, OR 03/10/88-03/31/08: $5.66 7272 55th Street 10/28/88-10/27/08 10 year(3) Sacramento, CA 10/28/98-10/27/03: $8.54 10/28/03-10/27/08: $9.30 6405 South Virginia St. 12/16/88-12/15/08 10 year(3) Reno, NV 12/16/98-12/15/03: $10.65 12/16/03-12/15/08: $11.60 5055 West Sahara Avenue 12/16/88-12/15/08 10 year(3) Las Vegas, NV 12/16/98-12/15/03: $7.93 12/16/03-12/15/08: $8.64 4733 Hills & Dales Road 01/01/89-12/31/08 5 year(2) Canton, OH 01/01/01-12/31/01: $17.97 01/01/02-12/31/08: Rent increases 2.2% annually Fort Street Mall 10/01/80-09/30/09 9 year, King St. 10/01/95-09/30/05: $11.25 7 months(1) Honolulu, HI 10/01/05-09/30/09: $11.56 2 year(1) 5 year(3) 7055 Highway 85 South 12/04/85-01/31/11 5 year(5) Riverdale, GA 12/04/85-01/31/11: $3.29 Highway 101 06/01/86-05/31/11 5 year(3) Newport, OR 06/01/86-05/31/11: $6.99 plus .5% of gross sales over $20 million 9580 Livingston Road 01/03/77-02/28/14 5 year(4) Oxon Hill, MD 03/01/77-02/29/04: $3.80 03/01/04-02/28/14: $1.91
162 153
---------------------------------------------------------------------------------------------------------- LAND NET TENANT YEAR CONSTRUCTED/ AREA RENTABLE PROPERTY LOCATION (GUARANTOR) REDEVELOPED (ACRES) SQUARE FEET ---------------------------------------------------------------------------------------------------------- Rockshire Village Center GFS Realty, Inc.(1) 1977 7.32 51,682 West Ritchie Parkway (Giant Food, Inc.) Rockville, MD 6475 Dobbin Road VACANT 1983 2.50 60,000 Columbia, MD Amigoland Shopping Center VACANT(1) 1973 7.61 115,000 Mexico St. & Palm Blvd. Brownsville, TX ------ ---------- RETAIL SUBTOTAL 125.91 1,535,958 ------ ---------- TOTAL 856.07 10,406,411 ====== ========== ------------------------------ ----------------------------------------- BASE LEASE TERM AND ANNUAL RENTS PER NET RENTABLE RENEWAL PROPERTY LOCATION SQUARE FOOT OPTIONS ------------------------------ ----------------------------------------- Rockshire Village Center 01/01/78-04/30/17 10 year(2) West Ritchie Parkway 01/01/78-02/28/05: $4.33 Rockville, MD 03/01/05-04/30/17: $2.23 6475 Dobbin Road Columbia, MD Amigoland Shopping Center Mexico St. & Palm Blvd. Brownsville, TX
--------------- (1) Lexington holds leasehold interest in the land. The leases, including renewal options, expire at various dates through 2074. (2) Tenant can cancel lease on April 30, 2004 with 270 days notice and a payment of $899. (3) The tenant leases 35,000 square feet. (4) Tenant can cancel lease on March 26, 2008 with 12 months notice and a payment of $1,392. (5) The property contains three buildings with four additional tenants that occupy 31,737 square feet out of the total of 127,855. 163 154 LEXINGTON CORPORATE PROPERTIES TRUST JOINT VENTURE PROPERTY CHART
------------------------------------------------------------------------------------------------------------ LAND NET TENANT PROPERTY TYPE/ AREA RENTABLE PROPERTY LOCATION (GUARANTOR) YEAR CONSTRUCTED (ACRES) SQUARE FEET ------------------------------------------------------------------------------------------------------------ OFFICE ------------------------------- 14040 Park Center Road NEC America, Inc.(1) 1987 13.30 108,000 Herndon, VA 15375 Memorial Drive Vastar Resources, Inc.(1) 1985 21.77 327,325 Houston, TX 550 International Parkway First USA Management Services, 1999 12.80 125,920 Lake Mary, FL Inc.(1)(4)(6) 600 International Parkway First USA Management Services, 1997 13.30 125,155 Lake Mary, FL Inc.(1)(4)(6) ------------------------------- --------------------------------------- BASE LEASE TERM AND ANNUAL RENTS PER NET RENTABLE RENEWAL PROPERTY LOCATION SQUARE FOOT OPTIONS ------------------------------- --------------------------------------- OFFICE ------------------------------- 14040 Park Center Road 08/01/99-07/31/09 5 year(2) Herndon, VA 08/01/00-07/31/01: $16.32 08/01/01-07/31/09 Rent increases 2.0% annually and by $216,000 in year six 15375 Memorial Drive 09/16/99-09/15/09 5 year(4) Houston, TX 09/16/99-09/15/02: $10.00 09/16/02-09/15/06: $10.50 09/16/06-09/15/09: $11.00 550 International Parkway 10/01/99-09/30/09 5 year(2) Lake Mary, FL 10/01/00-09/30/01: $20.60 10/01/01-09/30/02: $21.05 10/01/02-09/30/03: $21.50 10/01/03-09/30/04: $21.95 10/01/04-09/30/05: $22.40 10/01/05-09/30/06: $22.85 10/01/06-09/30/07: $23.30 10/01/07-09/30/08: $23.75 10/01/08-09/30/09: $24.20 600 International Parkway 10/1/99-09/30/09 5 year(2) Lake Mary, FL 10/01/00-09/30/01: $21.55 10/01/01-09/30/02: $22.00 10/01/02-09/30/03: $22.45 10/01/03-09/30/04: $22.90 10/01/04-09/30/05: $23.35 10/01/05-09/30/06: $23.80 10/01/06-09/30/07: $24.25 10/01/07-09/30/08: $24.70 10/01/08-09/30/09: $25.15
164 155
------------------------------------------------------------------------------------------------------------ LAND NET TENANT PROPERTY TYPE/ AREA RENTABLE PROPERTY LOCATION (GUARANTOR) YEAR CONSTRUCTED (ACRES) SQUARE FEET ------------------------------------------------------------------------------------------------------------ 17 Technology Circle Blue Cross/Blue Shield of South 1999 42.46 348,410 Columbia, SC Carolina(2) 10300 Kincaid Drive Bank One Indiana, N.A.(1)(5) 1999 13.30 193,000 Fishers, IN 6555 Sierra Drive True North Communications, 1999 9.98 247,254 Irving, TX Inc.(1) 389-399 Interpace Highway Avantis Pharmaceuticals, Inc. 2000 14.00 340,240 Morris Corporate Center IV (Pharma Holdings GmbH)(1) Parsippany, NJ 2000 Eastman Drive Structural Dynamic Research 1991 12.36 212,836 Milford, OH Corp.(1) ------ --------- OFFICE SUBTOTAL 153.27 2,028,140 ------ --------- ------------------------------- --------------------------------------- BASE LEASE TERM AND ANNUAL RENTS PER NET RENTABLE RENEWAL PROPERTY LOCATION SQUARE FOOT OPTIONS ------------------------------- --------------------------------------- 17 Technology Circle 10/01/99-09/30/09 5 year(2) Columbia, SC 10/01/99-09/30/04: $13.10 10/01/04-09/30/09: $15.07 10300 Kincaid Drive 03/29/00-10/31/09 5 year(2) Fishers, IN 03/29/00-10/31/04: $16.50 11/01/04-10/31/09: $17.52 6555 Sierra Drive 02/01/00-01/31/10 5 year(2) Irving, TX 02/01/00-01/31/05: $16.21 02/01/05-01/31/10: $18.05 389-399 Interpace Highway 06/01/00-01/31/10 5 years(2) Morris Corporate Center IV 06/01/00-01/31/05: $23.06 Parsippany, NJ 02/01/05-01/31/10: $26.49 2000 Eastman Drive 05/01/91-04/30/11 5 year(3) Milford, OH 05/01/00-04/30/01: $11.80 05/01/01-04/30/02: $12.05 05/01/02-04/30/03: $12.31 05/01/03-04/30/04: $12.57 05/01/04-04/30/05: $12.84 05/01/05-04/30/06: $13.11 05/01/06-04/30/07: $13.39 05/01/07-04/30/08: $13.73 05/01/08-04/30/09: $13.97 05/01/09-04/30/10: $14.27 05/01/10-04/30/11: $14.57
165 156
------------------------------------------------------------------------------------------------------------ LAND NET TENANT PROPERTY TYPE/ AREA RENTABLE PROPERTY LOCATION (GUARANTOR) YEAR CONSTRUCTED (ACRES) SQUARE FEET ------------------------------------------------------------------------------------------------------------ INDUSTRIAL ------------------------------- 3600 Southgate Drive Sygma Network, Inc.(3) 2000 19.00 149,500 Danville, IL (Sysco Corporation) 291 Park Center Drive Kraft Foods North America, 2001 25.50 344,700 Winchester, VA Inc.(1) 590 Ecology Lane Owens Corning(3) 2001 39.52 193,891 Chester, SC ------ --------- INDUSTRIAL SUBTOTAL 84.02 688,091 ------ --------- TOTAL 237.29 2,716,231 ====== ========= ------------------------------- --------------------------------------- BASE LEASE TERM AND ANNUAL RENTS PER NET RENTABLE RENEWAL PROPERTY LOCATION SQUARE FOOT OPTIONS ------------------------------- --------------------------------------- INDUSTRIAL ------------------------------- 3600 Southgate Drive 10/15/00-10/31/15: $6.24 5 years(2) Danville, IL 291 Park Center Drive 06/01/01-05/31/11 5 years(2) Winchester, VA 06/01/01-05/31/06: $4.12 06/01/06-05/31/11: $4.67 590 Ecology Lane 01/01/01-01/01/21: $7.76 5 years(2) Chester, SC
--------------- (1) Lexington has a 33% ownership interest in this property. (2) Lexington has a 40% ownership interest in this property. (3) Lexington has a 99% ownership interest in this property. (4) The joint venture has an operating expense stop at $1,264. (5) The joint venture has an operating expense stop at $768. (6) The joint venture operates this investment as a single property. 166 INSURANCE Lexington requires each of its tenants to carry, and may supplement that coverage with additional insurance if deemed necessary, comprehensive liability, fire, extended coverage and business interruption insurance on its properties, with policy specifications and insured limits customarily carried for similar properties. However, with respect to the properties where the leases do not provide for abatement of rent under any circumstances, we generally do not maintain rent loss insurance. In addition, there are certain types of losses, such as losses due to wars, earthquakes or acts of God, that generally are not insured because they are either uninsurable or not economically feasible to insure. Should an uninsured loss or a loss in excess of insured limits occur, Lexington could lose capital invested in a property, as well as the anticipated future revenues from such property, while remaining obligated for any mortgage indebtedness or other financial obligations related to such property. Any such loss would adversely affect Lexington's financial condition. Lexington believes that its properties are adequately insured in accordance with industry standards. LEGAL PROCEEDINGS Lexington is not presently involved in any litigation nor to its knowledge is any litigation threatened against Lexington or its subsidiaries that, in management's opinion, would result in any material adverse effect on Lexington's ownership, financial condition, management, or the operation of Lexington's properties. 157 167 INFORMATION ABOUT THE NET PARTNERSHIPS BUSINESS OF NET 1 Net 1 is a limited partnership formed on August 25, 1987 under the Revised Uniform Limited Partnership Act of the State of Delaware for the purpose of investing primarily in existing commercial properties that are triple net leased to corporations or other entities. The partnership agreement was amended and restated on September 30, 1994 to enable Net 1 to make additional real estate investments. The general partner of Net 1 is Lepercq Net 1 L.P., a Delaware limited partnership whose general partner is Lepercq Net 1, Inc. The LCP Group, L.P. is the sole shareholder of Lepercq Net 1, Inc. E. Robert Roskind, the chairman of the Board of Trustees and Co-Chief Executive Officer of Lexington, is the sole shareholder of the Third Lero Corp, which, in turn, is the general partner of the LCP Group, L.P. Net 1 commenced an offering to the public of 50,000 limited partnership units at $1,000 per unit on November 20, 1987. On January 17, 1989, Net 1 held the final admission of limited partners, and the offering was terminated after a total of 31,001 units had been sold, equaling $31.001 million in capital contributions. On September 30, 1990, Net 1 repurchased 229 units for an aggregate purchase price of $169,930. No units have been repurchased since 1990. Net 1 has invested all of the proceeds from the original offering. Net 1 has only made distributions to limited partners from operating cash flows and not from capital transactions. In 1994, the limited partners of Net 1 approved an amendment to its partnership agreement which permitted Net 1 to invest in new properties, reinvest cash from operations and sale and refinancing proceeds, and use additional leverage to finance its operations. Since the date of the amendment, Net 1 has acquired six properties, including three properties that it acquired from Lexington or its affiliates. Net 1 invests in net leased real properties (or interests therein) located throughout the United States, which offer the potential for: - preservation and protection of the capital of the limited partners of Net 1; - providing increasing cash available for distributions; - providing tax benefits so that a portion of the cash distributions is sheltered from current income taxation; and - appreciation in value of Net 1's investments. For the six months ended June 30, 2001, Net 1's properties generated aggregate gross revenues of approximately $2.9 million. Net 1 makes investments in various types of commercial real properties and interests therein. These investments include office buildings, retail stores, warehouses, distribution centers and fitness centers. Investments are not restricted as to specific geographic areas, although all of Net 1's investments are made within the United States. Net 1 attempts to negotiate provisions in its leases which will provide that all the risks of such matters as fitness for use or purpose, design or condition, quality of material or workmanship, latent or patent defects, Net 1's title, value, compliance with specifications, location, use, merchantability, quality, description, durability or operation are borne by the lessees. However, competitive conditions may require that Net 1 accept certain risks, in which case it will attempt to arrange adequate insurance, if available, at a reasonable cost. 158 168 Each of the following tenants/guarantors account for greater than 10% of revenues as of June 30, 2001:
PERCENT OF TENANT REVENUES ------ ---------- Wal-Mart Stores, Inc........................................ 34% Bull HN Information Systems, Inc............................ 18% Cymer, Inc.................................................. 15% Corporate Express Office Products, Inc...................... 14% Bally Total Fitness Holding Corp............................ 13%
Each of the above tenants, with the exception of Corporate Express Office Products, Inc. and Bull HN Information Systems, Inc., is a publicly registered company subject to the informational requirements of the Securities Exchange Act of 1934 which require them to file reports and other information with the Securities and Exchange Commission. You can inspect and copy reports, proxy statements and financial and other information filed by these tenants at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W. You can obtain copies of this material by mail from the Public Reference Section of the SEC at 450 West Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You can also obtain such reports, proxy statements and financial and other information from the web site that the SEC maintains at http://www.sec.gov. Reports, proxy statements and financial and other information concerning these tenants may also be obtained electronically through a variety of databases, including, among others, the SEC's Electronic Data Gathering and Retrieval ("EDGAR") program, Knight-Ridder Information Inc., Federal Filing/Dow Jones and Lexis/Nexis. The most recent summarized financial information for each of the non-publicly registered tenants as of and for the periods indicated is as follows ($000):
BULL HN INFORMATION CORPORATE EXPRESS OFFICE SYSTEMS INC. PRODUCTS INC. (WHOLLY-OWNED SUBSIDIARY (WHOLLY-OWNED SUBSIDIARY OF OF BULL) BUHRMANNNV OF AMSTERDAM) YEAR ENDED DECEMBER 31, 2000 SIX MONTHS ENDED JUNE 30, 2001 ---------------------------- ------------------------------ Current assets..................... $1,359,852 $2,823,838 Non-current assets................. 539,994 3,538,292 Current liabilities................ 1,227,096 1,699,060 Non-current liabilities............ 589,329 2,390,577 Redeemable preferred stock......... -- -- Minority interest.................. 6,279 28,884 Net sales.......................... 2,910,000 4,347,895 Gross profit....................... 684,000 998,198 Income (loss) -- continuing operations....................... (92,000) 36,530 Net income (loss).................. (218,000) 11,044
Net 1 attempts to maintain a working capital cash reserve in an amount equal to 3% of the gross proceeds of its initial offering, which is anticipated to be sufficient to satisfy liquidity requirements. Liquidity of Net 1 could be adversely affected by a number of unanticipated factors, such as costs relating to the vacancy of properties, the unanticipated inability of tenants to meet their obligations to Net 1 and greater than anticipated capital expenditures. To the extent that such working capital reserves are insufficient to satisfy the cash requirements of Net 1, additional funds may be obtained either through short-term or permanent loans or by reducing distributions to limited partners. Net 1 operates in one industry segment, investment in net leased real property throughout the United States. 159 169 BUSINESS OF NET 2 Net 2 is a limited partnership formed on November 9, 1988 under the Revised Uniform Limited Partnership Act of the State of Delaware for the purpose of investing primarily in existing commercial properties that are triple net leased to corporations or other entities. The partnership agreement was restated and amended on June 13, 1994 to enable Net 2 to make additional real estate investments. The general partner of Net 2 is Lepercq Net 2 L.P., a Delaware limited partnership whose general partner is Lepercq Net 2, Inc. The LCP Group, L.P. is the sole shareholder of Lepercq Net 2 Inc. E. Robert Roskind, the chairman of the Board of Trustees and Co-Chief Executive Officer of Lexington, is the sole shareholder of the Third Lero Corp, which, in turn, is the general partner of the LCP Group, L.P. Net 2 commenced an offering to the public of 500,000 limited partnership units at $100 per unit on January 10, 1989. On July 19, 1990, Net 2 held the final admission of limited partners, and the offering was terminated after a total of 477,417 units had been sold, equaling $47,741,700 in capital contributions. Net 2 returned a capital contribution of $25,000 (250 units) to a limited partner admitted in December 1989. No additional units have been returned or repurchased since 1990. Net 2 has invested all of the net proceeds from the original offering. Net 2 has only made distributions to limited partners from operating cash flows and not from capital transactions. In 1994, the limited partners of Net 2 approved an amendment to the partnership agreement which permitted Net 2 to invest in new properties, reinvest cash from operations and sale and refinancing proceeds, and use additional leverage to finance its operations. Since the date of the amendment, Net 2 has acquired 13 properties, including three properties that it acquired from Lexington or its affiliates, and sold two of those properties to Lexington. Net 2 invests in net leased real properties (or interests therein) located throughout the United States, which offer the potential for: - preservation and protection of the capital of the limited partners of Net 2; - providing increasing cash available for distributions; - providing tax benefits so that a portion of the cash distributions is sheltered from current income taxation; and - appreciation in value of Net 2's investments. For the six months ended June 30, 2001, Net 2's properties generated aggregate gross revenues of approximately $5.5 million. Net 2 makes investments in various types of commercial real properties or interests therein. These investments include office buildings, retail stores, warehouses, distribution centers and fitness centers. Investments are not restricted as to specific geographic areas, although all of the Net 2's investments are made within the United States. Net 2 attempts to negotiate provisions in its leases which will provide that all the risks of such matters as fitness for use or purpose, design or condition, quality of material or workmanship, latent or patent defects, Net 2's title, value, compliance with specifications, location, use, merchantability, quality, description, durability or operation are borne by the lessees. However, competitive conditions may require that Net 2 accept certain risks, in which case it will attempt to arrange adequate insurance, if available, at a reasonable cost. 160 170 Each of the following tenants/guarantors account for greater than 10% of revenues as of June 30, 2001:
PERCENT OF TENANT REVENUES ------ ---------- Associated Grocers of Florida, Inc.......................... 20% Hollywood Entertainment Corporation......................... 13% Nextel Communications, Inc.................................. 12% Wal-Mart Stores, Inc........................................ 15%
Each of the above tenants, with the exception of Associated Grocers of Florida, Inc., is a publicly registered company subject to the informational requirements of the Securities Exchange Act of 1934 which require them to file reports and other information with the Securities and Exchange Commission. You can inspect and copy reports, proxy statements and financial and other information filed by these tenants at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W. You can obtain copies of this material by mail from the Public Reference Section of the SEC at 450 West Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You can also obtain such reports, proxy statements and financial and other information from the web site that the SEC maintains at http://www.sec.gov. Reports, proxy statements and financial and other information concerning these tenants may also be obtained electronically through a variety of databases, including, among others, the SEC's Electronic Data Gathering and Retrieval ("EDGAR") program, Knight-Ridder Information Inc., Federal Filing/Dow Jones and Lexis/Nexis. Net 2 attempts to maintain a working capital cash reserve in an amount equal to 1.5% of the gross proceeds of the offering, which is anticipated to be sufficient to satisfy liquidity requirements. Liquidity of Net 2 could be adversely affected by a number of unanticipated factors, such as costs relating to the vacancy of properties, the unanticipated inability of tenants to meet their obligations to Net 2 and greater than anticipated capital expenditures. To the extent that such working capital reserves are insufficient to satisfy the cash requirements of Net 2, additional funds may be obtained through short-term or permanent loans or by reducing distributions to limited partners. Net 2 operates in one industry segment, investment in net leased real property throughout the United States. COMPETITION Net 1 and Net 2 have been in the net lease business since 1988, have established close relationships with a large number of major corporate tenants and maintain a broad network of contacts, including developers, brokers and lenders. Notwithstanding these relationships, there are numerous commercial developers, real estate companies, financial institutions and other investors with greater financial resources that compete with Net 1 and Net 2 in seeking properties for acquisition and tenants who will lease space in these properties. The Net Partnerships' competitors include other partnerships, pension funds, private companies, REITs and individuals. In addition, competition may also come from other partnerships which have been or may be formed by Lepercq Net 1 L.P., Lepercq Net 2 L.P., or their respective affiliates. INVESTMENT POLICIES The Net Partnerships' principal investment activity is the acquisition of a diversified portfolio of real estate assets. While the Net Partnerships generally hold their properties for long-term investment, a Net Partnership may dispose of a property if the general partners deem such disposition to be in its best interests. 161 171 FINANCING POLICIES The Net Partnerships are restricted in the amount and nature of borrowings as follows: Net 1 -- The general partner may, for the purpose of acquiring additional properties, obtain purchase money financing, and mortgage the additional property purchased with such financing up to a maximum amount of 75% of the purchase price of each additional property. Net 2 -- The general partner may, at any time, incur indebtedness to refinance loans entered into on behalf of the Net Partnership to refinance fees paid and expenses paid for services rendered in connection with the organization of the Net Partnership. The general partner may also cause the Net Partnership to incur indebtedness or mortgage properties of the Net Partnership in order to finance the acquisition of additional properties. In connection with such acquisitions, the general partner may obtain purchase money financing up to a maximum of 75% of the purchase price of each additional property. GENERAL PARTNERS The general partners of the Net Partnerships are entitled to receive: - a share of cash distributions when and as cash distributions are made to the limited partners; and - a share of taxable income or loss. For the six months ended June 30, 2001, cash distributions of $15,712 and $24,346 were made to the general partners of Net 1 and Net 2, respectively. The directors and executive officers of Lepercq Net 1, Inc. and Lepercq Net 2, Inc. receive no remuneration from the Net Partnerships. No person is known to the Net Partnerships to be the beneficial owner of more than 5% of the units of either Net Partnership. COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL PARTNERS The following information has been prepared to compare (a) the amounts of compensation paid and cash distributions made by the Net Partnerships to the general partners and their affiliates to (b) the amounts that would have been paid if the compensation and distribution structure which will be in effect after the Transaction had been in effect during the years presented below. Under the partnership agreements, the general partners of the Net Partnerships and their affiliates are entitled to receive fees in connection with managing the affairs of each Net Partnership. The partnership agreements also provide that the general partners are to be reimbursed for their expenses for services performed for each Net Partnership, such as legal, accounting, transfer agent, data processing and duplicating services. As holders of operating partnership units in Net 3, the general partners will receive distributions based upon their ownership of the operating partnership units. During the years ended December 31, 1998, 1999 and 2000 and the six months ended June 30, 2001, the aggregate amounts accrued or actually paid by the Net Partnerships to the general partners are shown below 162 172 under "Historical" and the estimated amounts of compensation that would have been paid had the Transaction been in effect for the years presented are shown below under "Pro Forma":
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED ------------------------------ JUNE 30, 1998 1999 2000 2001 -------- -------- -------- ---------- HISTORICAL: General Partner Distributions............. $ 80,000 $ 80,000 $ 80,000 $40,000 Asset Management Fees..................... $ 98,000 $129,000 $ 71,000 - -------- -------- -------- ------- Total Historical.......................... $178,000 $209,000 $151,000 $40,000 PRO FORMA: Cash Distributions on Units(1)(2)......... $148,278 $152,080 $154,614 $79,842
--------------- (1) Pro forma cash distributions are calculated as follows:
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED ------------------------------ JUNE 30, 1998 1999 2000 2001 -------- -------- -------- ---------- Class A units -- $650,000 at $15 per unit equals 43,333 units.... $ 50,700 $ 52,000 $ 52,866 $27,300 Operating partnership units issued to affiliates of Mr. Roskind for their interest in Lease Properties Management -- 83,400 units........................... $ 97,578 $100,080 $101,748 $52,542 -------- -------- -------- ------- $148,278 $152,080 $154,614 $79,842
Distributions per unit in 1998, 1999, 2000 and 2001 were $1.17, $1.20, $1.22 and $0.63, respectively. (2) As an officer of Lexington, Mr. Roskind received a salary of $250,000, $300,000 and $300,000 in 1998, 1999 and 2000, respectively, bonuses of $133,000, $158,000 and $302,297 in 1998, 1999 and 2000, respectively, options to purchase 100,000, 75,000 and 280,000 common shares in 1998, 1999 and 2000, respectively, and a restricted share award of $242,500 and $180,000 in 1999 and 2000, respectively. DIRECTORS AND EXECUTIVE OFFICERS OF THE NET PARTNERSHIPS The Net Partnerships are limited partnerships and have no directors or officers. The general partner of Net 1 is Lepercq Net 1 L.P., a Delaware limited partnership. Lepercq Net 1, Inc., a Delaware corporation, is the general partner of Lepercq Net 1 L.P. The directors and executive officers of Lepercq Net 1, Inc. are discussed below. The general partner of Net 2 is Lepercq Net 2 L.P., a Delaware limited partnership. Lepercq Net 2, Inc., a Delaware corporation, is the general partner of Lepercq Net 2 L.P. The directors and executive officers of Lepercq Net 2, Inc. are discussed below. The directors and executive officers of Lepercq Net 1, Inc. and Lepercq Net 2, Inc. are responsible for the management of each of the Net Partnership's businesses including, but not limited to, the acquisition, sale, financing or refinancing, or leasing of, or making major capital improvements to, the Net Partnership properties. 163 173 The same individuals hold the same director and executive officer positions for each of Lepercq Net 1, Inc. and Lepercq Net 2, Inc., and are as follows: E. Robert Roskind Age 56 E. Robert Roskind, the President and Secretary, has been associated with The LCP Group, L.P., a real estate advisory firm, since 1973 and has been Chairman of The LCP Group, L.P. since September 1976. He also serves as Chairman of the Board and Co-Chief Executive Officer of Lexington. Mr. Roskind is a graduate of the University of Pennsylvania and Columbia Law School, and has been a member of the New York Bar since 1970. Mr. Roskind is a director of Clarion CMBS Value Fund, Inc. Robert N. Albert Age 51 Robert N. Albert, Vice President and Treasurer, has been employed by The LCP Group, L.P. since 1997. He owned a retail furniture and antiques business for twenty-five years prior to joining The LCP Group, L.P. He is a graduate of the University of Louisville, where he received his bachelor's degree in Business Management. Denise E. DeBaun Age 50 Denise E. DeBaun, Vice President and Assistant Secretary, was associated with The LCP Group, L.P. from 1981 to 1997. She was a member of the marketing department from 1986 to 1990. Since 1997, she has served as an Executive Assistant of Lexington. Ms. DeBaun is a graduate of Hunter College of the City University of New York. Dianne R. Smith Age 54 Dianne R. Smith, Vice President and Assistant Secretary, has been associated with The LCP Group, L.P. since 1988 as its paralegal. Ms. Smith also serves as the paralegal to Lexington. Ms. Smith is a graduate of New York University where she received her Paralegal degree. Lisette Almedina Age 32 Lisette Almedina, Assistant Secretary, has been associated with The LCP Group, L.P. since 1997 as its office manager. Ms. Almedina worked as an office manager in a retail furniture and antiques business for three years prior to joining The LCP Group, L.P. Ms. Almedina is a graduate of Pace University. Lepercq Net 1 L.P. and Lepercq Net 2 L.P. have each granted Lexington, whose chairman and Co-Chief Executive Officer, Mr. Roskind, is an officer and a shareholder of each of Lepercq Net 1, Inc. and Lepercq Net 2, Inc., an option exercisable at any time, to acquire the general partnership interests in each of Lepercq Net 1 L.P. and Lepercq Net 2 L.P. Under the terms of the option, any such transaction is subject to review by the independent members of Lexington's Board of Trustees. Lexington may acquire the general partnership interests of Lepercq Net 1 L.P. and Lepercq Net 2 L.P. at their respective fair market value based upon a formula relating to partnership cash flows, with Lexington retaining the option of paying such fair market value in securities of Lexington, limited partnership units in controlled subsidiaries, cash or a combination thereof. Lexington provides the Net Partnerships with various administrative services. FIDUCIARY DUTY Under Delaware limited partnership law, the general partners are accountable to the Net Partnerships as fiduciaries and are required to exercise good faith and integrity in all their dealings in the Net Partnership's affairs. The limited partnership agreement of each of the Net Partnerships generally provides that neither the general partner nor any of its affiliates, acting within the scope of the general partner's authority, will be liable to the Net Partnership or any of the limited partners for any act or omission by any such person performed in good faith pursuant to authority granted to such person by such agreements, or in accordance with their 164 174 provisions. As a result, limited partners have a more limited right of action than they would have in the absence of that provision in the limited partnership agreements. The limited partnership agreements also generally provide that the general partners and their affiliates are indemnified, to the extent permitted by law, from losses relating to acts or omissions in connection with the business of the Net Partnerships, provided that those persons determined in good faith that the course of conduct did not constitute fraud, negligence or misconduct. The Net Partnerships may also advance funds to a person indemnified under the limited partnership agreements for legal expenses incurred as a result of legal action brought against that person by anyone other than a limited partner, if that person undertakes to repay the advanced funds to the Net Partnership if it is subsequently determined that the person is not entitled to indemnification. The Net Partnerships do not pay for any insurance covering liability of the general partners or any other indemnified person for acts or omissions for which indemnification is not permitted by the limited partnership agreements. As part of its assumption of liabilities in the mergers, Lexington will indemnify the general partners and their affiliates for periods prior to and following the mergers to the extent of the existing indemnity under the terms of the limited partnership agreements and applicable law. ENVIRONMENTAL MATTERS Under various federal, state and local environmental laws, statutes, ordinances, rules and regulations, an owner of real property may be liable for the costs of removal or redemption of certain hazardous or toxic substances at, on, in or under such property as well as certain other potential costs relating to hazardous or toxic substances. These liabilities may include government fines and penalties and damages for injuries to persons and adjacent property. Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence or disposal of such substances. Although the Net Partnerships' tenants are primarily responsible for any environmental damage and claims related to the leased premises, in the event of the bankruptcy or inability of the tenant of such premises to satisfy any obligations with respect to such environmental liability, the Net Partnerships may be required to satisfy such obligations. In addition, under certain environmental laws, the Net Partnerships, as the respective owners of such properties, may be held liable for any such damages or claims irrespective of the provisions of any lease. From time to time, in connection with the conduct of the Net Partnerships' business, and prior to the acquisition of any property from a third party or as required by the Net Partnerships' financing sources, the Net Partnerships authorize the preparation of Phase I environmental reports with respect to its properties. Based upon such environmental reports and the ongoing review of the management of each of Net Partnership of their respective properties, as of the date of this report, management of neither Net Partnership was aware of any environmental condition with respect to any of the Net Partnerships' properties which their respective management believed would be reasonably likely to have a material adverse effect on the Net Partnerships. The general partners cannot be certain, however, that the Net Partnerships will not be exposed to material liability in the future resulting from: - the discovery of environmental conditions, the existence or severity of which were previously unknown, - changes in law, - the conduct of tenants or - activities relating to properties in the vicinity of the Net Partnerships' properties. 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 or may otherwise adversely affect the operations of the Net Partnerships' tenants, which would adversely affect the Net Partnerships' financial condition and results of operations, including funds from operations. 165 175 NET PARTNERSHIP DISTRIBUTIONS The following table sets forth the amount of the distributions per unit made by each of the Net Partnerships each year from 1989 through June 30, 2001.
NET 1 NET 2 ------ ----- 1989........................................................ $99.23 $3.82 1990........................................................ 94.95 8.06 1991........................................................ 82.31 5.55 1992........................................................ 70.88 5.40 1993........................................................ 60.46 5.20 1994........................................................ 50.04 5.00 1995........................................................ 50.04 5.00 1996........................................................ 50.04 5.00 1997........................................................ 50.04 5.00 1998........................................................ 50.04 5.00 1999........................................................ 50.04 5.00 2000........................................................ 50.04 5.00 Through 6/30/01............................................. 25.02 2.50
Both Net 1 and Net 2 have only made distributions to limited partners from operating cash flows and not from capital transactions. Following the changes made to the Net Partnerships in 1994, excess cash flow above the distribution amounts have been used to establish reserves or make additional investments. The general partners implemented this distribution policy in order to preserve capital and provide an opportunity for capital appreciation from new investments. MARKET PRICE OF THE UNITS The units are not listed on any national or regional securities exchange or quoted on any over the counter market, and there is no established public trading market for the units. Secondary sales activity for the Net 1 and Net 2 units has been limited and sporadic. The general partners monitor transfers of the units because the admission of the transferee as a substitute investor requires the consent of the general partners under each of the partnership agreements and in order to track compliance with safe harbor provisions to avoid treatment of the Net Partnerships as "publicly traded partnerships" for federal income tax purposes. Set forth in the following table is information regarding sales transactions in the units of the Net Partnerships, as reported by Stanger & Co., which tracks such transactions on a continuous basis. While the general partners receive some information regarding the prices of secondary transactions in the units, the general partners do not receive or maintain comprehensive information regarding all activities of all broker/ dealers and others known to facilitate secondary sales of the units. Therefore, the transactions reflected in the tables below represent only some of the transactions in the units. There have been other secondary transactions in the units, including the purchase by Lexington, on June 29, 2001, of 390.6 units of Net 1 at a price of $779.36 per unit and 10,088.5 units of Net 2 at a price of $77.86 per unit. Specific information regarding any other such transactions is not readily available to the general partners. Because the information regarding transactions in the units included in the tables below is provided without verification by the general partners and because the information provided does not reflect sufficient activity to cause the prices shown to be representative of the values of the units, such information should not be relied upon as indicative of the ability of holders of unit to sell their units in secondary market transactions or as to the prices at which such units 166 176 may be sold. Therefore, the information presented should not necessarily be relied upon by holders of units in determining whether or not to consent to the Transaction. SECONDARY MARKET TRANSACTIONS(1) NET 1
WEIGHTED NUMBER OF AVERAGE UNIT UNITS PERIOD SALES PRICE HIGH LOW TRADED ------ ------------ ------- ------- --------- 1999 -- 1st Quarter $627.75 $652.47 $625.00 120 -- 2nd Quarter $620.82 $665.00 $565.00 395 -- 3rd Quarter $642.56 $652.50 $510.00 197 -- 4th Quarter $597.34 $628.00 $588.00 64 2000 -- 1st Quarter $615.77 $620.00 $600.00 142 -- 2nd Quarter $655.12 $663.00 $540.00 163 -- 3rd Quarter $645.00 $645.00 $645.00 25 -- 4th Quarter $632.33 $655.00 $540.00 94 2001 -- 1st Quarter $597.14 $600.00 $590.00 35 -- 2nd Quarter $664.70 $675.11 $590.00 730
NET 2
WEIGHTED NUMBER AVERAGE UNIT OF UNITS PERIOD SALES PRICE HIGH LOW TRADED ------ ------------ ------ ------ -------- 1999 -- 1st Quarter $63.61 $64.25 $61.50 702 -- 2nd Quarter $64.20 $66.88 $62.00 1,347 -- 3rd Quarter $65.19 $66.15 $56.00 2,060 -- 4th Quarter $62.07 $66.30 $59.00 1,730 2000 -- 1st Quarter $65.85 $68.10 $61.00 1,040 -- 2nd Quarter $66.43 $69.35 $56.00 5,463 -- 3rd Quarter $67.37 $68.00 $66.50 565 -- 4th Quarter $65.55 $73.50 $53.00 2,050 2001 -- 1st Quarter $64.67 $69.00 $58.00 1,255 -- 2nd Quarter $66.96 $68.12 $66.00 10,270
--------------- (1) Secondary market transactions are as reported by Stanger & Co., which tracks such transactions on a continuous basis. EMPLOYEES Net 1 and Net 2 have no employees. All necessary personnel are provided, respectively, by Lepercq Net 1 L.P. and Lepercq Net 2 L.P. or its affiliates or agents. REAL ESTATE PORTFOLIOS As of June 30, 2001, Net 1 owned nine properties located in 7 states containing an aggregate of 740,525 net rentable square feet of space, and Net 2 owned fifteen properties located in 10 states containing an aggregate of 1,759,471 net rentable square feet of space. 167 177 The number of properties, annualized revenues, percentage of annualized revenues, square footage and square footage mix of Net 1's and Net 2's respective property portfolios are as follows: NET 1
ANNUALIZED PERCENTAGE OF NUMBER OF REVENUES ANNUALIZED SQUARE PERCENTAGE OF TYPE OF PROPERTY PROPERTIES ($000) REVENUES FOOTAGE SQUARE FOOTAGE ---------------- ---------- ---------- ------------- ------- -------------- Office.............................. 2 $1,922 42% 202,813 27% Industrial.......................... 1 799 17% 196,946 27% Retail.............................. 6 1,907 41% 340,766 46% -- ------ --- ------- --- Total.......................... 9 $4,628 100% 740,525 100% == ====== === ======= ===
NET 2
ANNUALIZED PERCENTAGE OF NUMBER OF REVENUES ANNUALIZED SQUARE PERCENTAGE OF TYPE OF PROPERTY PROPERTIES ($000) REVENUES FOOTAGE SQUARE FOOTAGE ---------------- ---------- ---------- ------------- --------- -------------- Office............................ 5 $ 4,168 40% 374,093 21% Industrial........................ 5 3,950 38% 1,058,106 60% Retail............................ 5 2,211 22% 327,272 19% -- ------- --- --------- --- Total........................ 15 $10,329 100% 1,759,471 100% == ======= === ========= ===
On April 20, 2001, Net 2 sold its property in Earth City, MO, which was vacant. This property was sold for net proceeds of approximately $3.7 million, which was used to repay balances outstanding on Net 2's line of credit. REAL ESTATE HOLDINGS The tables on the following pages sets forth certain information relating to the real property portfolios of each of Net 1 and Net 2. As of September 18, 2001, which was the latest practicable date prior to the printing of this Joint Consent and Proxy Solicitation Statement/Prospectus ($000's except per share data). All of the properties listed for Net 1 and all of the properties listed for Net 2 were 100% leased as of that date. 168 178 169 NET 1. The following is a detailed schedule of Net 1's real estate and lease terms as of June 30, 2001:
NET LAND RENTABLE YEAR AREA SQUARE PROPERTY LOCATION TENANT (GUARANTOR) CONSTRUCTED (ACRES) FEET ----------------- ------------------ ----------- ------- -------- OFFICE -------------------- Phoenix, AZ Bull HN Information Systems, Inc. 1985 & 1994 13.37 137,058 San Diego, CA Cymer, Inc. 1989 2.73 65,755 INDUSTRIAL -------------------- Henderson, NC Corporate Express Office Products, Inc. 1998 19.09 196,946 RETAIL -------------------- Phoenix, AZ Bally's Health & Tennis Corp. 1988 3.00 36,556 Sumter, SC Wal-Mart Stores, Inc. 1983 7.40 103,377 Brownsville, TX Wal-Mart Stores, Inc. 1985 7.90 85,334 Gainesville, GA Wal-Mart Stores, Inc. 1984 8.10 89,199 BASE LEASE TERM & ANNUAL RENT RENEWAL PROPERTY LOCATION PER NET RENTABLE SQUARE FOOT OPTIONS ----------------- ----------------------------- ------- OFFICE -------------------- Phoenix, AZ 09/29/99 - 10/10/05 None 10/11/00 - 10/10/01: $7.70 10/11/01 - 10/10/02: $7.90 10/11/02 - 10/10/03: $8.10 10/11/03 - 10/10/04: $8.30 10/11/04 - 10/10/05: $8.50 San Diego, CA 09/27/99 - 01/01/10 None 09/27/99 - 05/31/01: $11.82 06/01/01 - 05/31/03: $12.42 06/01/03 - 05/31/05: $13.04 06/01/05 - 05/31/07: $13.69 06/01/07 - 01/01/10: $14.37 INDUSTRIAL -------------------- Henderson, NC 05/31/00 - 01/31/14 5 year(3) 05/31/00 - 01/31/02: $3.61 02/01/02 - 01/31/05: $3.83 02/01/05 - 01/31/08: $4.01 02/01/08 - 01/31/11: $4.19 02/01/11 - 01/31/14: $4.45 RETAIL -------------------- Phoenix, AZ 07/19/88 - 06/30/08 5 year(2) 07/01/98 - 06/30/03: $20.65 07/01/03 - 06/30/08: $23.03 Sumter, SC 11/27/95 - 01/31/08: $3.17 5 year(5) plus 1% of gross sales as defined Brownsville, TX 05/30/97 - 01/31/08: $3.76 5 year(5) plus 1% of gross sales as defined Gainesville, GA 12/28/95 - 01/31/09: $2.45 None plus percentage rent as defined
179 170
NET LAND RENTABLE YEAR AREA SQUARE PROPERTY LOCATION TENANT (GUARANTOR) CONSTRUCTED (ACRES) FEET ----------------- ------------------ ----------- ------- -------- Stockton, CA Greyhound Lines, Inc. 1968 1.67 17,000 Lynchburg, VA Circuit City Stores, Inc. 1986 0.84 9,300 ------ --------- 64.10 740,525 ====== ========= BASE LEASE TERM & ANNUAL RENT RENEWAL PROPERTY LOCATION PER NET RENTABLE SQUARE FOOT OPTIONS ----------------- ----------------------------- ------- Stockton, CA 02/28/89 - 12/31/09 10 year(2) 01/01/01 - 12/31/01: $11.38 Annual CPI increases not to exceed 2.75% Lynchburg, VA 08/22/94 - 11/20/06 10 year(2) 11/21/96 - 11/20/01: $9.23 11/21/01 - 11/20/06: $10.85
NET 2. The following is a detailed schedule of Net 2's real estate and lease terms as of June 30, 2001:
NET LAND RENTABLE YEAR AREA SQUARE PROPERTY LOCATION TENANT (GUARANTOR) CONSTRUCTED (ACRES) FEET ----------------- ------------------ ----------- ------- -------- OFFICE -------------------- Wilsonville, OR Hollywood Entertainment Corporation 1980/1998 8.72 122,853 Hampton, VA Nextel Communications of Mid-Atlantic, Inc. 1999 14.34 100,632 Highland Heights, OH The Tranzonic Companies 1968/1989 5.23 94,657 BASE LEASE TERM & ANNUAL RENT RENEWAL PROPERTY LOCATION PER NET RENTABLE SQUARE FOOT OPTIONS ----------------- ----------------------------- ------- OFFICE -------------------- Wilsonville, OR 09/29/98 - 11/30/08 5 year(1) 09/29/98 - 01/31/02: $10.95 02/01/02 - 12/31/05: $11.95 01/01/06 - 11/30/08: $13.25 Hampton, VA 03/20/00 - 12/31/09 5 year(4) 01/01/01 - 12/31/01: $11.83 01/01/02 - 12/31/02: $12.07 01/01/03 - 12/31/03: $12.31 01/01/04 - 12/31/04: $12.56 01/01/05 - 12/31/05: $12.81 01/01/06 - 12/31/06: $13.07 01/01/07 - 12/31/07: $13.33 01/01/08 - 12/31/08: $13.60 01/01/09 - 12/31/09: $13.87 Highland Heights, OH 02/28/89 - 02/28/09 10 year(2) 03/01/99 - 08/31/01: $7.47 09/01/01 - 02/28/09 Adjusted by CPI factor not to exceed 4.5% per annum
180 171
NET LAND RENTABLE YEAR AREA SQUARE PROPERTY LOCATION TENANT (GUARANTOR) CONSTRUCTED (ACRES) FEET ----------------- ------------------ ----------- ------- -------- Tucson, AZ Cox Communications, Inc. 1988 3.58 28,591 Milford, CT IKON Office Solutions 1994 3.01 27,360 INDUSTRIAL -------------------- Ocala, FL Associated Grocers of Florida, Inc. 1976 75.00 668,034 Plymouth, MI Johnson Controls, Inc. 1996 24.00 134,160 Columbia, SC Stone Container Corporation 1968/1998 10.76 185,961 Columbus, OH Ameritech Services, Inc. 1990 10.12 20,000 Tempe, AZ The Tranzonic Companies 1981 2.81 49,951 BASE LEASE TERM & ANNUAL RENT RENEWAL PROPERTY LOCATION PER NET RENTABLE SQUARE FOOT OPTIONS ----------------- ----------------------------- ------- Tucson, AZ 09/28/90 - 09/30/10 None 10/01/98 - 09/30/10: $12.48 Adjusted by 3x CPI not to exceed rent, as defined Milford, CT 12/23/94 - 12/31/04 5 year(4) 01/01/00 - 12/31/04: $12.31 INDUSTRIAL -------------------- Ocala, FL 01/08/99 - 12/31/18 10 year(2) 01/08/99 - 12/31/03: $2.80 01/01/04 - 12/31/08: $3.09 01/01/09 - 12/31/13: $3.42 01/01/14 - 12/31/18: $3.77 Plymouth, MI 05/19/00 - 12/22/06: $4.84 5 year(2) Annual escalations equal to 3x the percentage increase in CPI, not to exceed 4.5% per annum Columbia, SC 08/04/99 - 08/31/12 None 09/01/00 - 08/31/03: $2.71 09/01/03 - 08/31/06: $2.91 09/01/06 - 08/31/08: $3.12 09/01/08 - 08/31/12: $3.32 Columbus, OH 09/14/90 - 05/31/05 None 06/01/00 - 05/31/05: $12.75 Tempe, AZ 02/28/89 - 02/28/09 10 year(2) 03/01/99 - 08/31/01: $3.76 09/01/01 - 02/28/09 Adjusted by CPI factor not to exceed 4.5% per annum
181 172
NET LAND RENTABLE YEAR AREA SQUARE PROPERTY LOCATION TENANT (GUARANTOR) CONSTRUCTED (ACRES) FEET ----------------- ------------------ ----------- ------- -------- RETAIL -------------------- Westland, MI Sam's Real Estate Business Trust 1987 9.70 102,826 Canton, OH Best Buy Co., Inc. 1995 6.59 46,350 Eau Claire, WI Kohl's Department Stores, Inc. 1994 6.24 76,164 Spartanburg, SC Best Buy Co., Inc. 1996 7.49 45,800 Jacksonville, AL Wal-Mart Real Estate Business Trust 1982 5.21 56,132 ------ --------- 192.80 1,759,471 ====== ========= BASE LEASE TERM & ANNUAL RENT RENEWAL PROPERTY LOCATION PER NET RENTABLE SQUARE FOOT OPTIONS ----------------- ----------------------------- ------- RETAIL -------------------- Westland, MI 06/06/97 - 01/31/09: $7.32 None plus 1% of gross sales as defined Canton, OH 07/24/98 - 02/26/18: $10.03 5 year(3) Eau Claire, WI 06/22/94 - 01/25/15 5 year(4) 06/22/94 - 03/31/04: $5.71 04/01/04 - 01/25/15: $6.15 Spartanburg, SC 07/24/98 - 02/26/18: $8.62 5 year(3) Jacksonville, AL 06/29/99 - 01/31/09: $2.60 5 year(5) plus 1% of gross sales as defined
182 FEDERAL INCOME TAX CONSIDERATIONS The following is a general discussion of the material federal income tax considerations associated with the Transaction. Paul, Hastings, Janofsky & Walker LLP has given an opinion to the effect that this discussion, to the extent that it contains descriptions of applicable federal income tax law or legal conclusions with respect thereto, is a fair and accurate summary under current law of the material United States federal income tax consequences to the limited partners of the mergers described herein. Although Paul, Hastings, Janofsky & Walker has not made an independent investigation of the facts set forth herein, no facts have come to our attention that would cause us to believe that this discussion contains an untrue statement of material fact or omits to state a material fact required to be stated or necessary to make the statements herein not misleading in light of the circumstances in which they are made. This discussion is based on the Internal Revenue Code of 1986, as amended, which is referred to as the Code, existing regulations under the Code and current rulings and court decisions in effect as of the date of this Joint Consent and Proxy Solicitation Statement/Prospectus, all of which are subject to change, retroactively or prospectively, and to possibly differing interpretations. The following discussion is not intended to be and should not be construed as tax advice. An opinion of counsel merely represents counsel's best judgment with respect to the probable outcome on the merits and is not binding on the Internal Revenue Service or the courts. Accordingly, there can be no assurance that the Internal Revenue Service will not take a contrary position, that the applicable law will not change, or that any such change will not have retroactive effect. In addition, this discussion only applies to prospective holders of common shares and dissenter debentures. It does not discuss all of the aspects of federal income taxation that may be relevant to a prospective holder in light of its particular circumstances or to certain types of holders who are subject to special rules such as insurance companies, tax-exempt entities, financial institutions or broker-dealers, foreign corporations and persons who are not citizens or residents of the United States. This summary does not give a detailed discussion of any state, local or foreign tax considerations. No ruling on the federal, state or local tax considerations relevant to the operations of Lexington, the Transaction, the ownership or disposition of common shares or dissenter debentures is being requested from the Internal Revenue Service or from any other tax authority. Limited partners of the Net Partnerships should consult their own tax advisors in determining the federal, state, local, foreign and other tax consequences to them of the receipt, ownership, and disposition of common shares and cash, or dissenter debentures, the tax treatment of a REIT, and potential changes in applicable tax laws. CERTAIN TAX DIFFERENCES BETWEEN THE OWNERSHIP OF UNITS AND COMMON SHARES If the Transaction is consummated, each limited partner of a Net Partnership, other than limited partners who dissent and elect to receive dissenter debentures, will receive common shares and cash. The character and amount of income reportable by owners of common shares in the future could differ from the character and amount of income reportable by owners of units. Each Net Partnership is a partnership for federal income tax purposes, and therefore is not subject to taxation. Currently, limited partners, as owners of units, must take into account their distributive share of all income, loss and separately stated partnership items, regardless of the amount of any distributions of cash to them. Each Net Partnership supplies that information to their limited partners annually on a Schedule K-1. The character of the income that limited partners recognize depends upon the assets and activities of their Net Partnership and may, in some circumstances, be treated as income which may be offset by any losses that limited partners may have from passive activities. In contrast to the tax treatment of limited partners described above, shareholders, as owners of common shares, are taxed based on the amount of distributions they receive from Lexington. Each year Lexington sends to each shareholder a Form 1099-DIV reporting the amount of taxable and nontaxable distributions paid to such shareholder during the preceding year. The taxable portion of these distributions depends on the 173 183 amount of Lexington's earnings and profits. The portion of distributions made to shareholders by Lexington that constitutes taxable income to shareholders could differ from the portion of distributions made to limited partners by their respective Net Partnerships that constitutes taxable income to limited partners. In addition, the character of this income to a shareholder does not depend on its character to Lexington. The income will generally be ordinary dividend income to shareholders and will be classified as portfolio income under the passive loss rules, except with respect to capital gains dividends, discussed below. Furthermore, if Lexington incurs a taxable loss, the loss will not be passed through to shareholders. For other differences attributable to Lexington's status as a REIT, see "-- Taxation of Lexington" and "-- Taxation of Taxable U.S. Shareholders --" below. TAX CONSEQUENCES OF THE MERGERS GENERAL. On January 4, 2001, the Treasury Department issued final regulations regarding the tax treatment of a merger of two or more partnerships. The provisions of the final regulations are highly technical and complex. Limited partners are urged to consult their own tax advisors, as the following is only a summary of the material tax consequences of the transaction. Because of the recent and complex nature of these final regulations, there can be no assurance that they will be applied in the manner described herein. If the Transaction is consummated, each Net Partnership will be merged with and into Net 3. The federal income tax treatment of a limited partner will depend on whether the limited partner receives common shares and cash or elects to receive dissenter debentures. A limited partner that receives common shares and cash will be deemed to consent to treat the transaction for tax purposes as a sale of its Net Partnership units to Net 3. A limited partner that does not consent to this tax treatment and elects to receive dissenter debentures will be allocated gain or loss realized by its Net Partnership as a result of the merger. Regardless of whether a limited partner consents or does not consent, the Transaction will result in taxable gain or loss to all limited partners. CONSEQUENCES TO THE NET PARTNERSHIPS. Under the final regulations, the merger of each Net Partnership into Net 3 would be treated as if each Net Partnership transferred its assets and liabilities to Net 3 in exchange for common shares, cash and dissenter debentures, if any. Each Net Partnership would then be treated as though it liquidated and distributed the shares, cash and debentures to the respective limited partners. This tax treatment is generally referred to as an asset-over merger. Notwithstanding the foregoing, the final regulations permit the parties to a partnership merger to apply special treatment to exiting partners. Under this special provision, the parties may treat any transfers of cash or other property, made by the acquiring partnership to a partner in the merging partnership for the partner's interest in the merging partnership, as a direct sale of that interest to the acquiring partnership, rather than as part of the asset-over merger. This direct sale treatment is available if the selling partner consents to treat the transaction as a direct sale. Such direct sale is deemed to occur immediately before the asset-over merger. In addition, the preamble to the final regulations indicates that the Internal Revenue Service will apply the technical termination rules of the Code to a merging partnership if 50% or more of the total interests in the merging partnership are sold. Under the technical termination rules, a partnership is treated as if it reorganized itself into a new partnership. Its "new" partners are the partners to whom the 50% or more interests in the merging partnership were sold and any remaining partners that did not sell. The preamble to the final regulations provides that this technical termination occurs immediately before the asset-over merger. Under the final regulations, each Net Partnership merger with Net 3 will be treated as an asset-over merger for federal income tax purposes. However, since the limited partners of each Net Partnership that receive common shares and cash will have consented to direct sale treatment, these limited partners will be treated as selling their Net Partnership units to Net 3. In addition, because each merger will be consummated only if more than 50% of the limited partners of each Net Partnership approve the transaction, thereby accepting common shares and cash, and therefore, more than 50% of the limited partners would be treated as selling their respective units, each Net Partnership will be treated as reorganizing under the technical termination rules. Under those rules, consenting limited partners will be treated as selling their Net Partnership units as part of the technical termination. After the termination, the remaining limited partners of 174 184 the Net Partnerships will be (1) the new partner that purchased the consenting limited partners' interests, i.e., Net 3, and (2) the dissenting limited partners that receive dissenter debentures. As a result, the consenting limited partners should not be treated as participating in the asset-over merger of each Net Partnership into Net 3. In addition, because the common shares and the cash would be deemed transferred to the consenting limited partners as part of the technical termination, that consideration should not be treated as part of the asset-over merger. In the asset-over merger, each Net Partnership should be treated as transferring all of its assets and liabilities to Net 3 in exchange for any dissenter debentures. Each Net Partnership should then be treated as liquidating and distributing the dissenter debentures it received from Net 3 to its respective dissenting limited partners. TAX CONSEQUENCES TO THE CONSENTING LIMITED PARTNERS. A limited partner that receives common shares and cash, and thereby consents to direct sale treatment, will recognize taxable gain or loss equal to the difference between (1) the consideration it receives and its share of the Net Partnership's liabilities assumed by Net 3 and (2) its adjusted tax basis in its units. The consideration a consenting limited partner receives will be the limited partner's share of that number of common shares and amount of cash equal to the agreed upon adjusted net asset value of the units of the limited partner's Net Partnership. The limited partner's share of common shares and cash will be equal to that value attributable to the units held by the limited partner. The limited partner will receive 50% of such value in Lexington common shares and 50% of such value in cash. See the section above entitled "THE MERGERS -- The Merger Consideration." The consideration a consenting limited partner receives will be valued at the fair market value of the common shares and the amount of cash. TAX CONSEQUENCES TO THE DISSENTING LIMITED PARTNERS. A limited partner that elects to receive dissenter debentures and does not consent to direct sale treatment will recognize taxable gain or loss as part of the asset-over merger. The amount of gain or loss realized by each Net Partnership in the asset-over merger should be based on the difference between (1) the sum of the principal amount of the dissenter debentures received by the Net Partnership and the limited partners' share of the Net Partnership's liabilities assumed by Net 3 and (2) the Net Partnership's adjusted tax basis in its assets. This amount of gain or loss realized by each Net Partnership will be allocated to their respective dissenting limited partners in accordance with the Net Partnership's partnership agreement. Each dissenting limited partner must report its allocable share of such gain or loss pursuant to these terms. Gains or losses realized by each Net Partnership from transfers of non-dealer real estate in the mergers are likely to be treated as realized from the sale of a "Section 1231 asset" (i.e., real property and depreciable assets used in a trade or business and held for more than one year). Each limited partner's share of gains or losses from the sale of Section 1231 assets of its Net Partnership would be combined with any other Section 1231 gains and losses that such limited partner recognizes in that year. If the result is a net loss, such Section 1231 gains and losses will be characterized as ordinary. If the result is a net gain, Section 1231 gains and losses will be characterized as capital, except that the gain will be treated as ordinary income to the extent of any "non-recaptured Section 1231 losses." For these purposes, the term "non-recaptured Section 1231 losses" means aggregate net Section 1231 losses for the five most recent prior years that have not been previously recaptured. Gain recognized on the sale of personal property will be taxed as ordinary income to the extent of all prior depreciation deductions taken by the respective Net Partnership prior to sale. In general, limited partners who are individuals may only use up to $3,000 of capital losses in excess of capital gains to offset ordinary income in any taxable year. Any excess loss is carried forward to future years subject to the same limitations. A limited partner that receives dissenter debentures in the transaction should not recognize further gain or loss upon the liquidation of its Net Partnership, aside from the gain or loss allocated to each dissenting limited partner as described above. A dissenting limited partner's basis in the dissenter debentures received will be equal to its adjusted basis in its units, as adjusted by the partner's distributive share of income, gain, loss, deduction and credit for the final taxable year of the Net Partnership. Such distributive share will include any items recognized by the partnership as a result of the Transaction. Adjustments to be made before calculating the basis to the dissenter debentures will also include adjustments for any distributions the 175 185 dissenting limited partner receives, including any deemed distributions relating to liabilities, in the final taxable year, but will not include the distribution of the dissenter debentures. The dissenting limited partner's holding period for the dissenter debentures for purposes of capital gain or loss will begin on the closing date of the Transaction. TAX CONSEQUENCES OF THE TRANSACTION TO LEXINGTON. Lexington should not recognize gain or loss as a result of the Transaction. The aggregate basis of Lexington's assets will be allocated among such assets in accordance with their relative fair market values as described in Section 1060 of the Code. TAX CONSEQUENCES TO TAX-EXEMPT PARTNERS. The Transaction may result in the recognition by tax-exempt partners of material unrelated business taxable income. TAX ISSUES RELATING TO FOREIGN LIMITED PARTNERS. The Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA") subjects foreign investors to United States taxation at regular United States rates on gain from the sale of United States real property interests such as United States real estate and interests in partnerships holding United States real estate. FIRPTA also imposes withholding on such sales. Lexington believes that substantially all of the assets in the Net Partnerships consist of United States real property interests. Accordingly, foreign limited partners will be subject to tax upon the consummation of the Transaction. Section 1446 of the Code requires partnerships to withhold at a 39.6 percent rate with respect to noncorporate foreign partners and at a 35 percent rate with respect to corporate foreign partners on "effectively connected taxable income" allocable to foreign partners. A foreign partner's distributive share of the income from a disposition of a United States real property interest is subject to withholding under Section 1446 because FIRPTA characterizes such gain as effectively connected taxable income. Any amounts withheld with respect to the distributive share of a foreign partner are treated as a credit against the United States tax liability of such partner for the taxable year to which the withholding relates. Withheld amounts are treated as a distribution on the last day of the partnership taxable year for which the withheld amount was paid or, if earlier, on the last day on which the partner owned an interest in the partnership. To satisfy the above withholding obligation with respect to the Transaction, either or both of the Net Partnerships may retain and place in an escrow account, or similar arrangement, the common shares and cash or dissenter debentures to be received by any foreign limited partner, pending a sale of a portion of the common shares sufficient to satisfy the withholding requirement or, alternatively, the receipt of an amount of cash from such foreign limited partner sufficient to satisfy the withholding requirement. TREATMENT OF HOLDERS OF DISSENTER DEBENTURES STATED INTEREST. Limited partners that receive dissenter debentures must include stated interest in income in accordance with their method of tax accounting. Accordingly, limited partners that use the accrual method of tax accounting must include stated interest in income as it accrues and, limited partners that use the cash method of tax accounting must include stated interest in income as it is actually or constructively received. Interest income will constitute portfolio income, not passive activity income, for purposes of Section 469 of the Code. Accordingly, such income will not be subject to reduction by losses from passive activities, i.e., any trade or business held as a limited partner with no material participation, for limited partners that are subject to the passive activity loss rules. Income attributable to interest payments may be offset by investment expense deductions, however, subject to the limitation that individual investors may only deduct miscellaneous itemized deductions (including investment expenses) to the extent such deductions exceed two percent of their adjusted gross income. RECEIPT OF PRINCIPAL. Holders of dissenter debentures will recognize gain or loss when Lexington pays principal under the dissenter debentures. The amount of gain or loss recognized at the time the principal payments are made will be equal to the difference between the amount of the principal payments and the holder's basis in the dissenter debenture. If, however, the dissenter debentures are redeemed in part prior to 176 186 their maturity date, the amount of gain or loss recognized at the time the principal payments are made will be equal to the difference between the amount of the principal payments made and a proportionate amount of the holder's basis in the dissenter debentures. To the extent a holder's adjusted tax basis in its dissenter debentures is greater than the face amount of the dissenter debentures, the excess should be treated as a capital loss upon the retirement or maturity of the dissenter debentures. DISPOSITION OF DEBENTURES. In general, holders of dissenter debentures will recognize gain or loss upon the sale, exchange, redemption or other taxable disposition of such dissenter debentures measured by the difference between (1) the amount of cash and the fair market value of property received (except, for accrual method taxpayers, to the extent attributable to the payment of accrued interest) and (2) such holder's tax basis in the dissenter debenture. Any such gain or loss will generally be long-term capital gain or loss, provided the dissenter debenture was a capital asset of such holder and was held for more than one year. FRACTIONAL SHARES. Cash received in lieu of a fractional share interest in common shares will be treated as a payment in exchange for such fractional share interest. Accordingly, the receipt of cash in lieu of a fractional share interest in common shares will generally result in capital gain or loss, measured by the difference between the cash received for the fractional share and the holder's basis in the fractional share. TAXATION OF LEXINGTON GENERAL. Lexington has elected to be taxed as a REIT under Sections 856 through 860 of the Code commencing with its taxable year ended December 31, 1993. In the opinion of Paul, Hastings, Janofsky & Walker LLP, based on the factual representations that are described in this discussion and in the officer's certificates, commencing with its taxable year ended December 31, 1993, Lexington has been organized and has operated in conformity with the requirements for qualification as a REIT under the Code and Lexington's current and proposed method of operation, taking into account the anticipated mergers of the Net Partnerships with and into Net 3, will enable it to continue to meet the requirements for qualification and taxation as a REIT. Lexington intends to conduct its operations so as to continue to qualify for taxation as a REIT. No assurance, however, can be given that such requirements will be met in the future. Qualification and taxation as a REIT depend on Lexington's ability to satisfy on a continuing basis, through actual annual operating results, the required distribution levels, diversity of share ownership and various qualification tests imposed under the Code, as discussed below, the results of which will not be reviewed by counsel. Given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in circumstances of Lexington, no assurance can be given that the actual results of Lexington's operations for any one taxable year have satisfied or will continue to satisfy such requirements. The following is a general summary of the federal income tax treatment of a REIT and its shareholders and is qualified in its entirety by any applicable Code and other tax provisions. REIT QUALIFICATION. Lexington must be organized as an entity that would, if it does not maintain its REIT status, be taxable as a regular corporation. Lexington cannot be a financial institution or an insurance company. Lexington must be managed by one or more trustees or directors. Lexington's taxable year must be the calendar year. Lexington's beneficial ownership must be evidenced by transferable shares. Lexington's capital stock must be beneficially owned by at least 100 persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a taxable year of less than 12 months. Not more than 50% of the value of the outstanding shares of Lexington's capital stock may be held, applying the applicable constructive ownership rules of the Code, by five or fewer individuals at any time during the last half of each of Lexington's taxable years. Lexington must also meet other tests, described below, regarding the nature of its income and assets and the amount of its distributions. Lexington's outstanding common shares are owned by a sufficient number of investors and in appropriate proportions to permit it to satisfy these stock ownership requirements. To protect against violations of these stock ownership requirements, Lexington's Declaration of Trust provides that no person is permitted to own, applying constructive ownership tests set forth in the Code, more than 9.8% of the outstanding common shares, unless the trustees are provided evidence satisfactory to them in their sole discretion that Lexington's 177 187 qualification as a REIT will not be jeopardized. In addition, Lexington's Declaration of Trust contains restrictions on transfers of capital stock, as well as provisions that automatically convert shares into excess securities to the extent that the ownership otherwise might jeopardize Lexington's REIT status. These restrictions, however, may not ensure that Lexington will, in all cases, be able to satisfy the stock ownership requirements. If Lexington fails to satisfy these stock ownership requirements, except as provided in the next sentence, its status as a REIT will terminate. However, if Lexington complies with the rules contained in applicable Treasury regulations that require Lexington to ascertain the actual ownership of shares and Lexington does not know, or would not have known through the exercise of reasonable diligence, that it failed to meet the 50% ownership requirement described above, it will be treated as having met this requirement. See the section below entitled "-- Failure to Qualify as a REIT." To monitor Lexington's compliance with the share ownership requirements, it is required to and does maintain records disclosing the actual ownership of common shares. To do so, Lexington will demand written statements each year from the record holders of certain percentages of shares, disclosing the actual owners of the shares who are required to include in gross income the REIT dividends. A list of those persons failing or refusing to comply with this demand will be maintained as part of Lexington's records. Shareholders who fail or refuse to comply with the demand must submit a statement with their tax returns disclosing the actual ownership of the shares and other information. The Code allows a REIT to own wholly-owned subsidiaries which are "qualified REIT subsidiaries." The Code provides that a qualified REIT subsidiary is not treated as a separate corporation, and all of its assets, liabilities and items of income, deduction and credit are treated as assets, liabilities and items of income, deduction and credit of the REIT. Thus, in applying the requirements described herein, Lexington's qualified REIT subsidiaries will be ignored, and all assets, liabilities and items of income, deduction and credit of such subsidiaries will be treated as Lexington's assets, liabilities and items of income, deduction and credit. For taxable years beginning on or after January 1, 2001, a REIT may also hold any direct or indirect interest in a corporation that qualifies as a "taxable REIT subsidiary", as long as the REIT's aggregate holdings of taxable REIT subsidiary securities do not exceed 20% of the value of the REIT's total assets. A taxable REIT subsidiary is a fully taxable corporation that generally is permitted to engage in businesses, own assets, and earn income that, if engaged in, owned, or earned by the REIT, might jeopardize REIT status or result in the imposition of penalty taxes on the REIT. To qualify as a taxable REIT subsidiary, the subsidiary and the REIT must make a joint election to treat the subsidiary as a taxable REIT subsidiary. A taxable REIT subsidiary also includes any corporation (other than a REIT or a qualified REIT subsidiary) in which a taxable REIT subsidiary directly or indirectly owns more than 35% of the total voting power or value. A taxable REIT subsidiary will pay tax at regular corporate income rates on any taxable income it earns. Moreover, the Code contains rules, including rules requiring the imposition of taxes on a REIT at the rate of 100% on certain reallocated income and expenses, to ensure that contractual arrangements between a taxable REIT subsidiary and its parent REIT are at arm's-length. In the case of a REIT which is a partner in a partnership or any other entity, such as a limited liability company, that is treated as a partnership for federal income tax purposes, Treasury regulations provide that the REIT will be deemed to own its proportionate share of the assets of the partnership. Also, the REIT will be deemed to be entitled to its proportionate share of the income of the partnership. The character of the assets and gross income of the partnership retains the same character in the hands of the REIT for purposes of satisfying the gross income tests and the asset tests described below. Thus, Lexington's proportionate share of the assets and items of income of any partnership in which it owns an interest are treated as its assets and items of income for purposes of applying the requirements described in this discussion. Lexington currently satisfies, and expects to continue to satisfy, each of these requirements discussed above. Lexington also currently satisfies, and expects to continue to satisfy, the requirements that are separately described below concerning the nature and amounts of its income and assets and the levels of required annual distributions. 178 188 SOURCES OF GROSS INCOME. In order to qualify as a REIT for a particular year, Lexington also must meet two tests governing the sources of its income -- a 75% gross income test and a 95% gross income test. These tests are designed to ensure that a REIT derives its income principally from passive real estate investments. 75% GROSS INCOME TEST. At least 75% of a REIT's gross income for each taxable year must be derived from specified classes of income that are principally real estate related. The permitted categories of principal importance to Lexington are: (1) rents from real property; (2) interest on loans secured by real property; (3) gain from the sale of real property or loans secured by real property; (4) income from the operation and gain from the sale of property acquired in a foreclosure of a mortgage securing that property ("foreclosure property"); (5) distributions on, or gain from the sale of, shares of other qualifying REITs; (6) abatements and refunds of real property taxes; (7) amounts received as consideration for entering into agreements to make loans secured by real property or to purchase or lease real property; and (8) "qualified temporary investment income," which is income from qualified temporary investment property (described below). Gross income under the 75% income test, as well as the 95% income test described below, does not include gross income from "prohibited transactions." A prohibited transaction is a sale of property held primarily for sale to customers in the ordinary course of business ("dealer property"), not including foreclosure property and not including dealer property that Lexington has held for at least four years. Lexington expects that substantially all of its operating gross income will be considered rent from real property and interest income. Rent from real property is qualifying income for purposes of the gross income tests only if certain conditions are satisfied. Rent from real property includes charges for services customarily rendered to tenants, and rent attributable to personal property leased together with the real property so long as the personal property rent is not more than 15% of the total rent received or accrued under the lease for the taxable year. Lexington does not expect to earn material amounts in these categories. Rent from real property generally does not include rent based on the income or profits derived from the property. However, rent based on a percentage of gross receipts or sales is permitted as rent from real property. Also excluded from "rents from real property" is rent received from a person or corporation in which Lexington or any of its 10% or greater owners owns a 10% or greater interest. A third exclusion from qualifying rent income covers amounts received with respect to real property if Lexington furnishes services to the tenants or manages or operates the property, other than through an "independent contractor" from whom Lexington does not derive any income or through a taxable REIT subsidiary. 95% GROSS INCOME TEST. In addition to earning at least 75% of its gross income from the types listed above, 95% of Lexington's gross income for each taxable year must generally consist of the same types permitted under the 75% income test, dividends, interest or gains from the sale or other disposition of stock or other securities that do not constitute dealer property. This test permits a REIT to earn a significant portion of its income from traditional "passive" investment sources that are not necessarily real estate related. The term "interest" (under both the 75% and 95% income tests) does not include amounts that are based on the income or profits of any person, unless the computation is based only on a fixed percentage of receipts or sales. Lexington believes that substantially all of its rental income will be qualifying income under the gross income tests, and that its provision of services will not cause the rental income to fail to be qualifying income under that test. Upon the ultimate sale of Lexington's properties, any gains realized also are expected to constitute qualifying income, as gain from the sale of real property not involving a prohibited transaction. 179 189 FAILING THE 75% OR 95% GROSS INCOME TESTS; REASONABLE CAUSE. As a result of the 75% and 95% income tests, REITs generally are not permitted to earn more than 5% of their gross income from active sources, including brokerage commissions or other fees for services rendered. Lexington may receive certain types of that income. This type of income will not qualify for the 75% or 95% income tests but is not expected to be significant and, together with other nonqualifying income, is expected to be at all times less than 5% of Lexington's annual gross income. While Lexington does not anticipate that it will earn substantial amounts of nonqualifying income, if nonqualifying income exceeds 5% of its gross income in any taxable year, it could lose its status as a REIT. If Lexington fails to meet either the 75% or 95% income tests during a taxable year, it may still qualify as a REIT for that year if (1) it reports the source and nature of each item of its gross income in its federal income tax return for that year; (2) the inclusion of any incorrect information in its return is not due to fraud with intent to evade tax; and (3) the failure to meet the tests is due to reasonable cause and not due to willful neglect. It is not possible, however, to state whether in all circumstances Lexington would be entitled to the benefit of this relief provision. For example, if Lexington fails to satisfy the gross income tests because nonqualifying income that it intentionally accrues or receives causes it to exceed the limits on nonqualifying income, the IRS could conclude that its failure to satisfy the tests was not due to reasonable cause. If these relief provisions do not apply to a particular set of circumstances, Lexington will not qualify as a REIT. As discussed below, even if these relief provisions apply, and Lexington retains its status as a REIT, a tax would be imposed with respect to its non-qualifying income. Lexington would be subject to a 100% tax based on the greater of the amount by which it fails either the 75% or 95% income tests for that year. PROHIBITED TRANSACTION INCOME. Any gain that Lexington realizes on the sale of any property held as inventory or other dealer property, including Lexington's share of any such gain realized by any subsidiary partnerships, will be treated as income from a prohibited transaction that is subject to a 100% penalty tax. This prohibited transaction income may also adversely affect Lexington's ability to satisfy the income tests for qualification as a REIT. Whether property is held as inventory or is dealer property depends on all the facts and circumstances surrounding the particular transaction. Lexington intends to hold its properties, and its subsidiary partnerships intend to hold their properties, for investment with a view to long-term appreciation, to engage in the business of acquiring, developing and owning properties, and to make occasional sales of the properties as are consistent with their investment objectives. The IRS may contend, however, that one or more of these sales is subject to the 100% penalty tax. CHARACTER OF ASSETS OWNED. At the close of each calendar quarter of Lexington's taxable year, Lexington also must satisfy the following tests concerning the nature of its investments. At least 75% of the value of its total assets generally must consist of real estate assets, cash, cash items (including receivables) and government securities. For this purpose, "real estate assets" include interests in real property, interests in loans secured by mortgages on real property or by certain interests in real property, shares in other REITs and certain options, but excluding mineral, oil or gas royalty interests. Qualified temporary investment property, which is stock or debt instruments attributable to the temporary investment of new capital, also qualifies under this 75% asset test, but only for the one-year period beginning on the date Lexington receives the new capital. In addition, not more than 25% of Lexington's total assets may be represented by securities other than those in the 75% asset class. Not more than 20% of the value of Lexington's total assets may be represented by securities of one or more taxable REIT subsidiaries (as defined above under "REIT Qualification"). Except for investments included in the 75% asset class, securities in a taxable REIT subsidiary or qualified REIT subsidiary and certain partnership interests and debt obligations, (1) not more than 5% of the value of Lexington's total assets may be represented by securities of any one issuer, (2) Lexington may not hold securities that possess more than 10% of the total voting power of the outstanding securities of a single issuer and (3) Lexington may not hold securities that have a value of more than 10% of the total value of the outstanding securities of any one issuer. Lexington believes that substantially all of its assets consist and, after the Transaction, will consist of (1) real properties, (2) stock or debt investments that earn qualified temporary investment income, (3) other qualified real estate assets, and (4) cash, cash items and government securities. Lexington may also invest in 180 190 securities of other entities, provided that such investments will not prevent it from satisfying the asset and income tests for REIT qualification set forth above. After initially meeting the asset tests at the close of any quarter, Lexington will not lose its status as a REIT for failure to satisfy the asset tests at the end of a later quarter solely by reason of changes in asset values. If Lexington fails to satisfy the asset tests because it acquires securities or other property during a quarter, it can cure this failure by disposing of sufficient nonqualifying assets within 30 days after the close of that quarter. Lexington intends to take such action within the 30 days after the close of any quarter as may be required to cure any noncompliance. If Lexington fails to cure noncompliance with the asset tests within this time period, Lexington would cease to qualify as a REIT. ANNUAL DISTRIBUTIONS TO SHAREHOLDERS. To maintain its REIT status, Lexington generally must distribute as a dividend to its shareholders in each taxable year at least 90% (95% with respect to taxable years ended prior to January 1, 2001) of its net ordinary income. Capital gain is not required to be distributed. More precisely, Lexington must distribute an amount equal to (1) 90% of the sum of (a) its "REIT Taxable Income" before deduction of dividends paid and excluding any net capital gain and (b) any net income from foreclosure property less the tax on such income, minus (2) "excess noncash income," such as income attributable to leveled stepped rents, cancellation of indebtedness and original issue discount. REIT Taxable Income is the taxable income of the REIT, computed as if it were an ordinary corporation, with certain modifications. For example, the deduction for dividends paid is allowed, but neither net income from foreclosure property, nor net income from prohibited transactions, is included. In addition, the REIT may carry over, but not carry back, a net operating loss for 20 years following the year in which it was incurred. A REIT may satisfy the distribution test with dividends paid during the taxable year and with certain dividends paid after the end of the taxable year. Dividends paid in January that were declared during the last calendar quarter of the prior year and were payable to shareholders of record on a date during the last calendar quarter of that prior year are treated as paid on December 31 of the prior year. Other dividends declared before the due date of Lexington's tax return for the taxable year, including extensions, also will be treated as paid in the prior year if they are paid (1) within 12 months of the end of that taxable year and (2) no later than Lexington's next regular distribution payment. Dividends that are paid after the close of a taxable year that do not qualify under the rule governing payments made in January (described above) will be taxable to the shareholders in the year paid, even though Lexington may take them into account in a prior year. Lexington will be taxed at regular corporate rates to the extent that it retains any portion of its taxable income. For example, if Lexington distributes only the required 90% of its taxable income for 2001, it would be taxed on the retained 10%. A nondeductible excise tax equal to 4% will be imposed for each calendar year to the extent that dividends declared and distributed or deemed distributed before December 31 are less than the sum of (a) 85% of Lexington's "ordinary income" plus (b) 95% of Lexington's capital gain net income plus (c) any undistributed income from prior periods. Lexington believes that it has distributed and intends to continue to distribute to its shareholders in a timely manner such amounts sufficient to satisfy the annual distribution requirements. However, Lexington may not have sufficient cash or other liquid assets to meet the distribution requirement. This could arise because of competing demands for its funds, or because income may have to be reported for tax purposes before cash is received, or expenses may have to be paid before a tax deduction is allowed. Although Lexington does not anticipate any difficulty in meeting this requirement, no assurance can be given that necessary funds will be available. In the event these circumstances do occur, then in order to meet the distribution requirement, Lexington may cause its operating partnership to arrange for short-term, or possibly long-term, borrowings to permit the payment of required dividends. If Lexington fails to meet the distribution requirement because of an adjustment to its taxable income by the IRS, it may be able to cure the failure retroactively by paying a "deficiency dividend," as well as applicable interest and penalties, within a specified period. 181 191 TAXATION AS A REIT As a REIT, Lexington generally will not be subject to corporate income tax to the extent it currently distributes its REIT Taxable Income to its shareholders. This treatment effectively eliminates the "double taxation" imposed on investments in most corporations. Double taxation refers to taxation that occurs once at the corporate level when income is earned and once again at the shareholder level when such income is distributed. Lexington generally will be taxed only on the portion of its taxable income that it retains, which will include any undistributed net capital gain, because it will be entitled to a deduction for dividends paid to shareholders during the taxable year. A dividends paid deduction is not available for dividends that are considered preferential within any given class of shares or as between classes except to the extent that class is entitled to a preference. Because excess stock will represent a separate class of outstanding shares, the fact that those shares will not be entitled to dividends should not adversely affect Lexington's ability to deduct its dividend payments. Even as a REIT, Lexington will be subject to tax in certain circumstances as follows: (1) a tax at the highest corporate rate (currently 35%) on any income or gain from foreclosure property; (2) a confiscatory tax of 100% on any net income from prohibited transactions; (3) if Lexington fails to meet either the 75% or 95% income tests described above, but still qualifies for REIT status under the reasonable cause exception to those tests, a 100% tax on the greater of the amount, if any, by which it failed either the 75% income test or the 95% income test, times a fraction intended to reflect its profitability; (4) the alternative minimum tax on items of tax preference, excluding items specifically allocable to its shareholders; (5) if Lexington fails to distribute with respect to each calendar year at least the sum of (a) 85% of its REIT ordinary income for that year, (b) 95% of its REIT capital gain net income for that year, and (c) any undistributed taxable income from prior years, a 4% excise tax on the excess of the required distribution over the amounts actually distributed; (6) under temporary regulations, a tax at the highest regular corporate tax rate may apply on any appreciation in the assets that it acquires in tax-free corporate transactions, to the extent the gain is recognized during the first ten years after it acquires those assets assuming that Lexington will make the appropriate election; (7) a tax at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains; and (8) an excise tax of 100% on transactions with a taxable REIT subsidiary that are not conducted on an arm's-length basis. FAILURE TO QUALIFY AS A REIT For any taxable year in which Lexington fails to qualify as a REIT and no relief provisions apply, Lexington would be taxed at regular corporate rates, including alternative minimum tax rates, on all of its taxable income. Distributions to Lexington's shareholders would not be deductible in computing that taxable income, and distributions would no longer be required to be made. Any corporate level taxes generally would reduce the amount of cash available for distribution to Lexington's shareholders and, because the shareholders would continue to be taxed on the distributions they receive, the net after tax yield to the shareholders from their investment likely would be reduced substantially. As a result, failure to qualify as a REIT during any taxable year could have a material adverse effect on an investment in Lexington common shares. In addition, it would not be eligible to elect REIT status again until the fifth taxable year which begins after the taxable year during which its election was terminated. It is not possible to state whether in all circumstances Lexington would be entitled to any statutory relief. 182 192 TAXATION OF TAXABLE U.S. SHAREHOLDERS Distributions generally will be taxable to taxable U.S. shareholders as ordinary income to the extent of Lexington's current or accumulated earnings and profits. However, Lexington may generate cash in excess of its net earnings. If it distributes cash to shareholders in excess of its current and accumulated capital earnings and profits (other than as a capital gain dividend), the excess cash will be deemed to be a return of capital to each shareholder to the extent of the adjusted tax basis of the shareholder's shares. Distributions in excess of the adjusted tax basis will be treated as gain from the sale or exchange of the shares of stock. A shareholder who has received a distribution in excess of Lexington's current and accumulated earnings and profits may, upon the sale of the shares, realize a higher taxable gain or a smaller loss because the basis of the shares as reduced will be used for purposes of computing the amount of the gain or loss. Distributions that Lexington makes, whether characterized as ordinary income or as capital gains, are not eligible for the dividends received deduction for corporations. For purposes of determining whether distributions to holders of common shares are out of current or accumulated earnings and profits, Lexington's earnings and profits will be allocated first to the outstanding preferred shares, if any, and then to the common shares. Dividends that Lexington declares in October, November, or December of any year and payable to a shareholder of record on a specified date in any of these months shall be treated as both paid by Lexington and received by the shareholder on December 31 of that year, provided Lexington actually pays the dividend on or before January 31 of the following calendar year. Shareholders may not include in their own income tax returns any of Lexington's net operating losses or capital losses. Distributions that Lexington properly designates as capital gain dividends will be taxable to U.S. shareholders as gains from the sale or disposition of a capital asset to the extent that they do not exceed Lexington's actual net capital gain for the taxable year. Depending on the period of time the assets are held, the tax characteristics of the assets which produced these gains, and on designations, if any, which Lexington may make, these gains may be taxable to non-corporate U.S. shareholders at a 20% or 25% rate. Lexington may elect to retain, rather than distribute as a capital gain dividend, its net long-term capital gains. If Lexington makes this election, it would pay tax on its retained net long-term capital gains. In addition, to the extent Lexington designates, a U.S. shareholder generally would: - include its proportionate share of Lexington's undistributed long-term capital gains in computing its long-term capital gains in its return for its taxable year in which the last day of Lexington's taxable year falls; - be deemed to have paid the capital gains tax imposed on Lexington on the designated amounts included in the U.S. shareholder's long-term capital gains; - receive a credit or refund for the amount of tax deemed paid by it, increase the adjusted basis of its common share by the difference between the amount of includable gains and the tax deemed to have been paid by it; and - in the case of a U.S. shareholder that is a corporation, appropriately adjust its earnings and profits for the retained capital gains in accordance with Treasury regulations to be prescribed by the IRS. Distributions that Lexington makes and gains arising from the sale or exchange by a U.S. shareholder of Lexington's shares will not be treated as income from a passive activity, since income from a passive activity generally does not include dividends and gain attributable to the disposition of property that produces dividends. As a result, U.S. shareholders subject to the passive activity rules will generally be unable to apply any "passive losses" against this income or gain. Distributions that Lexington makes, to the extent they do not constitute a return of capital, generally will be treated as investment income for purposes of computing the investment interest limitation. Gain arising from the sale or other disposition of Lexington's shares, however, may not always be treated as investment income. Generally, gain or loss realized by a shareholder upon the sale of common shares will be reportable as capital gain or loss. If a shareholder receives a long-term capital gain dividend from Lexington and has held 183 193 the shares for six months or less, any loss incurred on the sale or exchange of the shares is treated as a long-term capital loss to the extent of the corresponding long-term capital gain dividend received. In any year in which Lexington fails to qualify as a REIT, the shareholders generally will continue to be treated in the same fashion described above. However, none of Lexington's dividends will be eligible for treatment as capital gains dividends, corporate shareholders will qualify for the dividends received deduction and the shareholders will not be required to report any share of Lexington's tax preference items. BACKUP WITHHOLDING Lexington will report to its shareholders and the IRS the amount of dividends paid during each calendar year and the amount of tax withheld, if any. If a shareholder is subject to backup withholding, Lexington will be required to deduct and withhold from any dividends payable to that shareholder a tax of 31%. These rules may apply (1) when a shareholder fails to supply a correct taxpayer identification number, (2) when the IRS notifies Lexington that the shareholder is subject to the rules or has furnished an incorrect taxpayer identification number, or (3) in the case of corporations or others within exempt categories, when they fail to demonstrate that fact when required. A shareholder that does not provide a correct taxpayer identification number may also be subject to penalties imposed by the IRS. Any amount withheld as backup withholding may be credited against the shareholder's federal income tax liability. Lexington also may be required to withhold a portion of capital gain distributions made to shareholders who fail to certify their non-foreign status. Recent final regulations regarding withholding and information reporting also unify certification procedures and clarify reliance standards. Limited partners of the Net Partnerships and shareholders of Lexington should consult their own tax advisors concerning any additional requirements under the final regulations. TAXATION OF TAX-EXEMPT ENTITIES In general, a tax-exempt entity that is a shareholder will not be subject to tax on distributions or gain realized on the sale of shares. In Revenue Ruling 66-106, the IRS confirmed that a REIT's distributions to a tax-exempt employees' pension trust did not constitute unrelated business taxable income (UBTI). However, distributions from Lexington may be taxable as UBTI to the extent that a tax-exempt entity has financed the acquisition of its shares with "acquisition indebtedness." Tax-exempt employees' pension and profit sharing trusts which qualify under Section 401(a) of the Code and are exempt from tax under Section 501(a) of the Code ("qualified trusts") owning more than 10% of a REIT may be required to treat a percentage of dividends from a REIT as UBTI. The percentage is determined by dividing the REIT's gross income (less direct expenses related thereto) derived from an unrelated trade or business for the year (determined as if the REIT were a qualified trust) by the gross income of the REIT for the year in which the dividends are paid. However, if this percentage is less than 5%, dividends are not treated as UBTI. These UBTI rules apply only if the REIT qualifies as a REIT because the REIT was permitted to count the tax-exempt shareholder's beneficiaries as direct, proportionate REIT shareholders under a special rule applicable to qualified trusts and if the REIT is "predominantly held" by qualified trusts. A REIT is predominantly held by qualified trusts if at least one pension trust owns more than 25% of the value or if the REIT or a group of pension trusts each owning more than 10% of the value of the REIT collectively own more than 50% of the value of the REIT. Lexington does not currently meet either of these requirements. For social clubs, voluntary employees' beneficiary associations, supplemental unemployment compensation benefits trusts, and qualified group legal services plans exempt from federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively, income from an investment in Lexington common shares will constitute UBTI unless the organization is able to deduct an amount properly set aside or placed in reserve for specified purposes so as to offset the UBTI generated by the investment in Lexington's capital shares. These prospective holders of Lexington common shares should consult their own tax advisors concerning the applicable tax consequences of an investment in common shares. 184 194 TAXATION OF FOREIGN INVESTORS The rules governing federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships and other foreign shareholders are complex. This is only a brief summary. Prospective foreign shareholders should consult with their own tax advisors to determine the impact of federal, state and local income tax laws with regard to an investment in common shares, including any reporting requirements, as well as the tax treatment of such an investment under the laws of their home country. Dividends that are not attributable to gain from any sales or exchanges that Lexington makes of United States real property interests and which Lexington does not designate as capital gain dividends will be treated as dividends of ordinary income to the extent that they are made out of Lexington's current or accumulated earnings and profits. Those dividends ordinarily will be subject to a withholding tax equal to 30% of the gross amount of the dividend unless an applicable tax treaty reduces or eliminates that tax. However, if income from the investment in the common shares is treated as effectively connected with the foreign shareholder's conduct of a United States trade or business, the foreign shareholder generally will be subject to a tax at graduated rates, in the same manner as U.S. shareholders are taxed with respect to those dividends, and may also be subject to the 30% branch profits tax in the case of a shareholder that is a foreign corporation. For withholding tax purposes, Lexington intends to withhold at the rate of 30%, or a reduced treaty rate if applicable, on the amount of any distribution (other than distributions designated as capital gain dividends) made to a foreign shareholder unless (1) the foreign shareholder files on IRS Form W8BEN claiming that a lower treaty rate applies or (2) the foreign shareholder files an IRS Form W8ECI claiming that the dividend is effectively connected income. However, Lexington is generally not required to withhold at the 30% rate on distributions that Lexington reasonably estimates to be in excess of its current and accumulated earnings and profits. Dividends in excess of Lexington's current and 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, but rather will reduce the adjusted basis of those shares. To the extent that those dividends exceed the adjusted basis of a foreign shareholder's shares, they will give rise to tax liability if the foreign shareholder would otherwise be subject to tax on any gain from the sale or disposition of his shares, as described below. If it cannot be determined at the time a dividend is paid whether or not a dividend will be in excess of current and accumulated earnings and profits, the dividend will be subject to such withholding. Lexington does not intend to make quarterly estimates of that portion of dividends that are in excess of earnings and profits, and, as a result, all dividends will be subject to such withholding. However, the foreign shareholder may seek a refund of those amounts from the IRS. For any year in which Lexington qualifies as a REIT, distributions that are attributable to gain from its sales or exchanges of United States real property interests will be taxed to a foreign shareholder under the provisions of FIRPTA. Under FIRPTA, those dividends are taxed to a foreign shareholder as if the gain were effectively connected with a United States business. Foreign shareholders would thus be taxed at the normal capital gain rates applicable to U.S. shareholders subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals. Also, dividends subject to FIRPTA may be subject to a 30% branch profits tax in the hands of a corporate foreign shareholder not entitled to treaty exemption. Lexington is required by the Code and applicable Treasury Regulations to withhold 35% of any dividend that could be designated as a capital gain dividend. This amount is creditable against the foreign shareholder's FIRPTA tax liability. Gain recognized by a foreign shareholder upon a sale of shares generally will not be taxed under FIRPTA if Lexington is a "domestically controlled REIT," defined generally as a REIT in which at all times during a specified testing period less than 50% in value of the shares was held by foreign persons. It is currently anticipated that Lexington will be a domestically controlled REIT, and therefore the sale of shares will not be subject to taxation under FIRPTA. Because the common shares will be publicly traded, however, no assurance can be given that Lexington will remain a domestically controlled REIT. However, gain not subject to FIRPTA will be taxable to a foreign shareholder if (1) investment in common shares is effectively connected with the foreign shareholder's United States trade or business, in which case the foreign shareholder will be subject to the same treatment as 185 195 U.S. shareholders with respect to that gain, and may also be subject to the 30% branch profits tax in the case of a corporate foreign shareholder, or (2) the foreign shareholder 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, in which case the nonresident alien individual will be subject to a 30% withholding tax on the individual's capital gains. If Lexington was not a domestically controlled REIT, whether or not a foreign shareholder's sale of common shares would be subject to tax under FIRPTA would depend on whether or not the shares of common shares were regularly traded on an established securities market (such as the NYSE) and on the size of the selling foreign shareholder's interest in Lexington's capital shares. If the gain on the sale of shares were to be subject to taxation under FIRPTA, the foreign shareholder will be subject to the same treatment as U.S. shareholders with respect to that gain and the purchaser of common shares may be required to withhold 10% of the gross purchase price. EXPERTS The consolidated financial statements and related financial statement schedule included in Lexington Corporate Properties Trust's Annual Report on Form 10-K as of and for the year ended December 31, 2000 and incorporated by reference into this Joint Consent and Proxy Solicitation Statement/Prospectus have been incorporated herein by reference in reliance on the report, also incorporated herein by reference, of KPMG LLP, independent certified public accountants, and upon the authority of KPMG LLP as experts in accounting and auditing. The consolidated financial statements and related financial statement schedule included in Net 1 L.P.'s Annual Report on Form 10-K/A-1 as of and for the year ended December 31, 2000 and incorporated by reference into this Joint Consent and Proxy Solicitation Statement/Prospectus have been incorporated herein by reference in reliance on the report, also incorporated herein by reference, of KPMG LLP, and upon the authority of KPMG LLP as experts in accounting and auditing. The consolidated financial statements and related financial statement schedule included in Net 2 L.P.'s Annual Report on Form 10-K/A-1 as of and for the year ended December 31, 2000 and incorporated by reference into this Joint Consent and Proxy Solicitation Statement/Prospectus have been incorporated herein by reference in reliance on the report, also incorporated herein by reference, of KPMG LLP, and upon the authority of KPMG LLP as experts in accounting and auditing. LEGAL MATTERS Certain legal matters will be passed upon for Lexington by Paul, Hastings, Janofsky & Walker LLP, New York, New York. Paul, Hastings, Janofsky & Walker LLP will rely as to all matters of Maryland law, including the legality of the common shares offered hereby, on the opinion of Piper Marbury Rudnick & Wolfe LLP, Baltimore, Maryland. INCORPORATION OF INFORMATION BY REFERENCE The Securities and Exchange Commission allows Lexington, Net 1 and Net 2 to incorporate information into this Joint Consent and Proxy Solicitation Statement/Prospectus by reference. This means that Lexington, Net 1 and Net 2 can disclose important information to you by referring you to other documents previously, and separately from into this Joint Consent and Proxy Solicitation Statement/Prospectus, filed with the Securities and Exchange Commission. The information incorporated by reference is considered to be a part of this Joint Consent and Proxy Solicitation Statement/Prospectus, except for any information that is superseded by information that is included in this document. 186 196 This Joint Consent and Proxy Solicitation Statement/Prospectus incorporates by reference the documents listed below. They contain important information about Lexington, Net 1 and Net 2 and their financial condition. The following documents previously filed by Lexington with the Securities and Exchange Commission (File No. 1-12386) under the Securities Exchange Act of 1934 are incorporated by reference into this Joint Consent and Proxy Solicitation Statement/Prospectus:
LEXINGTON SEC FILINGS PERIOD/FILING DATE --------------------- ------------------ Quarterly Report on Form 10-Q Quarter ended June 30, 2001, filed on August 14, 2001 Current Report on Form 8-K Filed on July 25, 2001 Current Report on Form 8-K/A Filed on July 25, 2001 Current Report on Form 8-K Filed on July 23, 2001 Quarterly Report on Form 10-Q Quarter ended March 31, 2001 filed on May 9, 2001 Proxy Statement on Schedule 14A Filed on April 12, 2001 Annual Report on Form 10-K Year ended December 31, 2000, filed on April 2, 2001
The following documents previously filed by Net 1 with the Securities and Exchange Commission (File No. 000-22596) under the Securities Exchange Act of 1934 are incorporated by reference into this Joint Consent and Proxy Solicitation Statement/Prospectus:
NET 1 SEC FILINGS PERIOD/FILING DATE ----------------- ------------------ Quarterly Report on Form 10-Q Quarter ended June 30, 2001, filed on August 14, 2001 Current Report on Form 8-K Filed on July 23, 2001 Quarterly Report on Form 10-Q Quarter ended March 31, 2001, filed on May 14, 2001 Annual Report on Form 10-K/A-1 Year ended December 31, 2000, filed on April 2, 2001 and amended on June 15, 2001
The following documents previously filed by Net 2 with the Securities and Exchange Commission (File No. 000-22566) under the Securities Exchange Act of 1934 are incorporated by reference into this Joint Consent and Proxy Solicitation Statement/Prospectus:
NET 2 SEC FILINGS PERIOD/FILING DATE ----------------- ------------------ Quarterly Report on Form 10-Q Quarter ended June 30, 2001, filed on August 14, 2001 Current Report on form 8-K Filed on July 23, 2001 Quarterly Report on Form 10-Q Quarter ended March 31, 2001, filed on May 14, 2001 Annual Report on Form 10-K/A-1 Year ended December 31, 2000, filed on April 2, 2001 and amended on June 15, 2001
In addition, all documents filed by Lexington, Net 1 or Net 2 under the Securities Exchange Act of 1934 after the date of this Joint Consent and Proxy Solicitation Statement/Prospectus, and before the deadline for returning proxies and consent forms, will be deemed to be incorporated by reference into, and to be a part of, this Joint Consent and Proxy Solicitation Statement/Prospectus as of the date of filing of such documents. These documents include periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy statements. Any statement contained in a document that is or is deemed to be incorporated by reference will be deemed to be modified or superseded for purposes of this Joint Consent and Proxy Solicitation Statement/ 187 197 Prospectus to the extent that a statement contained in this Joint Consent and Proxy Solicitation Statement/ Prospectus or any other subsequently filed document that is or is deemed to be incorporated by reference in this Joint Consent and Proxy Solicitation Statement/Prospectus modifies or supersedes such previous statement. Any statement so modified or superseded will not be deemed to constitute a part of this Joint Consent and Proxy Solicitation Statement/Prospectus except as so modified or superseded. All information contained or incorporated by reference in this Joint Consent and Proxy Solicitation Statement/Prospectus relating to Lexington and its subsidiaries, has been supplied by Lexington, all such information relating to Net 1 and its subsidiaries has been supplied by Net 1 and all such information relating to Net 2 and its subsidiaries has been supplied by Net 2. You can obtain any of the documents incorporated by reference in this document through Lexington, Net 1 or Net 2, as the case may be, or from the Securities and Exchange Commission through the Securities and Exchange Commission's web site at http://www.sec.gov. Documents incorporated by reference are available from the companies without charge, excluding any exhibits to those documents unless the exhibit is specifically incorporated by reference as an exhibit in this Joint Consent and Proxy Solicitation Statement/ Prospectus. You can obtain documents incorporated by reference in this Joint Consent and Proxy Solicitation Statement/Prospectus by requesting them in writing or by telephone from the appropriate company at the following addresses: Lexington Corporate Net 1 L.P. Net 2 L.P. Properties Trust c/o Lexington Corporate c/o Lexington Corporate 355 Lexington Avenue Properties Trust Properties Trust New York, New York 10017 355 Lexington Avenue 355 Lexington Avenue (212) 692-7260 New York, New York 10017 New York, New York 10017 (212) 692-7200 (212) 692-7200
Lexington, Net 1 or Net 2, as the case may be, will mail to you any document incorporated by reference which you request by first class mail or another equally prompt means, within one business day after your request is received. Lexington, Net 1 and Net 2 have not authorized anyone to give any information or make any representation about the mergers that is different from, or in addition to, that contained in this consent statement-prospectus or in any of the materials that have been incorporated into this document. Therefore, if anyone does give you information of this sort, you should not rely on it. If you are in a jurisdiction where offers or solicitations of offers to exchange or purchase the securities offered by this document, or the solicitation of proxies, is unlawful, or if you are a person to whom it is unlawful to direct these types of activities, then the offer presented in this document does not extend to you. The information contained in this document speaks only as of the date of this document unless the information specifically indicates that another date applies. FORWARD-LOOKING STATEMENTS When used in this Joint Consent and Proxy Solicitation Statement/ Prospectus, the words "believes," "expects," "estimates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially. In particular, among the factors that could cause actual results to differ materially are continued qualification as a real estate investment trust, general business and economic conditions, competition, increases in real estate construction costs, interest rates, accessibility of debt and equity capital markets and other risks inherent in the real estate business including tenant defaults or financial difficulties, potential liability relating to environmental matters and illiquidity of real estate investments. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Lexington, Net 1 and Net 2 undertake no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 188 198 PRO FORMA FINANCIAL INFORMATION LEXINGTON CORPORATE PROPERTIES TRUST The accompanying unaudited pro forma consolidated balance sheet of Lexington as of June 30, 2001 has been prepared from the historical consolidated financial statements of Lexington, Net 1 and Net 2, as adjusted to give effect to (i) Lexington's acquisition of Net 1 and Net 2 assuming that no limited partners elect to receive their merger consideration in the form of dissenter debentures and (ii) the sale of 4,400,000 common shares in an underwritten registered public offering completed in July and August 2001. The accompanying unaudited pro forma statements of income of Lexington for the year ended December 31, 2000 and the six months ended June 30, 2001 have been prepared as if (a) Lexington's acquisition of Net 1 and Net 2 had been consummated as of January 1, 2000 and (b) all 2001 and 2000 property purchases and sales, and the above-referenced sale of common shares, had been consummated as of January 1, 2000. The unaudited pro forma financial data does not purport to be indicative of what the results of operations or financial position of Lexington would have been had the mergers, all other property purchases and sales, and the above-referenced sale of common shares, been completed on the date assumed, nor is such unaudited financial data necessarily indicative of the results of operations of Lexington that may exist in the future. The unaudited pro forma financial data must be read in conjunction with the Notes thereto and with the historical Consolidated Financial Statements and the related Notes included/incorporated by reference. LEXINGTON CORPORATE PROPERTIES TRUST UNAUDITED PRO FORMA INCOME STATEMENT FOR THE SIX MONTHS ENDED JUNE 30, 2001
ALL OTHER COMMON PROFORMA PROFORMA LEXINGTON NET 1 NET 2 TRANSACTIONS(I) SHARE OFFERING ADJUSTMENTS ADJUSTED ---------- ------ ------ --------------- -------------- ----------- ---------- (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues Rental............................. $ 38,734 $2,863 $5,526 $(141) $ -- $ 48(a) $ 47,030 Equity in earnings of non-consolidated entities........ 1,416 -- -- 416 -- -- 1,832 Interest and other................. 531 37 140 -- -- (128)(b) 580 ---------- ------ ------ ----- ------- ----- ---------- 40,681 2,900 5,666 275 -- (80) 49,442 ---------- ------ ------ ----- ------- ----- ---------- Expenses Interest expense................... 15,344 810 2,198 (81) (1,000)(j) (48)(c) 17,223 Depreciation and amortization of real estate...................... 8,718 506 1,037 -- 90(d) 10,351 Amortization of deferred expenses......................... 756 -- 147 -- -- 903 General and administrative expenses......................... 2,457 247 549 -- (80)(e) 3,173 Property operating expenses........ 714 -- -- -- -- 714 ---------- ------ ------ ----- ------- ----- ---------- 27,989 1,563 3,931 (81) (1,000) (38) 32,364 ---------- ------ ------ ----- ------- ----- ---------- Income before gains on sale of property, minority interests and extraordinary item................. 12,692 1,337 1,735 356 1,000 (42) 17,078 Gains on sale of properties.......... -- -- 480 (480) -- -- -- ---------- ------ ------ ----- ------- ----- ---------- Income before minority interest and extraordinary item................. 12,692 1,337 2,215 (124) 1,000 (42) 17,078 Minority interests................... 2,754 -- -- -- -- 35(h) 2,789 ---------- ------ ------ ----- ------- ----- ---------- Income before extraordinary item..... 9,938 1,337 2,215 (124) 1,000 (77) 14,289 Extraordinary item................... (270) -- -- 270 -- -- -- ---------- ------ ------ ----- ------- ----- ---------- Net income........................... $ 9,668 $1,337 $2,215 $ 146 $ 1,000 $ (77) $ 14,289 ========== ====== ====== ===== ======= ===== ========== Income per common share -- basic: Income before extraordinary item... $ 0.50 $ 0.55 Extraordinary item................. (0.02) -- ---------- ---------- Net income......................... $ 0.48 $ 0.55 ========== ========== Weighted average common shares outstanding...................... 17,219,900 23,764,900 ========== ========== Income per common share -- diluted: Income before extraordinary item... $ 0.48 $ 0.53 Extraordinary item................. (0.01) -- ---------- ---------- Net income......................... $ 0.47 $ 0.53 ========== ========== Weighted average common shares outstanding...................... 23,039,062 29,627,395 ========== ==========
Note: If limited partners elect to receive up to $20,000 in dissenter debentures, then net income would decrease by $850. F-1 199 LEXINGTON CORPORATE PROPERTIES TRUST UNAUDITED PRO FORMA INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2000
ALL OTHER COMMON PROFORMA PROFORMA LEXINGTON NET 1 NET 2 TRANSACTIONS(I) SHARE OFFERING ADJUSTMENTS ADJUSTED ---------- ------ ------- --------------- -------------- ----------- ---------- (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues Rental............................ $ 76,824 $4,774 $10,126 $1,054 $ -- $ 96(a) $ 92,874 Equity in earnings of non-consolidated entities....... 1,851 -- -- 1,049 -- -- 2,900 Interest and other................ 1,330 163 541 -- -- (394)(b) 1,640 ---------- ------ ------- ------ ------- ------- ---------- 80,005 4,937 10,667 2,103 -- (298) 97,414 ---------- ------ ------- ------ ------- ------- ---------- Expenses Interest expense.................. 29,581 1,605 4,785 772 (2,000)(j) (183)(c) 34,560 Depreciation and amortization of real estate..................... 17,513 941 2,049 158 -- 181(d) 20,842 Amortization of deferred expenses........................ 1,497 -- 383 7 -- -- 1,887 General and administrative expenses........................ 4,902 447 1,011 (243) -- (91)(e) 6,026 Property operating expenses....... 1,504 -- -- -- -- -- 1,504 Transaction costs................. -- 400 400 -- -- (800)(f) -- ---------- ------ ------- ------ ------- ------- ---------- 54,997 3,393 8,628 694 (2,000) (893) 64,819 ---------- ------ ------- ------ ------- ------- ---------- Income before gain on sale of properties and minority interests......................... 25,008 1,544 2,039 1,409 2,000 595 32,595 Gain on sale of properties.......... 2,959 -- -- (695) -- (2,264)(g) -- ---------- ------ ------- ------ ------- ------- ---------- Income before minority interests.... 27,967 1,544 2,039 714 2,000 (1,669) 32,595 Minority interests.................. 6,015 -- -- (184) -- 39(h) 5,870 ---------- ------ ------- ------ ------- ------- ---------- Net income.......................... $ 21,952 $1,544 $ 2,039 $ 898 $ 2,000 $(1,708) $ 26,725 ========== ====== ======= ====== ======= ======= ========== Income per common share -- basic: Net income........................ $ 1.15 $ 1.03 ========== ========== Weighted average common shares outstanding..................... 16,900,039 23,445,039 ========== ========== Income per common share -- diluted: Net income........................ $ 1.10 $ 1.01 ========== ========== Weighted average common shares outstanding..................... 24,714,219 29,379,475 ========== ==========
Note: If limited partners elect to receive up to $20,000 in dissenter debentures, then net income would decrease by $1,700. F-2 200 NOTES TO UNAUDITED PRO FORMA INCOME STATEMENT (DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEAR ENDED FOR THE SIX MONTHS 12/31/00 ENDED 6/30/01 -------------- ------------------ (a) Reflects straight line revenues relating to new measurement date for the Net 1 and Net 2 property leases................................................. $ 96 $ 48 ======= ======= (b) Reflects the following: Elimination of acquisition fees earned by Lexington on third party acquisitions made by Net 1 and Net 2....... $ (120) $ -- Elimination of asset management fees earned by Lexington.............................................. (91) (80) Elimination of interest earned in inter-entity notes payable/receivable..................................... (183) (48) ------- ------- $ (394) $ (128) ======= ======= (c) Reflects the following: Elimination of interest expense on inter-entity notes payable/receivable..................................... $ (183) $ (48) ======= ======= (d) Depreciation expense on the merger consideration allocated to the real estate assets of Net 1 and Net 2. The allocation of the purchase price for pro forma purposes is based upon Lexington management's best estimate of the relative fair value of each asset acquired and liability assumed. This estimate was determined based upon the familiarity with the Net Partnerships and industry experience. Accordingly, for such pro forma purposes 80% of the purchase price, in excess of other identifiable assets, has been allocated to real estate with a 40 year life and 20% to land. Upon consummation of the merger allocations may vary... $ 181 $ 90 ======= ======= (e) Elimination of asset management fees paid by Net 1 & Net 2..................................................... $ (91) $ (80) ======= ======= (f) Elimination of merger costs incurred by Net 1 and Net 2......................................................... $ (800) $ -- ======= ======= (g) Elimination of gains on sale of real estate for transactions between Lexington and Net 1 and Net 2..... $(2,264) $ -- ======= ======= (h) Impact on minority interest relating to the pro forma adjustments............................................... $ 39 $ 35 ======= ======= (i) Represents the pro forma impact on each respective income statement item for all 2001 and 2000 Lexington, Net 1 and Net 2 purchases and sales of real estate..... (j) Elimination of interest expense associated with the repayment of $25,000, 8% Exchangeable Redeemable Secured Notes.......................................... $(2,000) $(1,000) ======= =======
F-3 201 LEXINGTON CORPORATE PROPERTIES TRUST UNAUDITED PRO FORMA BALANCE SHEET AS OF JUNE 30, 2001
COMMON PROFORMA PROFORMA LEXINGTON NET 1 NET 2 SHARE OFFERING ADJUSTMENTS ADJUSTED --------- ------- ------- -------------- ----------- -------- (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Real estate, net.................................. $577,040 $43,349 $90,051 $ -- $ 9,048(a) $719,488 Cash and cash equivalents......................... 10,935 1,045 1,519 34,573(i) (34,123)(b) 13,949 Restricted cash................................... 1,819 -- -- -- -- 1,819 Investment in non-consolidated entities........... 46,193 -- -- -- -- 46,193 Other assets...................................... 40,581 1,521 3,048 -- (7,720)(c) 37,430 -------- ------- ------- -------- -------- -------- Total assets.................................. $676,568 $45,915 $94,618 $ 34,573 $(32,795) $818,879 ======== ======= ======= ======== ======== ======== Mortgages and notes payable....................... $398,569 $20,039 $55,183 $(25,000)(j) $ (1,380)(d) $447,411 Deferred installment obligations.................. 6,671 -- -- -- -- 6,671 Other liabilities................................. 5,041 1,703 853 (641)(k) 865(e) 7,821 -------- ------- ------- -------- -------- -------- 410,281 21,742 56,036 (25,641) (515) 461,903 -------- ------- ------- -------- -------- -------- Minority interest................................. 58,834 -- -- -- 310(f) 59,144 -------- ------- ------- -------- -------- -------- Mezzanine equity: Preferred shares................................ 24,369 -- -- -- -- 24,369 -------- ------- ------- -------- -------- -------- Common shares................................... 3,809 -- -- -- -- 3,809 -------- ------- ------- -------- -------- -------- Partners' capital................................. -- 24,173 38,582 -- (62,755)(g) -- Shareholders' equity: Common shares................................... 2 -- -- -- -- 2 Additional paid in capital...................... 247,968 -- -- 62,964(l) 30,165(h) 341,097 Deferred compensation........................... (1,917) -- -- -- -- (1,917) Accumulated distributions in excess of earnings...................................... (64,801) -- -- (2,750)(m) -- (67,551) Notes receivable from officers/shareholders..... (1,977) -- -- -- -- (1,977) -------- ------- ------- -------- -------- -------- Shareholders' equity/partners' capital.......... 179,275 24,173 38,582 60,214 (32,590) 269,654 -------- ------- ------- -------- -------- -------- $676,568 $45,915 $94,618 $ 34,573 $(32,795) $818,879 ======== ======= ======= ======== ======== ========
Note: If limited partners in Net 1 and Net 2 elect to receive up to $20,000 of their merger consideration in dissenter debentures, the impact to mortgages and notes payable and shareholders equity would be to increase mortgages and notes payable and decrease shareholders' equity by $20,000. F-4 202 NOTES TO UNAUDITED PRO FORMA BALANCE SHEET (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (a) Reflects the excess over historical cost basis of consideration paid by Lexington for the real estate of Net 1 and Net 2 as determined as follows: Merger consideration issued............................ $ 65,000 Mortgages assumed...................................... 73,842 Merger costs........................................... 2,010 Other liabilities assumed.............................. 2,451 --------- Purchase price......................................... 143,303 Allocation Identifiable other assets............................ (1,739) Share issuance costs, contra equity.................. (2,010) --------- Subtotal.......................................... 139,554 Reclassification of Lexington investment in and receivables from Net 1 and Net 2.................... 2,894 --------- Allocation to real estate, net....................... 142,448 Historical Net Partnership real estate basis......... (133,400) --------- $ 9,048 ========= (b) Reflects the following: The payment of costs incurred by Net 1 and Net 2 associated with the mergers and estimated final partner distributions.......................................... $ (1,948) Cash paid to the limited partners of Net 1 and Net 2... (32,175) --------- $ (34,123) ========= (c) Reflects the following: Elimination of inter-entity notes receivable and accrued interest............................................ $ (1,380) Elimination of Lexington basis in its investments in limited partner units of Net 1 and Net 2............... (1,409) Allocation of merger costs paid by Lexington........... (1,040) Elimination of accounts receivable -- straight line rents for Net 1 and Net 2 property leases.............. (2,614) Elimination of inter-entity accounts receivable........ (105) Elimination of Lexington percentage ownership in the Net 1 and Net 2 asset management contracts............. (340) Elimination of capitalized financing costs of Net 1 and Net 2.................................................. (832) --------- $ (7,720) ========= (d) Reflects inter-entity notes payable and accrued interest............................................... $ (1,380) ========= (e) Reflects the following: Elimination of inter-entity accounts payable........... $ (105) Estimated merger costs to be paid by Lexington......... 970 --------- $ 865 =========
F-5 203 (f) Reflects the following: Issuance of 43,333 limited partnership units in Net 3, assuming a $15 per unit price, in exchange for the general partnership interests in Net 1 and Net 2....... $ 650 Elimination of Lexington percentage ownership in the Net 1 and Net 2 asset management contracts............. (340) --------- $ 310 ========= (g) Reflects the elimination of Net 1 and Net 2 partners' capital................................................ $ (62,755) ========= (h) Reflects the issuance of 2,145,000 common shares, assuming a $15 per share price, associated with the merger net of offering costs to be paid by Lexington of $2,010................................................. $ 30,165 ========= (i) Reflects the following: Cash proceeds from common share issuance, net of underwriters discount and estimated offering costs..... $ 62,964 Cash paid to satisfy the $25,000, 8% Exchangeable Redeemable Secured Notes, prepayment premium and accrued interest at June 30, 2001...................... (28,391) --------- $ 34,573 ========= (j) Reflects the repayment of the $25,000, 8% Exchangeable Redeemable Secured Notes............................... $ (25,000) ========= (k) Reflects the repayment of accrued interest............. $ (641) ========= (l) Reflects the issuance of 4,400,000 common shares, at $15.20 per share price, less underwriters discount and estimated offering costs............................... $ 62,964 ========= (m) Reflects the recognition of the prepayment premium...... $ (2,750) =========
F-6 204 LEXINGTON CORPORATE PROPERTIES TRUST UNAUDITED PRO FORMA INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE SIX MONTHS ENDED JUNE 30, 2001 EARNINGS PER SHARE CALCULATIONS The following is a reconciliation of numerators and denominators of the pro forma basic and diluted earnings per share computations for each of the periods presented ($000's except per share data):
12/31/00 6/30/01 ----------- ----------- BASIC Net income.................................................. $ 26,725 $ 14,289 Less preferred dividends.................................... (2,562) (1,344) ----------- ----------- Net income attributed to common shareholders................ $ 24,163 $ 12,945 =========== =========== Weighted average number of common shares outstanding -- historical................................. 16,900,039 17,219,900 Common shares issued in merger.............................. 2,145,000 2,145,000 Common shares issued in offering............................ 4,400,000 4,400,000 ----------- ----------- Weighted average number of common shares used in calculation of basic earnings per common share........................ 23,445,039 23,764,900 =========== =========== Net income per common share -- basic:.................. $ 1.03 $ 0.55 =========== =========== DILUTED Net income attributable to common shareholders.............. $ 24,163 $ 12,945 Add incremental income attributed to assumed conversion of dilutive securities....................................... 5,627 2,648 ----------- ----------- Net income attributed to common shareholders................ $ 29,790 $ 15,593 =========== =========== Weighted average number of common shares used in calculation of basic earnings per common share........................ 23,445,039 23,764,900 Add incremental shares representing: Shares issuable upon exercise of employee share options... 166,806 287,234 Shares issuable upon conversion of dilutive securities.... 5,767,630 5,575,261 ----------- ----------- Weighted average number of common shares used in calculation of diluted earnings per common share...................... 29,379,475 29,627,395 =========== =========== Net income per common share -- diluted:................ $ 1.01 $ 0.53 =========== ===========
F-7 205 PRO FORMA EQUIVALENT CALCULATIONS FOR THE NET PARTNERSHIPS The information set forth below provides a detailed analysis of the calculation of the pro forma comparative unit data for the Net Partnerships which is set forth under the heading "SUMMARY -- Unaudited Comparative Per Share/Unit Data" on page 25, and assumes that no limited partners elect to receive their merger consideration in the form of dissenter debentures. NET 1 PRO FORMA EQUIVALENT CALCULATIONS Assuming that the average closing price of Lexington common shares is $15.00, which is the midpoint of the range for determining the number of common shares to be issued, the exchange for each Net 1 limited partnership unit is 27.35 as calculated as follows: Merger consideration per $1,000/unit........................ $820.38 Common share component (50%)................................ $410.19(A) Assumed common share price.................................. $ 15.00(B) Exchange ratio(A)/(B)....................................... 27.35
YEAR ENDED DECEMBER 31, 2000 DIVIDENDS BASIC EPS DILUTED EPS ---------------------------- ---------- --------- ----------- Lexington pro forma amounts................................. $ 1.22 $ 1.03 $ 1.01 Exchange ratio.............................................. 27.35 27.35 27.35 ---------- ------- ------ $ 33.37 $ 28.17 $27.62 ========== ======= ======
SIX MONTHS ENDED JUNE 30, 2001 DIVIDENDS BASIC EPS DILUTED EPS ------------------------------ ---------- --------- ----------- Lexington pro forma amounts................................. $ 0.63 $ 0.55 $ 0.53 Exchange ratio.............................................. 27.35 27.35 27.35 ---------- ------- ------ $ 17.23 $ 15.04 $14.50 ========== ======= ======
NET 2 PRO FORMA EQUIVALENT CALCULATIONS Assuming that the average closing price of Lexington common shares is $15.00, which is the midpoint of the range for determining the number of common shares to be issued, the exchange ratio for each Net 2 limited partnership unit is 2.73 as calculated as follows: Merger consideration per $100/unit.......................... $ 81.96 Common share component (50%)................................ $ 40.98(A) Assumed common share price.................................. $ 15.00(B) Exchange ratio (A)/(B)...................................... 2.73
YEAR ENDED DECEMBER 31, 2000 DIVIDENDS BASIC EPS DILUTED EPS ---------------------------- ---------- --------- ----------- Lexington pro forma amounts................................. $ 1.22 $ 1.03 $ 1.01 Exchange ratio.............................................. 2.73 2.73 2.73 ---------- ------- ------ $ 3.33 $ 2.81 $ 2.76 ========== ======= ======
SIX MONTHS ENDED JUNE 30, 2001 DIVIDENDS BASIC EPS DILUTED EPS ------------------------------ ---------- --------- ----------- Lexington pro forma amounts................................. $ 0.63 $ 0.55 $ 0.53 Exchange ratio.............................................. 2.73 2.73 2.73 ---------- ------- ------ $ 1.72 $ 1.50 $ 1.45 ========== ======= ======
PRO FORMA BOOK VALUE PER SHARE
SIX MONTHS ENDED JUNE 30, 2001 ------------------------------ Lexington -- Pro forma book value........................... $ 269,654(A) Lexington -- Pro forma shares outstanding................... 24,065,896(B) Lexington Pro forma book value per share (A/B)............. $ 11.20 Net 1 (exchange ratio 27.35 plus $410.19 in cash)........... $ 716.51 Net 2 (exchange ratio 2.73 plus $40.98 in cash)............. $ 71.56
F-8 206 ANNEX A-1 MERGER AGREEMENT AND AMENDMENT BETWEEN LEXINGTON, NET 3 AND NET 1 207 AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER BY AND AMONG LEXINGTON CORPORATE PROPERTIES TRUST NET 3 ACQUISITION L.P. AND NET 1 L.P. This AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER (this "Amendment") is entered into as of July 19, 2001, by and between Lexington Corporate Properties Trust, a Maryland statutory real estate investment trust ("Lexington"), Net 3 Acquisition L.P., a Delaware limited partnership ("Net 3"), and Net 1 L.P., a Delaware limited partnership ("Net 1"). The parties to this Amendment are collectively referred to as the "Parties." W I T N E S S E T H: WHEREAS, the Parties have entered into an Agreement and Plan of Merger, dated as of November 13, 2000 (the "Agreement"); WHEREAS, the Parties desire, and have agreed, subject to the terms and conditions set forth herein, to amend the Agreement in the manner set forth in this Amendment to reflect, among others, the following changes: (i) to substitute cash for the portion of the Merger Consideration otherwise payable in Convertible Subordinated Debentures and (ii) to modify the "collar" reflected in the Average Closing Price used to determine the number of Common Shares to be issued to Net 1 from a range of $11 to $13 to a range of $14 to $16; and WHEREAS, capitalized terms used herein and not defined shall have the meanings ascribed to such terms in the Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows: AMENDMENTS 1. FIRST AMENDMENT. The Agreement is hereby amended to delete the present text of the fourth recital thereto in its entirety, and to insert in its place the following: "WHEREAS, immediately prior to the Effective Time, the Net 1 GP will contribute its general partnership interest in Net 1 to Net 3 as a partnership contribution, pursuant to the terms and condition set forth in the contribution agreement dated the date hereof by and between Net 3 and Net 1 GP, as amended as of July 19, 2001 (the "Net 1 Contribution Agreement");" 2. SECOND AMENDMENT. The Agreement is hereby amended to delete the phrase "Convertible Subordinated Debentures" from Section 1.5 thereof, and to insert in its place the phrase "Cash." 3. THIRD AMENDMENT. The Agreement is hereby amended to delete the present text of Section 2.1 thereof in its entirety, and to insert in its place the following: "SECTION 2.1 Effect on Units. As of the Effective Time, by virtue of the Merger and without any action on the part of the parties hereto or their respective affiliates, the limited partnership interests of the 208 limited partners of Net 1 (the "Units") shall be converted into the consideration (the "Merger Consideration"), determined as follows: (a) Consideration. Except as provided in Section 2.1(b) or (c) each Unit shall, in the Merger, be exchanged for the number of common shares of Lexington, $0.0001 par value per share (the "Common Shares"), and such amount of cash (the "Cash") as is determined in accordance with the following formulas: N = (0.50)V/A P = (0.50)V Where: N = the number of Common Shares exchanged for each Unit; A = the Average Closing Price; P = the amount of Cash exchanged for each Unit; and V = the Per Unit Adjusted Net Asset Value. (b) Notwithstanding Section 2.1(a), as of the Effective Time, each Unit held of record by a holder who votes against the Merger will receive Common Shares and Cash in accordance with Section 2.1(a), unless such holder affirmatively elects to receive consideration in the form of Lexington's 8.50% senior subordinated debentures due eight years after the closing date ("Dissenter Debentures") by following the procedures to be set forth in the Registration Statement, in which case each Unit shall, in the Merger, be exchanged for Dissenter Debentures with a principal amount equal to the Per Unit Adjusted Net Asset Value. (c) The Dissenter Debentures shall have the terms and conditions set forth in Exhibit A. On or before the closing, the parties shall enter into a mutually acceptable indenture with respect to the Dissenter Debentures, which indenture shall satisfy the requirements of the Trust Indenture Act of 1940. The indenture shall be substantially in a form as reasonably agreed to by the parties hereto. (d) Notwithstanding anything in the foregoing to the contrary. no fractional Common Shares shall be issued in connection with the Merger. All Common Shares to which a holder of Units is entitled immediately prior to the Effective Time shall be aggregated. If a fractional share results from such aggregation, in lieu of receiving any such fractional share, each holder of Units who would otherwise have been entitled to receive a fraction of a Common Share shall receive cash equal to the amount of Merger Consideration represented by such fractional share." 4. FOURTH AMENDMENT. The Agreement is hereby amended to delete the present text of the second sentence of Section 2.3 thereof, and to insert in its place the following: "At the Effective Time, Lexington shall deposit with the Exchange Agent, (i) share certificates representing the total number of Common Shares issuable pursuant to Section 2.1(a), (ii) the aggregate amount of Cash payable pursuant to Section 2.1(a) and (iii) the aggregate amount of Dissenter Debentures issuable pursuant to Section 2.1(b), in each case in exchange for the Units (such share certificates and Dissenter Debentures, together with any dividends or distributions with respect thereto, and payments of cash in lieu of fractional shares being hereinafter referred to as the "Exchange Fund")." 5. FIFTH AMENDMENT. The Agreement is hereby amended to delete the phrase "Convertible Subordinated Debentures or" and the phrase "Convertible Subordinated Debentures" and wherever such phrases appear in Sections 2.4 and 3.1(s) thereof. 209 6. SIXTH AMENDMENT. The Agreement is hereby amended to delete the present text of the second sentence of Section 7.2(f) thereof, and to insert in its place the following: "(f) "Average Closing Price" means the average closing price on the New York Stock Exchange of the Common Shares for the 20-day period preceding, but not including, the Closing Date; provided, however, that the Average Closing Price shall not exceed $16.00 per Common Share, nor be less than $14.00 per Common Share." 7. SEVENTH AMENDMENT. The Agreement is hereby amended to delete Section 7.2(m) in its entirety. 8. EIGHTH AMENDMENT. The Agreement is hereby amended to delete the present text of Exhibit A thereto, and to insert in its place Exhibit A hereto. MISCELLANEOUS 9. COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 10. ORIGINAL DOCUMENT. Except as amended hereby, the Agreement is in all respects ratified, reaffirmed and confirmed and all of its terms shall remain in full force and effect. 11. ENTIRE AGREEMENT. This Amendment and the Agreement constitute the entire agreement between the Parties and supersede all prior understandings, agreements, or representations by or between the Parties, written or oral, to the extent they related in any way to the subject matter hereof or thereof. 12. SUCCESSION AND ASSIGNMENT. This Amendment shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns. No Party may assign either this Amendment or any of its rights, interests, or obligations hereunder without the prior written approval of the other Parties hereto. 13. WAIVERS. Failure of any Party at any time to require the performance by any other Party of any provision of this Amendment or any related agreement shall in no way affect the right to require full performance of such provision thereafter. Furthermore, the waiver by any Party of a breach of any provision of this Amendment or any related agreement will not be held to be a waiver of any other provision of this Amendment or any related agreement. 14. SEVERABILITY. The invalidity or unenforceability of any term or provision of this Amendment or any related agreement shall not affect the validity or enforceability of the remaining terms and provisions hereof or thereof. [REMAINDER OF PAGE LEFT INTENTIONALLY BLANK] 210 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to the Agreement and Plan of Merger to be duly executed and made and entered into as of the date first set forth above. LEXINGTON CORPORATE PROPERTIES TRUST By: /s/ T. WILSON EGLIN ------------------------------------ Name: T. Wilson Eglin Title: President NET 3 ACQUISITION L.P. By: Lex GP-1, Inc., its general partner By: /s/ PATRICK CARROLL ------------------------------------ Name: Patrick Carroll Title: Vice President NET 1 L.P. By: Lepercq Net 1 L.P., its general partner By: Lepercq Net 1 Inc., its general partner By: /s/ E. ROBERT ROSKIND ------------------------------------ Name: E. Robert Roskind Title: President [SIGNATURE PAGE TO AMENDMENT NO. 1 TO LEXINGTON NET 1 MERGER AGREEMENT] 211 EXHIBIT A TERMS OF DISSENTER DEBENTURES Principal Amount.............. Up to $20 million, subject to waiver by Lexington. The exact principal amount of the dissenter debentures will be determined at the closing of the Transaction based upon the number of Units held by limited partners who elect to receive Dissenter Debentures and will be subject to the waiver by Lexington of the limit on the amount of Dissenter Debentures to be issued. Interest...................... 8.5% per annum, on a day-to-day basis (based upon a 365-day year and actual days elapsed) from the closing of the Transaction. Interest will be paid semi-annually in cash in arrears. Repayment of Principal........ Principal on the Dissenter Debentures is due in one installment on , 2009; provided, however, that 80% of the net proceeds of any taxable sale or refinancing of the assets previously owned by either Net Partnership, as applicable, will be used to prepay the Dissenter Debentures. Prepayment.................... Prepayable in whole or in part at any time. Seniority..................... Expressly subordinated in right and priority of payment to all institutional indebtedness of Lexington outstanding on the closing of the Transaction and any other indebtedness of Lexington issued in the future which is not, by its terms, expressly subordinated to the Dissenter Debentures. The Dissenter Debentures are also senior in right and priority of payment to Lexington's existing Class A Senior Cumulative Convertible Preferred Shares and to all other classes of Lexington's capital shares currently authorized or authorized in the future. Remedies...................... If an event of default occurs and is continuing, holders of Dissenter Debentures will have the following remedies (a) the rate of interest on the Dissenter Debentures will increase to 10%; provided that if such event of default is cured or waived, the rate of interest will be reduced, from the date of such cure or waiver, to 8.5%, (b) automatic acceleration with respect to bankruptcy defaults, and (c) acceleration upon vote by majority of holders upon non-bankruptcy defaults. 212 AGREEMENT AND PLAN OF MERGER DATED AS OF NOVEMBER 13, 2000 BY AND AMONG LEXINGTON CORPORATE PROPERTIES TRUST NET 3 ACQUISITION L.P. AND NET 1 L.P. 213
PAGE ---- ARTICLE I THE MERGER....................................................... SECTION 1.1 The Merger.................................................. SECTION 1.2 Closing..................................................... SECTION 1.3 Effective Time.............................................. SECTION 1.4 Effects of the Merger....................................... SECTION 1.5 Partnership Agreement....................................... SECTION 1.6 General Partner............................................. ARTICLE II CONSIDERATION FOR, AND MANNER OF CONVERTING LIMITED PARTNERSHIP INTERESTS OF NET 1............................................... SECTION 2.1 Effect on Units............................................. SECTION 2.2 Further Assurances.......................................... SECTION 2.3 Exchange Procedures......................................... SECTION 2.4 Payments with Respect to Unexchanged Units.................. SECTION 2.5 Rights of Former Holders of Units........................... ARTICLE III REPRESENTATIONS AND WARRANTIES................................. SECTION 3.1 Representations and Warranties of Lexington................. SECTION 3.2 Representations and Warranties of Net 3..................... SECTION 3.3 Representations and Warranties of Net 1..................... ARTICLE IV ADDITIONAL AGREEMENTS........................................... SECTION 4.1 Reasonable Best Efforts..................................... SECTION 4.2 Public Announcements........................................ SECTION 4.3 Consents, Approvals and Filings............................. SECTION 4.4 State Takeover Laws......................................... SECTION 4.5 No Solicitation by Net 1.................................... SECTION 4.6 Conduct of Businesses....................................... SECTION 4.7 Approvals of Shareholder and Limited Partners............... SECTION 4.8 Inspection of Records....................................... SECTION 4.9 Regulatory Filings.......................................... SECTION 4.10 Expenses.................................................... SECTION 4.11 REIT Status................................................. SECTION 4.12 Appraisals.................................................. SECTION 4.13 Termination Fees............................................ ARTICLE V CONDITIONS PRECEDENT............................................. SECTION 5.1 Conditions to Each Party's Obligation to Effect the Merger...................................................... SECTION 5.2 Conditions to Obligations of Net 1.......................... SECTION 5.3 Conditions to Obligations of Lexington and Net 3............ SECTION 5.4 Frustration of Closing Conditions...........................
i 214
PAGE ---- ARTICLE VI TERMINATION, AMENDMENT AND WAIVER............................... SECTION 6.1 Termination................................................. SECTION 6.2 Effect of Termination....................................... SECTION 6.3 Amendment................................................... SECTION 6.4 Extension; Waiver........................................... ARTICLE VII GENERAL PROVISIONS............................................. SECTION 7.1 Nonsurvival of Representations and Warranties............... SECTION 7.3 Notices..................................................... SECTION 7.4 Interpretation.............................................. SECTION 7.5 Counterparts................................................ SECTION 7.6 Entire Agreement; Third-Party Beneficiaries................. SECTION 7.7 GOVERNING LAW............................................... SECTION 7.8 Assignment.................................................. SECTION 7.9 Enforcement................................................. SECTION 7.10 Severability................................................
ii 215 AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of November 13, 2000, by and among Lexington Corporate Properties Trust, a Maryland statutory real estate investment trust ("Lexington"), Net 3 Acquisition L.P.. a Delaware limited partnership ("Net 3"), and Net 1 L.P., a Delaware limited partnership ("Net 1"). Certain capitalized terms used in this Agreement are defined in Section 7.2. W I T N E S S E T H: WHEREAS, the Board of Trustees of Lexington (the "Board"), has determined that it would be advisable and in the best interests of the holders of beneficial interests in Lexington for Net 1 to merge with and into Net 3 with Net 3 as the surviving entity, subject to the terms and conditions set forth in this Agreement (the "Merger"); and WHEREAS, Lexington, in its capacity as the general partner of Net 3, has determined that it would be advisable and in the best interests of Net 3 for Net 3 to enter into and consummate the proposed Merger; and WHEREAS, Lepercq Net 1 L.P., in its capacity as the general partner of Net 1 (the "Net 1 GP"), has determined that it would be advisable and in the best interests of Net 1 to enter into and consummate the proposed Merger; and WHEREAS, immediately prior to the Effective Time, the Net 1 GP will contribute its general partnership interest in Net 1 to Net 3 as a partnership contribution, pursuant to the terms and condition set forth in the contribution agreement dated the date hereof by and between Net 3 and Net 1 GP (the "Net 1 Contribution Agreement"); WHEREAS, for federal income tax purposes and in accordance with Treasury Regulations sec. 1.708-1(c)(3) and (4), immediately prior to the Effective Time of the Merger and subject to the consummation of the Merger, Net 3 will purchase each limited partnership interest of Net 1 from each limited partner of Net 1 for a specified amount of consideration; WHEREAS, the Merger is subject to the simultaneous consummation of the merger of Net 2 with and into Net 3; WHEREAS, Net l and Lexington have each received a fairness opinion ("Fairness Opinion") from a nationally-recognized investment banking firm retained by it to provide such fairness opinion; and WHEREAS, Net 1, the Net 1 GP, Net 3 and Lexington desire to make certain representations, warranties, covenants and agreements in connection with the Merger and also to prescribe various conditions to the Merger. NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained in this Agreement, the parties hereto hereby agree as follows: ARTICLE I THE MERGER SECTION 1.1 The Merger. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with Maryland General Corporate Law (the "MGCL") and the Delaware Revised Uniform Limited Partnership Act (the "DRULPA"), the Merger shall be effected such that Net 1 shall be merged with and into Net 3 at the Effective Time (as defined in Section 1.3), the separate existence of Net 1 shall cease and Net 3 shall continue as the surviving entity in the Merger (the "Surviving Entity") and shall succeed to and assume all the rights and obligations of Net 1. The Merger shall have the effects specified in the MGCL and the DRULPA. The Merger shall be consummated pursuant to the terms of this Agreement, which has been approved and adopted by the Board, the Net 1 GP and Lexington, in its capacity as the majority limited partner and sole general partner of Net 3. 216 SECTION 1.2 Closing. Unless this Agreement shall have been terminated pursuant to Section 6.1, and subject to the satisfaction or waiver of the conditions set forth in Article V, the closing of the Merger (the "Closing") will take place as soon as practicable following the last to be satisfied or waived of the conditions set forth in Article V (other than the delivery of certificates referred to in Sections 5.2(a) and (b) and Sections 5.3(a) and (b)) in accordance with this Agreement the date of the Closing being referred to herein as (the "Closing Date"), at the offices of Paul, Hastings, Janofsky & Walker LLP, 399 Park Avenue, New York, New York 10022, unless another date, time or place is agreed to in writing by the parties hereto. SECTION 1.3 Effective Time. If all the conditions to the Merger set forth in Article V shall have been fulfilled or waived (and this Agreement shall not have been terminated pursuant to Section 6.1 hereof), the parties shall cause a Certificate of Merger to be properly executed, verified and delivered for filing in accordance with DRULPA and the MGCL on the Closing Date. The Merger shall become effective upon the later of (i) the issuance of a certificate of merger by the State Department of Assessments and Taxation of the State of Maryland and (ii) the issuance of a certificate of merger by the Secretary of State of the State of Delaware, or such other date as may be agreed to by the parties, but not later than the Closing Date (the "Effective Time"). SECTION 1.4 Effects of the Merger. The Merger shall have the effects set forth in this Agreement and in the applicable provisions of the Act. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the properties, rights, privileges, powers and franchises of Net l and Net 3 shall vest in the Surviving Entity, and all debts, liabilities and duties of Net 1 and Net 3 shall become the debts, liabilities and duties of Surviving Entity. SECTION 1.5 Federal Income Tax Treatment. For federal income tax purposes and in accordance with Treasury Regulations sec. 1.708-1(c)(3) and (4), immediately prior to the Merger, and subject to the consummation thereof, Net 3 will purchase each limited partnership interest of Net 1 from each limited partner of Net 1 that consents to treat the transaction for tax purposes as a sale of that limited partner's partnership interest. Such consent shall have been acquired pursuant to the terms of the Proxy Statement. The consideration transferred for each such interest shall equal the sum of (1) the fair market value of the Common Shares and principal amount of the Convertible Subordinated Debentures received per Unit as specified in Section 2.1 and (2) the assumption of such limited partner's share of partnership liabilities. Any limited partner that does not consent to treat the Merger as a sale by such limited partner of its partnership interests and elects to receive Dissenter Debentures will remain a limited partner of Net 1 at the time of the Merger. Net 1 shall be considered as undertaking the assets-over form of merger for federal income tax purposes pursuant to Reg. sec. 1.7081(c)(3). SECTION 1.6 Partnership Agreement. At the Effective Time, Net 3's partnership agreement shall continue to be the partnership agreement of the Surviving Entity until thereafter changed or amended as provided therein or by applicable law. SECTION 1.7 General Partner. At the Effective Time, Lexington shall continue to be the general partner of the Surviving Entity, serving until the earlier of its resignation or removal or until a successor is duly elected by the limited partners. ARTICLE II CONSIDERATION FOR, AND MANNER OF CONVERTING LIMITED PARTNERSHIP INTERESTS OF NET 1 SECTION 2.1 Effect on Units. As of the Effective Time, by virtue of the Merger and without any action on the part of the parties hereto or their respective affiliates, the limited partnership interests of the limited partners of Net 1 (the "Units") shall be converted into the consideration (the "Merger Consideration"), determined as follows: (a) Consideration. Except as provided in Section 2.1(b) or (c) each Unit shall, in the Merger, be exchanged for the number of common shares of Lexington, $0.0001 par value per share (the 2 217 "Common Shares"), and such principal amount of Lexington's 8.5% convertible subordinated debentures due eight years after the Closing Date ("Convertible Subordinated Debentures") as is determined in accordance with the following formulas: N = (0.50)V/A P = (0.50)V Where: N = the number of Common Shares exchanged for each Unit; A = the Average Closing Price; P = the principal amount of Convertible Subordinated Debentures exchanged for each Unit; and V = the Per Unit Adjusted Net Asset Value. (b) Notwithstanding Section 2.1(a) hereof, a holder of Units may elect to receive a greater proportion of its Merger Consideration, in increments of 10% of such holder's Merger Consideration, in principal amount of Convertible Subordinated Debentures with a corresponding reduction in its Merger Consideration payable in Common Shares, as provided in this Section 2.1(b) by following the procedures to be set forth in the Registration Statement. In the event a holder of Units elects to receive a greater proportion of its Merger Consideration in principal amount of Convertible Subordinated Debentures, with a corresponding reduction in Merger Consideration payable in Common Shares, then each Unit shall, in the Merger, be exchanged for the number of Common Shares, and such principal amount of Convertible Subordinated Debentures as is determined in accordance with the following formulas: N = V(X)/A P = (1-X)V Where: N = the number of Common Shares exchangeable per Unit; V = the Per Unit Adjusted Net Asset Value; X = the percentage (i.e., less than 50%, by increments of 10% only) of the Merger Consideration which the holder of the Unit elects to receive in Common Shares; A = the Average Closing Price, and P = the principal amount of Convertible Subordinated Debentures exchangeable per Unit. (c) Notwithstanding Sections 2.1(a) and (b), as of the Effective Time, each Unit held of record by a holder who votes against the Merger will receive Common Shares and Convertible Subordinated Debentures in accordance with Section 2.1(a) or 2.1(b), as applicable, unless such holder affirmatively elects to receive consideration in the form of Lexington's 8.50% senior subordinated debentures due eight years after the closing date ("Dissenter Debentures") by following the procedures to be set forth in the Registration Statement, in which case each Unit shall, in the Merger, be exchanged for Dissenter Debentures with a principal amount equal to the Per Unit Adjusted Net Asset Value. (d) The Convertible Subordinated Debentures and the Dissenter Debentures shall have the terms and conditions set forth in Exhibit A. On or before the closing, the parties shall enter into mutually acceptable indentures with respect to the Convertible Subordinated Debentures and Dissenter Debentures, which indentures shall satisfy the requirements of the Trust Indenture Act of 1940. The indentures shall be substantially in a form as reasonably agreed to by the parties hereto. 3 218 (e) Notwithstanding anything in the foregoing to the contrary, no fractional Common Shares shall be issued in connection with the Merger. All Common Shares to which a holder of Units is entitled immediately prior to the Effective Time shall be aggregated. If a fractional share results from such aggregation, in lieu of receiving any such fractional share, each holder of Units who would otherwise have been entitled to receive a fraction of a Common Share shall receive cash equal to the amount of Merger Consideration represented by such fractional share. SECTION 2.2 Further Assurances. If, at any time after the Effective Time, the Surviving Entity shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Entity the right, title or interest in, to or under any of the rights, properties or assets of Net 1 acquired or to be acquired by the Surviving Entity as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving Entity shall be authorized to execute and deliver, in the name and on behalf of each of Lexington, Net 3 and Net 1, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of each of Lexington, Net 3 and Net 1 or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in the Surviving Entity or otherwise to carry out this Agreement. SECTION 2.3 Exchange Procedures. Prior to the Effective Time, Lexington shall appoint a commercial bank or trust company satisfactory to Net 1 to act as exchange agent hereunder (the "Exchange Agent"). At the Effective Time, Lexington shall deposit with the Exchange Agent, (i) share certificates representing the total number of Common Shares issuable pursuant to Sections 2.1(a) and (b), (ii) the aggregate amount of Convertible Subordinated Debentures issuable pursuant to Sections 2.1(a) and (b) and (iii) the aggregate amount of Dissenter Debentures issuable pursuant to Section 2.1(c), in each case in exchange for the Units (such share certificates. Convertible Subordinated Debentures and Dissenter Debentures, together with any dividends or distributions with respect thereto, and payments of cash in lieu of fractional shares being hereinafter referred to as the "Exchange Fund"). Promptly after the Effective Time, Lexington shall cause the Exchange Agent to mail to each holder a form letter of transmittal (the "Transmittal Letter") specifying that delivery shall be effected only upon proper execution and delivery to the Exchange Agent of an assignment of interest of the Unit or such other documents as Lexington or Net 3 may reasonably require (the "Transfer Document"), and instructions for use in effecting the surrender of the Units in exchange for the applicable Merger Consideration. Subject to the delivery to the Exchange Agent of a duly executed Transfer Document and Transmittal Letter, promptly after the Effective Time, the Exchange Agent shall issue to each holder of Units delivering such Transfer Document and Transmittal Letter such holder's Merger Consideration calculated in accordance with Section 2.1 in exchange for its Units. Until such Transfer Document and Transmittal Letter are delivered as contemplated by this Section 2.3, each Unit shall be deemed at any time after the Effective Time to constitute only the right to receive, upon such delivery, such Merger Consideration. SECTION 2.4 Payments with Respect to Unexchanged Units. No (i) distributions with respect to Common Shares with a record date after the Effective Time or (ii) amounts otherwise payable with respect to the Convertible Subordinated Debentures or Dissenter Debentures shall be paid to any holder of Units until the delivery of a Transfer Document and Transmittal Letter in respect of such Units in accordance with Section 2.3. Following delivery of a Transfer Document and Transmittal Letter in respect of such Units in accordance with Section 2.3, Lexington shall pay to the holder of such Unit (the "Unexchanged Units"), the Accrued Amounts attributable to such Unexchanged Units. "Accrued Amounts" with respect to Unexchanged Units shall mean those amounts which are payable (i) with respect to the Common Shares, (a) at the time of such delivery, the amount of dividends from Lexington with a record date after the Effective Time theretofore paid with respect to the number of whole Common Shares into which the Units immediately prior to the Effective Time were converted pursuant to Section 2.1, and (b) at the appropriate payment date, the amount of dividends from Lexington with a record date after the Effective Time, but prior to such delivery, and with a payment date subsequent to such delivery, payable with respect to such whole Common Shares, and (ii) with respect to the Convertible Subordinated Debentures or Dissenter Debentures, (a) at the time of delivery of such Unexchanged Units, the amount of interest and principal payable by Lexington with a record date after the Effective Time theretofore paid with respect to the Convertible Subordinated Debentures or Dissenter 4 219 Debentures into which the Units immediately prior to the Effective Time were converted pursuant to Section 2.1, and (b) at the appropriate payment date, the amount of interest and principal payable from Lexington with a record date after the Effective Time, but prior to such delivery, and with a payment date subsequent to such delivery, payable with respect to such whole Convertible Subordinated Debentures or Dissenter Debentures. SECTION 2.5 Rights of Former Holders of Units. At the Effective Time, the unit transfer books of Net 1 shall be closed as to holders of Units immediately prior to the Effective Time and no transfer of Units by any such holder shall thereafter be made or recognized. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1 Representations and Warranties of Lexington. Lexington represents and warrants to Net 1 as follows: (a) Organization, Standing and Power. Lexington is a statutory real estate investment trust duly created, validly existing and in good standing under the laws of the State of Maryland and has the requisite trust power and authority to carry on its business as now being conducted, except where failure to do so would not have a Lexington Material Adverse Effect. Each of Lexington's Subsidiaries (other than Net 3) is a corporation or partnership duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, has the requisite power and authority to own its properties and to carry on its business as it is now being conducted, and is duly qualified to do business and is in good standing in each jurisdiction in which the ownership of its property or the conduct of its business requires such qualification, except for jurisdictions in which such failure to be so qualified or to be in good standing would not have a Lexington Material Adverse Effect. Lexington and its Subsidiaries have obtained all licenses, permits and other authorizations and have taken all actions required by applicable law or governmental regulations in connection with their business as now conducted, where the failure to obtain any such item or to take any such action would have a Lexington Material Adverse Effect. Copies of the Subsidiaries' organizational documents and partnership and Joint Venture agreements have been or will be prior to the Closing, delivered or made available to Net 1 and were or will be true and correct when delivered or made available. For purposes of this Agreement, the term "Lexington Material Adverse Effect" means any material adverse effect with respect to Lexington or its Subsidiaries, taken as a whole, or any change of effect that adversely, or is reasonably expected to adversely affect (i) the business, assets, results from operations or condition (financial or otherwise) of Lexington and its Subsidiaries, or (ii) the ability of Lexington to consummate the transactions contemplated by this Agreement in any material respect or materially impair or delay Lexington's ability to perform its obligations hereunder. For the purposes of this Section 3.1, the term "Subsidiaries" shall include the entities set forth in the Schedule 3.1(a), which are all of Lexington's Subsidiaries. (b) Authority. Lexington has the requisite power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement and all other documents, agreements and instruments related to the transactions contemplated by this Agreement to which it is a party (the "Lexington Ancillary Agreements"). The execution, delivery and performance of this Agreement by Lexington of the transactions contemplated hereby have been duly authorized by all necessary action on the part of Lexington. Subject only to the approval of the Merger by the holders of a majority of the outstanding voting shares of Lexington, the consummation by Lexington of this Agreement, the Lexington Ancillary Agreements and the transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of Lexington. (c) Enforceability. This Agreement has been duly executed and delivered by Lexington and, assuming this Agreement constitutes the valid and binding agreement of Net 1 and Net 3, constitutes a valid and binding obligation of Lexington, enforceable against Lexington in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar 5 220 laws affecting creditors' rights and remedies and to general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity). (d) Noncontravention. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions hereof will not, (i) conflict with any of the provisions of the declaration of trust or bylaws of Lexington, (ii) conflict with, result in a breach of or default (with or without notice or lapse of time, or both) under, or give rise to a right of first refusal, termination, cancellation or acceleration of any obligation (including to pay any sum of money) or loss of a benefit under, or require the consent of any person under, any indenture or other agreement, permit, concession, ground lease, franchise, license or similar instrument or undertaking to which Lexington is a party or by Lexington or any of its assets is bound, result in the creation or imposition of a material lien or other restriction or encumbrance on any material asset of Lexington, which, singly or in the aggregate, would have a Lexington Material Adverse Effect, or (iii) violate any domestic or foreign law, rule or regulation or any order, writ, judgment, injunction, decree, determination or award currently in effect except for such violations, which, singly or in the aggregate, would only have an immaterial effect. To Lexington's actual acknowledge, neither Lexington nor any of its Subsidiaries (other than Net 3) is in violation of any order of any court, governmental authority or arbitration board or tribunal, or any law, ordinance, governmental rule or regulation to which Lexington or any of its Subsidiaries (other than Net 3) or any of their respective properties or assets are subject, where such violation would have a Lexington Material Adverse Effect. Lexington and its Subsidiaries (other than Net 3) have obtained all licenses, permits and other authorizations and have taken all actions required by applicable law or governmental regulations in connection with their business as now conducted, where the failure to obtain any such item or to take any such action would have a Lexington Material Adverse Effect. (e) Consents. Other than the filings provided for in this Agreement to effect the Merger, any filings required under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Securities Act of 1933, as amended (the "Securities Act"), or applicable state securities and "Blue Sky" laws (collectively, the "Regulatory Filings"), no consent, approval or authorization of; or declaration or filing with, or notice to, any domestic or foreign governmental agency or regulatory authority (a "Governmental Entity") or any third party which has not been received or made, is required by or with respect to Lexington or in connection with the execution and delivery of this Agreement by Lexington or the consummation by Lexington of the transactions contemplated hereby, except for (i) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware and the State Department of Assessments and Taxation of the State of Maryland and (ii) consents, approvals, authorizations, declarations, filings and notices that, if not obtained or made, will not, individually or in the aggregate, result in a Lexington Material Adverse Effect. (f) Capitalization. As of September 30, 2000, the authorized capital of Lexington consisted of Forty Million (40,000,000) Common Shares and Ten Million (10,000,000) preferred shares of Lexington, $0.0001 par value per share (the "Preferred Shares"). As of September 30, 2000, Seventeen Million One Hundred Sixty Two Thousand Nine Hundred Seventy (17,162,970) Common Shares were outstanding and Two Million (2,000,000) Preferred Shares were outstanding. Except as disclosed in the Lexington Reports, Lexington has no outstanding bonds, debentures, notes or other obligations, the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the shareholders of Lexington on any matter. All such issued and outstanding Common Shares are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights. Except as disclosed in the Lexington Reports, there are not any existing options, warrants, calls, puts, subscriptions, convertible securities, or other rights, agreements or commitments which obligate Lexington or any of its subsidiaries to issue, transfer, acquire or sell any shares or other equity interest of Lexington or any of its Subsidiaries, except under any employee incentive plan approved by Lexington's shareholders. There are no agreements or understandings to which Lexington is a party with respect to the voting of any Common Shares or which restrict the transfer of any such shares, except in order to protect its REIT status. 6 221 (g) Subsidiaries. Except as set forth in Schedule 3.1(a), Lexington owns directly or indirectly each of the outstanding shares of capital stock or all of the partnership or other equity interests of each of Lexington's Subsidiaries (except those Joint Venture interests as many be disclosed in Schedule 3.1(a)) and such interests are free and clear of all Encumbrances other than liens imposed by local law which are not material. (h) Other Interests. Except as disclosed in Schedule 3.1(a), Lexington does not own directly or indirectly any interest or investment (whether equity or debt) in any corporation, partnership, Joint Venture, business, trust or entity (other than investments in short-term investments securities). (i) SEC Documents. (i) Lexington has made available or will make available to Net 1 prior to the Closing, registration statements of Lexington filed with the SEC in connection with public offerings of Lexington's securities since 1995 and all exhibits, amendments and supplements thereto (the "Lexington Registration Statements"), and each report, proxy statement or information statement and all exhibits thereto prepared by it or relating to its properties since the effective date of the latest Lexington Registration Statement, each in the form (including exhibits and any amendments thereto) filed with the SEC (collectively, the "Lexington Reports"). (ii) To Lexington's actual knowledge, as of their respective dates, the Lexington Reports (i) complied as to form in all material respects with the applicable requirements of the Securities Laws and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. To Lexington's actual knowledge, each of the consolidated balance sheets of Lexington included in or incorporated by reference into the Lexington Reports (including the related notes and schedules) fairly presents the consolidated financial position of Lexington and its Subsidiaries as of its date and each of the consolidated statements of income, retained earnings and cash flows of Lexington included in or incorporated by reference into the Lexington Reports (including any related notes and schedules) fairly presents the results of operations, retained earnings or cash flows, as the case may be, of Lexington and its Subsidiaries for the periods set forth therein (subject, in the case of unaided statements, to normal year-end audit adjustments which would not be material in amount or effect), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein and except, in the case of the unaided statements, as permitted by the Securities Laws. (iii) Except as and to the extent set forth on the consolidated balance sheet of Lexington and its Subsidiaries at June 30, 2000, including all notes thereto, or as set forth in the Lexington Reports, neither Lexington nor any of its Subsidiaries has any material liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on, or reserved against in, a balance sheet of Lexington or in the notes thereto, prepared in accordance with generally accepted accounting principles consistently applied, except liabilities arising in the ordinary course of business since such date which would not have a Lexington Material Adverse Effect. (j) Litigation. To Lexington's actual knowledge, there are (i) no continuing orders, injunctions or decrees of any court, arbitrator or governmental authority to which Lexington or any of its Subsidiaries is a party or by which any of its properties or assets are bound or, to which any of its trustees, directors, officers, or affiliates is a party or by which any of their properties or assets are bound and (ii) no actions, suits or proceedings pending against Lexington or any of its Subsidiaries or, to the knowledge of Lexington, against any of its trustees, officers or affiliates or, to the knowledge of Lexington, threatened against Lexington or any of its Subsidiaries or against any of its trustees, directors, officers, or affiliates, at law or in equity, or before or by any federal or state commission, board, bureau, agency or instrumentality that in the case of clauses (i) or (ii) above are reasonably likely, individually or in the aggregate, to have a Lexington Material Adverse Effect. 7 222 (k) Absence of Certain Changes. Except as disclosed in the Lexington Reports filed with the SEC prior to the date hereof, (a) Lexington and its Subsidiaries have conducted their business only in the ordinary course of such business (which, for purposes of this Section only, shall include all acquisitions of real estate properties and financing arrangements made in connection therewith); (b) there has not been any Lexington Material Adverse Effect; (c) there has not been any declaration, setting aside or payment of any dividend or other distribution with respect to the Common Shares (other than such payments which are consistent with past practice); and (d) there has not been any material change in Lexington's accounting principles, practices or methods. (1) Taxes. (i) Lexington and each of its Subsidiaries: (1) has timely filed all federal and state tax returns including, without limitation, information returns and reports required to be filed by any of them for tax periods ended prior to the date of this Agreement or requests for extensions have been timely filed and any such request has been granted and has not expired and all such returns are absolute and complete in all material respects, (2) has paid or accrued all taxes shown to be due and payable on such returns or which have become due and payable pursuant to any assessment, deficiency notice, 30-day letter or other notice received by it and (3) has properly accrued all taxes for such periods subsequent to the periods covered by such returns. Neither Lexington nor any of its Subsidiaries has received notice that the federal, state and local income and franchise tax returns of Lexington or any such Subsidiary has been or will be examined by any taxing authority. Neither Lexington nor any of its Subsidiaries has executed or filed with the Internal Revenue Service ("IRS") or any other taxing authority any agreement now in effect extending the period for assessment or collection of any income or other taxes. (4) neither Lexington nor any of its Subsidiaries is a party to any pending action or proceedings by any governmental authority for assessment or collection of taxes, and no claim for assessment or collection of taxes has been asserted against it. True, correct and complete copies of all federal, state and local income or franchise tax returns filed by Lexington and each of its Subsidiaries and all communications relating thereto have been delivered to Net 1 or made available to representatives of Net 1 or will be so delivered or made available prior to the Closing. Lexington has (A) qualified to be taxed as a REIT pursuant to Sections 856 through 859 of the Code for its taxable years ended December 31, 1993 through 1999, inclusive; (B) operated, and intends to continue to operate, in such a manner as to qualify to be taxed as a REIT pursuant to Sections 856 through 859 of the Code for its taxable year in which the Effective Date occurs; and (C) not taken or omitted to take any action which could result in a challenge to its status as a REIT. Lexington represents that each of its Subsidiaries is a qualified REIT subsidiary as defined in Section 856 (i) of the Code. (m) Books and Records. The books of account and other financial records of Lexington and its Subsidiaries are in all material respects true, complete and correct, have been maintained in accordance with good business practices, and are accurately reflected in all materials respects in the financial statements included in the Lexington Reports. (n) Properties (i) Except as disclosed on Schedule 3.1(n), Lexington and its Subsidiaries own, and each Joint Venture to which Lexington or any of its Subsidiaries is a party owns, fee simple title to each of the real properties reflected on the most recent balances sheet of Lexington included in the Lexington Reports (the "Lexington Properties"), which are all of the real estate properties owned by them, such Lexington Properties which are subject to Encumbrances are so subject only to the extent disclosed in the Lexington Reports and such Lexington Properties which are free and clear of Encumbrances are listed as such on Schedule 3.1 (n) hereto. To Lexington's actual knowledge, 8 223 Lexington's 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 (1) Encumbrances and Property Restrictions set forth in the Lexington Reports; (2) Property Restrictions imposed or promulgated by law or any governmental body or authority with respect to real property, including zoning regulations that do not materially adversely affect the current use of the property; (3) Encumbrances and Property Restrictions disclosed on existing title reports or surveys (in either case copies of which title reports and surveys have been or will be delivered or made available to Net 1 prior to the Closing); and (4) mechanics', carriers', workmen's, repairmen's liens and other Encumbrances, Property Restrictions and other limitations of any kind, if any, which have heretofore been bonded (and that are disclosed in the Lexington Reports) or which individually or in the aggregate, do not exceed $100,000, do not materially detract from the value of or materially interfere with the present use of any of Lexington Properties subject thereto or affected thereby, and do not otherwise materially impair business operations conducted by Lexington and its Subsidiaries and which have arisen or been incurred only in its construction activities or in the ordinary course of business. (ii) Valid policies of title insurance have been issued insuring Lexington's or any of its Subsidiaries' fee simple title to Lexington Properties, subject only to the matters disclosed above and such policies are, at the date hereof, in full force and effect and no material claim has been made against any such policy. To Lexington's actual knowledge (1) there is no certificate, permit or license from any governmental authority having jurisdiction over any of Lexington 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 Lexington 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 Lexington Properties that has not been obtained and is not in full force and effect, or any pending threat of modification or cancellation of any of same; (2) neither Lexington nor its Subsidiaries has received written notice of any material violation of any federal, state or municipal law, ordinance, order, regulation or requirement affecting any portion of any of Lexington Properties issued by any governmental authority; (3) there are no structural defects relating to Lexington Properties and no Lexington Properties whose building systems are not in working order in any material respect: and (4) there is (A) no physical damage to any Lexington Property in excess of $100,000 for which there is no insurance in effect covering the cost of the restoration, (B) no current renovation to any Lexington Property for which Lexington is responsible, the cost of which exceeds $100,000 and (C) no current restoration (excluding tenant improvements) on any of Lexington Property the cost of which exceeds $100,000. (iii) Neither Lexington nor its Subsidiaries have received notice to the effect that and there are any (1) condemnation or rezoning proceedings that are pending or threatened with respect to any of Lexington Properties or (2) any zoning, building or similar laws, codes, ordinances, orders or regulations that are or will be violated by the continued maintenance, operation or use of any buildings or other improvements on any of Lexington Properties or by the continued maintenance, operation or use of the parking areas in any material respect. All work to be performed, payments to be made and actions to be taken by Lexington or its 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 Lexington Properties has been performed, paid or taken, as the case may be, and Lexington is not aware of any planned proposed work, payments or actions that may be required after the date hereof pursuant to such agreements. (o) Environmental Matters. To the actual knowledge of Lexington, none of Lexington, any of its Subsidiaries or any other person, has caused or permitted (i) the unlawful presence of any Hazardous Material on any of Lexington Properties, or (ii) any unlawful spills, releases, discharges or disposal of Hazardous Materials to have occurred or be presently occurring on or from Lexington 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 Lexington Material Adverse Effect; and in connection with the construction on or operation and use of Lexington Properties, Lexington and its Subsidiaries have not 9 224 failed to comply, in any material respect, with any 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. (p) Labor Materials. Neither Lexington nor any of its Subsidiaries is a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor union organization. There is no unfair labor practice or labor arbitration proceeding pending or, to the knowledge of the executive officers of Lexington, threatened against Lexington or its Subsidiaries relating to their business, except for any such proceeding which would not have Lexington Material Adverse Effect. To the knowledge of Lexington, there are no organizational efforts with respect to the formation of a collective bargaining unit presently being made or threatened involving employees of Lexington or any of its Subsidiaries. (q) No Brokers. Lexington has not entered into any contract, arrangement or understanding with any person or firm which may result in the obligation of Net 1 to pay any finder's fee, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby. Lexington is not aware of any claim for payment of any finder's fee, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby. (r) Common Shares. The issuance and delivery by Lexington of the Common Shares in connection with the Merger and this Agreement have been duly and validly authorized by all necessary action on the part of Lexington, except for the approval of its shareholders of the Merger contemplated by this Agreement. The Common Shares to be issued in connection with the Merger and this Agreement, when issued in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable, except that 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 Lexington. (s) The Debentures. The issuance and delivery by Lexington of the Convertible Subordinated Debentures and the Dissenter Debentures in connection with the Merger and this Agreement have been duly and validly authorized by all necessary action on the part of Lexington, except for the approval of its shareholders of the Merger as contemplated by this Agreement. The Convertible Subordinated Debentures and the Dissenter Debentures to be issued in connection with the Merger and this Agreement, when issued in accordance with the terms of this Agreement, will constitute binding obligations of Lexington enforceable in accordance with their terms, subject to the laws respecting debtor rights generally. (t) Convertible Securities. Lexington has no outstanding options, warrants or other securities exercisable for, or convertible into, Common Shares, the terms of which require any anti-dilution adjustments by reason of the consummation of the transactions contemplated hereby. (u) Contracts and Commitments. The Lexington Reports disclose (i) all unsecured notes or other obligations of Lexington and its Subsidiaries which individually may result in total payments in excess of $100,000, (ii) notes, debentures, bonds and other evidence of indebtedness which are secured or collateralized by mortgages, deeds of trust or other security interests in Lexington Properties or personal property of Lexington and its Subsidiaries and (iii) each commitment entered into by Lexington or any of its Subsidiaries which individually may result in total payments or liability in excess of $100,000. Copies of the foregoing have been or will be made available to Net 1 prior to the Closing and will be materially true and correct when delivered or made available. None of Lexington or any of its Subsidiaries has received any notice of a default that has not been cured under any of the documents described in clauses (i) or (ii) above or is in default respecting any payment obligations thereunder beyond any applicable grace periods. There are no options of Lexington or any of its Subsidiaries to purchase real property. All Joint Venture agreements to which Lexington or any of its Subsidiaries is a party are disclosed in the Lexington Reports and Lexington or its Subsidiaries are not in default with respect to any obligations, which individually or in the aggregate are material, thereunder. 10 225 (v) Developmental Rights. Set forth in Schedule 3.1 (v) is a list of all material agreements entered into by Lexington relating to the development, rehabilitation, capital improvement or construction of office buildings, industrial facilities or other real estate properties, which development or construction has not been substantially completed as of the date of this Agreement. Such agreements have not been modified and are valid and binding in accordance with their respective terms. SECTION 3.2 Representations and Warranties of Net 3. Net 3 represents and warrants to Net 1 as follows: (a) Organization, Standing and Power. Net 3 is a limited partnership duly created, validly existing and in good standing under the laws of the State of Delaware, and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted, except where the failure to do so would not have, individually or in the aggregate, a Lexington Material Adverse Effect. (b) Authority. Net 3 has the requisite power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement. The execution, delivery and performance by Net 3 of this Agreement and the consummation of the Merger by Net 3 has been duly authorized by all necessary action on the part of Net 3. (c) Enforceability. This Agreement has been duly executed and delivered by Net 3 and, assuming this Agreement constitutes the valid and binding agreement of Lexington and Net 1, constitutes a valid and binding obligation of Net 3, enforceable against such party in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws affecting creditors' rights and remedies and to general principles of equity. (d) Noncontravention. Except as set forth in Schedule 3.2(d), the execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions of this Agreement, will not (i) conflict with the limited partnership agreement of Net 3, (ii) conflict with, result in a breach 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 obligation or loss of a material benefit under, or require the consent of any person under, any indenture, or other material agreement, permit, concession, franchise, license or similar instrument or undertaking to which Net 3 is a party or by which Net 3 or any of their assets are bound or affected, or (iii) contravene any law, rule or regulation, or any order, writ, judgment, injunction, decree, determination or award binding on or applicable to Net 3 and currently in effect, which, in the case of clauses (ii) and (iii) above, singly or in the aggregate, would have a Lexington Material Adverse Effect. To the General Partner's actual knowledge, Net 3 is not in violation of any order of any court, governmental authority or arbitration board or tribunal, or any law, ordinance, governmental rule or regulation to which Net 3 or any of its properties or assets are subject, where such violation would have a Lexington Material Adverse Effect. Net 3 has obtained all licenses, permits and other authorizations and has taken all actions required by applicable law or governmental regulations in connection with its business as now conducted, where the failure to obtain any such item or to take any such action would have a Lexington Material Adverse Effect. SECTION 3.3 Representations and Warranties of Net 1. Net 1 represents and warrants to Lexington and Net 3 as follows: (a) Organization, Standing and Power. Net 1 is a limited partnership duly created, validly existing and in good standing under the laws of the State of Delaware, and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted, except where the failure to do so would not have, individually or in the aggregate, a Net 1 Material Adverse Effect. Each of Net 1's subsidiaries is a corporation, limited liability company or partnership duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, has the requisite power and authority to own its properties and to carry on its business as it is now be conducted, and is duly qualified to do business and is in good standing in each jurisdiction in which the ownership of its property or the conduct of its business requires such qualification, except for 11 226 jurisdictions in which such failure to be so qualified or to be in good standing would not have a Net 1 Material Adverse Effect. Net 1 and its subsidiaries have obtained all licenses, permits and other authorizations and have taken all actions required by applicable law or governmental regulations in connection with their business as now conducted, where the failure to obtain any such item or to take any such action would have a Net 1 Material Adverse Effect. Copies of each of Net 1's subsidiaries' organizational documents and partnership and Joint Venture agreements have been or will be prior to the Closing, delivered or made available to Lexington and were or will be true and correct when delivered or made available. For purposes of this Agreement, the term "Net 1 Material Adverse Effect" means any material adverse effect with respect to Net 1 or its subsidiaries, taken as a whole, or any change of effect that adversely, or is reasonably expected to adversely affect, (i) the business, assets, results from operations or condition (financial or otherwise) or (ii) the ability of Net 1 to consummate the transactions contemplated by this Agreement in any material respect or materially impair or delay Net 1's ability to perform its obligations hereunder. (b) Authority. Net 1 has the requisite power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement. The execution, delivery and performance by Net 1 of this Agreement and the consummation of the Merger by Net 1 has been duly authorized by all necessary action on the part of Net 1. Subject only to the approval of the Merger by the holders of a majority of the outstanding partnership interests of Net 1, the consummation by Net 1 of this Agreement, the Net 1 Ancillary Agreements and the transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of Net 1. (c) Enforceability. This Agreement has been duly executed and delivered by Net 1 and, assuming this Agreement constitutes the valid and binding agreement of Lexington and Net 3, constitutes a valid and binding obligation of Net 1, enforceable against Net 1 in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws affecting creditors' rights and remedies and to general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity). (d) Noncontravention. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions of this Agreement, will not (i) conflict with the limited partnership agreement of Net 1, (ii) conflict with, result in a breach 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 obligation or loss of a material benefit under, or require the consent of any person under, any indenture, or other material agreement, permit, concession, franchise, license or similar instrument or undertaking to which Net 1 is a party or by which Net 1 or any of their assets are bound or affected, or (iii) contravene any law, rule or regulation, or any order, writ, judgment, injunction, decree, determination or award binding on or applicable to Net 1 and currently in effect, which, in the case of clauses (ii) and (iii) above, singly or in the aggregate, would have a Net 1 Material Adverse Effect. To the General Partner's actual knowledge, Net 1 is not in violation of any order of any court, governmental authority or arbitration board or tribunal, or any law, ordinance, governmental rule or regulation to which Net 1 or any of its properties or assets are subject, where such violation would have a Net 1 Material Adverse Effect. Net 1 has obtained all licenses, permits and other authorizations which it is required to have and has taken all actions required by applicable law or governmental regulations in connection with its business as now conducted, where the failure to obtain any such item or to take any such action would have a Net 1 Material Adverse Effect. (e) Consents. Other than the filings provided for in this Agreement to effect the Merger, any Regulatory Filings required under the Exchange Act, the Securities Act, or applicable State Securities and "Blue Sky" laws, no consent, approval or authorization of, or declaration or filing with, or notice to, any Governmental Entity which has not been received or made is required by or with respect to Net 1 in connection with the execution and delivery of this Agreement by Net 1 or the consummation by Net 1 of any of the transactions contemplated by this Agreement, except for (i) the filing of the Certificate of Mergers with the Secretary of State of the State of Delaware and the State Department of Assessments and Taxation of the State of Maryland, (ii) such other consents, approvals, authorizations, filings or 12 227 notices as are set forth in Schedule 3.3(e) and (iii) consents, approvals, authorizations, declarations, filings and notices that, if not obtained or made, will not, individually or in the aggregate, result in a Net 1 Material Adverse Effect. (f) Capitalization. As of September 30, 2000, Net 1's outstanding partnership interests consisted of Thirty Thousand Seven Hundred Seventy Two (30,772) Units and a general partnership interest equal to 1% of the partnership interests. Net 1 has no outstanding bonds, debentures, notes or other obligations, the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the partners of Net 1 on any matter. All such outstanding partnership interests are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights. There are no existing options, warrants, calls, puts, subscriptions, convertible securities, or other rights, agreements or commitments which obligate Net 1 or any of its subsidiaries to issue, transfer, acquire or sell any shares or other equity interest of Net 1 or any of its subsidiaries. There are no agreements or understandings to which Net 1 is a party with respect to the voting of any partnership interests or which restrict the transfer of any such partnership interests. (g) Other Interests. Except as set forth in Schedule 3.3(o), Net 1 does not own, directly or indirectly, any interest or investment (whether equity or debt) in any corporation, partnership, Joint Venture, business, trust or entity (other than investments in short-term investment securities). (h) SEC Documents. (i) Net 1 has made available or will make available to Lexington prior to the Closing, registration statements of Net 1 filed with the SEC in connection with public offerings of Net 1's securities since 1995 and all exhibits, amendments and supplements thereto (the "Net 1 Registration Statements"), and each report, proxy statement or information statement and all exhibits thereto prepared by it or relating to its properties since the effective date of the latest Net 1 Registration Statement, each in the form (including exhibits and any amendments thereto) filed with the SEC (collectively, the "Net 1 Reports"). (ii) To Net 1 GP's actual knowledge, as of their respective dates, the Net 1 Reports (i) complied as to form in all material respects with the applicable requirements of the Securities Laws and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. To Net 1's actual knowledge, each of the consolidated balance sheets of Net 1 included in or incorporated by reference into the Net 1 Reports (including the related notes and schedules) fairly presents the consolidated financial position of Net 1 and its subsidiaries as of its date and each of the consolidated statements of income, retained earnings and cash flows of Net 1 included in or incorporated by reference into the Net 1 Reports (including any related notes and schedules) fairly presents the results of operations, retained earnings or cash flows, as the case may be, of Net 1 and its subsidiaries for the periods set forth therein (subject, in the case of unaided statements, to normal year-end audit adjustments which would not be material in amount or effect), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein and except, in the case of the unaided statements, as permitted by the Securities Laws. (iii) Except as and to the extent set forth on the consolidated balance sheet of Net l and its subsidiaries at June 30, 2000, including all notes thereto, or as set forth in the Net 1 Reports, neither Net 1 nor any of its subsidiaries has any material liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on, or reserved against in, a balance sheet of Net 1 or in the notes thereto, prepared in accordance with generally accepted accounting principles consistently applied, except liabilities arising in the ordinary course of business since such date which would not have a Net 1 Material Adverse Effect. (i) Litigation. To the Net 1 GP's actual knowledge, there are (a) no continuing orders, injunctions or decrees of any court, arbitrator or governmental authority to which Net 1 is a party or by 13 228 which any of its properties or assets are bound or to which the Net 1 GP is a party or by which any of his/ its properties or assets are bound and (b) no actions, suits or proceedings pending against Net 1 or against the Net 1 GP or, to the actual knowledge of the Net 1 GP, threatened against Net 1 or against the Net 1 GP, at law or in equity, or before or by any federal or state commission, board, bureau, agency or instrumentality that in the case of clauses (a) or (b) above are reasonably likely, individually or in the aggregate, to have a Net 1 Material Adverse Effect. (j) Absence of Certain Changes. Except as disclosed in the Net 1 Reports, (a) Net 1 has conducted its business only in the ordinary course of such business (which for purposes of this Section 3.3 only, shall include all acquisitions of real estate properties and financing arrangements made in connection therewith); (b) there has not been any Net 1 Material Adverse Effect; (c) there has not been any distribution, setting aside or payment of any distribution with respect to any Partner interest in Net 1; and (d) there has not been any material change in Net 1's accounting principles, practices or methods. (k) Taxes. (i) Net 1 (A) has timely filed all federal and state tax returns including, without limitation, information returns and reports required to be filed by it for tax periods ended prior to the date of this Agreement or requests for extensions have been timely filed and any such request has been granted and has not expired and all such returns are accurate and complete in all material respects, (B) has paid or accrued all taxes shown to be due and payable on such returns or which have become due and payable pursuant to any assessment, deficiency notice, 30-day letter or other notice received by it and (C) has properly accrued all taxes for such periods and periods subsequent to the periods covered by such returns. Net 1 has not received notice that the federal, state and local income and franchise tax returns of Net 1 have been or will be examined by any taxing authority. Net 1 has not executed or filed with the IRS or any other taxing authority any agreement now in effect extending the period for assessment or collection of any income or other taxes. (ii) Net 1 is not a party to any pending action or proceeding by any governmental authority for assessment or collection of taxes, and no claim for assessment or collection of taxes has been asserted against it. True, correct and complete copies of all federal, state and local income or franchise tax returns filed by Net 1 since its inception and all communications relating thereto have been delivered to Lexington or made available to representatives of Lexington or will be so delivered or made available prior to the Closing. Net 1 does not hold any asset (i) the disposition of which could be subject to rules similar to Section 1374 of the Code, as a result of an election under IRS Notice 88-19 or (ii) that is subject to a consent filed pursuant to Section 341(f) of the Code and regulations thereunder. For purposes of this Section 3.3(k), "taxes" includes any interest, penalty or additional amount payable with respect to any tax. (1) Books and Records. The books of account and other financial records of Net 1 are in all material respects true, complete and correct, have been maintained in accordance with good business practices, and are accurately reflected in all material respects in Net 1 financial statements. (m) Properties. (i) Net 1 owns fee simple title to each of the real properties reflected on the June 30, 2000 balance sheet of Net 1 (such properties, the "Net 1 Properties"), which are all of the real estate properties owned by it, and such Lexington Properties are subject to Encumbrances only to the extent disclosed in the Lexington Reports and such Lexington Properties that are free and clear of Encumbrances are listed as such on Schedule 3.3(m)(i). To the Net 1 GP's actual knowledge, the Net 1 Properties are not subject to any Property Restrictions, except for (1) Encumbrances and Property Restrictions disclosed in the Net 1 Reports, (2) Property Restrictions imposed or promulgated by law or any governmental body or authority with respect to real property, including zoning regulations that do not materially adversely affect the current use of the property, (3) Encumbrances and Property Restrictions disclosed on existing title reports or current surveys (in either case copies of which title reports and surveys have been or will be delivered or made available to Lexington prior to the Closing) and/or (4) mechanics', carriers', workmen's, repairmen's liens and 14 229 other Encumbrances, Property Restrictions and other limitations of any kind, if any, which have heretofore been bonded (which individually or in the aggregate do not exceed $10,000), do not materially detract from the value of or materially interfere with the present use of any of the Net 1 Properties subject thereto or affected thereby, and do not otherwise materially impair business operations conducted by Net 1 and which have arisen or been incurred only in its construction activities or in the ordinary course of business. (ii) Valid policies of title insurance have been issued insuring Net 1's fee simple title to the Net 1 Properties subject only to the matters disclosed above and such policies are, at the date hereof, in full force and effect and no claim has been made against any such policy. To the Net 1 GP's actual knowledge: (i) there is no certificate, permit or license from any governmental authority having jurisdiction over any of the Net 1 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 Net 1 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 Net 1 Properties that has not been obtained and is not in full force and effect, or any pending threat of modification or cancellation of any of the same; (ii) Net 1 has not received written notice of any material violation of any federal, state or municipal law, ordinance, order, regulation or requirement affecting any portion of any of the Net 1 Properties issued by any governmental authority; (iii) there are no structural defects relating to the Net 1 Properties and no Net 1 Properties whose building systems are not in working order in any material respect; and (iv) there is (A) no physical damage to any Net 1 Property in excess of $10,000 for which there is no insurance in effect covering the cost of the restoration, (B) no current renovation to any Net 1 Property the cost of which exceeds $10,000 and (C) no current restoration (excluding tenant improvements) of any Net 1 Property, the cost of which exceeds $10,000. (iii) Net 1 has not received notice to the effect that and there are no (i) condemnation or rezoning proceedings that are pending or threatened with respect to any of the Net 1 Properties or (ii) zoning, building or similar laws, codes, ordinances, orders or regulations that are or will be violated by the continued maintenance, operation or use of any buildings or other improvements on any of the Net 1 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 Net 1 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 the Net 1 Properties has been performed, paid or taken, as the case may be, and the Net 1 GP is not aware of any planned or proposed work, payments or actions that may be required pursuant to such agreements, except as set forth in Schedule 3.3(m)(iii). (n) Environmental Matters. To the Net 1 GP's actual knowledge, neither Net 1 nor any other person has caused (a) the unlawful presence of Hazardous Materials on any of the Net 1 Properties, or (b) any unlawful spills, releases, discharges or disposal of Hazardous Materials to have occurred or be presently occurring on or from the Net 1 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 Net 1 Material Adverse Effect; and in connection with the construction on or operation and use of The Net 1 Properties, Net 1 has not failed to comply, in any material respect, with any 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. (o) Subsidiaries and Joint Ventures. Except as disclosed on Schedule 3.3(o), Net 1 has no subsidiaries, and Net 1 does not own, directly or indirectly, any outstanding capital stock or equity interest in any corporation, partnership, Joint Venture or other entity. For purposes of this Agreement, (a) "subsidiary" means, with respect to any entity, any corporation of which securities or other ownership interests have an ordinary voting power to elect a majority of the board of directors of other persons performing similar functions are directly or indirectly owned by such entity and (b) "Joint Venture" means, with respect to any entity, any corporation or organization (other than such entity and any 15 230 subsidiary thereof) of which such entity or any subsidiary thereof is, directly or indirectly, the beneficial owner of 40% or more of any class of equity securities or equivalent profit participation interest. (p) Labor Matters. Net 1 is not a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor union organization. There is no unfair labor practice or labor arbitration proceeding pending or, to the actual knowledge of the Net 1 GP, threatened against Net 1 relating to its business, except for any such proceeding which would not have a Net 1 Material Adverse Effect. To the actual knowledge of the Net 1 GP, there are no organizational efforts with respect to the formation of a collective bargaining unit presently being made or threatened involving employees of Net 1. (q) No Brokers. Net 1 has not entered into any contract, arrangement or understanding with any person or firm which may result in the obligation of Net 1 or Lexington to pay any finder's fees, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby. Net 1 is not aware of any claim for payment of any finder's fees, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby. (r) Related Party Transactions. Except as set forth in the Net 1 Reports, there are no arrangements, agreements or contracts entered into by Net 1 with (a) any consultant, (b) any person who is an officer, director or affiliate of Net 1 or the General Partner, 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 Units in a private placement. (s) Contracts and Commitments. The Net 1 Reports disclose (i) all unsecured notes or other obligations of Net 1 which individually may result in total payments in excess of $10,000, (ii) all notes, debentures, bonds and other evidence of indebtedness which are secured or collateralized by mortgages, deeds of trust or other security interests in The Net 1 Properties or personal property of Net 1, and (iii) each commitment entered into by Net 1 which may result in total payments or liability in excess of $10,000. Net 1 has not received any notice of a default that has not been cured under any of the documents described in clause (i) above or is in default respecting any payment of obligations thereunder beyond any applicable grace periods. All options of Net 1 to purchase real property are set forth in the Net 1 Reports and such options and Net 1's rights thereunder are in full force and effect. (t) Developmental Rights. There are no material agreements entered into by Net 1 relating to the development, rehabilitation, capital improvement or construction of office buildings, industrial facilities or other real estate properties, which development or construction has not been substantially completed as of the date of this Agreement. (u) Convertible Securities. To the General Partner's actual knowledge, Net 1 has no outstanding options, warrants or other securities exercisable for, or convertible into, Units or other interests of Net 1, the terms of which would require any anti-dilution adjustments by reason of the consummation of the transactions contemplated hereby. ARTICLE IV ADDITIONAL AGREEMENTS SECTION 4.1 Reasonable Best Efforts. Upon the terms and subject to the conditions and other agreements set forth in this Agreement, each of the parties agrees to use its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Merger and the other transactions contemplated by this Agreement, including the satisfaction of the respective conditions set forth in Article V. 16 231 SECTION 4.2 Public Announcements. Lexington and Net 3, on the one hand, and Net 1, on the other hand, will consult with each other before issuing, and provide each other the opportunity to review and comment upon, any press release or other public statements with respect to the transactions contemplated by this Agreement, including the Merger, and shall not issue any such press release or make any such 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 or automated quotation system. SECTION 4.3 Consents, Approvals and Filings. (i) Net 1 and Lexington will make and cause their respective Subsidiaries to make all necessary filings, as soon as practicable, in order to facilitate prompt consummation of the Merger and the other transactions contemplated by this Agreement. In addition, Net 1 and Lexington will each use their reasonable best efforts, and will cooperate fully with each other (a) to comply as promptly as practicable with all governmental requirements applicable to the Merger and the other transactions contemplated by this Agreement; and (b) to obtain as promptly as practicable all necessary permits, orders or other consents of Governmental Entities and consents of all third parties necessary for the consummation of the Merger and the other transactions contemplated by this Agreement. Each of Net 1 and Lexington shall use reasonable best efforts to provide such information and communications to Governmental Entities as such Governmental Entities may reasonably request. (ii) Each of the parties shall provide to the other party copies of all applications in advance of filing or submission of such applications to Governmental Entities in connection with this Agreement, and copies of all correspondence with such Governmental Entities, and shall keep all the parties timely apprised of the status of the foregoing. SECTION 4.4 State Takeover Laws. Lexington, Net 3 and Net 1 shall take all necessary steps to exempt the transactions contemplated by this Agreement from, or if necessary to challenge the validity or applicability of, any state takeover law, if any. SECTION 4.5 No Solicitation by Net 1. (i) Net 1 shall not, directly or indirectly, through any officer, director, employee, representative or agent of Net 1, or any of its subsidiaries, solicit or encourage (including by way of furnishing information) the initiation of any inquiries or proposals regarding any merger, amalgamation, take-over bid, reorganization, sale of substantial assets, sale of Units (including, without limitation, by way of a tender offer) or similar transaction involving Net 1 or its subsidiaries with any party other than Lexington and its Subsidiaries (any of the foregoing inquiries or proposals being referred to herein as an "Acquisition Proposal"); provided, however, that nothing contained in this Agreement shall prevent the Net 1 GP, in its capacity as the general partner of Net 1, after consultation with its financial advisors, and after receiving advice from outside counsel to the effect that the Net 1 GP, in its capacity as the general partner of Net 1, is required to do so in order to discharge properly its fiduciary duties, from considering, negotiating, approving and recommending to the holders of Units an unsolicited bona fide Acquisition Proposal which the Net 1 GP, in its capacity as the general partner of Net 1, determines in good faith would result in a transaction more favorable to the holders of Units than the transaction contemplated by this Agreement (any such Acquisition Proposal being referred to herein as a "Superior Proposal"). (ii) Net 1 shall immediately notify Lexington after receipt of any Acquisition Proposal or any request for nonpublic information relating to Net 1 in connection with an Acquisition Proposal or for access to the properties, books or records of Net 1 by any person that informs the Net 1 GP that it is considering making, or has made, an Acquisition Proposal. Such notice to Lexington shall be made orally and in writing and shall indicate in reasonable detail the identity of the offeror and the terms and conditions of such proposal, inquiry or contract. (iii) If the Net 1 GP, in its capacity as the general partner of Net 1, receives a request for material nonpublic information by a person who makes a bona fide Acquisition Proposal and the Net 1 GP, in its capacity as the general partner of Net 1, determines that such proposal is a Superior Proposal, then, and only in such case, Net 1 may, subject to the execution of a confidentiality agreement, provide such party with access to information regarding Net 1. 17 232 (iv) The Net 1 GP, in its capacity as the general partner of Net 1, shall immediately cease and cause to be terminated any existing discussions or negotiations with any parties (other than with Lexington or Net 3) conducted heretofore with respect to any of the foregoing. (v) The Net 1 GP, in its capacity as the general partner of Net 1, shall ensure that any investment banker or other advisor or representative retained by Net 1 are aware of the restrictions described in this Section 4.5, and shall be responsible for any breach of this Section by such bankers, advisors and representatives. SECTION 4.6 Conduct of Businesses. (a) Prior to the Effective Time, except as may be set forth in the Schedule 4.6(a) or as contemplated by this Agreement, unless the other party has consented in writing thereto, Lexington, Net 3 and Net 1: (i) Shall use their reasonable best efforts, and shall cause each of their respective subsidiaries to use their reasonable best efforts, to preserve intact their business organizations and goodwill and keep available the services of their respective officers and employees; (ii) Shall confer on a regular basis with one or more representatives of the other to report material operational matters and, subject to Section 4.5, any proposals to engage in material transactions; and (iii) Shall promptly notify the other of any material change in the condition (financial or otherwise) of the business, properties, assets or liabilities, or any material governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated), or the breach in any material respect of any representation, warranty, covenant or agreement contained herein. (b) Prior to the Effective Time, except as may be set forth in Schedule 4.6(b), unless Lexington has consented (such consent not to be unreasonably withheld or delayed) in writing thereto, Net 1: (i) Shall conduct its operations according to its usual, regular and ordinary course in substantially the same manner as heretofore conducted; (ii) Shall not amend its limited partnership agreement; (iii) Shall not (A) except pursuant to the exercise of options, warrants, conversion rights and other contractual rights existing on the date hereof and disclosed pursuant to this Agreement, issue any Units or other interests in Net 1, make any distribution (other than in accordance with past practice), effect any recapitalization or other similar transaction, or (B) grant, confer or award any option, warrant, conversion right or other right not existing on the date hereof to acquire any Units; (iv) Shall not sell or otherwise dispose of (A) any Net 1 Properties, or (B) except in the ordinary course of business, any of its other assets which are material, individually or in the aggregate, provided, however, it is understood and agreed that Net 1 shall distribute out any excess cash, after payment of Net 1 Transaction Costs, prior to consummation of the Merger; (v) Shall not make any loans, advances or capital contributions to, or investments in, any other person; (vi) Shall not enter into any commitment which individually may result in total payments or liability by or to it in excess of Ten Thousand Dollars ($10,000.00) in the case of any one commitment or in excess of Fifty Thousand Dollars ($50,000.00) for all commitments; (vii) Shall not enter into or terminate any lease. (c) Prior to the Effective Time, except as may be set forth in Schedule 4.6(c), unless Net 1 has consented (such consent not to be unreasonably withheld or delayed) in writing thereto, Lexington: (i) Shall, and shall cause each of its Subsidiaries to, conduct its operations according to their usual, regular and ordinary course in substantially the same manner as heretofore conducted; (ii) Shall not amend it Declaration of Trust except as contemplated by this Agreement; 18 233 (iii) Shall not (A) except pursuant to the exercise of options, warrants, conversion rights and other contractual rights (including Lexington's existing dividend reinvestment plan) existing on the date hereof and disclosed pursuant to this Agreement, issue any of its capital shares, share dividend, recapitalization or other similar transaction, or (B) grant, confer or award any option, warrant, conversion right to or other right not existing on the date hereof to acquire any of its capital shares (except pursuant to any employee incentive plan approved by shareholders), (iv) Except as set forth in Schedule 4.6(c), shall not, and shall not permit any of its Subsidiaries to, sell or otherwise dispose of any Lexington Properties or any of its capital stock of or other interests in Subsidiaries, except in the ordinary course of business; (v) Shall not, and shall not permit any of its Subsidiaries to (except in the ordinary course of business), make any loans, advances or capital contributions to, or investments in, any other person other than in connection with the sale of properties; (vi) Shall not, and shall not permit any of its Subsidiaries to, enter into any commitment which individually may result in total payments or liability by or to it in excess of One Hundred Thousand Dollars ($100,000.00) in the case of any one commitment or in excess of One Hundred Thousand Dollars ($100.000.00) for all commitments, except for those commitments in connection with the acquisition and/or development of property disclosed in Schedule 3.1(v); (vii) Shall not enter or terminate any lease. SECTION 4.7 Approvals of Shareholder and Limited Partners. Lexington will take all action necessary in accordance with applicable law and its organizational documents to convene a meeting of its shareholders as promptly as practicable to consider and vote upon or otherwise to obtain the consent of its shareholders to approve this Agreement and the transactions contemplated hereby. Net 1 will take all action necessary in accordance with applicable law and its organizational documents to obtain the consent of its limited partners to approve this Agreement and the transactions contemplated hereby. The Board and the Net 1 GP shall each recommend such approval and Lexington and Net 1 shall each take all lawful action to solicit such approval, including, without limitation, timely mailing the Proxy Statement; provided, however, that such recommendation or solicitation is subject to any action taken by, or upon authority of, the Board and Net 1 GP, as the case may be, in the exercise of its good faith judgment as to its fiduciary duties to its shareholders or partners, as applicable, imposed by law as advised by counsel. SECTION 4.8 Inspection of Records. From the date hereof to the Effective Time, Net 1 and Lexington shall allow all designated officers, attorneys, accountants and other representatives of the other access at all reasonable times to the records and files, correspondence, audits and properties, as well as to all information relating to commitments, contracts, titles and financial position, or otherwise pertaining to the business and affairs of Net 1 and Lexington and their respective subsidiaries. SECTION 4.9 Regulatory Filings. Lexington, Net 3 and Net 1 shall cooperate and promptly prepare and Lexington shall file with the SEC under the Securities, as soon as practicable a Registration Statement on Form S-4 (the "Registration Statement"), which will include a Joint Proxy and Consent Solicitation Statement/Prospectus in connection with the Merger (the "Proxy Statement"). The respective parties will cause the Registration Statement and the Proxy Statement to comply as to form in all material respects with the applicable provisions of the Securities Act, the Exchange Act and the rules and regulations promulgated thereunder. Lexington and Net 1 shall use reasonable best efforts, and each will cooperate with the other, to have the Registration Statement declared effective by the SEC as promptly as practicable. Lexington and Net 1 shall use their respective best efforts to obtain, prior to the effectiveness of the Registration Statement, any necessary state securities law or "Blue Sky" permits or approvals required to carry out the transactions contemplated by this Agreement. Lexington and Net 1 both agree that, with respect to information within the scope of their knowledge, the Registration Statement and the Proxy Statement and each amendment or supplement thereto, at the time it is filed or becomes effective, will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the 19 234 foregoing shall not apply to the extent that any such untrue statement of a material fact or omission to state a material fact was made by either Lexington or Net 1 in reliance upon and in conformity with written information concerning the other party furnished to by such other party specifically for use in the Registration Statement. Lexington and Net 1 both agree that the written information provided by them specifically for inclusion in the Registration Statement and each amendment or supplement thereto, at the time it is filed or becomes effective, will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Lexington will advise Net 1, promptly after it receives notice thereof, of the time when the Registration Statement may be filed or any supplement or amendment has been filed or when the Registration Statement will become effective, the issuance of any stop order, the suspension of the qualification of the Merger Consideration issuable in connection with the Merger for offering or sale in any jurisdiction, or any request by the SEC for amendment of the Proxy Statement or comments thereon and responses thereto or requests by the SEC for additional information. SECTION 4.10 Expenses. Net 1 shall pay all of the Net 1 Transaction Costs and Lexington shall pay all of the Lexington Transaction Costs. SECTION 4.11 REIT Status. From and after the date and until the Effective Time, neither Lexington, Net 3 not Net 1 nor any of their respective subsidiaries or other affiliates shall (a) knowingly take any action, or knowingly fail to take any action, that would jeopardize qualification of Lexington as a REIT within the meaning of Sections 856 through 859 of the Code; or (b) enter into any contract, agreement, commitment or arrangement with respect to the foregoing. SECTION 4.12 Appraisals. The parties acknowledge that Net 1 is obligated to obtain an appraisal of the Net 1 Properties in accordance with the Net 1 partnership agreement. Net 1 agrees to engage Robert A. Stanger & Company to conduct such appraisal as of December 31, 2000 and to furnish such appraisal to Lexington and Net 3 as soon as practicable after December 31, 2000. SECTION 4.13 Termination Fees. Net 1 shall pay a termination fee to Lexington equal to 4% of the aggregate value of the Merger Consideration to be received by the holders of Units if this Agreement is terminated in any of the following circumstances: (a) the Net 1 GP accepts, solicits or recommends, a Superior Proposal (b) the Net 1 GP withdraws or adversely modifies its recommendation of the Merger; (c) the Net 1 GP makes any positive or neutral recommendation regarding any Superior Proposal; (d) Net 1 enters into any agreement which would result in a Superior Proposal occurring; or (e) the Net 1 GP authorizes any of the above. Lexington shall pay a termination fee to Net 1 equal to 4% of the aggregate value of the Merger Consideration to be received by the holders of Units if this Agreement is terminated in any of the following circumstances: (a) Lexington accepts a proposal for an Alternative Acquisition Transaction; (b) the Board withdraws or adversely modifies its recommendation of the Merger; (c) the Board makes any positive or neutral recommendation regarding any proposal for an Alternative Acquisition Transaction; (d) Lexington enters into any agreement which would result in an Alternative Acquisition Transaction occurring; or (e) the Board authorizes any of the above. An "Alternative Acquisition Transaction" is any merger, amalgamation, take-over bid, reorganization, sale of substantial assets, sale of Common Shares (including, without limitation, by way of a tender offer) or similar transaction involving Lexington and its Subsidiaries with any party other than Net 1 and its subsidiaries which would prevent Lexington from consummating the Merger with Net 1. ARTICLE V CONDITIONS PRECEDENT SECTION 5.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligation of each party to effect the Merger is subject to the satisfaction or written waiver on or prior to the Closing Date of the following conditions: (a) Limited Partner and Shareholder Approval. This Agreement, and the consummation of the transactions contemplated hereby, including the Merger and the issuance of the Merger Consideration 20 235 shall have been duly adopted and approved by the requisite vote of the holders of Units and Lexington shareholders. (b) Dissenters Debentures. Subject to waiver by Lexington, the absence of holders of Units and holders of limited partnership interests in Net 2 electing to receive Dissenter Debentures with an aggregate principal amount in excess of $20 million. (c) Concurrent Closings. The closing of the Net 2 Merger, the Net 1 GP Contribution, and the Net 2 GP Contribution shall occur concurrently with the Closing hereunder. (d) No Injunctions or Restraints. No statute, rule, regulation, 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 shall be in effect; provided, however, that the party invoking this condition shall use its best efforts to have any such temporary restraining order, injunction, order, restraint or prohibition vacated. (e) Governmental and Regulatory Consents. All material filings required to be made prior to the Effective Time with, and all material consents, approvals, permits and authorizations required to be obtained prior to the Effective Time from, Governmental Entities, in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby by Net 1 and Lexington will have been made or obtained (as the case may be). (f) Exchange Listing. The Common Shares issuable pursuant to the Merger shall have been approved for listing on the New York Stock Exchange. (g) Registration Statement. The Registration Statement shall be effective under the Securities Act, no stop orders suspending the effectiveness of the Registration Statement shall have been issued, no action, suit, proceeding or investigation by the Securities and Exchange Commission to suspend the effectiveness thereof shall have been initiated and be continuing, and all necessary approvals under state securities laws, or the Securities Act or the Exchange Act relating to the issuance or trading of the Common Shares issuable pursuant to the Merger shall have been received. (h) Tax Opinion. The receipt by each of Lexington and Net 1 of an opinion from Paul, Hastings, Janofsky & Walker LLP, in form reasonably satisfactory to Net 1 and to Lexington as to various tax consequences of the Merger to the holders of Units and certain "REIT" matters including the continuing status of Lexington as a REIT following completion of the Merger. SECTION 5.2 Conditions to Obligations of Net 1. The obligations of Net 1 to effect the Merger are further subject to the satisfaction or written waiver on or prior to the Closing Date of the following conditions: (a) Representations and Warranties. The representations and warranties of Lexington and Net 3 set forth in Sections 3.1 and 3.2 that are qualified as to materiality or Lexington Material Adverse Effect shall be true and correct and the representations and warranties of Lexington and Net 3 set forth in Sections 3.1 and 3.2 that are not so qualified shall be true and correct in all material respects, in each case 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 such representations and warranties speak as of an earlier date. In addition, all such representations and warranties shall be true and correct as of the date hereof and as though made on and as of the Closing Date, except to the extent such representation or warranty speaks of an earlier date (without regard to any qualifications for materiality or Lexington Material Adverse Effect) except to the extent that any such failure to be true and correct (other than any such failure the effect of which is immaterial) individually and in the aggregate with all such other failures would not have a Lexington Material Adverse Effect, and Net 1 shall have received a certificate signed on behalf of Lexington by an authorized officer of Lexington to the effect set forth in this paragraph. (b) Performance of Obligations of Lexington and Net 3. Lexington and Net 3 shall have performed in all material respects all obligations required to be performed by them under this Agreement at or prior to the Closing Date, and Net 1 shall have received a certificate signed on behalf of Lexington 21 236 by an authorized officer of Lexington to such effect and a certificate signed on behalf of Net 3 by its general partner to such effect. (c) No Material Adverse Effect. From and after the date of this Agreement, there shall not have been any changes or events which, individually or in the aggregate, have had or reasonably would be expected to have a Lexington Material Adverse Effect. (d) Consents. All consents of third parties set forth in Schedule 5.2(d) shall have been obtained. (e) Bring-down of Fairness Opinion. Net 1 shall have received a bring-down of its Fairness Opinion dated as of or immediately prior to the date of mailing of the Proxy Statement to holders of Units. SECTION 5.3 Conditions to Obligations of Lexington and Net 3. The obligation of Lexington and Net 3 to effect the Merger is further subject to the satisfaction or written waiver on or prior to the Closing Date of the following conditions: (a) Representations and Warranties. The representations and warranties of Net 1 and the Net 1 GP set forth in Sections 3.3 that are qualified as to materiality or Net 1 Material Adverse Effect shall be true and correct and the representations and warranties of Net 1 and the Net 1 GP set forth in Sections 3.3 that are not so qualified shall be true and correct in all material respects, in each case as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date. In addition, all such representations and warranties shall be true and correct as of the date hereof and as though made on and as of the Closing Date, except to the extent such representation or warranty speaks of an earlier date (without regard to any qualifications for materiality or Net 1 Material Adverse Effect) except to the extent that any such failure to be true and correct (other than any such failure the effect of which is immaterial) individually and in the aggregate with all such other failures would not have a Net 1 Material Adverse Effect, and Lexington and Net 3 shall have received a certificate signed on behalf of Net 1 by the Net 1 GP to the effect set forth in this paragraph. (b) Performance of Obligations of Net 1 and the Net 1 GP. Net 1 and the Net 1 GP shall have performed in all material respects all obligations required to be performed by them under this Agreement at or prior to the Closing Date, and Lexington and Net 3 shall have received a certificate signed on behalf of Net 1 by the Net 1 GP to such effect. (c) No Material Adverse Effect. From and after the date of this Agreement, there shall not have been any changes or events which, individually or in the aggregate, have had or reasonably would be expected to have a Net 1 Material Adverse Effect. (d) Consents. All consents of third parties set forth in Schedule 5.3(d) shall have been obtained. (e) Amendment of Net 1's Limited Partnership Agreement. Immediately prior to the Effective Time, Net 1 shall have amended its limited partnership agreement to the extent required to permit the Merger and other transactions contemplated by this Agreement to be consummated. (f) Bring-down of Fairness Opinion. Lexington shall have received a bring-down of its Fairness Opinion dated as of or immediately prior to the date of mailing of the Proxy Statement to holders of its Common Shares. SECTION 5.4 Frustration of Closing Conditions. None of Lexington, Net 3 nor Net 1 may rely on the failure of any condition set forth in Section 5.1, 5.2 or 5.3, as the case may be, to be satisfied if such failure was caused by such party's failure to use reasonable best efforts to commence or complete the Merger and the other transactions contemplated by this Agreement. 22 237 ARTICLE VI TERMINATION, AMENDMENT AND WAIVER SECTION 6.1 Termination. This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Effective Time, in any one of the following circumstances: (a) By Lexington or Net 1 if the Merger has not been completed by December 31, 2001. However, no party may terminate this Agreement if its breach is the reason that the Merger has not been completed. (b) By Lexington or Net 1 if a law or final court order prohibits the Merger. (c) By Lexington or Net 1 if the December 31, 2000 Appraisal Value is greater than one hundred and five percent (105%) or less than ninety-five percent (95%) of the Deemed Value. (d) By Lexington or Net 1 if the requisite holders of the Units vote not to approve the Merger. (e) By Lexington or Net 1 if the requisite equity holders of Lexington shares do not approve the Merger. (f) By Lexington or Net 1, if (x) any statute, rule or regulation shall have been promulgated by any Governmental Entity prohibiting or restricting the Merger or (y) any federal or state court of competent jurisdiction or other Governmental Entity shall have issued an order, decree or ruling, or taken any other action permanently restraining, enjoining or otherwise prohibiting the Merger and such order, decree, ruling or other action shall have become final and non-appealable; provided, that a party may not terminate this Agreement pursuant to this clause (f) if it has not complied with its obligations under Section 4.3. (g) By Lexington or Net 1, if (A) the other party shall have failed to comply in any material respect with any of the covenants and agreements (or in any respect with regard to covenants and agreements qualified by materiality) contained in this Agreement to be complied with or performed by such party at or prior to such date of termination, and such failure continues for thirty (30) Business Days after the actual receipt by such party of a written notice from the other party setting forth in detail the nature of such failure, or (B) a representation or warranty of the other party contained in this Agreement shall be untrue in any material respect or a representation or warranty qualified as to materiality or Material Adverse Effect, as the case may be, shall be untrue in any respect. (h) By Net 1, if any of the conditions set forth in Section 5.2 shall have become incapable of being fulfilled and shall not have been waived by Net 1, or by Lexington and Net 3 if any of the conditions set forth in Section 5.3 shall have become incapable of being fulfilled and shall not have been waived by Lexington. (i) By Lexington or Net 3, if the Net 1 GP shall have (a) withdrawn or modified, in accordance with Section 4.7, in any manner adverse to Lexington or Net 3, its approval or recommendation of the Merger or this Agreement or (b) entered into, approved or recommended, a Superior Proposal. (j) By Net 1, if Lexington shall have (a) withdrawn or modified, in accordance with Section 4.7, in any manner adverse to Net 1, its approval or recommendation of the Merger or this Agreement or (b) entered into, approved or recommended an Alternative Acquisition Transaction. SECTION 6.2 Effect of Termination. In the event of the termination and abandonment of this Agreement pursuant to Section 6.1, this Agreement (except for the provisions of Sections 4.13 (with respect to a termination pursuant to Section 6.1 (i) or (j)), this Section 6.2 and Article VII) shall forthwith become void and have no effect, without any liability on the part of any party hereto or its trustees, officers or shareholders; provided, however, that nothing in this Section 6.2 shall relieve any party to this Agreement of liability for any willful or intentional breach of this Agreement. SECTION 6.3 Amendment. To the extent permitted by law, this Agreement may be amended by a subsequent writing signed by each of the parties upon the approval of the Net 1 GP and the Board, whether 23 238 before or after Net 1 Limited partner's or the Lexington shareholders' approval of this Agreement has been obtained; provided, that after any such approval by the Net 1 limited partners or the Lexington shareholders, as the case may be, there shall be made no amendment that requires further approval by such limited partners or shareholders without the further approval of such limited partners or shareholders. SECTION 6.4 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 parties, (b) waive any inaccuracies in the representations and warranties of the other parties contained in this Agreement or in any document delivered pursuant to this Agreement or (c) subject to Section 6.3, waive compliance with any of the agreements or conditions of the other parties 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 such rights. ARTICLE VII GENERAL PROVISIONS SECTION 7.1 Nonsurvival of Representations and Warranties. None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time. This Section 7.1 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time. SECTION 7.2 Definitions. For purposes of this Agreement of the following terms shall have the following meanings: (a) "Acquisition Proposal" shall have the meaning set forth in Section 4.5 of this Agreement. (b) "Adjusted Net Asset Value" means Twenty Five Million Two Hundred Forty Five Thousand Dollars ($25,245,000.00), which represents 99% of (1) the Deemed Value less (2) Net 1's liabilities, determined in accordance with GAAP, consistently applied, and (3) Net 1 Liquidation Costs. (c) "Agreement" shall have the meaning set forth in the preamble to this Agreement. (d) "Aggregate Transaction Costs" means the total costs associated with consummating the Mergers, but excluding the fees and expenses of Prudential Securities Incorporated and the fees and expenses of Cohen & Steers Capital Advisors LLC. (e) "Alternative Acquisition Transaction" shall have the meaning set forth in Section 4.13 of this Agreement. (f) "Average Closing Price" means the average closing price on the New York Stock Exchange of the Common Shares for the 20-day period preceding, but not including, the Closing Date; provided, however, that the Average Closing Price shall not exceed $13.00 per Common Share, nor be less than $11.00 per Common Share. (g) "Board" shall have the meaning set forth in the recitals to this Agreement. (h) "Business Day" means any day other than Saturday, Sunday or any other day on which banks in the City of New York are required or permitted to close. (i) "Closing" shall have the meaning set forth in Section 1.2 of this Agreement. (j) "Closing Date" shall have the meaning set forth in Section 1.2 of this Agreement. (k) "Code" means the Internal Revenue Code of 1986, as amended. (1) "Common Share" shall have the meaning set forth in Section 2.1(a) of this Agreement. (m) "Convertible Subordinated Debentures" shall have the meaning set forth in Section 2.1(a) of this Agreement. 24 239 (n) "December 31, 2000 Appraisal Value" means the value of the Net 1's properties as established by the December 31, 2000 appraisals to be conducted by Robert A. Stanger & Company. (o) "Deemed Value" means Forty Six Million Seven Hundred Fifty Thousand Dollars ($46,750,000.00), representing the value of the Net 1 Properties as agreed upon by the parties. (p) "Dissenter Debentures" shall have the meaning set forth in Section 2.1(c) of this Agreement. (p) "DRUPLA" shall have the meaning set forth in Section 1.1 of this Agreement. (q) "Effective Time" shall have the meaning set forth in Section 1.3 of this Agreement. (r) "Encumbrances" means liens, mortgages, deeds of trust, claims against title, charges which are liens or security interests. (s) "Exchange Act" shall have the meaning set forth in Section 3.1(e) of this Agreement. (t) "Exchange Agent" shall have the meaning set forth in Section 2.3 of this Agreement. (u) "Exchange Fund" shall have the meaning set forth in Section 2.3 of this Agreement. (v) "GAAP" means generally accepted accounting principles, as in effect in the United States. (w) "Governmental Entity" shall have the meaning set forth in Section 3.1(e) of this Agreement. (x) "Hazardous Materials" means any hazardous substance, hazardous materials, toxic substances or waste materials. (y) "IRS" shall have the meaning set forth in Section 3.3(k) of this Agreement. (z) "Joint Venture" shall have the meaning set forth in Section 3.3(o) of this Agreement. (aa) "Lexington" shall have the meaning set forth in the preamble to this Agreement. (bb) "Lexington Ancillary Agreements" shall have the meaning set forth in Section 3.1(b) of this Agreement. (cc) "Lexington Material Adverse Effect" shall have the meaning set forth in Section 3.1(a) of this Agreement. (dd) "Lexington Properties" shall have the meaning set forth in Section 3.1(n)(i) of this Agreement. (ee) "Lexington Registration Statements" shall have the meaning set forth in Section 3.1(i)(i) of this Agreement. (ff) "Lexington Reports" shall have the meaning set forth in Section 3.1(i)(i) of this Agreement. (gg) "Lexington Transaction Costs" shall mean one-third of the Aggregate Transaction Costs plus all of the fees and expenses of Prudential Securities Incorporated. (hh) "Merger" shall have the meaning set forth in the recitals to this Agreement. (ii) "Mergers" means, collectively, the Merger and the Net 2 Merger. (jj) "Merger Consideration" shall have the meaning set forth in Section 2.1 of this Agreement. (kk) "MGCL" shall have the meaning set forth in Section 1.1 of this Agreement. (ll) "Net 1" shall have the meaning set forth in the preamble to this Agreement. (mm) "Net 1 Contribution Agreement" shall have the meaning set forth in the preamble to this Agreement. (nn) "Net 1 GP" shall have the meaning set forth in the recitals to this Agreement. 25 240 (oo) "Net 1 Material Adverse Effect" shall have the meaning set forth in Section 3.3(a) of this Agreement. (pp) "Net 1 Properties" shall have the meaning set forth in Section 3.3(m)(i) of this Agreement. (qq) "Net 1 Liquidation Costs" means One Million Eight Hundred Fifteen Million ($1,815,000.00), which represents the expected costs of liquidating the real properties of Net l and related costs and expenses of winding up the affairs Net 1 in order to effectuate a distribution of all proceeds from such liquidation to the partners of Net 1. (rr) "Net 1 Transaction Costs" shall mean one-third of the Aggregate Transaction Costs plus one-half of the fees and expenses of Cohen & Steers Capital Advisors LLC attributable to services rendered to Net 1 pursuant to an engagement letter, dated July 6, 2000, by and between Net 1, Net 2 and Cohen & Steers Capital Advisors LLC. (ss) "Net 2" shall have the meaning set forth in the preamble to this Agreement. (tt) "Net 2 Merger" means the merger contemplated by the Net 2 Merger Agreement. (uu) "Net 2 Merger Agreement" means the Agreement and Plan of Merger dated the date hereof among Lexington, Net 3 and Net 2. (vv) "Net 3" shall have the meaning set forth in the preamble to this Agreement. (ww) "Per Unit Adjusted Net Value" means the amount obtained by dividing (1) the Adjusted Net Asset Value by (2) the total number of Units. (xx) "Property Restrictions" shall have the meaning set forth in Section 3.1(n) of this Agreement. (yy) "Proxy Statement" shall have the meaning set forth in Section 4.9 of this Agreement. (zz) "Registration Statement" shall have the meaning set forth in Section 4.9 of this Agreement. (aaa) "Regulatory Filings" shall have the meaning set forth in Section 3.1(e) of this Agreement. (bbb) "Securities Act" shall have the meaning set forth in Section 3.1(e) of this Agreement. (ccc) "subsidiary" shall have the meaning set forth in Section 3.3(o)(a) of this Agreement. (ddd) "Subsidiaries" shall have the meaning set forth in Section 3.1(a) of this Agreement. (eee) "Superior Proposal" shall have the meaning set forth in Section 4.5 of this Agreement. (fff) "Surviving Entity" shall have the meaning set forth in Section 1.1 of this Agreement. (ggg) "Transfer Document" shall have the meaning set forth in Section 2.3 of this Agreement. (hhh) "Transmittal Letter" shall have the meaning set forth in Section 2.3 of this Agreement. (iii) "Units" shall have the meaning set forth in Section 2.1 of this Agreement. 26 241 SECTION 7.3 Notices. All notices, requests, claims, demands and other communications under this Agreement shall be in writing and shall be deemed given if delivered personally or sent by overnight courier (providing proof of delivery) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (i) if to Lexington, to Lexington Corporate Properties Trust 355 Lexington Avenue New York, New York 10017 Attention: T. Wilson Eglin Telecopy: (212) 986-6972 with a copy (which shall not constitute notice) to: Paul, Hastings, Janofsky & Walker LLP 399 Park Avenue New York, New York 10022 Attention: Mark Schonberger, Esq. Telecopy: (212) 319-4090 (ii) if to Net 3, to c/o Lexington Corporate Properties Trust 355 Lexington Avenue New York, New York 10017 Attention: Patrick Carroll Telecopy: (212) 986-6972 with a copy (which shall not constitute notice) to: Paul, Hastings, Janofsky & Walker LLP 399 Park Avenue New York, New York 10022 Attention: Mark Schonberger, Esq. Telecopy: (212) 319-4090 (iii) if to Net 1, to c/o Lepercq Net 1 L.P. 355 Lexington Avenue New York, New York 10017 Attention: E. Robert Roskind Telecopy: (212) 986-6972 with a copy (which shall not constitute notice) to: Solomon, Zauderer, Ellenhorn, Frishcer & Sharp 45 Rockefeller Plaza New York, NY 10111 Telecopy: (212) 956-3700 SECTION 7.4 Interpretation. When a reference is made in this Agreement to a Section or Schedule, such reference shall be to a Section of, or a Schedule to, 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". 27 242 SECTION 7.5 Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. SECTION 7.6 Entire Agreement; Third-Party Beneficiaries. This Agreement constitutes the entire agreement, and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter of this Agreement. This Agreement is not intended to confer upon any person other than the parties hereto and the third party beneficiaries referred to in the following sentence, any rights or remedies. SECTION 7.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. SECTION 7.8 Assignment. Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, 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, and any such assignment that is not consented to shall be null and void. 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. SECTION 7.9 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 federal or state court located in the State of New York, County of New York, this being in addition to any other remedy to which they are entitled at law or in equity. SECTION 7.10 Severability. Whenever possible, each provision or portion of any provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law but if any provision or portion of any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party, such invalidity, illegality or unenforceability will not affect any other provision or portion of any provision in such jurisdiction, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision or portion of any provision had never been contained herein. [signature page follows] 28 243 IN WITNESS WHEREOF, Lexington, Net 3, and Net 1 have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first written above. LEXINGTON CORPORATE PROPERTIES TRUST By: /s/ T. WILSON EGLIN ------------------------------------ Name: T. Wilson Eglin Title: President NET 3 ACQUISITION L.P. By: Lex GP-1, Inc., its general partner By: /s/ PATRICK CARROLL ------------------------------------ Name: Patrick Carroll Title: Vice President NET 1 L.P. By: Lepercq Net 1 L.P., its general partner By: Lepercq Net 1 Inc., its general partner By: /s/ E. ROBERT ROSKIND ------------------------------------ Name: E. Robert Roskind Title: President [SIGNATURE PAGE TO LEXINGTON NET 1 MERGER AGREEMENT] 244 EXHIBIT A TERMS OF CONVERTIBLE SUBORDINATED DEBENTURES AND DISSENTER DEBENTURES A-1 245 TERMS OF THE CONVERTIBLE SUBORDINATED DEBENTURES Principal Amount.............. Up to $64.35 million. The exact amount of the Convertible Subordinated Debentures to be issued will be determined at the closing of the Transaction based upon the number of Units held by limited partners who elect to receive Dissenter Debentures and the number of limited partners who elect to receive a greater proportion of their merger consideration in Convertible Subordinated Debentures. Interest...................... 8.5% per annum on a day-to-day basis based upon a 365-day year and actual days elapsed from the closing of the Transaction and will be paid semi-annually in cash in arrears. Repayment of Principal........ Due in one installment at maturity on , 2009. Seniority..................... Expressly subordinated in right and priority of payment to the Dissenter Debentures, all institutional indebtedness of Lexington outstanding on the closing of the Transaction and any other indebtedness of Lexington issued in the future which is not by its terms expressly subordinated to the Convertible Subordinated Debentures. The Convertible Subordinated Debentures are senior in right and priority of payment to Lexington's existing Class A Senior Cumulative Convertible Preferred Shares and to all other classes of Lexington's capital shares currently authorized or authorized in the future. Prepayment.................... No prepayment or redemption, in whole or in part, prior to the fifth anniversary of issuance. Following the fifth anniversary of issuance and in the event that the Common Shares trade at a price above $14.00 per share for a period of thirty consecutive calendar days, Lexington may repay or redeem, at any time thereafter in cash or in Common Shares, the Convertible Subordinated Debentures in whole (but not in part). The $14.00 price is subject to anti-dilution adjustments for stock splits, stock dividends, other securities dividends, reclassifications, exchanges, substitutions, reorganizations, mergers and consolidations. Conversion.................... Subject to prepayment by Lexington, holders may convert all or a portion of their Convertible Subordinated Debentures commencing on the fourth anniversary of the closing of the Transaction into such number of Common Shares as is obtained by dividing the aggregate principal amount of all Convertible Subordinated Debentures being converted by the conversion price of $14.00 per share, subject to anti-dilution adjustments for stock splits, stock dividends, other securities dividends, reclassifications, exchanges, substitutions, reorganizations, mergers and consolidations. Remedies...................... If an event of default occurs and is continuing, holders of Convertible Subordinated Debentures will have the following remedies: (a) the rate of interest on the Convertible Subordinated Debentures will increase to 10%, provided that if such event of default is cured or waived, the rate of interest will be reduced from the date of such cure or waiver, to 8.5%, (b) automatic acceleration with respect to bankruptcy defaults, and (c) acceleration upon vote by majority of holders upon non-bankruptcy defaults. A-2 246 TERMS OF THE DISSENTER DEBENTURES Principal Amount.............. Up to $20 million, subject to waiver by Lexington. The exact principal amount of the Dissenter Debentures will be determined at the closing of the Transaction based upon the number of Units held by limited partners who elect to receive Dissenter Debentures and will be subject to the waiver by Lexington of the limit on the amount of Dissenters Debentures to be issued. Interest...................... 8.5% per annum, on a day-to-day basis (based on a 365-day year and actual days elapsed) from the closing of the Transaction and will be paid semi-annually in cash in arrears. Repayment of Principal........ Principal on the Dissenters Debentures is due in one installment on , 2009, provided, however, that 80% of the net proceeds of any taxable sale or refinancing of the assets previously owned by either Net Partnership, as applicable, will be used to prepay the Dissenter Debentures. Prepayment.................... Prepayable in whole or in part at any time. Seniority..................... Senior to the Convertible Subordinated Debentures and expressly subordinated in right and priority of payment to all institutional indebtedness of Lexington outstanding on the closing of the Transaction and any other indebtedness of Lexington issued in the future which is not, by its terms, expressly subordinated to the Dissenter Debentures. The Dissenter Debentures are also senior in right and priority of payment to Lexington's existing Class A Senior Cumulative Convertible Preferred Shares and to all other classes of Lexington's capital shares currently authorized or authorized in the future. Remedies...................... Same as for the Convertible Subordinated Debentures. A-3 247 ANNEX A-2 MERGER AGREEMENT AND AMENDMENT BETWEEN LEXINGTON, NET 3 AND NET 2 248 AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER BY AND AMONG LEXINGTON CORPORATE PROPERTIES TRUST NET 3 ACQUISITION L.P. AND NET 2 L.P. This AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER (this "Amendment") is entered into as of July 19, 2001, by and between Lexington Corporate Properties Trust, a Maryland statutory real estate investment trust ("Lexington"), Net 3 Acquisition L.P., a Delaware limited partnership ("Net 3"), and Net 2 L.P., a Delaware limited partnership ("Net 2"). The parties to this Amendment are collectively referred to as the "Parties." W I T N E S S E T H: WHEREAS, the Parties have entered into an Agreement and Plan of Merger, dated as of November 13, 2000 (the "Agreement"); WHEREAS, the Parties desire, and have agreed, subject to the terms and conditions set forth herein, to amend the Agreement in the manner set forth in this Amendment to reflect, among others, the following changes: (i) to substitute cash for the portion of the Merger Consideration otherwise payable in Convertible Subordinated Debentures and (ii) to modify the "collar" reflected in the Average Closing Price used to determine the number of Common Shares to be issued to Net 2 from a range of $11 to $13 to a range of $14 to $16; and WHEREAS, capitalized terms used herein and not defined shall have the meanings ascribed to such terms in the Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows: AMENDMENTS 1. FIRST AMENDMENT. The Agreement is hereby amended to delete the present text of the fourth recital thereto in its entirety, and to insert in its place the following: "WHEREAS, immediately prior to the Effective Time, the Net 2 GP will contribute its general partnership interest in Net 2 to Net 3 as a partnership contribution, pursuant to the terms and condition set forth in the contribution agreement dated the date hereof by and between Net 3 and Net 2 GP, as amended as of July 19, 2001 (the "Net 2 Contribution Agreement");" 2. SECOND AMENDMENT. The Agreement is hereby amended to delete the phrase "Convertible Subordinated Debentures" from Section 1.5 thereof, and to insert in its place the phrase "Cash." 3. THIRD AMENDMENT. The Agreement is hereby amended to delete the present text of Section 2.1 thereof in its entirety, and to insert in its place the following: "SECTION 2.1 Effect on Units. As of the Effective Time, by virtue of the Merger and without any action on the part of the parties hereto or their respective affiliates, the limited partnership interests of the limited partners of Net 2 (the "Units") shall be converted into the consideration (the "Merger Consideration"), determined as follows: (a) Consideration. Except as provided in Section 2.1(b) or (c) each Unit shall, in the Merger, be exchanged for the number of common shares of Lexington, $0.0001 par value per share (the 249 "Common Shares"), and such amount of cash (the "Cash") as is determined in accordance with the following formulas: N = (0.50)V/A P = (0.50)V Where: N = the number of Common Shares exchanged for each Unit; A = the Average Closing Price; P = the amount of Cash exchanged for each Unit; and V = the Per Unit Adjusted Net Asset Value. (b) Notwithstanding Section 2.1(a), as of the Effective Time, each Unit held of record by a holder who votes against the Merger will receive Common Shares and Cash in accordance with Section 2.1(a), unless such holder affirmatively elects to receive consideration in the form of Lexington's 8.50% senior subordinated debentures due eight years after the closing date ("Dissenter Debentures") by following the procedures to be set forth in the Registration Statement, in which case each Unit shall, in the Merger, be exchanged for Dissenter Debentures with a principal amount equal to the Per Unit Adjusted Net Asset Value. (c) The Dissenter Debentures shall have the terms and conditions set forth in Exhibit A. On or before the closing, the parties shall enter into a mutually acceptable indenture with respect to the Dissenter Debentures, which indenture shall satisfy the requirements of the Trust Indenture Act of 1940. The indenture shall be substantially in a form as reasonably agreed to by the parties hereto. (d) Notwithstanding anything in the foregoing to the contrary, no fractional Common Shares shall be issued in connection with the Merger. All Common Shares to which a holder of Units is entitled immediately prior to the Effective Time shall be aggregated. If a fractional share results from such aggregation, in lieu of receiving any such fractional share, each holder of Units who would otherwise have been entitled to receive a fraction of a Common Share shall receive cash equal to the amount of Merger Consideration represented by such fractional share." 4. FOURTH AMENDMENT. The Agreement is hereby amended to delete the present text of the second sentence of Section 2.3 thereof, and to insert in its place the following: "At the Effective Time, Lexington shall deposit with the Exchange Agent, (i) share certificates representing the total number of Common Shares issuable pursuant to Section 2.1(a), (ii) the aggregate amount of Cash payable pursuant to Section 2.1 (a) and (iii) the aggregate amount of Dissenter Debentures issuable pursuant to Section 2.1(b), in each case in exchange for the Units (such share certificates and Dissenter Debentures, together with any dividends or distributions with respect thereto, and payments of cash in lieu of fractional shares being hereinafter referred to as the "Exchange Fund")." 5. FIFTH AMENDMENT. The Agreement is hereby amended to delete the phrase "Convertible Subordinated Debentures or" and the phrase "Convertible Subordinated Debentures and" wherever such phrases appear in Sections 2.4 and 3.1(s) thereof. 6. SIXTH AMENDMENT. The Agreement is hereby amended to delete the present text of the second sentence of Section 7.2(f) thereof, and to insert in its place the following: "(f) "Average Closing Price" means the average closing price on the New York Stock Exchange of the Common Shares for the 20-day period preceding, but not including, the Closing Date; provided, however, that the Average Closing Price shall not exceed $16.00 per Common Share, nor be less than $14.00 per Common Share." 7. SEVENTH AMENDMENT. The Agreement is hereby amended to delete Section 7.2(m) in its entirety. 250 8. EIGHTH AMENDMENT. The Agreement is hereby amended to delete the present text of Exhibit A thereto, and to insert in its place Exhibit A hereto. MISCELLANEOUS 9. COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 10. ORIGINAL DOCUMENT. Except as amended hereby, the Agreement is in all respects ratified, reaffirmed and confirmed and all of its terms shall remain in full force and effect. 11. ENTIRE AGREEMENT. This Amendment and the Agreement constitute the entire agreement between the Parties and supersede all prior understandings, agreements, or representations by or between the Parties, written or oral, to the extent they related in any way to the subject matter hereof or thereof. 12. SUCCESSION AND ASSIGNMENT. This Amendment shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns. No Party may assign either this Amendment or any of its rights, interests, or obligations hereunder without the prior written approval of the other Parties hereto. 13. WAIVERS. Failure of any Party at any time to require the performance by any other Party of any provision of this Amendment or any related agreement shall in no way affect the right to require full performance of such provision thereafter. Furthermore, the waiver by any Party of a breach of any provision of this Amendment or any related agreement will not be held to be a waiver of any other provision of this Amendment or any related agreement. 14. SEVERABILITY. The invalidity or unenforceability of any term or provision of this Amendment or any related agreement shall not affect the validity or enforceability of the remaining terms and provisions hereof or thereof. [REMAINDER OF PAGE LEFT INTENTIONALLY BLANK] 251 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to the Agreement and Plan of Merger to be duly executed and made and entered into as of the date first set forth above. LEXINGTON CORPORATE PROPERTIES TRUST By: /s/ T. WILSON EGLIN ------------------------------------ Name: T. Wilson Eglin Title: President NET 3 ACQUISITION L.P. By: Lex GP-1, Inc., its general partner By: /s/ PATRICK CARROLL ------------------------------------ Name: Patrick Carroll Title: Vice President NET 2 L.P. By: Lepercq Net 2 L.P., its general partner By: Lepercq Net 2 Inc., its general partner By: /s/ E. ROBERT ROSKIND ------------------------------------ Name: E. Robert Roskind Title: President [SIGNATURE PAGE TO AMENDMENT NO 1 TO LEXINGTON NET 2 MERGER AGREEMENT] 252 EXHIBIT A TERMS OF DISSENTER DEBENTURES Principal Amount.......................... Up to $20 million, subject to waiver by Lexington. The exact principal amount of the dissenter debentures will be determined at the closing of the Transaction based upon the number of Units held by limited partners who elect to receive Dissenter Debentures and will be subject to the waiver by Lexington of the limit on the amount of Dissenter Debentures to be issued. Interest.................................. 8.5% per annum, on a day-to-day basis (based upon a 365-day year and actual days elapsed) from the closing of the Transaction. Interest will be paid semi-annually in cash in arrears. Repayment of Principal.................... Principal on the Dissenter Debentures is due in one installment on , 2009; provided, however, that 80% of the net proceeds of any taxable sale or refinancing of the assets previously owned by either Net Partnership, as applicable, will be used to prepay the Dissenter Debentures. Prepayment................................ Prepayable in whole or in part at any time. Seniority................................. Expressly subordinated in right and priority of payment to all institutional indebtedness of Lexington outstanding on the closing of the Transaction and any other indebtedness of Lexington issued in the future which is not, by its terms, expressly subordinated to the Dissenter Debentures. The Dissenter Debentures are also senior in right and priority of payment to Lexington's existing Class A Senior Cumulative Convertible Preferred Shares and to all other classes of Lexington's capital shares currently authorized or authorized in the future. Remedies.................................. If an event of default occurs and is continuing, holders of Dissenter Debentures will have the following remedies (a) the rate of interest on the Dissenter Debentures will increase to 10%, provided that if such event of default is cured or waived, the rate of interest will be reduced, from the date of such cure or waiver, to 8.5%, (b) automatic acceleration with respect to bankruptcy defaults, and (c) acceleration upon vote by majority of holders upon non-bankruptcy defaults.
253 AGREEMENT AND PLAN OF MERGER DATED AS OF NOVEMBER 13, 2000 BY AND AMONG LEXINGTON CORPORATE PROPERTIES TRUST NET 3 ACQUISITION L.P. AND NET 2 L.P. 254
Page ---- ARTICLE I THE MERGER......................................................... 2 SECTION 1.1 The Merger.................................................. 2 SECTION 1.2 Closing..................................................... 2 SECTION 1.3 Effective Time.............................................. 2 SECTION 1.4 Effects of the Merger....................................... 2 SECTION 1.5 Partnership Agreement....................................... 3 SECTION 1.6 General Partner............................................. 3 ARTICLE II CONSIDERATION FOR, AND MANNER OF CONVERTING LIMITED PARTNERSHIP INTERESTS OF NET 2................................................ 3 SECTION 2.1 Effect on Units............................................. 3 SECTION 2.2 Further Assurances.......................................... 5 SECTION 2.3 Exchange Procedures......................................... 5 SECTION 2.4 Payments with Respect to Unexchanged Units.................. 6 SECTION 2.5 Rights of Former Holders of Units........................... 6 ARTICLE III REPRESENTATIONS AND WARRANTIES................................... 7 SECTION 3.1 Representations and Warranties of Lexington................. 7 SECTION 3.2 Representations and Warranties of Net 3..................... 16 SECTION 3.3 Representations and Warranties of Net 2..................... 17 ARTICLE IV ADDITIONAL AGREEMENTS............................................. 24 SECTION 4.1 Reasonable Best Efforts..................................... 24 SECTION 4.2 Public Announcements........................................ 24 SECTION 4.3 Consents, Approvals and Filings............................. 24 SECTION 4.4 State Takeover Laws......................................... 25 SECTION 4.5 No Solicitation by Net 2.................................... 25 SECTION 4.6 Conduct of Businesses....................................... 26 SECTION 4.7 Approvals of Shareholder and Limited Partners............... 28 SECTION 4.8 Inspection of Records....................................... 28 SECTION 4.9 Regulatory Filings.......................................... 28 SECTION 4.10 Expenses.................................................... 29 SECTION 4.11 REIT Status................................................. 29 SECTION 4.12 Appraisals.................................................. 29 SECTION 4.13 Termination Fees............................................ 30 ARTICLE V CONDITIONS PRECEDENT............................................... 30 Conditions to Each Party's Obligation to Effect the SECTION 5.1 Merger...................................................... 30 SECTION 5.2 Conditions to Obligations of Net 2.......................... 31 SECTION 5.3 Conditions to Obligations of Lexington and Net 3............ 32 SECTION 5.4 Frustration of Closing Conditions........................... 33 ARTICLE VI TERMINATION, AMENDMENT AND WAIVER................................. 33 SECTION 6.1 Termination................................................. 33 SECTION 6.2 Effect of Termination....................................... 34 SECTION 6.3 Amendment................................................... 35 SECTION 6.4 Extension; Waiver........................................... 35
i 255
Page ---- ARTICLE VII GENERAL PROVISIONS............................................... 35 SECTION 7.1 Nonsurvival of Representations and Warranties............... 35 SECTION 7.3 Notices..................................................... 40 SECTION 7.4 Interpretation.............................................. 41 SECTION 7.5 Counterparts................................................ 41 SECTION 7.6 Entire Agreement; Third-Party Beneficiaries................. 41 SECTION 7.7 GOVERNING LAW............................................... 41 SECTION 7.8 Assignment.................................................. 41 SECTION 7.9 Enforcement................................................. 41 SECTION 7.10 Severability................................................ 42
ii 256 AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of November 13, 2000, by and among Lexington Corporate Properties Trust, a Maryland statutory real estate investment trust ("Lexington"), Net 3 Acquisition L.P., a Delaware limited partnership ("Net 3"), and Net 2 L.P., a Delaware limited partnership ("Net 2"). Certain capitalized terms used in this Agreement are defined in Section 7.2. W I T N E S S E T H: WHEREAS, the Board of Trustees of Lexington (the "Board"), has determined that it would be advisable and in the best interests of the holders of beneficial interests in Lexington for Net 2 to merge with and into Net 3 with Net 3 as the surviving entity, subject to the terms and conditions set forth in this Agreement (the "Merger"); and WHEREAS, Lexington, in its capacity as the general partner of Net 3, has determined that it would be advisable and in the best interests of Net 3 for Net 3 to enter into and consummate the proposed Merger; and WHEREAS, Lepercq Net 2 L.P., in its capacity as the general partner of Net 2 (the "Net 2 GP"), has determined that it would be advisable and in the best interests of Net 2 to enter into and consummate the proposed Merger; and WHEREAS, immediately prior to the Effective Time, the Net 2 GP will contribute its general partnership interest in Net 2 to Net 3 as a partnership contribution, pursuant to the terms and condition set forth in the contribution agreement dated the date hereof by and between Net 3 and Net 2 GP (the "Net 2 Contribution Agreement"); WHEREAS, for federal income tax purposes and in accordance with Treasury Regulations sec.1.708-1(c)(3) and (4), immediately prior to the Effective Time of the Merger and subject to the consummation of the Merger, Net 3 will purchase each limited partnership interest of Net 2 from each consenting limited partner of Net 2 for a specified amount of consideration; WHEREAS, the Merger is subject to the simultaneous consummation of the merger of Net 1 with and into Net 3; WHEREAS, Net 2 and Lexington have each received a fairness opinion ("Fairness Opinion") from a nationally-recognized investment banking firm retained by it to provide such fairness opinion; and WHEREAS, Net 2, the Net 2 GP, Net 3 and Lexington desire to make certain representations, warranties, covenants and agreements in connection with the Merger and also to prescribe various conditions to the Merger. NOW, THEREFORE, in consideration of the representations, warranties. covenants and agreements contained in this Agreement, the parties hereto hereby agree as follows: ARTICLE I THE MERGER SECTION 1.1 The Merger. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with Maryland General Corporate Law (the "MGCL") and the Delaware Revised Uniform Limited Partnership Act (the "DRULPA"), the Merger shall be effected such that Net 2 shall be merged with and into Net 3 at the Effective Time (as defined in Section 1.3), the separate existence of Net 2 shall cease and Net 3 shall continue as the surviving entity in the Merger (the "Surviving Entity") and shall succeed to and assume all the rights and obligations of Net 2. The Merger shall have the effects specified in the MGCL and the DRULPA. The Merger shall be consummated pursuant to the terms of this Agreement, which has been approved and adopted by the Board, the Net 2 GP and Lexington, in its capacity as the majority limited partner and sole general partner of Net 3. 257 SECTION 1.2 Closing. Unless this Agreement shall have been terminated pursuant to Section 6.1, and subject to the satisfaction or waiver of the conditions set forth in Article V, the closing of the Merger (the "Closing") will take place as soon as practicable following the last to be satisfied or waived of the conditions set forth in Article V (other than the delivery of certificates referred to in Sections 5.2(a) and (b) and Sections 5.3(a) and (b)) in accordance with this Agreement the date of the Closing being referred to herein as (the "Closing Date"), at the offices of Paul, Hastings, Janofsky & Walker LLP, 399 Park Avenue, New York, New York 10022, unless another date, time or place is agreed to in writing by the parties hereto. SECTION 1.3 Effective Time. If all the conditions to the Merger set forth in Article V shall have been fulfilled or waived (and this Agreement shall not have been terminated pursuant to Section 6.1 hereof), the parties shall cause a Certificate of Merger to be properly executed, verified and delivered for filing in accordance with DRULPA and the MGCL on the Closing Date. The Merger shall become effective upon the later of (i) the issuance of a certificate of merger by the State Department of Assessments and Taxation of the State of Maryland and (ii) the issuance of a certificate of merger by the Secretary of State of the State of Delaware, or such other date as may be agreed to by the parties, but not later than the Closing Date (the "Effective Time"). SECTION 1.4 Effects of the Merger. The Merger shall have the effects set forth in this Agreement and in the applicable provisions of the Act. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the properties, rights, privileges, powers and franchises of Net 2 and Net 3 shall vest in the Surviving Entity, and all debts, liabilities and duties of Net 2 and Net 3 shall become the debts, liabilities and duties of Surviving Entity. SECTION 1.5 Federal Income Tax Treatment. For federal income tax purposes and in accordance with Treasury Regulations sec.1.708-1(c)(3) and (4), immediately prior to the Merger, and subject to the consummation thereof, Net 3 will purchase each limited partnership interest of Net 2 from each limited partner of Net 2 that consents to treat the transaction for tax purposes as a sale of that limited partner's partnership interest. Such consent shall have been acquired pursuant to the terms of the Proxy Statement. The consideration transferred for each such interest shall equal the sum of (1) the fair market value of the Common Shares and principal amount of the Convertible Subordinated Debentures received per Unit as specified in Section 2.1 and (2) the assumption of such limited partner's share of partnership liabilities. Any limited partner that does not consent to treat the Merger as a sale by such limited partner of its partnership interests and elects to receive Dissenter Debentures will remain a limited partner of Net 2 at the time of the Merger. Net 2 shall be considered as undertaking the assets-over form of merger for federal income tax purposes pursuant to Reg. sec.1.7081(c)(3). SECTION 1.6 Partnership Agreement. At the Effective Time, Net 3's partnership agreement shall continue to be the partnership agreement of the Surviving Entity until thereafter changed or amended as provided therein or by applicable law. SECTION 1.7 General Partner. At the Effective Time, Lexington shall continue to be the general partner of the Surviving Entity, serving until the earlier of its resignation or removal or until a successor is duly elected by the limited partners. ARTICLE II CONSIDERATION FOR, AND MANNER OF CONVERTING LIMITED PARTNERSHIP INTERESTS OF NET 2 SECTION 2.1 Effect on Units. As of the Effective Time, by virtue of the Merger and without any action on the part of the parties hereto or their respective affiliates, the limited partnership interests of the limited partners of Net 2 (the "Units") shall be converted into the consideration (the "Merger Consideration"), determined as follows: (a) Consideration. Except as provided in Section 2.1(b) or (c) each Unit shall, in the Merger, be exchanged for the number of common shares of Lexington, $0.0001 par value per share (the 2 258 "Common Shares"), and such principal amount of Lexington's 8.5% convertible subordinated debentures due eight years after the Closing Date ("Convertible Subordinated Debentures") as is determined in accordance with the following formulas: N = (0.50)V/A P = (0.50)V Where: N = the number of Common Shares exchanged for each Unit; A = the Average Closing Price; P = the principal amount of Convertible Subordinated Debentures exchanged for each Unit; and V = the Per Unit Adjusted Net Asset Value. (b) Notwithstanding Section 2.1(a) hereof, a holder of Units may elect to receive a greater proportion of its Merger Consideration, in increments of 10% of such holder's Merger Consideration, in principal amount of Convertible Subordinated Debentures with a corresponding reduction in its Merger Consideration payable in Common Shares, as provided in this Section 2.1(b) by following the procedures to be set forth in the Registration Statement. In the event a holder of Units elects to receive a greater proportion of its Merger Consideration in principal amount of Convertible Subordinated Debentures, with a corresponding reduction in Merger Consideration payable in Common Shares, then each Unit shall, in the Merger, be exchanged for the number of Common Shares, and such principal amount of Convertible Subordinated Debentures as is determined in accordance with the following formulas: N = V (X)/A P = (1-X)V Where: N = the number of Common Shares exchangeable per Unit; V = the Per Unit Adjusted Net Asset Value; X = the percentage (i.e., less than 50%, by increments of 10% only) of the Merger Consideration which the holder of the Unit elects to receive in Common Shares; A = the Average Closing Price, and P = the principal amount of Convertible Subordinated Debentures exchangeable per Unit. (c) Notwithstanding Sections 2.1(a) and (b), as of the Effective Time, each Unit held of record by a holder who votes against the Merger will receive Common Shares and Convertible Subordinated Debentures in accordance with Section 2.1(a) or 2.1(b), as applicable, unless such holder affirmatively elects to receive consideration in the form of Lexington's 8.50% senior subordinated debentures due eight years after the closing date ("Dissenter Debentures") by following the procedures to be set forth in the Registration Statement, in which case each Unit shall, in the Merger, be exchanged for Dissenter Debentures with a principal amount equal to the Per Unit Adjusted Net Asset Value. (d) The Convertible Subordinated Debentures and the Dissenter Debentures shall have the terms and conditions set forth in Exhibit A. On or before the closing, the parties shall enter into mutually acceptable indentures with respect to the Convertible Subordinated Debentures and Dissenter Debentures, which indentures shall satisfy the requirements of the Trust Indenture Act of 1940. The indentures shall be substantially in a form as reasonably agreed to by the parties hereto (e) Notwithstanding anything in the foregoing to the contrary, no fractional Common Shares shall be issued in connection with the Merger. All Common Shares to which a holder of Units is entitled immediately prior to the Effective Time shall be aggregated. If a fractional share results from such 3 259 aggregation, in lieu of receiving any such fractional share, each holder of Units who would otherwise have been entitled to receive a fraction of a Common Share shall receive cash equal to the amount of Merger Consideration represented by such fractional share. SECTION 2.2 Further Assurances. If, at any time after the Effective Time, the Surviving Entity shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Entity the right, title or interest in, to or under any of the rights, properties or assets of Net 2 acquired or to be acquired by the Surviving Entity as a result of, or in connection with, the Merger or otherwise to carry out this Agreement, the Surviving Entity shall be authorized to execute and deliver, in the name and on behalf of each of Lexington, Net 3 and Net 2, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of each of Lexington, Net 3 and Net 2 or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in the Surviving Entity or otherwise to carry out this Agreement. SECTION 2.3 Exchange Procedures. Prior to the Effective Time, Lexington shall appoint a commercial bank or trust company satisfactory to Net 2 to act as exchange agent hereunder (the "Exchange Agent"). At the Effective Time, Lexington shall deposit with the Exchange Agent, (i) share certificates representing the total number of Common Shares issuable pursuant to Sections 2.1(a) and (b), (ii) the aggregate amount of Convertible Subordinated Debentures issuable pursuant to Sections 2.1(a) and (b) and (iii) the aggregate amount of Dissenter Debentures issuable pursuant to Section 2.1(c), in each case in exchange for the Units (such share certificates, Convertible Subordinated Debentures and Dissenter Debentures, together with any dividends or distributions with respect thereto, and payments of cash in lieu of fractional shares being hereinafter referred to as the "Exchange Fund"). Promptly after the Effective Time, Lexington shall cause the Exchange Agent to mail to each holder a form letter of transmittal (the "Transmittal Letter") specifying that delivery shall be effected only upon proper execution and delivery to the Exchange Agent of an assignment of interest of the Unit or such other documents as Lexington or Net 3 may reasonably require (the "Transfer Document"), and instructions for use in effecting the surrender of the Units in exchange for the applicable Merger Consideration. Subject to the delivery to the Exchange Agent of a duly executed Transfer Document and Transmittal Letter, promptly after the Effective Time, the Exchange Agent shall issue to each holder of Units delivering such Transfer Document and Transmittal Letter such holder's Merger Consideration calculated in accordance with Section 2.1 in exchange for its Units. Until such Transfer Document and Transmittal Letter are delivered as contemplated by this Section 2.3, each Unit shall be deemed at any time after the Effective Time to constitute only the right to receive, upon such delivery, such Merger Consideration. SECTION 2.4 Payments with Respect to Unexchanged Units. No (i) distributions with respect to Common Shares with a record date after the Effective Time or (ii) amounts otherwise payable with respect to the Convertible Subordinated Debentures or Dissenter Debentures shall be paid to any holder of Units until the delivery of a Transfer Document and Transmittal Letter in respect of such Units in accordance with Section 2.3. Following delivery of a Transfer Document and Transmittal Letter in respect of such Units in accordance with Section 2.3, Lexington shall pay to the holder of such Unit (the "Unexchanged Units"), the Accrued Amounts attributable to such Unexchanged Units. "Accrued Amounts" with respect to Unexchanged Units shall mean those amounts which are payable (i) with respect to the Common Shares, (a) at the time of such delivery, the amount of dividends from Lexington with a record date after the Effective Time theretofore paid with respect to the number of whole Common Shares into which the Units immediately prior to the Effective Time were converted pursuant to Section 2.1, and (b) at the appropriate payment date, the amount of dividends from Lexington with a record date after the Effective Time, but prior to such delivery, and with a payment date subsequent to such delivery, payable with respect to such whole Common Shares, and (ii) with respect to the Convertible Subordinated Debentures or Dissenter Debentures, (a) at the time of delivery of such Unexchanged Units, the amount of interest and principal payable by Lexington with a record date after the Effective Time theretofore paid with respect to the Convertible Subordinated Debentures or Dissenter Debentures into which the Units immediately prior to the Effective Time were converted pursuant to Section 2.1, and (b) at the appropriate payment date, the amount of interest and principal payable from Lexington with a record date after the Effective Time, but prior to such delivery, and with a payment date 4 260 subsequent to such delivery, payable with respect to such whole Convertible Subordinated Debentures or Dissenter Debentures. SECTION 2.5 Rights of Former Holders of Units. At the Effective Time, the unit transfer books of Net 2 shall be closed as to holders of Units immediately prior to the Effective Time and no transfer of Units by any such holder shall thereafter be made or recognized. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1 Representations and Warranties of Lexington. Lexington represents and warrants to Net 2 as follows: (a) Organization, Standing and Power. Lexington is a statutory real estate investment trust duly created, validly existing and in good standing under the laws of the State of Maryland and has the requisite trust power and authority to carry on its business as now being conducted, except where failure to do so would not have a Lexington Material Adverse Effect. Each of Lexington's Subsidiaries (other than Net 3) is a corporation or partnership duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, has the requisite power and authority to own its properties and to carry on its business as it is now being conducted, and is duly qualified to do business and is in good standing in each jurisdiction in which the ownership of its property or the conduct of its business requires such qualification, except for jurisdictions in which such failure to be so qualified or to be in good standing would not have a Lexington Material Adverse Effect. Lexington and its Subsidiaries have obtained all licenses, permits and other authorizations and have taken all actions required by applicable law or governmental regulations in connection with their business as now conducted, where the failure to obtain any such item or to take any such action would have a Lexington Material Adverse Effect. Copies of the Subsidiaries' organizational documents and partnership and Joint Venture agreements have been or will be prior to the Closing, delivered or made available to Net 2 and were or will be true and correct when delivered or made available. For purposes of this Agreement, the term "Lexington Material Adverse Effect" means any material adverse effect with respect to Lexington or its Subsidiaries, taken as a whole, or any change of effect that adversely, or is reasonably expected to adversely affect (i) the business, assets, results from operations or condition (financial or otherwise) of Lexington and its Subsidiaries, or (ii) the ability of Lexington to consummate the transactions contemplated by this Agreement in any material respect or materially impair or delay Lexington's ability to perform its obligations hereunder. For the purposes of this Section 3.1, the term "Subsidiaries" shall include the entities set forth in the Schedule 3.1(a), which are all of Lexington's Subsidiaries. (b) Authority. Lexington has the requisite power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement and all other documents, agreements and instruments related to the transactions contemplated by this Agreement to which it is a party (the "Lexington Ancillary Agreements"). The execution, delivery and performance of this Agreement by Lexington of the transactions contemplated hereby have been duly authorized by all necessary action on the part of Lexington. Subject only to the approval of the Merger by the holders of a majority of the outstanding voting shares of Lexington, the consummation by Lexington of this Agreement, the Lexington Ancillary Agreements and the transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of Lexington. (c) Enforceability. This Agreement has been duly executed and delivered by Lexington and, assuming this Agreement constitutes the valid and binding agreement of Net 2 and Net 3, constitutes a valid and binding obligation of Lexington, enforceable against Lexington in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws affecting creditors' rights and remedies and to general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity). 5 261 (d) Noncontravention. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions hereof will not, (i) conflict with any of the provisions of the declaration of trust or bylaws of Lexington, (ii) conflict with, result in a breach of or default (with or without notice or lapse of time, or both) under, or give rise to a right of first refusal, termination, cancellation or acceleration of any obligation (including to pay any sum of money) or loss of a benefit under, or require the consent of any person under, any indenture or other agreement, permit, concession, ground lease, franchise, license or similar instrument or undertaking to which Lexington is a party or by Lexington or any of its assets is bound, result in the creation or imposition of a material lien or other restriction or encumbrance on any material asset of Lexington, which, singly or in the aggregate, would have a Lexington Material Adverse Effect, or (iii) violate any domestic or foreign law, rule or regulation or any order, writ, judgment, injunction, decree, determination or award currently in effect except for such violations, which, singly or in the aggregate, would only have an immaterial effect. To Lexington's actual acknowledge, neither Lexington nor any of its Subsidiaries (other than Net 3) is in violation of any order of any court, governmental authority or arbitration board or tribunal, or any law, ordinance, governmental rule or regulation to which Lexington or any of its Subsidiaries (other than Net 3) or any of their respective properties or assets are subject, where such violation would have a Lexington Material Adverse Effect. Lexington and its Subsidiaries (other than Net 3) have obtained all licenses, permits and other authorizations and have taken all actions required by applicable law or governmental regulations in connection with their business as now conducted, where the failure to obtain any such item or to take any such action would have a Lexington Material Adverse Effect. (e) Consents. Other than the filings provided for in this Agreement to effect the Merger, any filings required under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Securities Act of 1933, as amended (the "Securities Act"), or applicable state securities and "Blue Sky" laws (collectively. the "Regulatory Filings"), no consent, approval or authorization of, or declaration or filing with, or notice to, any domestic or foreign governmental agency or regulatory authority (a "Governmental Entity") or any third party which has not been received or made, is required by or with respect to Lexington or in connection with the execution and delivery of this Agreement by Lexington or the consummation by Lexington of the transactions contemplated hereby, except for (i) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware and the State Department of Assessments and Taxation of the State of Maryland and (ii) consents, approvals, authorizations, declarations, filings and notices that, if not obtained or made, will not, individually or in the aggregate, result in a Lexington Material Adverse Effect. (f) Capitalization. As of September 30, 2000, the authorized capital of Lexington consisted of Forty Million (40,000,000) Common Shares and Ten Million (10,000,000) preferred shares of Lexington, $0.0001 par value per share (the "Preferred Shares"). As of September 30, 2000, Seventeen Million One Hundred Sixty Two Thousand Nine Hundred Seventy (17,162,970) Common Shares were outstanding and Two Million (2,000,000) Preferred Shares were outstanding. Except as disclosed in the Lexington Reports, Lexington has no outstanding bonds, debentures, notes or other obligations, the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the shareholders of Lexington on any matter. All such issued and outstanding Common Shares are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights. Except as disclosed in the Lexington Reports, there are not any existing options, warrants, calls, puts, subscriptions, convertible securities, or other rights, agreements or commitments which obligate Lexington or any of its subsidiaries to issue, transfer, acquire or sell any shares or other equity interest of Lexington or any of its Subsidiaries, except under any employee incentive plan approved by Lexington's shareholders. There are no agreements or understandings to which Lexington is a party with respect to the voting of any Common Shares or which restrict the transfer of any such shares, except in order to protect its REIT status. (g) Subsidiaries. Except as set forth in Schedule 3.1(a), Lexington owns directly or indirectly each of the outstanding shares of capital stock or all of the partnership or other equity interests of each of 6 262 Lexington's Subsidiaries (except those Joint Venture interests as many be disclosed in Schedule 3.1(a)) and such interests are free and clear of all Encumbrances other than liens imposed by local law which are not material. (h) Other Interests. Except as disclosed in Schedule 3.1(a), Lexington does not own directly or indirectly any interest or investment (whether equity or debt) in any corporation, partnership, Joint Venture, business, trust or entity (other than investments in short-term investments securities). (i) SEC Documents. (i) Lexington has made available or will make available to Net 2 prior to the Closing, registration statements of Lexington filed with the SEC in connection with public offerings of Lexington's securities since 1995 and all exhibits, amendments and supplements thereto (the "Lexington Registration Statements"), and each report, proxy statement or information statement and all exhibits thereto prepared by it or relating to its properties since the effective date of the latest Lexington Registration Statement, each in the form (including exhibits and any amendments thereto) filed with the SEC (collectively, the "Lexington Reports"). (ii) To Lexington's actual knowledge, as of their respective dates, the Lexington Reports (i) complied as to form in all material respects with the applicable requirements of the Securities Laws and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. To Lexington's actual knowledge, each of the consolidated balance sheets of Lexington included in or incorporated by reference into the Lexington Reports (including the related notes and schedules) fairly presents the consolidated financial position of Lexington and its Subsidiaries as of its date and each of the consolidated statements of income, retained earnings and cash flows of Lexington included in or incorporated by reference into the Lexington Reports (including any related notes and schedules) fairly presents the results of operations, retained earnings or cash flows, as the case may be, of Lexington and its Subsidiaries for the periods set forth therein (subject, in the case of unaided statements, to normal year-end audit adjustments which would not be material in amount or effect), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein and except, in the case of the unaided statements, as permitted by the Securities Laws. (iii) Except as and to the extent set forth on the consolidated balance sheet of Lexington and its Subsidiaries at June 30, 2000, including all notes thereto, or as set forth in the Lexington Reports, neither Lexington nor any of its Subsidiaries has any material liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on, or reserved against in, a balance sheet of Lexington or in the notes thereto, prepared in accordance with generally accepted accounting principles consistently applied, except liabilities arising in the ordinary course of business since such date which would not have a Lexington Material Adverse Effect. (j) Litigation. To Lexington's actual knowledge, there are (i) no continuing orders, injunctions or decrees of any court, arbitrator or governmental authority to which Lexington or any of its Subsidiaries is a party or by which any of its properties or assets are bound or, to which any of its trustees, directors, officers, or affiliates is a party or by which any of their properties or assets are bound and (ii) no actions, suits or proceedings pending against Lexington or any of its Subsidiaries or, to the knowledge of Lexington, against any of its trustees, officers or affiliates or, to the knowledge of Lexington, threatened against Lexington or any of its Subsidiaries or against any of its trustees, directors, officers, or affiliates, at law or in equity, or before or by any federal or state commission, board, bureau, agency or instrumentality that in the case of clauses (i) or (ii) above are reasonably likely, individually or in the aggregate, to have a Lexington Material Adverse Effect. (k) Absence of Certain Changes. Except as disclosed in the Lexington Reports filed with the SEC prior to the date hereof, (a) Lexington and its Subsidiaries have conducted their business only in 7 263 the ordinary course of such business (which, for purposes of this Section only, shall include all acquisitions of real estate properties and financing arrangement's made in connection therewith); (b) there has not been any Lexington Material Adverse Effect; (c) there has not been any declaration, setting aside or payment of any dividend or other distribution with respect to the Common Shares (other than such payments which are consistent with past practice); and (d) there has not been any material change in Lexington's accounting principles, practices or methods. (1) Taxes. (i) Lexington and each of its Subsidiaries: (1) has timely filed all federal and state tax returns including, without limitation, information returns and reports required to be filed by any of them for tax periods ended prior to the date of this Agreement or requests for extensions have been timely filed and any such request has been granted and has not expired and all such returns are absolute and complete in all material respects, (2) has paid or accrued all taxes shown to be due and payable on such returns or which have become due and payable pursuant to any assessment, deficiency notice, 30-day letter or other notice received by it and (3) has properly accrued all taxes for such periods subsequent to the periods covered by such returns. Neither Lexington nor any of its Subsidiaries has received notice that the federal, state and local income and franchise tax returns of Lexington or any such Subsidiary has been or will be examined by any taxing authority. Neither Lexington nor any of its Subsidiaries has executed or filed with the Internal Revenue Service ("IRS") or any other taxing authority any agreement now in effect extending the period for assessment or collection of any income or other taxes. (4) neither Lexington nor any of its Subsidiaries is a party to any pending action or proceedings by any governmental authority for assessment or collection of taxes, and no claim for assessment or collection of taxes has been asserted against it. True, correct and complete copies of all federal, state and local income or franchise tax returns filed by Lexington and each of its Subsidiaries and all communications relating thereto have been delivered to Net 2 or made available to representatives of Net 2 or will be so delivered or made available prior to the Closing. Lexington has (A) qualified to be taxed as a REIT pursuant to Sections 856 through 859 of the Code for its taxable years ended December 31, 1993 through 1999. inclusive; (B) operated, and intends to continue to operate, in such a manner as to qualify to be taxed as a REIT pursuant to Sections 856 through 859 of the Code for its taxable year in which the Effective Date occurs; and (C) not taken or omitted to take any action which could result in a challenge to its status as a REIT. Lexington represents that each of its Subsidiaries is a qualified REIT subsidiary as defined in Section 856(i) of the Code. (m) Books and Records. The books of account and other financial records of Lexington and its Subsidiaries are in all material respects true, complete and correct, have been maintained in accordance with good business practices, and are accurately reflected in all materials respects in the financial statements included in the Lexington Reports. (n) Properties. (i) Except as disclosed on Schedule 3.1(n), Lexington and its Subsidiaries own, and each Joint Venture to which Lexington or any of its Subsidiaries is a party owns, fee simple title to each of the real properties reflected on the most recent balances sheet of Lexington included in the Lexington Reports (the "Lexington Properties"), which are all of the real estate properties owned by them, such Lexington Properties which are subject to Encumbrances are so subject only to the extent disclosed in the Lexington Reports and such Lexington Properties which are free and clear of Encumbrances are listed as such on Schedule 3.1(n) hereto. To Lexington's actual knowledge, Lexington's 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, 8 264 "Property Restrictions"), except for (1) Encumbrances and Property Restrictions set forth in the Lexington Reports; (2) Property Restrictions imposed or promulgated by law or any governmental body or authority with respect to real property, including zoning regulations that do not materially adversely affect the current use of the property; (3) Encumbrances and Property Restrictions disclosed on existing title reports or surveys (in either case copies of which title reports and surveys have been or will be delivered or made available to Net 2 prior to the Closing); and (4) mechanics', carriers', workmen's, repairmen's liens and other Encumbrances, Property Restrictions and other limitations of any kind, if any, which have heretofore been bonded (and that are disclosed in the Lexington Reports) or which individually or in the aggregate, do not exceed $100,000, do not materially detract from the value of or materially interfere with the present use of any of Lexington Properties subject thereto or affected thereby, and do not otherwise materially impair business operations conducted by Lexington and its Subsidiaries and which have arisen or been incurred only in its construction activities or in the ordinary course of business. (ii) Valid policies of title insurance have been issued insuring Lexington's or any of its Subsidiaries' fee simple title to Lexington Properties, subject only to the matters disclosed above and such policies are, at the date hereof, in full force and effect and no material claim has been made against any such policy. To Lexington's actual knowledge (1) there is no certificate, permit or license from any governmental authority having jurisdiction over any of Lexington 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 Lexington 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 Lexington Properties that has not been obtained and is not in full force and effect, or any pending threat of modification or cancellation of any of same; (2) neither Lexington nor its Subsidiaries has received written notice of any material violation of any federal, state or municipal law, ordinance, order, regulation or requirement affecting any portion of any of Lexington Properties issued by any governmental authority; (3) there are no structural defects relating to Lexington Properties and no Lexington Properties whose building systems are not in working order in any material respect; and (4) there is (A) no physical damage to any Lexington Property in excess of $100,000 for which there is no insurance in effect covering the cost of the restoration, (B) no current renovation to any Lexington Property for which Lexington is responsible, the cost of which exceeds $100,000 and (C) no current restoration (excluding tenant improvements) on any of Lexington Property the cost of which exceeds $100,000. (iii) Neither Lexington nor its Subsidiaries have received notice to the effect that and there are any (1) condemnation or rezoning proceedings that are pending or threatened with respect to any of Lexington Properties or (2) any zoning, building or similar laws, codes, ordinances, orders or regulations that are or will be violated by the continued maintenance, operation or use of any buildings or other improvements on any of Lexington Properties or by the continued maintenance, operation or use of the parking areas in any material respect. All work to be performed, payments to be made and actions to be taken by Lexington or its 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 Lexington Properties has been performed, paid or taken, as the case may be, and Lexington is not aware of any planned proposed work, payments or actions that may be required after the date hereof pursuant to such agreements. (o) Environmental Matters. To the actual knowledge of Lexington, none of Lexington, any of its Subsidiaries or any other person, has caused or permitted (i) the unlawful presence of any Hazardous Material on any of Lexington Properties, or (ii) any unlawful spills, releases, discharges or disposal of Hazardous Materials to have occurred or be presently occurring on or from Lexington 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 Lexington Material Adverse Effect; and in connection with the construction on or operation and use of Lexington Properties, Lexington and its Subsidiaries have not failed to comply, in any material respect, with any applicable local, state and federal environmental laws, 9 265 regulations, ordinances and administrative and judicial orders relating to the generation, recycling, reuse, sale, storage, handling, transport and disposal of any Hazardous Materials. (p) Labor Materials. Neither Lexington nor any of its Subsidiaries is a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor union organization. There is no unfair labor practice or labor arbitration proceeding pending or, to the knowledge of the executive officers of Lexington, threatened against Lexington or its Subsidiaries relating to their business, except for any such proceeding which would not have Lexington Material Adverse Effect. To the knowledge of Lexington, there are no organizational efforts with respect to the formation of a collective bargaining unit presently being made or threatened involving employees of Lexington or any of its Subsidiaries. (q) No Brokers. Lexington has not entered into any contract, arrangement or understanding with any person or firm which may result in the obligation of Net 2 to pay any finder's fee, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby. Lexington is not aware of any claim for payment of any finder's fee, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby. (r) Common Shares. The issuance and delivery by Lexington of the Common Shares in connection with the Merger and this Agreement have been duly and validly authorized by all necessary action on the part of Lexington, except for the approval of its shareholders of the Merger contemplated by this Agreement. The Common Shares to be issued in connection with the Merger and this Agreement, when issued in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable, except that 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 Lexington. (s) The Debentures. The issuance and delivery by Lexington of the Convertible Subordinated Debentures and the Dissenter Debentures in connection with the Merger and this Agreement have been duly and validly authorized by all necessary action on the part of Lexington, except for the approval of its shareholders of the Merger as contemplated by this Agreement. The Convertible Subordinated Debentures and the Dissenter Debentures to be issued in connection with the Merger and this Agreement, when issued in accordance with the terms of this Agreement, will constitute binding obligations of Lexington enforceable in accordance with their terms, subject to the laws respecting debtor rights generally. (t) Convertible Securities. Lexington has no outstanding options, warrants or other securities exercisable for, or convertible into, Common Shares, the terms of which require any anti-dilution adjustments by reason of the consummation of the transactions contemplated hereby. (u) Contracts and Commitments. The Lexington Reports disclose (i) all unsecured notes or other obligations of Lexington and its Subsidiaries which individually may result in total payments in excess of $100,000, (ii) notes, debentures, bonds and other evidence of indebtedness which are secured or collateralized by mortgages, deeds of trust or other security interests in Lexington Properties or personal property of Lexington and its Subsidiaries and (iii) each commitment entered into by Lexington or any of its Subsidiaries which individually may result in total payments or liability in excess of $100,000. Copies of the foregoing have been or will be made available to Net 2 prior to the Closing and will be materially true and correct when delivered or made available. None of Lexington or any of its Subsidiaries has received any notice of a default that has not been cured under any of the documents described in clauses (i) or (ii) above or is in default respecting any payment obligations thereunder beyond any applicable grace periods. There are no options of Lexington or any of its Subsidiaries to purchase real property. All Joint Venture agreements to which Lexington or any of its Subsidiaries is a party are disclosed in the Lexington Reports and Lexington or its Subsidiaries are not in default with respect to any obligations, which individually or in the aggregate are material, thereunder. 10 266 (v) Developmental Rights. Set forth in Schedule 3.1(v) is a list of all material agreements entered into by Lexington relating to the development, rehabilitation, capital improvement or construction of office buildings, industrial facilities or other real estate properties, which development or construction has not been substantially completed as of the date of this Agreement. Such agreements have not been modified and are valid and binding in accordance with their respective terms. SECTION 3.2 Representations and Warranties of Net 3. Net 3 represents and warrants to Net 2 as follows: (a) Organization, Standing and Power. Net 3 is a limited partnership duly created, validly existing and in good standing under the laws of the State of Delaware, and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted, except where the failure to do so would not have, individually or in the aggregate, a Lexington Material Adverse Effect. (b) Authority. Net 3 has the requisite power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement. The execution, delivery and performance by Net 3 of this Agreement and the consummation of the Merger by Net 3 has been duly authorized by all necessary action on the part of Net 3. (c) Enforceability. This Agreement has been duly executed and delivered by Net 3 and, assuming this Agreement constitutes the valid and binding agreement of Lexington and Net 2, constitutes a valid and binding obligation of Net 3, enforceable against such party in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws affecting creditors' rights and remedies and to general principles of equity. (d) Noncontravention. Except as set forth in Schedule 3.2(d), the execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions of this Agreement, will not (i) conflict with the limited partnership agreement of Net 3, (ii) conflict with, result in a breach 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 obligation or loss of a material benefit under, or require the consent of any person under, any indenture, or other material agreement, permit, concession, franchise, license or similar instrument or undertaking to which Net 3 is a party or by which Net 3 or any of their assets are bound or affected, or (iii) contravene any law, rule or regulation, or any order, writ, judgment, injunction, decree, determination or award binding on or applicable to Net 3 and currently in effect, which, in the case of clauses (ii) and (iii) above, singly or in the aggregate, would have a Lexington Material Adverse Effect. To the General Partner's actual knowledge, Net 3 is not in violation of any order of any court, governmental authority or arbitration board or tribunal, or any law, ordinance, governmental rule or regulation to which Net 3 or any of its properties or assets are subject, where such violation would have a Lexington Material Adverse Effect. Net 3 has obtained all licenses, permits and other authorizations and has taken all actions required by applicable law or governmental regulations in connection with its business as now conducted, where the failure to obtain any such item or to take any such action would have a Lexington Material Adverse Effect. SECTION 3.3 Representations and Warranties of Net 2. Net 2 represents and warrants to Lexington and Net 3 as follows: (a) Organization, Standing and Power. Net 2 is a limited partnership duly created, validly existing and in good standing under the laws of the State of Delaware, and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted, except where the failure to do so would not have, individually or in the aggregate, a Net 2 Material Adverse Effect. Each of Net 2's subsidiaries is a corporation, limited liability company or partnership duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, has the requisite power and authority to own its properties and to carry on its business as it is now be conducted, and is duly qualified to do business and is in good standing in each jurisdiction in which the ownership of its property or the conduct of its business requires such qualification. except for 11 267 jurisdictions in which such failure to be so qualified or to be in good standing would not have a Net 2 Material Adverse Effect. Net 2 and its subsidiaries have obtained all licenses, permits and other authorizations and have taken all actions required by applicable law or governmental regulations in connection with their business as now conducted, where the failure to obtain any such item or to take any such action would have a Net 2 Material Adverse Effect. Copies of each of Net 2's subsidiaries' organizational documents and partnership and Joint Venture agreements have been or will be prior to the Closing, delivered or made available to Lexington and were or will be true and correct when delivered or made available. For purposes of this Agreement, the term "Net 2 Material Adverse Effect" means any material adverse effect with respect to Net 2 or its subsidiaries, taken as a whole, or any change of effect that adversely, or is reasonably expected to adversely affect, (i) the business, assets, results from operations or condition (financial or otherwise) or (ii) the ability of Net 2 to consummate the transactions contemplated by this Agreement in any material respect or materially impair or delay Net 1's ability to perform its obligations hereunder. (b) Authority. Net 2 has the requisite power and authority to enter into this Agreement and to consummate the transactions contemplated by this Agreement. The execution, delivery and performance by Net 2 of this Agreement and the consummation of the Merger by Net 2 has been duly authorized by all necessary action on the part of Net 2. Subject only to the approval of the Merger by the holders of a majority of the outstanding partnership interests of Net 2, the consummation by Net 2 of this Agreement, the Net 2 Ancillary Agreements and the transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of Net 2. (c) Enforceability. This Agreement has been duly executed and delivered by Net 2 and, assuming this Agreement constitutes the valid and binding agreement of Lexington and Net 3, constitutes a valid and binding obligation of Net 2, enforceable against Net 2 in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws affecting creditors' rights and remedies and to general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity). (d) Noncontravention. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions of this Agreement, will not (i) conflict with the limited partnership agreement of Net 2, (ii) conflict with, result in a breach 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 obligation or loss of a material benefit under, or require the consent of any person under, any indenture, or other material agreement, permit, concession, franchise, license or similar instrument or undertaking to which Net 2 is a party or by which Net 2 or any of their assets are bound or affected, or (iii) contravene any law, rule or regulation, or any order, writ, judgment, injunction, decree, determination or award binding on or applicable to Net 2 and currently in effect. which, in the case of clauses (ii) and (iii) above, singly or in the aggregate, would have a Net 2 Material Adverse Effect. To the General Partner's actual knowledge, Net 2 is not in violation of any order of any court, governmental authority or arbitration board or tribunal, or any law, ordinance, governmental rule or regulation to which Net 2 or any of its properties or assets are subject, where such violation would have a Net 2 Material Adverse Effect. Net 2 has obtained all licenses, permits and other authorizations which it is required to have and has taken all actions required by applicable law or governmental regulations in connection with its business as now conducted, where the failure to obtain any such item or to take any such action would have a Net 2 Material Adverse Effect. (e) Consents. Other than the filings provided for in this Agreement to effect the Merger, any Regulatory Filings required under the Exchange Act, the Securities Act, or applicable State Securities and "Blue Sky" laws, no consent, approval or authorization of, or declaration or filing with, or notice to, any Governmental Entity which has not been received or made is required by or with respect to Net 2 in connection with the execution and delivery of this Agreement by Net 2 or the consummation by Net 2 of any of the transactions contemplated by this Agreement, except for (i) the filing of the Certificate of Mergers with the Secretary of State of the State of Delaware and the State Department of Assessments and Taxation of the State of Maryland, (ii) such other consents, approvals, authorizations, filings or 12 268 notices as are set forth in Schedule 3.3(e) and (iii) consents, approvals, authorizations, declarations, filings and notices that, if not obtained or made, will not, individually or in the aggregate, result in a Net 2 Material Adverse Effect. (f) Capitalization. As of September 30, 2000, Net 2's outstanding partnership interests consisted of Four Hundred Seventy Seven Thousand One Hundred Sixty Seven (477,167) Units and a general partnership interest equal to 1 of the partnership interests. Net 2 has no outstanding bonds, debentures, notes or other obligations, the holders of which have the right to vote (or which are convertible into or exercisable for securities having the right to vote) with the partners of Net 2 on any matter. All such outstanding partnership interests are duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights. There are no existing options, warrants, calls, puts, subscriptions, convertible securities, or other rights, agreements or commitments which obligate Net 2 or any of its subsidiaries to issue, transfer, acquire or sell any shares or other equity interest of Net 2 or any of its subsidiaries. There are no agreements or understandings to which Net 2 is a party with respect to the voting of any partnership interests or which restrict the transfer of any such partnership interests. (g) Other Interests. Except as set forth in Schedule 33(o). Net 2 does not own, directly or indirectly, any interest or investment (whether equity or debt) in any corporation, partnership, Joint Venture, business, trust or entity (other than investments in short-term investment securities). (h) SEC Documents. (i) Net 2 has made available or will make available to Lexington prior to the Closing, registration statements of Net 2 filed with the SEC in connection with public offerings of Net 2's securities since 1995 and all exhibits, amendments and supplements thereto (the "Net 2 Registration Statements"), and each report, proxy statement or information statement and all exhibits thereto prepared by it or relating to its properties since the effective date of the latest Net 2 Registration Statement, each in the form (including exhibits and any amendments thereto) filed with the SEC (collectively, the "Net 2 Reports"). (ii) To Net 2 GP's actual knowledge, as of their respective dates, the Net 2 Reports (i) complied as to form in all material respects with the applicable requirements of the Securities Laws and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. To Net 2's actual knowledge, each of the consolidated balance sheets of Net 2 included in or incorporated by reference into the Net 2 Reports (including the related notes and schedules) fairly presents the consolidated financial position of Net 2 and its subsidiaries as of its date and each of the consolidated statements of income, retained earnings and cash flows of Net 2 included in or incorporated by reference into the Net 2 Reports (including any related notes and schedules) fairly presents the results of operations, retained earnings or cash flows, as the case may be, of Net 2 and its subsidiaries for the periods set forth therein (subject, in the case of unaided statements, to normal year-end audit adjustments which would not be material in amount or effect), in each case in accordance with generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein and except, in the case of the unaided statements, as permitted by the Securities Laws. (iii) Except as and to the extent set forth on the consolidated balance sheet of Net 2 and its subsidiaries at June 30, 2000, including all notes thereto, or as set forth in the Net 2 Reports, neither Net 2 nor any of its subsidiaries has any material liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on, or reserved against in, a balance sheet of Net 2 or in the notes thereto, prepared in accordance with generally accepted accounting principles consistently applied, except liabilities arising in the ordinary course of business since such date which would not have a Net 2 Material Adverse Effect. (i) Litigation. To the Net 2 GP's actual knowledge, there are (a) no continuing orders, injunctions or decrees of any court, arbitrator or governmental authority to which Net 2 is a party or by 13 269 which any of its properties or assets are bound or to which the Net 2 GP is a party or by which any of his/its properties or assets are bound and (b) no actions, suits or proceedings pending against Net 2 or against the Net 2 GP or, to the actual knowledge of the Net 2 GP, threatened against Net 2 or against the Net 2 GP, at law or in equity, or before or by any federal or state commission, board, bureau, agency or instrumentality that in the case of clauses (a) or (b) above are reasonably likely, individually or in the aggregate, to have a Net 2 Material Adverse Effect. (j) Absence of Certain Changes. Except as disclosed in the Net 2 Reports, (a) Net 2 has conducted its business only in the ordinary course of such business (which for purposes of this Section 3.3 only, shall include all acquisitions of real estate properties and financing arrangements made in connection therewith); (b) there has not been any Net 2 Material Adverse Effect; (c) there has not been any distribution, setting aside or payment of any distribution with respect to any Partner interest in Net 2; and (d) there has not been any material change in Net 2's accounting principles, practices or methods. (k) Taxes. (i) Net 2 (A) has timely filed all federal and state tax returns including, without limitation, information returns and reports required to be filed by it for tax periods ended prior to the date of this Agreement or requests for extensions have been timely filed and any such request has been granted and has not expired and all such returns are accurate and complete in all material respects, (B) has paid or accrued all taxes shown to be due and payable on such returns or which have become due and payable pursuant to any assessment, deficiency notice, 30-day letter or other notice received by it and (C) has properly accrued all taxes for such periods and periods subsequent to the periods covered by such returns. Net 2 has not received notice that the federal, state and local income and franchise tax returns of Net 2 have been or will be examined by any taxing authority. Net 2 has not executed or filed with the IRS or any other taxing authority any agreement now in effect extending the period for assessment or collection of any income or other taxes. (ii) Net 2 is not a party to any pending action or proceeding by any governmental authority for assessment or collection of taxes, and no claim for assessment or collection of taxes has been asserted against it. True, correct and complete copies of all federal, state and local income or franchise tax returns filed by Net 2 since its inception and all communications relating thereto have been delivered to Lexington or made available to representatives of Lexington or will be so delivered or made available prior to the Closing. Net 2 does not hold any asset (i) the disposition of which could be subject to rules similar to Section 1374 of the Code, as a result of an election under IRS Notice 88-19 or (ii) that is subject to a consent filed pursuant to Section 341 (f) of the Code and regulations thereunder. For purposes of this Section 3.3(k), "taxes" includes any interest, penalty or additional amount payable with respect to any tax. (1) Books and Records. The books of account and other financial records of Net 2 are in all material respects true, complete and correct, have been maintained in accordance with good business practices, and are accurately reflected in all material respects in Net 2 financial statements. (m) Properties. (i) Net 2 owns fee simple title to each of the real properties reflected on the June 30, 2000 balance sheet of Net 2 (such properties, the "Net 2 Properties"), which are all of the real estate properties owned by it, and such Lexington Properties are subject to Encumbrances only to the extent disclosed in the Lexington Reports and such Lexington Properties that are free and clear of Encumbrances are listed as such on Schedule 3.3(m)(i). To the Net 2 GP's actual knowledge, the Net 2 Properties are not subject to any Property Restrictions, except for (1) Encumbrances and Property Restrictions disclosed in the Net 2 Reports, (2) Property Restrictions imposed or promulgated by law or any governmental body or authority with respect to real property, including zoning regulations that do not materially adversely affect the current use of the property, (3) Encumbrances and Property Restrictions disclosed on existing title reports or current surveys (in either case copies of which title reports and surveys have been or will be delivered or made available to Lexington prior to the Closing) and/or (4) mechanics', carriers', workmen's, repairmen's liens and other Encumbrances, Property Restrictions and other limitations of any kind, if any, which have 14 270 heretofore been bonded (which individually or in the aggregate do not exceed $10,000), do not materially detract from the value of or materially interfere with the present use of any of the Net 2 Properties subject thereto or affected thereby, and do not otherwise materially impair business operations conducted by Net 2 and which have arisen or been incurred only in its construction activities or in the ordinary course of business. (ii) Valid policies of title insurance have been issued insuring Net 2's fee simple title to the Net 2 Properties subject only to the matters disclosed above and such policies are, at the date hereof, in full force and effect and no claim has been made against any such policy. To the Net 2 GP's actual knowledge: (i) there is no certificate, permit or license from any governmental authority having jurisdiction over any of the Net 2 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 Net 2 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 Net 2 Properties that has not been obtained and is not in full force and effect, or any pending threat of modification or cancellation of any of the same; (ii) Net 2 has not received written notice of any material violation of any federal, state or municipal law, ordinance, order, regulation or requirement affecting any portion of any of the Net 2 Properties issued by any governmental authority; (iii) there are no structural defects relating to the Net 2 Properties and no Net 2 Properties whose building systems are not in working order in any material respect; and (iv) there is (A) no physical damage to any Net 2 Property in excess of $10,000 for which there is no insurance in effect covering the cost of the restoration, (B) no current renovation to any Net 2 Property the cost of which exceeds $10,000 and (C) no current restoration (excluding tenant improvements) of any Net 2 Property, the cost of which exceeds $10,000. (iii) Net 2 has not received notice to the effect that and there are no (i) condemnation or rezoning proceedings that are pending or threatened with respect to any of the Net 2 Properties or (ii) zoning, building or similar laws, codes, ordinances, orders or regulations that are or will be violated by the continued maintenance, operation or use of any buildings or other improvements on any of the Net 2 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 Net 2 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 the Net 2 Properties has been performed, paid or taken, as the case may be, and the Net 2 GP is not aware of any planned or proposed work, payments or actions that may be required pursuant to such agreements, except as set forth in Schedule 3.3(m)(iii). (n) Environmental Matters. To the Net 2 GP's actual knowledge, neither Net 2 nor any other person has caused (a) the unlawful presence of Hazardous Materials on any of the Net 2 Properties. or (b) any unlawful spills, releases, discharges or disposal of Hazardous Materials to have occurred or be presently occurring on or from the Net 2 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 Net 2 Material Adverse Effect; and in connection with the construction on or operation and use of The Net 2 Properties, Net 2 has not failed to comply, in any material respect, with any 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. (o) Subsidiaries and Joint Ventures. Except as disclosed on Schedule 3.3(o), Net 2 has no subsidiaries, and Net 2 does not own, directly or indirectly, any outstanding capital stock or equity interest in any corporation, partnership, Joint Venture or other entity. For purposes of this Agreement, (a) "subsidiary" means, with respect to any entity, any corporation of which securities or other ownership interests have an ordinary voting power to elect a majority of the board of directors of other persons performing similar functions are directly or indirectly owned by such entity and (b) "Joint Venture" means, with respect to any entity, any corporation or organization (other than such entity and any subsidiary thereof) of which such entity or any subsidiary thereof is, directly or indirectly, the beneficial owner of 40% or more of any class of equity securities or equivalent profit participation interest. 15 271 (p) Labor Matters. Net 2 is not a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor union organization. There is no unfair labor practice or labor arbitration proceeding pending or, to the actual knowledge of the Net 2 GP, threatened against Net 2 relating to its business, except for any such proceeding which would not have a Net 2 Material Adverse Effect. To the actual knowledge of the Net 2 GP, there are no organizational efforts with respect to the formation of a collective bargaining unit presently being made or threatened involving employees of Net 2. (q) No Brokers. Net 2 has not entered into any contract, arrangement or understanding with any person or firm which may result in the obligation of Net 2 or Lexington to pay any finder's fees, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby. Net 2 is not aware of any claim for payment of any finder's fees, brokerage or agent's commissions or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby. (r) Related Party Transactions. Except as set forth in the Net 2 Reports, there are no arrangements, agreements or contracts entered into by Net 2 with (a) any consultant, (b) any person who is an officer, director or affiliate of Net 2 or the General Partner, 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 Units in a private placement. (s) Contracts and Commitments. The Net 2 Reports disclose (i) all unsecured notes or other obligations of Net 2 which individually may result in total payments in excess of $10,000, (ii) all notes, debentures, bonds and other evidence of indebtedness which are secured or collateralized by mortgages, deeds of trust or other security interests in The Net 2 Properties or personal property of Net 2, and (iii) each commitment entered into by Net 2 which may result in total payments or liability in excess of $10,000. Net 2 has not received any notice of a default that has not been cured under any of the documents described in clause (i) above or is in default respecting any payment of obligations thereunder beyond any applicable grace periods. All options of Net 2 to purchase real property are set forth in the Net 2 Reports and such options and Net 2's rights thereunder are in full force and effect. (t) Developmental Rights. There are no material agreements entered into by Net 2 relating to the development, rehabilitation, capital improvement or construction of office buildings, industrial facilities or other real estate properties, which development or construction has not been substantially completed as of the date of this Agreement. (u) Convertible Securities. To the General Partner's actual knowledge, Net 2 has no outstanding options, warrants or other securities exercisable for, or convertible into, Units or other interests of Net 2, the terms of which would require any anti-dilution adjustments by reason of the consummation of the transactions contemplated hereby. ARTICLE IV ADDITIONAL AGREEMENTS SECTION 4.1 Reasonable Best Efforts. Upon the terms and subject to the conditions and other agreements set forth in this Agreement, each of the parties agrees to use its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Merger and the other transactions contemplated by this Agreement, including the satisfaction of the respective conditions set forth in Article V. SECTION 4.2 Public Announcements. Lexington and Net 3, on the one hand, and Net 2, on the other hand, will consult with each other before issuing, and provide each other the opportunity to review and comment upon, any press release or other public statements with respect to the transactions contemplated by 16 272 this Agreement, including the Merger, and shall not issue any such press release or make any such 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 or automated quotation system. SECTION 4.3 Consents, Approvals and Filings. (i) Net 2 and Lexington will make and cause their respective Subsidiaries to make all necessary filings, as soon as practicable, in order to facilitate prompt consummation of the Merger and the other transactions contemplated by this Agreement. In addition, Net 2 and Lexington will each use their reasonable best efforts, and will cooperate fully with each other (a) to comply as promptly as practicable with all governmental requirements applicable to the Merger and the other transactions contemplated by this Agreement; and (b) to obtain as promptly as practicable all necessary permits, orders or other consents of Governmental Entities and consents of all third parties necessary for the consummation of the Merger and the other transactions contemplated by this Agreement. Each of Net 2 and Lexington shall use reasonable best efforts to provide such information and communications to Governmental Entities as such Governmental Entities may reasonably request. (ii) Each of the parties shall provide to the other party copies of all applications in advance of filing or submission of such applications to Governmental Entities in connection with this Agreement, and copies of all correspondence with such Governmental Entities, and shall keep all the parties timely apprised of the status of the foregoing. SECTION 4.4 State Takeover Laws. Lexington, Net 3 and Net 2 shall take all necessary steps to exempt the transactions contemplated by this Agreement from, or if necessary to challenge the validity or applicability of, any state takeover law, if any. SECTION 4.5 No Solicitation by Net 2. (i) Net 2 shall not, directly or indirectly. through any officer, director, employee, representative or agent of Net 2. or any of its subsidiaries, solicit or encourage (including by way of furnishing information) the initiation of any inquiries or proposals regarding any merger, amalgamation, take-over bid, reorganization, sale of substantial assets, sale of Units (including, without limitation, by way of a tender offer) or similar transaction involving Net 2 or its subsidiaries with any party other than Lexington and its Subsidiaries (any of the foregoing inquiries or proposals being referred to herein as an "Acquisition Proposal"); provided, however, that nothing contained in this Agreement shall prevent the Net 2 GP, in its capacity as the general partner of Net 2, after consultation with its financial advisors, and after receiving advice from outside counsel to the effect that the Net 2 GP, in its capacity as the general partner of Net 2, is required to do so in order to discharge properly its fiduciary duties, from considering, negotiating, approving and recommending to the holders of Units an unsolicited bona fide Acquisition Proposal which the Net 2 GP, in its capacity as the general partner of Net 2, determines in good faith would result in a transaction more favorable to the holders of Units than the transaction contemplated by this Agreement (any such Acquisition Proposal being referred to herein as a "Superior Proposal"). (ii) Net 2 shall immediately notify Lexington after receipt of any Acquisition Proposal or any request for nonpublic information relating to Net 2 in connection with an Acquisition Proposal or for access to the properties, books or records of Net 2 by any person that informs the Net 2 GP that it is considering making, or has made, an Acquisition Proposal. Such notice to Lexington shall be made orally and in writing and shall indicate in reasonable detail the identity of the offeror and the terms and conditions of such proposal, inquiry or contract. (iii) If the Net 2 GP, in its capacity as the general partner of Net 2, receives a request for material nonpublic information by a person who makes a bona fide Acquisition Proposal and the Net 2 GP, in its capacity as the general partner of Net 2, determines that such proposal is a Superior Proposal, then, and only in such case, Net 2 may, subject to the execution of a confidentiality agreement, provide such party with access to information regarding Net 2. (iv) The Net 2 GP, in its capacity as the general partner of Net 2, shall immediately cease and cause to be terminated any existing discussions or negotiations with any parties (other than with Lexington or Net 3) conducted heretofore with respect to any of the foregoing. 17 273 (v) The Net 2 GP, in its capacity as the general partner of Net 2, shall ensure that any investment banker or other advisor or representative retained by Net 2 are aware of the restrictions described in this Section 4.5, and shall be responsible for any breach of this Section by such bankers, advisors and representatives. SECTION 4.6 Conduct of Businesses. (a) Prior to the Effective Time, except as may be set forth in the Schedule 4.6(a) or as contemplated by this Agreement, unless the other party has consented in writing thereto, Lexington, Net 3 and Net 2: (i) Shall use their reasonable best efforts, and shall cause each of their respective subsidiaries to use their reasonable best efforts, to preserve intact their business organizations and goodwill and keep available the services of their respective officers and employees; (ii) Shall confer on a regular basis with one or more representatives of the other to report material operational matters and, subject to Section 4.5, any proposals to engage in material transactions; and (iii) Shall promptly notify the other of any material change in the condition (financial or otherwise) of the business, properties, assets or liabilities, or any material governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated), or the breach in any material respect of any representation, warranty, covenant or agreement contained herein. (b) Prior to the Effective Time, except as may be set forth in Schedule 4.6(b), unless Lexington has consented (such consent not to be unreasonably withheld or delayed) in writing thereto, Net 2: (i) Shall conduct its operations according to its usual, regular and ordinary course in substantially the same manner as heretofore conducted; (ii) Shall not amend its limited partnership agreement; (iii) Shall not (A) except pursuant to the exercise of options, warrants, conversion rights and other contractual rights existing on the date hereof and disclosed pursuant to this Agreement, issue any Units or other interests in Net 2, make any distribution (other than in accordance with past practice), effect any recapitalization or other similar transaction, or (B) grant, confer or award any option, warrant, conversion right or other right not existing on the date hereof to acquire any Units; (iv) Shall not sell or otherwise dispose of (A) any Net 2 Properties, or (B) except in the ordinary course of business, any of its other assets which are material, individually or in the aggregate, provided, however, it is understood and agreed that Net 2 shall distribute out any excess cash, after payment of Net 2 Transaction Costs, prior to consummation of the Merger; (v) Shall not make any loans, advances or capital contributions to, or investments in, any other person; (vi) Shall not enter into any commitment which individually may result in total payments or liability by or to it in excess of Ten Thousand Dollars ($10,000.00) in the case of any one commitment or in excess of Fifty Thousand Dollars ($50,000.00) for all commitments; (vii) Shall not enter into or terminate any lease. (c) Prior to the Effective Time, except as may be set forth in Schedule 4.6(c), unless Net 2 has consented (such consent not to be unreasonably withheld or delayed) in writing thereto, Lexington: (i) Shall, and shall cause each of its Subsidiaries to, conduct its operations according to their usual, regular and ordinary course in substantially the same manner as heretofore conducted; (ii) Shall not amend it Declaration of Trust except as contemplated by this Agreement; (iii) Shall not (A) except pursuant to the exercise of options, warrants, conversion rights and other contractual rights (including Lexington's existing dividend reinvestment plan) existing on the date hereof and disclosed pursuant to this Agreement, issue any of its capital shares, share dividend, recapitalization or other similar transaction, or (B) grant, confer or award any option, warrant, conversion right to or 18 274 other right not existing on the date hereof to acquire any of its capital shares (except pursuant to any employee incentive plan approved by shareholders), (iv) Except as set forth in Schedule 4.6(c), shall not, and shall not permit any of its Subsidiaries to, sell or otherwise dispose of any Lexington Properties or any of its capital stock of or other interests in Subsidiaries, except in the ordinary course of business; (v) Shall not, and shall not permit any of its Subsidiaries to (except in the ordinary course of business), make any loans, advances or capital contributions to, or investments in, any other person other than in connection with the sale of properties; (vi) Shall not, and shall not permit any of its Subsidiaries to, enter into any commitment which individually may result in total payments or liability by or to it in excess of One Hundred Thousand Dollars ($100,000.00) in the case of any one commitment or in excess of One Hundred Thousand Dollars ($100,000.00) for all commitments, except for those commitments in connection with the acquisition and/or development of property disclosed in Schedule 3.1(v); (vii) Shall not enter or terminate any lease. SECTION 4.7 Approvals of Shareholder and Limited Partners. Lexington will take all action necessary in accordance with applicable law and its organizational documents to convene a meeting of its shareholders as promptly as practicable to consider and vote upon or otherwise to obtain the consent of its shareholders to approve this Agreement and the transactions contemplated hereby. Net 2 will take all action necessary in accordance with applicable law and its organizational documents to obtain the consent of its limited partners to approve this Agreement and the transactions contemplated hereby. The Board and the Net 2 GP shall each recommend such approval and Lexington and Net 2 shall each take all lawful action to solicit such approval, including, without limitation, timely mailing the Proxy Statement; provided, however, that such recommendation or solicitation is subject to any action taken by, or upon authority of, the Board and Net 2 GP, as the case may be, in the exercise of its good faith judgment as to its fiduciary duties to its shareholders or partners, as applicable. imposed by law as advised by counsel. SECTION 4.8 Inspection of Records. From the date hereof to the Effective Time, Net 2 and Lexington shall allow all designated officers, attorneys, accountants and other representatives of the other access at all reasonable times to the records and files, correspondence, audits and properties, as well as to all information relating to commitments, contracts, titles and financial position, or otherwise pertaining to the business and affairs of Net 2 and Lexington and their respective subsidiaries. SECTION 4.9 Regulatory Filings. Lexington, Net 3 and Net 2 shall cooperate and promptly prepare and Lexington shall file with the SEC under the Securities, as soon as practicable a Registration Statement on Form S-4 (the "Registration Statement"), which will include a Joint Proxy and Consent Solicitation Statement/Prospectus in connection with the Merger (the "Proxy Statement"). The respective parties will cause the Registration Statement and the Proxy Statement to comply as to form in all material respects with the applicable provisions of the Securities Act, the Exchange Act and the rules and regulations promulgated thereunder. Lexington and Net 2 shall use reasonable best efforts, and each will cooperate with the other, to have the Registration Statement declared effective by the SEC as promptly as practicable. Lexington and Net 2 shall use their respective best efforts to obtain, prior to the effectiveness of the Registration Statement, any necessary state securities law or "Blue Sky" permits or approvals required to carry out the transactions contemplated by this Agreement. Lexington and Net 2 both agree that, with respect to information within the scope of their knowledge, the Registration Statement and the Proxy Statement and each amendment or supplement thereto, at the time it is filed or becomes effective, will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing shall not apply to the extent that any such untrue statement of a material fact or omission to state a material fact was made by either Lexington or Net 2 in reliance upon and in conformity with written information concerning the other party furnished to by such other party specifically for use in the Registration Statement. Lexington and Net 2 both agree that the written information provided by them specifically for 19 275 inclusion in the Registration Statement and each amendment or supplement thereto, at the time it is filed or becomes effective, will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Lexington will advise Net 2, promptly after it receives notice thereof, of the time when the Registration Statement may be filed or any supplement or amendment has been filed or when the Registration Statement will become effective, the issuance of any stop order, the suspension of the qualification of the Merger Consideration issuable in connection with the Merger for offering or sale in any jurisdiction, or any request by the SEC for amendment of the Proxy Statement or comments thereon and responses thereto or requests by the SEC for additional information. SECTION 4.10 Expenses. Net 2 shall pay all of the Net 2 Transaction Costs and Lexington shall pay all of the Lexington Transaction Costs. SECTION 4.11 REIT Status. From and after the date and until the Effective Time, neither Lexington, Net 3 nor Net 2 nor any of their respective subsidiaries or other affiliates shall (a) knowingly take any action, or knowingly fail to take any action, that would jeopardize qualification of Lexington as a REIT within the meaning of Sections 856 through 859 of the Code; or (b) enter into any contract, agreement, commitment or arrangement with respect to the foregoing. SECTION 4.12 Appraisals. The parties acknowledge that Net 2 is obligated to obtain an appraisal of the Net 2 Properties in accordance with the Net 2 partnership agreement. Net 2 agrees to engage Robert A. Stanger & Company to conduct such appraisal as of December 31, 2000 and to furnish such appraisal to Lexington and Net 3 as soon as practicable after December 31, 2000. SECTION 4.13 Termination Fees. Net 2 shall pay a termination fee to Lexington equal to 4% of the aggregate value of the Merger Consideration to be received by the holders of Units if this Agreement is terminated in any of the following circumstances: (a) the Net 2 GP accepts, solicits or recommends, a Superior Proposal (b) the Net 2 GP withdraws or adversely modifies its recommendation of the Merger; (c) the Net 2 GP makes any positive or neutral recommendation regarding any Superior Proposal; (d) Net 2 enters into any agreement which would result in a Superior Proposal occurring; or (e) the Net 2 GP authorizes any of the above. Lexington shall pay a termination fee to Net 2 equal to 4% of the aggregate value of the Merger Consideration to be received by the holders of Units if this Agreement is terminated in any of the following circumstances: (a) Lexington accepts a proposal for an Alternative Acquisition Transaction; (b) the Board withdraws or adversely modifies its recommendation of the Merger; (c) the Board makes any positive or neutral recommendation regarding any proposal for an Alternative Acquisition Transaction; (d) Lexington enters into any agreement which would result in an Alternative Acquisition Transaction occurring: or (e) the Board authorizes any of the above. An "Alternative Acquisition Transaction" is any merger, amalgamation, take-over bid, reorganization, sale of substantial assets, sale of Common Shares (including, without limitation, by way of a tender offer) or similar transaction involving Lexington and its Subsidiaries with any party other than Net 2 and its subsidiaries which would prevent Lexington from consummating the Merger with Net 2. ARTICLE V CONDITIONS PRECEDENT SECTION 5.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligation of each party to effect the Merger is subject to the satisfaction or written waiver on or prior to the Closing Date of the following conditions: (a) Limited Partner and Shareholder Approval. This Agreement, and the consummation of the transactions contemplated hereby, including the Merger and the issuance of the Merger Consideration shall have been duly adopted and approved by the requisite vote of the holders of Units and Lexington shareholders. 20 276 (b) Dissenters Debentures. Subject to waiver by Lexington, the absence of holders of Units and holders of limited partnership interests in Net 1 electing to receive Dissenter Debentures with an aggregate principal amount in excess of $20 million. (c) Concurrent Closings. The closing of the Net 1 Merger, the Net 2 GP Contribution, and the Net 1 GP Contribution shall occur concurrently with the Closing hereunder. (d) No Injunctions or Restraints. No statute, rule, regulation, 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 shall be in effect; provided, however, that the party invoking this condition shall use its best efforts to have any such temporary restraining order, injunction, order, restraint or prohibition vacated. (e) Governmental and Regulatory Consents. All material filings required to be made prior to the Effective Time with, and all material consents, approvals, permits and authorizations required to be obtained prior to the Effective Time from, Governmental Entities, in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby by Net 2 and Lexington will have been made or obtained (as the case may be). (f) Exchange Listing. The Common Shares issuable pursuant to the Merger shall have been approved for listing on the New York Stock Exchange. (g) Registration Statement. The Registration Statement shall be effective under the Securities Act, no stop orders suspending the effectiveness of the Registration Statement shall have been issued, no action, suit, proceeding or investigation by the Securities and Exchange Commission to suspend the effectiveness thereof shall have been initiated and be continuing, and all necessary approvals under state securities laws, or the Securities Act or the Exchange Act relating to the issuance or trading of the Common Shares issuable pursuant to the Merger shall have been received. (h) Tax Opinion. The receipt by each of Lexington and Net 2 of an opinion from Paul, Hastings, Janofsky & Walker LLP, in form reasonably satisfactory to Net 2 and to Lexington as to various tax consequences of the Merger to the holders of Units and certain "REIT" matters including the continuing status of Lexington as a REIT following completion of the Merger. SECTION 5.2 Conditions to Obligations of Net 2. The obligations of Net 2 to effect the Merger are further subject to the satisfaction or written waiver on or prior to the Closing Date of the following conditions: (a) Representations and Warranties. The representations and warranties of Lexington and Net 3 set forth in Sections 3.1 and 3.2 that are qualified as to materiality or Lexington Material Adverse Effect shall be true and correct and the representations and warranties of Lexington and Net 3 set forth in Sections 3.1 and 3.2 that are not so qualified shall be true and correct in all material respects, in each case 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 such representations and warranties speak as of an earlier date. In addition, all such representations and warranties shall be true and correct as of the date hereof and as though made on and as of the Closing Date, except to the extent such representation or warranty speaks of an earlier date (without regard to any qualifications for materiality or Lexington Material Adverse Effect) except to the extent that any such failure to be true and correct (other than any such failure the effect of which is immaterial) individually and in the aggregate with all such other failures would not have a Lexington Material Adverse Effect, and Net 2 shall have received a certificate signed on behalf of Lexington by an authorized officer of Lexington to the effect set forth in this paragraph. (b) Performance of Obligations of Lexington and Net 3. Lexington and Net 3 shall have performed in all material respects all obligations required to be performed by them under this Agreement at or prior to the Closing Date, and Net 2 shall have received a certificate signed on behalf of Lexington by an authorized officer of Lexington to such effect and a certificate signed on behalf of Net 3 by its general partner to such effect. 21 277 (c) No Material Adverse Effect. From and after the date of this Agreement, there shall not have been any changes or events which, individually or in the aggregate, have had or reasonably would be expected to have a Lexington Material Adverse Effect. (d) Consents. All consents of third parties set forth in Schedule 5.2(d) shall have been obtained. (e) Bring-down of Fairness Opinion. Net 2 shall have received a bring-down of its Fairness Opinion dated as of or immediately prior to the date of mailing of the Proxy Statement to holders of Units. SECTION 5.3 Conditions to Obligations of Lexington and Net 3. The obligation of Lexington and Net 3 to effect the Merger is further subject to the satisfaction or written waiver on or prior to the Closing Date of the following conditions: (a) Representations and Warranties. The representations and warranties of Net 2 and the Net 2 GP set forth in Sections 3.3 that are qualified as to materiality or Net 2 Material Adverse Effect shall be true and correct and the representations and warranties of Net 2 and the Net 2 GP set forth in Sections 3.3 that are not so qualified shall be true and correct in all material respects, in each case as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date. In addition, all such representations and warranties shall be true and correct as of the date hereof and as though made on and as of the Closing Date, except to the extent such representation or warranty speaks of an earlier date (without regard to any qualifications for materiality or Net 2 Material Adverse Effect) except to the extent that any such failure to be true and correct (other than any such failure the effect of which is immaterial) individually and in the aggregate with all such other failures would not have a Net 2 Material Adverse Effect, and Lexington and Net 3 shall have received a certificate signed on behalf of Net 2 by the Net 2 GP to the effect set forth in this paragraph. (b) Performance of Obligations of Net 2 and the Net 2 GP. Net 2 and the Net 2 GP shall have performed in all material respects all obligations required to be performed by them under this Agreement at or prior to the Closing Date, and Lexington and Net 3 shall have received a certificate signed on behalf of Net 2 by the Net 2 GP to such effect. (c) No Material Adverse Effect. From and after the date of this Agreement, there shall not have been any changes or events which, individually or in the aggregate, have had or reasonably would be expected to have a Net 2 Material Adverse Effect. (d) Consents. All consents of third parties set forth in Schedule 5.3(d) shall have been obtained. (e) Amendment of Net 2's Limited Partnership Agreement. Immediately prior to the Effective Time, Net 2 shall have amended its limited partnership agreement to the extent required to permit the Merger and other transactions contemplated by this Agreement to be consummated. (f) Bring-down of Fairness Opinion. Lexington shall have received a bring-down of its Fairness Opinion dated as of or immediately prior to the date of mailing of the Proxy Statement to holders of its Common Shares. SECTION 5.4 Frustration of Closing Conditions. None of Lexington, Net 3 nor Net 2 may rely on the failure of any condition set forth in Section 5.1, 5.2 or 5.3, as the case may be, to be satisfied if such failure was caused by such party's failure to use reasonable best efforts to commence or complete the Merger and the other transactions contemplated by this Agreement. 22 278 ARTICLE VI TERMINATION, AMENDMENT AND WAIVER SECTION 6.1 Termination. This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Effective Time, in any one of the following circumstances: (a) By Lexington or Net 2 if the Merger has not been completed by December 31, 2001. However, no party may terminate this Agreement if its breach is the reason that the Merger has not been completed. (b) By Lexington or Net 2 if a law or final court order prohibits the Merger. (c) By Lexington or Net 2 if the December 31, 2000 Appraisal Value is greater than one hundred and five percent (105%) or less than ninety-five percent (95%) of the Deemed Value. (d) By Lexington or Net 2 if the requisite holders of the Units vote not to approve the Merger. (e) By Lexington or Net 2 if the requisite equity holders of Lexington shares do not approve the Merger. (f) By Lexington or Net 2, if (x) any statute, rule or regulation shall have been promulgated by any Governmental Entity prohibiting or restricting the Merger or (y) any federal or state court of competent jurisdiction or other Governmental Entity shall have issued an order, decree or ruling, or taken any other action permanently restraining, enjoining or otherwise prohibiting the Merger and such order, decree, ruling or other action shall have become final and non-appealable; provided, that a party may not terminate this Agreement pursuant to this clause (f) if it has not complied with its obligations under Section 4.3. (g) By Lexington or Net 2, if (A) the other party shall have failed to comply in any material respect with any of the covenants and agreements (or in any respect with regard to covenants and agreements qualified by materiality) contained in this Agreement to be complied with or performed by such party at or prior to such date of termination, and such failure continues for thirty (30) Business Days after the actual receipt by such party of a written notice from the other party setting forth in detail the nature of such failure, or (B) a representation or warranty of the other party contained in this Agreement shall be untrue in any material respect or a representation or warranty qualified as to materiality or Material Adverse Effect, as the case may be, shall be untrue in any respect. (h) By Net 2, if any of the conditions set forth in Section 5.2 shall have become incapable of being fulfilled and shall not have been waived by Net 2. or by Lexington and Net 3 if any of the conditions set forth in Section 5.3 shall have become incapable of being fulfilled and shall not have been waived by Lexington. (i) By Lexington or Net 3, if the Net 2 GP shall have (a) withdrawn or modified, in accordance with Section 4.7, in any manner adverse to Lexington or Net 3, its approval or recommendation of the Merger or this Agreement or (b) entered into, approved or recommended, a Superior Proposal. (j) By Net 2, if Lexington shall have (a) withdrawn or modified, in accordance with Section 4.7, in any manner adverse to Net 2, its approval or recommendation of the Merger or this Agreement or (b) entered into, approved or recommended an Alternative Acquisition Transaction. SECTION 6.2 Effect of Termination. In the event of the termination and abandonment of this Agreement pursuant to Section 6.1, this Agreement (except for the provisions of Sections 4.13 (with respect to a termination pursuant to Section 6.1(i) or (j)), this Section 6.2 and Article VII) shall forthwith become void and have no effect, without any liability on the part of any party hereto or its trustees, officers or shareholders; provided, however, that nothing in this Section 6.2 shall relieve any party to this Agreement of liability for any willful or intentional breach of this Agreement. SECTION 6.3 Amendment. To the extent permitted by law, this Agreement may be amended by a subsequent writing signed by each of the parties upon the approval of the Net 2 GP and the Board, whether 23 279 before or after Net 2 Limited partner's or the Lexington shareholders' approval of this Agreement has been obtained; provided, that after any such approval by the Net 2 limited partners or the Lexington shareholders, as the case may be, there shall be made no amendment that requires further approval by such limited partners or shareholders without the further approval of such limited partners or shareholders. SECTION 6.4 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 parties, (b) waive any inaccuracies in the representations and warranties of the other parties contained in this Agreement or in any document delivered pursuant to this Agreement or (c) subject to Section 6.3, waive compliance with any of the agreements or conditions of the other parties 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 such rights. ARTICLE VII GENERAL PROVISIONS SECTION 7.1 Nonsurvival of Representations and Warranties. None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time. This Section 7.1 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time. SECTION 7.2 Definitions. For purposes of this Agreement of the following terms shall have the following meanings: (a) "Acquisition Proposal" shall have the meaning set forth in Section 4.5 of this Agreement. (b) "Adjusted Net Asset Value" means Thirty Nine Million One Hundred Five Thousand Dollars ($39,105,000.00), which represents 99% of (1) the Deemed Value less (2) Net 2's liabilities, determined in accordance with GAAP, consistently applied, and (3) Net 2 Liquidation Costs. (c) "Agreement" shall have the meaning set forth in the preamble to this Agreement. (d) "Aggregate Transaction Costs" means the total costs associated with consummating the Mergers, but excluding the fees and expenses of Prudential Securities Incorporated and the fees and expenses of Cohen & Steers Capital Advisors LLC. (e) "Alternative Acquisition Transaction" shall have the meaning set forth in Section 4.13 of this Agreement. (f) "Average Closing Price" means the average closing price on the New York Stock Exchange of the Common Shares for the 20-day period preceding, but not including, the Closing Date; provided, however, that the Average Closing Price shall not exceed $13.00 per Common Share, nor be less than $11.00 per Common Share. (g) "Board" shall have the meaning set forth in the recitals to this Agreement. (h) "Business Day" means any day other than Saturday, Sunday or any other day on which banks in the City of New York are required or permitted to close. (i) "Closing" shall have the meaning set forth in Section 1.2 of this Agreement. (j) "Closing Date" shall have the meaning set forth in Section 1.2 of this Agreement. (k) "Code" means the Internal Revenue Code of 1986, as amended. (1) "Common Share" shall have the meaning set forth in Section 2.1(a) of this Agreement. (m) "Convertible Subordinated Debentures" shall have the meaning set forth in Section 2.1(a) of this Agreement. 24 280 (n) "December 31, 2000 Appraisal Value" means the value of the Net 2's properties as established by the December 31, 2000 appraisals to be conducted by Robert A. Stanger & Company. (o) "Deemed Value" means One Hundred One Million Five Hundred Sixty Two Thousand Ten Dollars ($101,562,010.00), representing the value of the Net 2 Properties as agreed upon by the parties. (p) "Dissenter Debentures" shall have the meaning set forth in Section 2.1(c) of this Agreement. (p) "DRUPLA" shall have the meaning set forth in Section 1.1 of this Agreement. (q) "Effective Time" shall have the meaning set forth in Section 1.3 of this Agreement. (r) "Encumbrances" means liens, mortgages, deeds of trust, claims against title, charges which are liens or security interests. (s) "Exchange Act" shall have the meaning set forth in Section 3.1 (e) of this Agreement. (t) "Exchange Agent" shall have the meaning set forth in Section 2.3 of this Agreement. (u) "Exchange Fund" shall have the meaning set forth in Section 2.3 of this Agreement. (v) "GAAP" means generally accepted accounting principles, as in effect in the United States. (w) "Governmental Entity" shall have the meaning set forth in Section 3.1(e) of this Agreement. (x) "Hazardous Materials" means any hazardous substance, hazardous materials, toxic substances or waste materials. (y) "IRS" shall have the meaning set forth in Section 3.3(k) of this Agreement. (z) "Joint Venture" shall have the meaning set forth in Section 3.3(o) of this Agreement. (aa) "Lexington" shall have the meaning set forth in the preamble to this Agreement. (bb) "Lexington Ancillary Agreements" shall have the meaning set forth in Section 3.1(b) of this Agreement. (cc) "Lexington Material Adverse Effect" shall have the meaning set forth in Section 3.1(a) of this Agreement. (dd) "Lexington Properties" shall have the meaning set forth in Section 3.1(n)(i) of this Agreement. (ee) "Lexington Registration Statements" shall have the meaning set forth in Section 3.1(i)(i) of this Agreement. (ff) "Lexington Reports" shall have the meaning set forth in Section 3.1(i)(i) of this Agreement. (gg) "Lexington Transaction Costs" shall mean one-third of the Aggregate Transaction Costs plus all of the fees and expenses of Prudential Securities Incorporated. (hh) "Merger" shall have the meaning set forth in the recitals to this Agreement. (ii) "Mergers" means, collectively, the Merger and the Net 1 Merger. (jj) "Merger Consideration" shall have the meaning set forth in Section 2.1 of this Agreement. (kk) "MGCL" shall have the meaning set forth in Section 1.1 of this Agreement. (ll) "Net 2" shall have the meaning set forth in the preamble to this Agreement. (mm) "Net 2 Contribution Agreement" shall have the meaning set forth in the preamble to this Agreement. (nn) "Net 2 GP" shall have the meaning set forth in the recitals to this Agreement. 25 281 (oo) "Net 2 Material Adverse Effect" shall have the meaning set forth in Section 3.3(a) of this Agreement. (pp) "Net 2 Properties" shall have the meaning set forth in Section 3.3(m)(i) of this Agreement. (qq) "Net 2 Liquidation Costs" means Four Million Two Hundred Sixteen Thousand ($4,216,000.00), which represents the expected costs of liquidating the real properties of Net 2 and related costs and expenses of winding up the affairs Net 2 in order to effectuate a distribution of all proceeds from such liquidation to the partners of Net 2. (rr) "Net 2 Transaction Costs" shall mean one-third of the Aggregate Transaction Costs plus one-half of the fees and expenses of Cohen & Steers Capital Advisors LLC attributable to services rendered to Net 2 pursuant to an engagement letter, dated July 6, 2000, by and between Netl, Net 1 and Cohen & Steers Capital Advisors LLC. (ss) "Net 1" shall have the meaning set forth in the preamble to this Agreement. (tt) "Net 1 Merger" means the merger contemplated by the Net 1 Merger Agreement. (uu) "Net 1 Merger Agreement" means the Agreement and Plan of Merger dated the date hereof among Lexington, Net 3 and Net 1. (vv) "Net 3" shall have the meaning set forth in the preamble to this Agreement. (ww) "Per Unit Adjusted Net Value" means the amount obtained by dividing (1) the Adjusted Net Asset Value by (2) the total number of Units. (xx) "Property Restrictions" shall have the meaning set forth in Section 3.1(n) of this Agreement. (yy) "Proxy Statement" shall have the meaning set forth in Section 4.9 of this Agreement. (zz) "Registration Statement" shall have the meaning set forth in Section 4.9 of this Agreement. (aaa) "Regulatory Filings" shall have the meaning set forth in Section 3.1(e) of this Agreement. (bbb) "Securities Act" shall have the meaning set forth in Section 3.1(e) of this Agreement. (ccc) "subsidiary" shall have the meaning set forth in Section 3.3(o)(a) of this Agreement. (ddd) "Subsidiaries" shall have the meaning set forth in Section 3.1(a) of this Agreement. (eee) "Superior Proposal" shall have the meaning set forth in Section 4.5 of this Agreement. (fff) "Surviving Entity" shall have the meaning set forth in Section 1.1 of this Agreement. (ggg) "Transfer Document" shall have the meaning set forth in Section 2.3 of this Agreement. (hhh) "Transmittal Letter" shall have the meaning set forth in Section 2.3 of this Agreement. (iii) "Units" shall have the meaning set forth in Section 2.1 of this Agreement. 26 282 SECTION 7.3 Notices. All notices, requests, claims, demands and other communications under this Agreement shall be in writing and shall be deemed given if delivered personally or sent by overnight courier (providing proof of delivery) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (i) if to Lexington, to Lexington Corporate Properties Trust 355 Lexington Avenue New York, New York 10017 Attention: T. Wilson Eglin Telecopy: (212) 986-6972 with a copy (which shall not constitute notice) to: Paul, Hastings, Janofsky & Walker LLP 399 Park Avenue New York, New York 10022 Attention: Mark Schonberger, Esq. Telecopy: (212) 319-4090 (ii) If to Net 3, to C/o Lexington Corporate Properties Trust 355 Lexington Avenue New York, New York 10017 Attention: Patrick Carroll Telecopy: (212) 986-6972 with a copy (which shall not constitute notice) to: Paul, Hastings, Janofsky & Walker LLP 399 Park Avenue New York, New York 10022 Attention: Mark Schonberger, Esq. Telecopy: (212) 319-4090 (iii) If to Net 2, to C/o Lepercq Net 2 L.P. 355 Lexington Avenue New York. New York 10017 Attention: E. Robert Roskind Telecopy: (212) 986-6972 with a copy (which shall not constitute notice) to: Solomon, Zauderer, Ellenhorn, Frishcer & Sharp 45 Rockefeller Plaza New York, NY 10111 Telecopy: (212) 956-3700 SECTION 7.4 Interpretation. When a reference is made in this Agreement to a Section or Schedule, such reference shall be to a Section of, or a Schedule to, 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". 27 283 SECTION 7.5 Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. SECTION 7.6 Entire Agreement; Third-Party Beneficiaries. This Agreement constitutes the entire agreement, and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter of this Agreement. This Agreement is not intended to confer upon any person other than the parties hereto and the third party beneficiaries referred to in the following sentence, any rights or remedies. SECTION 7.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. SECTION 7.8 Assignment. Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, 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, and any such assignment that is not consented to shall be null and void. 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. SECTION 7.9 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 federal or state court located in the State of New York, County of New York, this being in addition to any other remedy to which they are entitled at law or in equity. SECTION 7.10 Severability. Whenever possible, each provision or portion of any provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law but if any provision or portion of any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party, such invalidity, illegality or unenforceability will not affect any other provision or portion of any provision in such jurisdiction, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision or portion of any provision had never been contained herein. [signature page follows] 28 284 IN WITNESS WHEREOF, Lexington, Net 3, and Net 2 have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first written above. LEXINGTON CORPORATE PROPERTIES TRUST By: /s/ T. WILSON EGLIN ------------------------------------ Name: T. Wilson Eglin Title: President NET 3 ACQUISITION L.P. By: Lex GP-1, Inc., its general partner By: /s/ PATRICK CARROLL ------------------------------------ Name: Patrick Carroll Title: Vice President NET 2 L.P. By: Lepercq Net 2 L.P., its general partner By: Lepercq Net 2 Inc., its general partner By: /s/ E. ROBERT ROSKIND ------------------------------------ Name: E. Robert Roskind Title: President [SIGNATURE PAGE TO LEXINGTON NET 2 MERGER AGREEMENT] 285 EXHIBIT A TERMS OF CONVERTIBLE SUBORDINATED DEBENTURES AND DISSENTER DEBENTURES A-1 286 TERMS OF THE CONVERTIBLE SUBORDINATED DEBENTURES Principal Amount.............. Up to $64.35 million. The exact amount of the Convertible Subordinated Debentures to be issued will be determined at the closing of the Transaction based upon the number of Units held by limited partners who elect to receive Dissenter Debentures and the number of limited partners who elect to receive a greater proportion of their merger consideration in Convertible Subordinated Debentures. Interest...................... 8.5% per annum on a day-to-day basis (based upon a 365-day year and actual days elapsed) from the closing of the Transaction and will be paid semi-annually in cash in arrears. Repayment of Principal........ Due in one installment at maturity on , 2009. Seniority..................... Expressly subordinated in right and priority of payment to the Dissenter Debentures, all institutional indebtedness of Lexington outstanding on the closing of the Transaction and any other indebtedness of Lexington issued in the future which is not by its terms, expressly subordinated to the Convertible Subordinated Debentures. The Convertible Subordinated Debentures are senior in right and priority of payment to Lexington's existing Class A Senior Cumulative Convertible Preferred Shares and to all other classes of Lexington's capital shares currently authorized or authorized in the future. Prepayment.................... No prepayment or redemption, in whole or in part, prior to the fifth anniversary of issuance. Following the fifth anniversary of issuance and in the event that the Common Shares trade at a price above $14.00 per share for a period of thirty consecutive calendar days. Lexington may repay or redeem, at any time thereafter in cash or in Common Shares, the Convertible Subordinated Debentures in whole (but not in part). The $14.00 price is subject to anti-dilution adjustments for stock splits, stock dividends, other securities dividends, reclassification, exchanges, substitutions, reorganizations, mergers and consolidations. Conversion.................... Subject to prepayment by Lexington, holders may convert all or a portion of their Convertible Subordinated Debentures commencing on the fourth anniversary of the closing of the Transaction into such number of Common Shares as is obtained by dividing the aggregate principal amount of all Convertible Subordinated Debentures being converted by the conversion price of $14.00 per share, subject to anti-dilution adjustments for stock splits, stock dividends, other securities dividends, reclassifications, exchanges, substitutions, reorganizations, mergers and consolidations. Remedies...................... If an event of default occurs and is continuing, holders of Convertible Subordinated Debentures will have the following remedies (a) the rate of interest on the Convertible Subordinated Debentures will increase to 10%, provided that if such event of default is cured or waived, the rate of interest will be reduced from the date of such cure or wavier, to 8.5%, (b) automatic acceleration with respect to bankruptcy defaults, and (c) acceleration upon vote by majority of holders upon non-bankruptcy defaults. A-2 287 TERMS OF THE DISSENTER DEBENTURES Principal Amount.............. Up to $20 million, subject to waiver by Lexington. The exact principal amount of the Dissenter Debentures will be determined at the closing of the Transaction based upon the number of Units held by limited partners who elect to receive Dissenter Debentures and will be subject to the waiver by Lexington of the limit on the amount of Dissenter Debentures to be issued. Interest...................... 8.5% per annum, on a day-to-day basis (based upon a 365-day year and actual days elapsed) from the closing of the Transaction and will be paid semi-annually in cash in arrears. Repayment of Principal........ Principal on the Dissenters Debentures is due in one installment on , 2009, provided, however, that 80% of the net proceeds of any taxable sale or refinancing of the assets previously owned by either Net Partnership, as applicable, will be used to prepay the Dissenter Debentures. Prepayment.................... Prepayable in whole or in part at any time. Seniority..................... Senior to the Convertible Subordinated Debentures and expressly subordinated in right and priority of payment to all institutional indebtedness of Lexington outstanding on the closing of the Transaction and any other indebtedness of Lexington issued in the future which is not, by its terms, expressly subordinated to the Dissenter Debentures. The Dissenter Debentures are also senior in right and priority of payment to Lexington's existing Class A Senior Cumulative Convertible Preferred Shares and to all other classes of Lexington's capital shares currently authorized or authorized in the future. Remedies...................... Same as for the Convertible Subordinated Debentures. A-3 288 ANNEX A-3 CONTRIBUTION AGREEMENT AND AMENDMENT BETWEEN NET 3 AND NET 1 GP 289 AMENDMENT NO. 1 TO CONTRIBUTION AGREEMENT BETWEEN LEPERCQ NET 1 L.P. AND NET 3 ACQUISITION L.P. This AMENDMENT NO. 1 TO CONTRIBUTION AGREEMENT (this "Amendment") is entered into as of July 19, 2001, by and between Lepercq Net 1, L.P., a Delaware limited partnership ("Lepercq") and Net 3 Acquisition L.P., a Delaware limited partnership ("Net 3"). The parties to this Amendment are collectively referred to as the "Parties." W I T N E S S E T H: WHEREAS, the Parties have entered into a Contribution Agreement dated as of November 13, 2000 (the "Agreement"); WHEREAS, the Parties desire, and have agreed, subject to the terms and conditions set forth herein, to amend the Agreement in the manner set forth in this Amendment to reflect Lepercq's agreement to accept additional Units (defined below) in substitution for the Class B Units that were otherwise payable to Lepercq under the Agreement (in order to reflect the substitution of cash for the portion of the Merger Consideration otherwise payable to a Comparable Holder in Convertible Subordinated Debentures); and WHEREAS, capitalized terms used herein and not defined shall have the meanings ascribed to such terms in the Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows: AMENDMENTS 1. FIRST AMENDMENT. The Agreement is hereby amended to delete the present text of the third recital thereof in its entirety, and to insert in its place the following: "WHEREAS, Lexington and Net 3 have entered into a merger agreement with Net 1 (the "Merger Agreement"), pursuant to which, if consummated, Net 1 shall be merged with and into Net 3, such that the existing limited partners of Net 1 shall receive merger consideration ("Merger Consideration") in the form of Lexington common shares (the "Common Shares") and cash (the "Cash"), or, under limited circumstances, senior subordinated debentures ("Dissenter Debentures"); and" 2. SECOND AMENDMENT. The Agreement is hereby amended to delete the present text of the fifth recital thereof in its entirety, and to insert in its place the following: "WHEREAS, it is the intent of the parties that Lepercq receive consideration in the Merger that is economically no better those which will be received by a holder of a 1% limited partnership interest who received 50% of its Merger Consideration as Common Shares and 50% as Cash (a "Comparable Holder"), such that Lepercq will receive (i) distributions that equal the distributions on Common Shares actually received by a Comparable Holder and, (ii) instead of Cash, additional Units (defined below) based upon the Average Closing Price (as defined in the Merger Agreement); and" 3. THIRD AMENDMENT. The Agreement is hereby amended to delete the present text of the sixth recital thereof in its entirety, and to insert in its place the following: "WHEREAS, in connection with the consummation of the Merger, Lepercq will contribute the Partnership Interest to Net 3 in return for units of limited partnership interest in Net 3 (the "Units") which will entitle the holder (i) to have economic rights comparable to the economic rights attributable to the 290 Common Shares to be issued as part of the Merger Consideration and (ii) to convert the Units after 5 years into an equal number of Common Shares; and" 4. FOURTH AMENDMENT. The Agreement is hereby amended to delete the present text of the Section 1 thereof in its entirety, and to insert in its place the following: "1. Contribution of the Partnership Interest by Lepercq. Lepercq agrees that, immediately prior to the Effective Time of the Merger, Lepercq will contribute, transfer and assign to Net 3 all of its right, title and interest in and to the Partnership Interest, for which Lepercq does and shall have good, valid and marketable title, free and clear of restraints on or conditions to transfer or assignment (other than those that will be released or terminated prior to or concurrent with the closing of the Merger) and free and clear of all liens, mortgages, pledges, encumbrances, security interests, or charges of any kind. Immediately prior to the Effective Time of the Merger, Net 3 will, upon the transfer of the Partnership Interest, issue to Lepercq, in exchange for such contribution, the number of Units based on the Average Closing Price equal to the Merger Consideration being received by a Comparable Holder." MISCELLANEOUS 5. COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 6. ORIGINAL DOCUMENT. Except as amended hereby, the Agreement is in all respects ratified, reaffirmed and confirmed and all of its terms shall remain in full force and effect. 7. ENTIRE AGREEMENT. This Amendment and the Agreement constitute the entire agreement between the Parties and supersede all prior understandings, agreements, or representations by or between the Parties, written or oral, to the extent they related in any way to the subject matter hereof or thereof. 8. SUCCESSION AND ASSIGNMENT. This Amendment shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns. No Party may assign either this Amendment or any of its rights, interests, or obligations hereunder without the prior written approval of the other Party hereto. 9. WAIVERS. Failure of any Party at any time to require the performance by the other Party of any provision of this Amendment or any related agreement shall in no way affect the right to require full performance of such provision thereafter. Furthermore, the waiver by any Party of a breach of any provision of this Amendment or any related agreement will not be held to be a waiver of any other provision of this Amendment or any related agreement. 10. SEVERABILITY. The invalidity or unenforceability of any term or provision of this Amendment or any related agreement shall not affect the validity or enforceability of the remaining terms and provisions hereof or thereof. [REMAINDER OF PAGE LEFT INTENTIONALLY BLANK] 291 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to the Contribution Agreement to be duly executed and made and entered into as of the date first set forth above. LEPERCQ NET 1 L.P. By: Lepercd Net 1 Inc., its general partner By: /s/ E. ROBERT ROSKIND ------------------------------------ Name: E. Robert Roskind Title: President NET 3 ACQUISITION L.P. By: Lex GP-1, Inc., its general partner By: /s/ PATRICK CARROLL ------------------------------------ Name: Patrick Carroll Title: Vice President [SIGNATURE PAGE TO AMENDMENT NO 1 TO NET 1 CONTRIBUTION AGREEMENT] 292 CONTRIBUTION AGREEMENT BETWEEN LEPERCQ NET 1 L.P. AND NET 3 ACQUISITION L.P. DATED NOVEMBER 13, 2000 293 CONTRIBUTION AGREEMENT THIS CONTRIBUTION AGREEMENT, dated November 13, 2000 (this "Agreement"), is entered into between Lepercq Net 1 L.P., a Delaware limited partnership ("Lepercq") and Net 3 Acquisition L.P., a Delaware limited partnership ("Net 3"). W I T N E S S E T H: WHEREAS, Lepercq is the general partner of Net 1 L.P., a Delaware limited partnership ("Net 1") and is the holder of the sole general partnership interest in Net 1 representing 1% of the partnership interests in Net 1 (the "Partnership Interest"); and WHEREAS, Net 3 is a wholly owned subsidiary of Lexington Corporate Properties Trust, a Maryland real estate investment trust ("Lexington"); and WHEREAS, Lexington and Net 3 have entered into a merger agreement with Net 1 (the "Merger Agreement"), pursuant to which, if consummated, Net 1 shall be merged with and into Net 3, such that the existing limited partners of Net 1 shall receive merger consideration ("Merger Consideration") in the form of Lexington common shares (the "Common Shares") and convertible subordinated debentures (the "Convertible Subordinated Debentures"), or, under limited circumstances, senior subordinated debentures ("Dissenter Debentures"); and WHEREAS, Lexington will file an S-4 registration statement (the "Registration Statement") with the Securities and Exchange Commission setting forth the terms and conditions of the merger of Net 1 with and into Net 3 (the "Merger"); and WHEREAS, it is the intent of the parties that Lepercq receive levels of distributions and interest payments after the Merger that are economically the equivalent of those which will be received by a holder of a 1% limited partnership interest who elected to receive 50% of its Merger Consideration as Common Shares and 50% as Convertible Subordinate Debentures (a "Comparable Holder"), such that Lepercq will receive distributions that equal the distributions on Common Stock actually received by a Comparable Holder ("Equity Distributions"), and distributions that equal the interest payments on Convertible Subordinated Debentures ("Debenture Distributions"); and WHEREAS, in connection with the consummation of the Merger, Lepercq will contribute the Partnership Interest to Net 3 in return for operating partnership units in Net 3 which will have economic rights comparable to the economic rights attributable to the Merger Consideration, such that (a) one half of the Net 3 operating partnership units will be Class A units (the "Class A Units") which will entitle the holder to receive the Equity Distributions and to convert after 5 years into an equal number of Common Shares as Comparable Holder received (other than those to be received upon conversion of the Convertible Subordinated Debenture), and (b) the other half will be Class B units ("Class B Units") which will entitle the holder to distributions equal to 8.5% on a notional amount equal to the amount of principal of Convertible Subordinated Debentures which would have been received by a Comparable Holder and having such other conversion rights, subject to an eight year lockout period, which are attributed to the Convertible Subordinate Debentures (the Class A Units and the Class B Units, together the "Net 3 Units"); and WHEREAS, the proposed exchange of the Partnership Interest for the Net 3 Units is intended to qualify as a tax-free transfer under Section 721 of the Internal Revenue Code of 1986, as amended (the "Code"); and NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements hereinafter set forth, the parties hereto hereby agree as follows: 1. Contribution of the Partnership Interest by Lepercq. Lepercq agrees that, immediately prior to the Effective Time of the Merger, Lepercq will contribute, transfer and assign to Net 3 all of its right, title and interest in and to the Partnership Interest, for which Lepercq does and shall have good, valid and marketable title, free and clear of restraints on or conditions to transfer or assignment (other than those that will be released or terminated prior to or concurrent with the closing of the Merger) and free and 294 clear of all liens, mortgages, pledges, encumbrances, security interests, or charges of any kind. Immediately prior to the Effective Time of the Merger, Net 3 will, upon the transfer of the Partnership Interest, issue to Lepercq, in exchange for such contribution, Class A Units and Class B Units in numbers and/or notional amount equivalent to those received by a Comparable Holder. 2. Parties in Interest. Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any persons or entities other than the parties to it and their respective successors and assigns, nor is anything in this Agreement intended to relieve or discharge the obligations or liabilities of any third persons or entities which are not a party to this Agreement, nor shall any provision of this Agreement give any third persons or entities any rights of subrogation or action over against any party to this Agreement. 3. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof, supersedes all prior and contemporaneous agreements, representations and understandings of the parties with respect thereto, and may not be modified, amended or otherwise changed in any manner except by a writing executed by a duly authorized representative of the party to be charged. 4. Counterparts; Further Assurances. This Agreement may be executed in multiple counterparts. The parties agree to execute such documents, stock powers and instruments of assignment and assumption as may be necessary or expedient to carry out the transactions contemplated by this Agreement. 5. Miscellaneous. This Agreement shall be governed by the laws of the State of New York without regard to the principles of conflicts of laws. [Signature page follows] 2 295 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on or as of the date first above written. LEPERCQ NET 1 L.P. By: Lepercq Net 1 Inc., its general partner By: /s/ E. ROBERT ROSKIND ------------------------------------ Name: E. Robert Roskind Title: President NET 3 ACQUISITION L.P. By: Lex GP-1, Inc., its general partner By: /s/ PATRICK CARROLL ------------------------------------ Name: Patrick Carroll Title: Vice President [SIGNATURE PAGE TO NET 1 CONTRIBUTION AGREEMENT] 296 ANNEX A-4 CONTRIBUTION AGREEMENT AND AMENDMENT BETWEEN NET 3 AND NET 2 GP 297 AMENDMENT NO. 1 TO CONTRIBUTION AGREEMENT BETWEEN LEPERCQ NET 2 L.P. AND NET 3 ACQUISITION L.P. THIS AMENDMENT NO. 1 TO CONTRIBUTION AGREEMENT (this "Amendment") is entered into as of July 19, 2001, by and between Lepercq Net 2, L.P., a Delaware corporation ("Lepercq") and Net 3 Acquisition L.P., a Delaware limited partnership ("Net 3"). The parties to this Amendment are collectively referred to as the "Parties." W I T N E S S E T H: WHEREAS, the Parties have entered into a Contribution Agreement dated as of November 13, 2000 (the "Agreement"); WHEREAS, the Parties desire, and have agreed, subject to the terms and conditions set forth herein, to amend the Agreement in the manner set forth in this Amendment to reflect Lepercq's agreement to accept additional Units (defined below) in substitution for the Class B Units that were otherwise payable to Lepercq under the Agreement (in order to reflect the substitution of cash for the portion of the Merger Consideration otherwise payable to a Comparable Holder in Convertible Subordinated Debentures); and WHEREAS, capitalized terms used herein and not defined shall have the meanings ascribed to such terms in the Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows: AMENDMENTS 1. FIRST AMENDMENT. The Agreement is hereby amended to delete the present text of the third recital thereof in its entirety, and to insert in its place the following: "WHEREAS, Lexington and Net 3 have entered into a merger agreement with Net 2 (the "Merger Agreement"), pursuant to which, if consummated, Net 2 shall be merged with and into Net 3, such that the existing limited partners of Net 2 shall receive merger consideration ("Merger Consideration") in the form of Lexington common shares (the "Common Shares") and cash (the "Cash"), or, under limited circumstances, senior subordinated debentures ("Dissenter Debentures"); and" 2. SECOND AMENDMENT. The Agreement is hereby amended to delete the present text of the fifth recital thereof in its entirety, and to insert in its place the following: "WHEREAS, it is the intent of the parties that Lepercq receive consideration in the Merger that is economically no better those which will be received by a holder of a 1% limited partnership interest who received 50% of its Merger Consideration as Common Shares and 50% as Cash (a "Comparable Holder"), such that Lepercq will receive (i) distributions that equal the distributions on Common Shares actually received by a Comparable Holder and, (ii) instead of Cash, additional Units (defined below) based upon the Average Closing Price (as defined in the Merger Agreement); and" 3. THIRD AMENDMENT. The Agreement is hereby amended to delete the present text of the sixth recital thereof in its entirety, and to insert in its place the following: "WHEREAS, in connection with the consummation of the Merger, Lepercq will contribute the Partnership Interest to Net 3 in return for units of limited partnership interest in Net 3 (the "Units") which will entitle the holder (i) to have economic rights comparable to the economic rights attributable to the 298 Common Shares to be issued as part of the Merger Consideration and (ii) to convert the Units after 5 years into an equal number of Common Shares; and" 4. FOURTH AMENDMENT. The Agreement is hereby amended to delete the present text of the Section 1 thereof in its entirety, and to insert in its place the following: "1. Contribution of the Partnership Interest by Lepercq. Lepercq agrees that, immediately prior to the Effective Time of the Merger, Lepercq will contribute, transfer and assign to Net 3 all of its right, title and interest in and to the Partnership Interest, for which Lepercq does and shall have good, valid and marketable title, free and clear of restraints on or conditions to transfer or assignment (other than those that will be released or terminated prior to or concurrent with the closing of the Merger) and free and clear of all liens, mortgages, pledges, encumbrances, security interests, or charges of any kind. Immediately prior to the Effective Time of the Merger, Net 3 will, upon the transfer of the Partnership Interest, issue to Lepercq, in exchange for such contribution, the number of Units based on the Average Closing Price equal to the Merger Consideration being received by a Comparable Holder." MISCELLANEOUS 5. COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 6. ORIGINAL DOCUMENT. Except as amended hereby, the Agreement is in all respects ratified, reaffirmed and confirmed and all of its terms shall remain in full force and effect. 7. ENTIRE AGREEMENT. This Amendment and the Agreement constitute the entire agreement between the Parties and supersede all prior understandings, agreements, or representations by or between the Parties, written or oral, to the extent they related in any way to the subject matter hereof or thereof. 8. SUCCESSION AND ASSIGNMENT. This Amendment shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns. No Party may assign either this Amendment or any of its rights, interests, or obligations hereunder without the prior written approval of the other Party hereto. 9. WAIVERS. Failure of any Party at any time to require the performance by the other Party of any provision of this Amendment or any related agreement shall in no way affect the right to require full performance of such provision thereafter. Furthermore, the waiver by any Party of a breach of any provision of this Amendment or any related agreement will not be held to be a waiver of any other provision of this Amendment or any related agreement. 10. SEVERABILITY. The invalidity or unenforceability of any term or provision of this Amendment or any related agreement shall not affect the validity or enforceability of the remaining terms and provisions hereof or thereof. [REMAINDER OF PAGE LEFT INTENTIONALLY BLANK] 299 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to the Contribution Agreement to be duly executed and made and entered into as of the date first set forth above. LEPERCQ NET 2 L.P. By: Lepercq Net 2 Inc., its general partner By: /s/ E. ROBERT ROSKIND ------------------------------------ Name: E. Robert Roskind Title: President NET 3 ACQUISITION L.P. By: Lex GP-1, Inc., its general partner By: /s/ PATRICK CARROLL ------------------------------------ Name: Patrick Carroll Title: Vice President [SIGNATURE PAGE TO AMENDMENT NO I TO NET 2 CONTRIBUTION AGREEMENT] 300 CONTRIBUTION AGREEMENT BETWEEN LEPERCQ NET 2 L.P. AND NET 3 ACQUISITION L.P. DATED NOVEMBER 13, 2000 301 CONTRIBUTION AGREEMENT THIS CONTRIBUTION AGREEMENT, dated November 13, 2000 (this "Agreement"), is entered into between Lepercq Net 2 L.P., a Delaware limited partnership ("Lepercq") and Net 3 Acquisition L.P., a Delaware limited partnership ("Net 3"). W I T N E S S E T H: WHEREAS, Lepercq is the general partner of Net 2 L.P., a Delaware limited partnership ("Net 2") and is the holder of the sole general partnership interest in Net 2 representing 1% of the partnership interests in Net 2 (the "Partnership Interest"); and WHEREAS, Net 3 is a wholly owned subsidiary of Lexington Corporate Properties Trust, a Maryland real estate investment trust ("Lexington"); and WHEREAS, Lexington and Net 3 have entered into a merger agreement with Net 2 (the "Merger Agreement"), pursuant to which, if consummated, Net 2 shall be merged with and into Net 3, such that the existing limited partners of Net 2 shall receive merger consideration ("Merger Consideration") in the form of Lexington common shares (the "Common Shares") and convertible subordinated debentures (the "Convertible Subordinated Debentures"), or, under limited circumstances, senior subordinated debentures ("Dissenter Debentures"); and WHEREAS, Lexington will file an S-4 registration statement (the "Registration Statement") with the Securities and Exchange Commission setting forth the terms and conditions of the merger of Net 2 with and into Net 3 (the "Merger"); and WHEREAS, it is the intent of the parties that Lepercq receive levels of distributions and interest payments after the Merger that are economically the equivalent of those which will be received by a holder of a 1% limited partnership interest who elected to receive 50% of its Merger Consideration as Common Shares and 50% as Convertible Subordinate Debentures (a "Comparable Holder"), such that Lepercq will receive distributions that equal the distributions on Common Stock actually received by a Comparable Holder ("Equity Distributions"), and distributions that equal the interest payments on Convertible Subordinated Debentures ("Debenture Distributions"); and WHEREAS, in connection with the consummation of the Merger, Lepercq will contribute the Partnership Interest to Net 3 in return for operating partnership units in Net 3 which will have economic rights comparable to the economic rights attributable to the Merger Consideration, such that (a) one half of the Net 3 operating partnership units will be Class A units (the "Class A Units") which will entitle the holder to receive the Equity Distributions and to convert after 5 years into an equal number of Common Shares as Comparable Holder received (other than those to be received upon conversion of the Convertible Subordinated Debenture), and (b) the other half will be Class B units ("Class B Units") which will entitle the holder to distributions equal to 8.5% on a notional amount equal to the amount of principal of Convertible Subordinated Debentures which would have been received by a Comparable Holder and having such other conversion rights, subject to an eight year lockout period, which are attributed to the Convertible Subordinate Debentures (the Class A Units and the Class B Units, together the "Net 3 Units"); and WHEREAS, the proposed exchange of the Partnership Interest for the Net 3 Units is intended to qualify as a tax-free transfer under Section 721 of the Internal Revenue Code of 1986, as amended (the "Code"); and NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements hereinafter set forth, the parties hereto hereby agree as follows: 1. Contribution of the Partnership Interest by Lepercq. Lepercq agrees that, immediately prior to the Effective Time of the Merger, Lepercq will contribute, transfer and assign to Net 3 all of its right, title and interest in and to the Partnership Interest, for which Lepercq does and shall have good, valid and marketable title, free and clear of restraints on or conditions to transfer or assignment (other than those that will be released or terminated prior to or concurrent with the closing of the Merger) and free and 302 clear of all liens, mortgages, pledges, encumbrances, security interests, or charges of any kind. Immediately prior to the Effective Time of the Merger, Net 3 will, upon the transfer of the Partnership Interest, issue to Lepercq, in exchange for such contribution, Class A Units and Class B Units in numbers and/or notional amount equivalent to those received by a Comparable Holder. 2. Parties in Interest. Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any persons or entities other than the parties to it and their respective successors and assigns, nor is anything in this Agreement intended to relieve or discharge the obligations or liabilities of any third persons or entities which are not a party to this Agreement, nor shall any provision of this Agreement give any third persons or entities any rights of subrogation or action over against any party to this Agreement. 3. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof, supersedes all prior and contemporaneous agreements, representations and understandings of the parties with respect thereto, and may not be modified, amended or otherwise changed in any manner except by a writing executed by a duly authorized representative of the party to be charged. 4. Counterparts; Further Assurances. This Agreement may be executed in multiple counterparts. The parties agree to execute such documents, stock powers and instruments of assignment and assumption as may be necessary or expedient to carry out the transactions contemplated by this Agreement. 5. Miscellaneous. This Agreement shall be governed by the laws of the State of New York without regard to the principles of conflicts of laws. [Signature page follows] 2 303 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on or as of the date first above written. LEPERCQ NET 2 L.P. By: Lepercq Net 2 Inc., its general partner By: /s/ E. ROBERT ROSKIND ------------------------------------ Name: E. Robert Roskind Title: President NET 3 ACQUISITION L.P. By: Lex GP-1, Inc., its general partner By: /s/ PATRICK CARROLL ------------------------------------ Name: Patrick Carroll Title: Vice President [SIGNATURE PAGE TO NET 2 CONTRIBUTION AGREEMENT] 304 ANNEX A-5 ARTICLES OF AMENDMENT TO LEXINGTON'S DECLARATION OF TRUST 305 LEXINGTON CORPORATE PROPERTIES TRUST FORM OF ARTICLES OF AMENDMENT OF THE DECLARATION OF TRUST October , 2001 Lexington Corporate Properties Trust, a Maryland real estate investment trust having its principal office in Baltimore City, Maryland (the "Trust"), hereby certifies to the State of Maryland Department of Assessments and Taxation that: FIRST: The Trust desires to amend its Declaration of Trust as currently in effect (the "Declaration of Trust"). SECOND: The Declaration of Trust is hereby amended by replacing Article SIXTH (a) with the following: "The total number of shares of beneficial interest of all classes which the Trust has authority to issue is 130,000,000 shares of beneficial interest (par value $.0001 per share), of which shares 80,000,000 are classified as "Common Stock" 40,000,000 are classified as "Excess Stock" and 10,000,000 are classified as "Preferred Stock." The Board of Trustees may classify and reclassify any unissued shares of beneficial interest by setting or changing, in any one or more respects, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such shares of beneficial interest." THIRD: (a) As of immediately before the above amendment, the total number of shares of beneficial interest of all classes which the Trust had authority to issue was 90,000,000 shares (par value $.0001 per share), of which 40,000,000 shares were classified as "Common Stock," 40,000,000 were classified as "Excess Stock" and 10,000,000 shares were classified as "Preferred Stock." (b) As amended, the total number of shares of beneficial interest of all classes which the Trust has authority to issue is 130,000,000 shares (par value $.0001 per share), of which 80,000,000 shares are classified as "Common Stock," 40,000,000 are classified as "Excess Stock" and 10,000,000 shares are classified as "Preferred Stock." (c) The aggregate par value of all shares was $90,000 before the above amendment and is $130,000 as amended. (d) The shares of beneficial interest of the Trust are divided into classes, but the descriptions of each class of beneficial interest of the Trust are not changed by the amendment. FOURTH: The Board of Trustees, by unanimous written consent on August 27, 2001, approved the above amendment, adopted a resolution which sets forth the above amendment to the Declaration of Trust, and declared that said amendment was advisable. FIFTH: The above amendment was approved by the holders of record on , 2001 of a majority of all outstanding shares of beneficial interest of the Trust entitled to vote on the above amendment at a special meeting of the shareholders of the Trust held on , 2001. SIXTH: The above amendment to the Declaration of Trust shall be effective on , 2001. 306 IN WITNESS WHEREOF, Lexington Corporate Properties Trust has caused these presents to be signed in its name and on its behalf by its President and witnessed by its Secretary as of the date first above written. WITNESS: LEXINGTON CORPORATE PROPERTIES TRUST By: ----------------------------------------------------- ------------------------------------------- Paul R. Wood T. Wilson Eglin Secretary President
THE UNDERSIGNED, T. Wilson Eglin, President of Lexington Corporate Properties Trust, who executed on behalf of the Trust the foregoing Amendment of which this certificate is made a part and having been authorized by at least a majority of the Board of Trustees of the Trust, hereby acknowledges in the name and on behalf of said Trust the foregoing Amendment to be the act of said Trust and hereby certifies that to the best of his knowledge, information, and belief the matters and facts set forth therein with respect to the authorization and approval thereof are true in all material respects under the penalties of perjury. -------------------------------------- T. Wilson Eglin President 307 ANNEX B OPINION OF PRUDENTIAL SECURITIES INCORPORATED 308 [PRUDENTIAL LOGO] PRUDENTIAL SECURITIES INCORPORATED One New York Plaza, New York, NY 10292 (212) 778-1000 July 30, 2001 The Board of Trustees Lexington Corporate Properties Trust 355 Lexington Avenue 14th Floor New York, NY 10017 Members of the Board: We understand Lexington Corporate Properties Trust, a Maryland real estate investment trust ("Lexington," or the "Company"), and Net 1 L.P. and Net 2 L.P. (together, the "Net Partnerships"), have entered into an Amendment to the Agreement and Plan of Merger dated November 13, 2000 (the "Agreement"). Pursuant to the Amendment to the Agreement, the Net Partnerships shall be merged with and into Lexington (the "Merger"). At the effective time of the Merger, merger consideration (the "Merger Consideration") of $65.0 million will be paid to the limited partners (the "Limited Partners") and general partners (the "General Partners") of the Net Partnerships. The portion of the Merger Consideration to be paid to the Limited Partners, who own 99.0% of the Net Partnerships, is payable 50% in Lexington's common shares (the "Common Shares") and 50% in cash. The portion of the Merger Consideration to be paid to the General Partners, who have a 1.0% interest in the Net Partnerships, is payable 100% in Lexington operating partnership units, exchangeable into Common Shares on a one-for-one basis. You have requested our opinion as to the fairness from a financial point of view of the Merger Consideration to the shareholders of the Company. In conducting our analysis and arriving at the opinion expressed herein, we have reviewed such materials and considered such financial and other factors as we deemed relevant under the circumstances, including: (i) the Agreement and Plan of Merger dated November 13, 2000 and the Amendment to the Agreement dated July 19, 2001 (which amends the earlier Agreement and Plan of Merger that provided for the portion of the Merger Consideration payable to the Limited Partners to be paid 50% in Common Shares and 50% in Lexington's convertible debentures); (ii) certain publicly-available historical financial and operating data of the Company including, but not limited to, (a) the Annual Report to Shareholders and Annual Report on Form 10-K of the Company for the three fiscal years ended December 31, 2000, 1999 and 1998, (b) the Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, (c) the Proxy Statement for the Annual Meeting of Shareholders held on May 23, 2001, and (d) the Prospectus dated April 3, 1998 and the Prospectus Supplement dated July 20, 2001; (iii) certain publicly-available historical financial and operating data for the Net Partnerships including, but not limited to, (a) the Annual Report on Form 10-K fox the three fiscal years ended December 31, 2000, 1999 and 1998 and (b) the Quarterly Report on Form 10-Q for the quarter ended March 31, 2001; (iv) certain information relating to the Company and the Net Partnerships, including financial forecasts for the Company for the fiscal years ending December 31, 2001 through December 31, 2004, and financial forecasts for the Net Partnerships for the fiscal years ending December 31, 2001 through December 31, 2005, prepared by management of the Company and the Net Partnerships and a schedule of future investment projects, acquisitions and dispositions of the Company; 309 [PRUDENTIAL LOGO] PRUDENTIAL SECURITIES INCORPORATED (v) publicly available financial, operating and stock market data concerning certain companies engaged in businesses we deemed comparable to the Company and the Net Partnerships, respectively, or otherwise relevant to our inquiry; (vi) the financial terms of certain recent comparable transactions we deemed relevant to our inquiry; (vii) the historical stock prices and trading volumes of the Lexington Common Shares; and (viii) such other financial studies, analyses and investigations as we deemed appropriate. We have met with the senior management of the Company and the General Partners of the Net Partnerships to discuss (i) their operations and historical financial statements; (ii) the prospects for their respective businesses; (iii) their estimates of such businesses' future financial performance; (iv) the financial impact of the Merger on the respective companies; and (v) such other matters as we deemed relevant. In connection with our review and analysis and in arriving at our opinion, we have relied upon the accuracy and completeness of the financial and other information provided to us by the Company and the Net Partnerships and have not undertaken any independent verification of such information nor have we undertaken or obtained any independent valuation or appraisal of any of the assets or liabilities of the Company or the Net Partnerships. With respect to certain financial forecasts provided to us by the management of Net Partnerships and the Company, we have assumed such information (and the assumptions and basis therefor) represents the best currently available estimates and judgments of the Net Partnership's and the Company's respective management as to the future financial performance of the Net Partnerships and Lexington. Our opinion is predicated on the Merger qualifying as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986. Further, our opinion is necessarily based on economic, financial, and market conditions as they exist and can only be evaluated as of the date hereof. Our opinion does not address nor should it be construed to address the relative merits of the Merger and alternative business strategies. In addition, this opinion does not in any manner address the prices at which the shares of Lexington will actually trade following consummation of the Merger. As you know, we have been retained by the Company to render this opinion in connection with the Merger and will receive a fee for such services. In the ordinary course of business we may actively trade the shares of Lexington common stock for our own account and for the accounts of customers and we may, therefore, at any time hold a long or short position in such securities. This letter and the opinion expressed herein are for the use of the Board of Trustees of the Company. This opinion does not constitute a recommendation to the shareholders of the Company as to how such shareholders should vote or as to any other action such shareholders should take regarding the Merger or any other action such holders should take regarding these transactions. This opinion may not be reproduced, summarized, excerpted from or otherwise publicly referred to or disclosed in any manner, without our prior written consent, except that the Company may include this opinion in its entirety in any proxy statement or information statement relating to the Merger sent to the Company's shareholders. 2 310 [PRUDENTIAL LOGO] PRUDENTIAL SECURITIES INCORPORATED Based upon and subject to the foregoing, we are of the opinion, as of the date hereof, that the Merger Consideration is fair to the shareholders of the Company from a financial point of view. Very truly yours, /s/ PRUDENTIAL SECURITIES INCORPORATED ---------------------------------------------------- PRUDENTIAL SECURITIES INCORPORATED 3 311 ANNEX C OPINION OF COHEN & STEERS CAPITAL ADVISORS LLC 312 [COHEN LOGO] July 19, 2001 NET 2 L.P. 355 Lexington Avenue New York, NY 10017 Dear Sirs: We understand that NET 2 L.P. (the "Company") and Lexington Corporate Properties Trust ("Lexington") have entered into an agreement and plan of merger dated November 13, 2000 (the "Merger Agreement") providing for a business combination of the Company and Net 1 L.P., on the one hand, and Lexington, on the other hand. We also understand that the Company and Lexington propose to amend the terms of the Merger Agreement in order to, among other things, provide for cash consideration in substitution for subordinated convertible debentures of Lexington in the merger and to change the minimum and maximum number of shares of common stock of Lexington (the "Lexington Common Stock") issuable to the Limited Partners (as defined below) in exchange for their LP Interests (as defined below). The business combination of the Company and Lexington pursuant to the Merger Agreement as so amended is referred to herein as the "Merger." In the Merger, (i) except to the extent the holders of the issued and outstanding limited partnership interests in the Company (the "Limited Partners") may elect to receive alternative consideration in accordance with the Merger Agreement (the "Alternative Consideration"), (ii) based on the closing price of Lexington's Common Stock as of the last trading date preceding the date of this opinion letter, and (iii) subject to recalculation as hereinafter described, the Limited Partners will have the right to elect to receive for each of their limited partnership interests (the "LP Interests") (a) 2.71 shares of Lexington Common Stock and (b) $40.98 in cash, hereinafter referred to as the "Merger Consideration." The number of shares of Lexington Common Stock to be issued will be recalculated based upon an average of the closing prices thereof during a 20 day period preceding, but not including, the closing date of the Merger, with the number of shares issuable in exchange for each LP Interest to be limited to a maximum of 2.93 shares (corresponding to an average price of $14.00 per share of Lexington Common Stock) and a minimum of 2.56 shares (corresponding to an average price of $16.00 per share of Lexington Common Stock). Although we were not engaged to act as financial advisors to, or as an agent or fiduciary of, or otherwise to represent the General Partner or the Limited Partners in connection with formulating, structuring or negotiating the Merger Consideration or any other aspect of the Merger Agreement, the Company has requested our opinion as to the fairness, from a financial point of view, of the Merger Consideration to the Limited Partners. In arriving at our opinion expressed herein, we have, among other things: (i) reviewed certain publicly available financial statements and other business and financial information of the Company and Lexington, respectively; (ii) reviewed certain internal financial and operating data, including financial forecasts for the Company and Lexington, prepared by the general partner of the Company and the management of Lexington, respectively; (iii) reviewed the recent restated prices and trading activity for the Lexington Common Stock; (iv) discussed the past and current operations and financial condition and the prospects of the Company and Lexington, with the general partner of the Company and senior management of Lexington, respectively; 313 [COHEN LOGO] (v) reviewed the executed Merger Agreement; (vi) reviewed a draft of the proposed amendment to the Merger Agreement; (vii) performed various financial analyses, as we deemed appropriate, using generally accepted analytical valuation methodologies, including (a) the application of the public trading multiples of triple-net REITs reasonably comparable to the Company, to the financial results of the Company; (b) a review of the reported prices and trading activity of Lexington's common shares; (c) a discounted projected cash flow analysis of the Company; (d) an analysis of the net asset value of the Company; and (e) an analysis with respect to the liquidation of the Company's portfolio assets; and (viii) conducted such other financial studies, analyses and financial investigations as we deemed appropriate. We assumed, at your direction, that the form of the amendment to the Merger Agreement which we reviewed will conform in all material respects to the amendment to the Merger Agreement as executed and delivered. We also assumed, at your direction, that the Merger Agreement, as proposed to be amended, will conform in all material respects to the Merger Agreement as executed and delivered other than the substitution of cash for subordinated convertible debentures of Lexington as part of the Merger Consideration and the changing of the minimum and maximum number of shares of Lexington Common Stock issuable to the Limited Partners in exchange for their LP Interests, each as described above. We assumed further, at your direction, that at the closing of the Merger, the Lexington Common Stock will have been duly registered with the Securities and Exchange Commission and will have been duly listed for trading on the New York Stock Exchange, upon receipt of notice of issuance, and that all other material conditions to the closing of the Merger will have been satisfied. We were not requested to and, therefore, did not verify independently the accuracy or completeness of any information furnished by the Company or Lexington or any publicly available information which we reviewed in arriving at our opinion expressed herein. At your direction, we assumed and relied, without independent verification, upon the accuracy and completeness of all information furnished or otherwise communicated to us and upon the assurance of the Company that it was not aware of any information or facts that would make the information provided to us materially incomplete or misleading. At your direction, we assumed further that the financial and operating forecasts reviewed by us were reasonably prepared on a basis reflecting the best current estimates and good faith judgments of the respective managements of the Company and Lexington as to their anticipated future financial condition and operating results, and we express no opinion with respect to such forecasts. We were not engaged to conduct a physical inspection of any properties or make an independent valuation or appraisal of any assets or liabilities, contingent or otherwise, of the Company. Although we reviewed and considered historical appraisals of certain of the Company's properties, in rendering our opinion expressed herein, we express no opinion with respect to the estimated value of the Company indicated by such appraisals. We were not engaged to review any legal, accounting or tax aspects of the Merger. Except as we may have agreed in writing to do so, we do not intend to conduct any review or analysis with respect to the Merger after the date of this letter, and we accept no responsibility to update or revise our opinion based on events or circumstances occurring after the date hereof. Our opinion herein is necessarily based on our assessment of economic, monetary, market, regulatory and other conditions, including the financial condition of Lexington as of such date, as they exist and which can be evaluated on the date hereof. We express no opinion concerning what the value of the Lexington Common Stock actually will be when issued to the Limited Partners pursuant to the Merger Agreement. We express no opinion concerning the future financial condition and operating results of Lexington or the price or trading range at which Lexington Common Stock may trade following the date hereof. Our opinion does not address and we hereby make no recommendation as to the Company's underlying decision to proceed with the Merger 2 314 [COHEN LOGO] or the relative merits of its decision not to proceed with any alternative financial strategies that may be available to the Company. We express no opinion herein concerning the fairness of any Alternative Consideration involved in the Merger or the consideration to be received in the Merger by Limited Partners who qualify as dissenters. Our opinion expressed herein is provided at the Company's request and for its use in connection with evaluating the Merger Consideration, and for no other purpose. As noted above, we have not been engaged as an agent or fiduciary of the Company, the General Partner or the Limited Partners. Our opinion is addressed only to the Company and only addresses the fairness, from a financial point of view, of the Merger Consideration to the Limited Partners. Our opinion does not constitute a recommendation concerning any action the Limited Partners should take concerning the Merger or any alternative thereto (including whether to consent to, approve of or vote in favor of the Merger or take or refrain from taking any other action) and should not be relied upon as such, and does not confer any rights or remedies upon the Limited Partners. At your direction, we express no opinion with respect to the desirability of pursuing any alternative to the Merger. We have not been requested to and, at your direction, we express no opinion as to whether the value of the Merger Consideration, as contemplated by the proposed amendment to the Merger Agreement, is the same as, more, or less than the merger consideration contemplated by the executed Merger Agreement. We also express no opinion as to the relative merits, implicit valuation or desirability of the Merger Consideration compared to the merger consideration contemplated by the executed Merger Agreement. Neither this letter nor our opinion expressed herein may be reproduced, summarized, excerpted, quoted from, referred to or disclosed in any filing, report, document, release or other communication, whether written or oral, made, prepared, issued or transmitted by the Company or Lexington without our prior written approval; provided, however, that this letter may be submitted to and filed with the Securities and Exchange Commission in connection with its review of the Merger, and may be reproduced without alteration in the definitive proxy statement disseminated to the Limited Partners relating to the Merger and referred to in such proxy statement if reproduced without alteration therein. Based upon and subject to the foregoing, we are of the opinion that, as of the date hereof, the Merger Consideration, taken as a whole, is fair, from a financial point of view, to the Limited Partners. Very truly yours, /s/ COHEN & STEERS CAPITAL ADVISORS LLC 3 315 [Cohen & Steers logo] July 19, 2001 NET 1 L.P. 355 Lexington Avenue New York, NY 10017 Dear Sirs: We understand that NET 1 L.P. (the "Company") and Lexington Corporate Properties Trust ("Lexington") have entered into an agreement and plan of merger dated November 13, 2000 (the "Merger Agreement") providing for a business combination of the Company and Net 2 L.P., on the one hand, and Lexington, on the other hand. We also understand that the Company and Lexington propose to amend the terms of the Merger Agreement in order to, among other things, provide for cash consideration in substitution for subordinated convertible debentures of Lexington in the merger and to change the minimum and maximum number of shares of common stock of Lexington (the "Lexington Common Stock") issuable to the Limited Partners (as defined below) in exchange for their LP Interests (as defined below). The business combination of the Company and Lexington pursuant to the Merger Agreement as so amended is referred to herein as the "Merger." In the Merger, (i) except to the extent the holders of the issued and outstanding limited partnership interests in the Company (the "Limited Partners") may elect to receive alternative consideration in accordance with the Merger Agreement (the "Alternative Consideration"), (ii) based on the closing price of Lexington's Common Stock as of the last trading date preceding the date of this opinion letter, and (iii) subject to recalculation as hereinafter described, the Limited Partners will have the right to elect to receive for each of their limited partnership interests (the "LP Interests") (a) 27.15 shares of Lexington Common Stock and (b) $410.19 in cash, hereinafter referred to as the "Merger Consideration." The number of shares of Lexington Common Stock to be issued will be recalculated based upon an average of the closing prices thereof during a 20 day period preceding, but not including, the closing date of the Merger, with the number of shares issuable in exchange for each LP Interest to be limited to a maximum of 29.30 shares (corresponding to an average price of $14.00 per share of Lexington Common Stock) and a minimum of 25.64 shares (corresponding to an average price of $16.00 per share of Lexington Common Stock). Although we were not engaged to act as financial advisors to, or as an agent or fiduciary of, or otherwise to represent the General Partner or the Limited Partners in connection with formulating, structuring or negotiating the Merger Consideration or any other aspect of the Merger Agreement, the Company has requested our opinion as to the fairness, from a financial point of view, of the Merger Consideration to the Limited Partners. In arriving at our opinion expressed herein, we have, among other things: (i) reviewed certain publicly available financial statements and other business and financial information of the Company and Lexington, respectively; (ii) reviewed certain internal financial and operating data, including financial forecasts for the Company and Lexington, prepared by the general partner of the Company and the management of Lexington, respectively; (iii) reviewed the recent restated prices and trading activity for the Lexington Common Stock; (iv) discussed the past and current operations and financial condition and the prospects of the Company and Lexington, with the general partner of the Company and senior management of Lexington, respectively; 316 [Cohen & Steers logo] (v) reviewed the executed Merger Agreement; (vi) reviewed a draft of the proposed amendment to the Merger Agreement; (vii) performed various financial analyses, as we deemed appropriate, using generally accepted analytical valuation methodologies, including (a) the application of the public trading multiples of triple-net REITs reasonably comparable to the Company, to the financial results of the Company; (b) a review of the reported prices and trading activity of Lexington's common shares; (c) a discounted projected cash flow analysis of the Company; (d) an analysis of the net asset value of the Company; and (e) an analysis with respect to the liquidation of the Company's portfolio assets; and (viii) conducted such other financial studies, analyses and financial investigations as we deemed appropriate. We assumed, at your direction, that the form of the amendment to the Merger Agreement which we reviewed will conform in all material respects to the amendment to the Merger Agreement as executed and delivered. We also assumed, at your direction, that the Merger Agreement, as proposed to be amended, will conform in all material respects to the Merger Agreement as executed and delivered other than the substitution of cash for subordinated convertible debentures of Lexington as part of the Merger Consideration and the changing of the minimum and maximum number of shares of Lexington Common Stock issuable to the Limited Partners in exchange for their LP Interests, each as described above. We assumed further, at your direction, that at the closing of the Merger, the Lexington Common Stock will have been duly registered with the Securities and Exchange Commission and will have been duly listed for trading on the New York Stock Exchange, upon receipt of notice of issuance, and that all other material conditions to the closing of the Merger will have been satisfied. We were not requested to and, therefore, did not verify independently the accuracy or completeness of any information furnished by the Company or Lexington or any publicly available information which we reviewed in arriving at our opinion expressed herein. At your direction, we assumed and relied, without independent verification, upon the accuracy and completeness of all information furnished or otherwise communicated to us and upon the assurance of the Company that it was not aware of any information or facts that would make the information provided to us materially incomplete or misleading. At your direction, we assumed further that the financial and operating forecasts reviewed by us were reasonably prepared on a basis reflecting the best current estimates and good faith judgments of the respective managements of the Company and Lexington as to their anticipated future financial condition and operating results, and we express no opinion with respect to such forecasts. We were not engaged to conduct a physical inspection of any properties or make an independent valuation or appraisal of any assets or liabilities, contingent or otherwise, of the Company. Although we reviewed and considered historical appraisals of certain of the Company's properties, in rendering our opinion expressed herein, we express no opinion with respect to the estimated value of the Company indicated by such appraisals. We were not engaged to review any legal, accounting or tax aspects of the Merger. Except as we may have agreed in writing to do so, we do not intend to conduct any review or analysis with respect to the Merger after the date of this letter, and we accept no responsibility to update or revise our opinion based on events or circumstances occurring after the date hereof. Our opinion herein is necessarily based on our assessment of economic; monetary, market, regulatory and other conditions, including the financial condition of Lexington as of such date, as they exist and which can be evaluated on the date hereof. We express no opinion concerning what the value of the Lexington Common Stock actually will be when issued to the Limited Partners pursuant to the Merger Agreement. We express no opinion concerning the future financial condition and operating results of Lexington or the price or trading range at which Lexington Common Stock may trade following the date hereof. Our opinion does not address and we hereby make no recommendation as to the Company's underlying decision to proceed with the Merger 2 317 [Cohen & Steers logo] or the relative merits of its decision not to proceed with any alternative financial strategies that may be available to the Company. We express no opinion herein concerning the fairness of any Alternative Consideration involved in the Merger or the consideration to be received in the Merger by Limited Partners who qualify as dissenters. Our opinion expressed herein is provided at the Company's request and for its use in connection with evaluating the Merger Consideration, and for no other purpose. As noted above, we have not been engaged as an agent or fiduciary of the Company, the General Partner or the Limited Partners. Our opinion is addressed only to the Company and only addresses the fairness, from a financial point of view, of the Merger Consideration to the Limited Partners. Our opinion does not constitute a recommendation concerning any action the Limited Partners should take concerning the Merger or any alternative thereto (including whether to consent to, approve of or vote in favor of the Merger or take or refrain from taking any other action) and should not be relied upon as such, and does not confer any rights or remedies upon the Limited Partners. At your direction, we express no opinion with respect to the desirability of pursuing any alternative to the Merger. We have not been requested to and, at your direction, we express no opinion as to whether the value of the Merger Consideration, as contemplated by the proposed amendment to the Merger Agreement, is the same as, more, or less than the merger consideration contemplated by the executed Merger Agreement. We also express no opinion as to the relative merits, implicit valuation or desirability of the Merger Consideration compared to the merger consideration contemplated by the executed Merger Agreement. Neither this letter nor our opinion expressed herein may be reproduced, summarized, excerpted, quoted from, referred to or disclosed in any filing, report, document, release or other communication, whether written or oral, made, prepared, issued or transmitted by the Company or Lexington without our prior written approval; provided, however, that this letter may be submitted to and filed with the Securities and Exchange Commission in connection with its review of the Merger, and may be reproduced without alteration in the definitive proxy statement disseminated to the Limited Partners relating to the Merger and referred to in such proxy statement if reproduced without alteration therein. Based upon and subject to the foregoing, we are of the opinion that, as of the date hereof, the Merger Consideration, taken as a whole, is fair, from a financial point of view, to the Limited Partners. Very truly yours, /s/ COHEN & STEERS CAPITAL ADVISORS LLC ---------------------------------------------------- 3 318 ANNEX D ROBERT A. STANGER & CO., INC. PORTFOLIO APPRAISAL AS OF DECEMBER 31, 2000 319 ----------------------------------------------------------------------------------------- 1129 Broad Street Shrewsbury, NJ 07702-4314 ROBERT A. STANGER & CO., INC. (732)389-3600 INVESTMENT BANKING FAX: (732)389-1751 (732)544-0779 ----------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------
SUMMARY REAL ESTATE APPRAISAL REPORT NINE PROPERTY PORTFOLIO OF NET 1 L.P. SIXTEEN PROPERTY PORTFOLIO OF NET 2 L.P. MAY 21, 2001 320 ROBERT A. STANGER & CO., INC. TABLE OF CONTENTS
PAGE ---- Letter of Transmittal....................................... Identification of Subject Portfolios........................ Property Ownership and History.............................. Purpose of Appraisals....................................... Function of Appraisals...................................... Scope of Appraisals......................................... Date of Valuation........................................... Value Definition............................................ Valuation Methodology....................................... Site Inspections and Data Gathering....................... Lease Review.............................................. Market Rental Rates....................................... Highest and Best Use...................................... Operational Projections................................... Reversion Value........................................... Selection of Discount Rates............................... Portfolio Value Conclusions................................. Portfolio Properties Net 1 L.P. Portfolio................................... Net 2 L.P. Portfolio................................... Assumptions and Limiting Conditions.........................
i 321 ----------------------------------------------------------------------------------------- 1129 Broad Street Shrewsbury, NJ 07702-4314 ROBERT A. STANGER & CO., INC. (732)389-3600 INVESTMENT BANKING FAX: (732)389-1751 (732)544-0779 ----------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------
Net 1 L.P. Net 2 L.P. 355 Lexington Avenue New York, NY 10017 Gentlemen: You have engaged Robert A. Stanger & Co., Inc. ("Stanger") to update its prior valuation, contained in the summary appraisal report dated February 10, 2000, of the real property portfolios (the "Portfolios") owned by Net 1 L.P. and Net 2 L.P. (hereinafter the "Partnerships"). Such updated appraisal reflects the estimated market value of the leased fee or, where applicable, fee simple interests in the portfolios of real property owned by the Partnerships (the "Portfolio Valuations") as of December 31, 2000. This report is prepared in accordance with agreements between Robert A. Stanger & Co., Inc. and the Partnerships dated October 19, 2000. Pursuant to those agreements, Stanger has been engaged to perform the appraisals on a limited scope basis using a summary report format in conformity with the departure provisions of the Uniform Standards of Professional Appraisal Practice of the Appraisal Institute, relying solely upon the Income Approach to value. We have been engaged to deliver to the Partnerships a summary appraisal report format that is not designed to meet the requirements of Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") This summary report is not intended to serve as a substitute for a selfcontained report and certain background data and analysis has been retained in our files. Due to the type of real estate owned by the Partnerships and the nature of the lease terms, the engagement calls for these assets to be valued utilizing a discounted cash flow analysis, subject to existing leases. We have therefore valued the net cash flows related to the leases with reversion to underlying real estate value only after the primary lease term and any renewal options deemed favorable to the tenant and likely to be exercised have been exhausted. Our valuation has been based in part upon information supplied to us by the Partnerships including but not limited to: lease abstracts; renewal and purchase option status; information relating to the creditworthiness of tenants; current lease rates, expenses and sales levels, where applicable; property descriptive information, physical condition of improvements and prior appraisals; and, where appropriate, proposed sales terms, sales agreements and supporting documentation. We have also interviewed relevant property and Partnership management personnel. We have relied upon such information and have assumed that the information provided by property management and the Partnerships is accurate and complete. We have not attempted to independently verify such information. We are advised by the Partnerships that the purpose of the appraisals is to estimate the value of the leased fee or, where applicable, fee simple interests in the Portfolios under market conditions as of the appraisal date and subject to existing leases, and that the Portfolio Valuations may be used in connection with a proposed transaction (the "Transaction") in which interest in or assets owned by the Partnerships, including the Portfolios, will be transferred to Lexington Corporate Properties, Inc. ("LCPI") in exchange for securities of LCPI. Stanger agrees to the use of the appraisal for this purpose subject to the terms and conditions of the agreements related thereto. This summary appraisal report was prepared stating our opinion as to the market value of the Portfolios as of December 31, 2000. The attached summary appraisal report should be reviewed in its entirety and is subject 322 ROBERT A. STANGER & CO., INC. to the assumptions and limiting conditions contained herein. Background information and analysis upon which value conclusions are based has been retained in our files. Our review was undertaken solely for the purpose of providing an opinion of value, and we make no representation as to the adequacy of such review for any other purpose. Our opinion is expressed with respect to the total value of the Portfolios, assuming existing lease contracts, in which each Partnership has an interest and not with respect to any joint venture participations or to limited partners' allocations. Stanger has no present or contemplated future interest in the Portfolios' properties, the Partnerships, or LCPI and any of its affiliates. The appraisal is only an estimate of the aggregate market value of the leased fee or, were applicable, fee simple interests in the Portfolios as of the date of valuation and should not be relied upon as being the equivalent of the price that would necessarily be received in the event of a sale or other disposition of the Portfolios' properties. Changes in corporate financing rates generally, changes in individual tenant creditworthiness, changes in tenant motivation with respect to the exercise of renewal or purchase options, or changes in real estate property markets may result in higher or lower values of real property. The use of other valuation methodologies might produce a higher or lower value. However, in our opinion, the use of the discounted cash flow methodology is reasonable. Our opinion is subject to the assumptions and limiting conditions set forth herein. We have used methods and assumptions deemed appropriate in our professional judgment; however, future events may demonstrate that the assumptions were incorrect or that other, different methods or assumptions may have been more appropriate. This summary appraisal report provides our value conclusion with respect to each of the Portfolios, definitions of value, discussions of the valuation methodology employed, assumptions, and limiting conditions. Sincerely, /s/ ROBERT A. STANGER & CO., INC. -------------------------------------- Robert A. Stanger & Co., Inc. Shrewsbury, New Jersey May 21, 2001 2 323 ROBERT A. STANGER & CO., INC. IDENTIFICATION OF SUBJECT PORTFOLIOS The subjects of this summary appraisal report are the real property portfolios (the "Portfolios") in which Net 1 L.P. and Net 2 L.P. (the "Partnerships") own leased fee or, in the case of the vacant Everest & Jennings property, fee simple interests. The Net 1 Portfolio is comprised of nine properties (including office, office/warehouse, R&D, retail, a fitness center and a bus terminal) located in seven states. The Net 2 Portfolio is comprised of sixteen properties (including retail, office, office/warehouse and manufacturing/warehouse properties) located in eleven states. (A listing of the properties in each Portfolio is provided in the "Portfolio Properties" section herein.) PROPERTY OWNERSHIP AND HISTORY All the properties in the Net 1 Portfolio are owned by Net 1 L.P. The properties were purchased by Net 1 L.P. between 1988 and 1997, with the exception of the Bull HN Information Systems property in Phoenix, AZ, which was purchased in September 1999 for $11,390,000, the Cymer property in San Diego, CA, which was purchased in September 1999 for $8,605,000, and the Corporate Express property in Henderson, NC, which was purchased in April 2000 for $7,436,000. All the properties in the Net 2 Portfolio are owned by Net 2 L.P. The properties were purchased by Net 2 L.P. between 1989 and 1997, with the exception of the Best Buy properties located in Canton, Ohio and Spartanburg, South Carolina which were purchased in July 1998 for $5,150,000 and $4,375,000, respectively, the Hollywood Entertainment property located in Wilsonville, Oregon which was purchased in September 1998 for $13,700,000, the Associated Grocers property located in Ocala, FL, which was purchased in January 1999 for $19,500,000, the Wal-Mart property in Jacksonville, AL, which was purchased in June 1999 for $2,135,000, the Stone Container property in Columbia, SC, which was purchased in August 1999 for $4,750,000, the Johnson Controls property in Plymouth, MI, which was purchased in May 2000 for $7,815,000, and the Nextel Communications property in Hampton, VA, which was purchased in March 2000 for $11,960,000. PURPOSE OF APPRAISALS The purpose of the appraisals is to estimate the market value of the leased fee or, where applicable, fee simple interests in the Portfolios of real property owned by Net 1 L.P. and Net 2 L.P. subject to existing leases in place under market conditions as of December 31, 2000. FUNCTION OF APPRAISALS The function of the appraisal is to provide a current estimate of market value of each Portfolio for use by the Partnerships in connection with the Transaction. No representation is made as to the adequacy of the appraisal for any other purpose. SCOPE OF APPRAISALS The Portfolio Valuations have been prepared on a limited scope basis using a summary report format in conformity with the departure provisions of the Uniform Standards of Professional Appraisal Practice of the Appraisal Institute, in accordance with agreements between Robert A. Stanger & Co., Inc. and each of the Partnerships dated October 19, 2000. Pursuant to those agreements, Stanger has relied solely upon the income approach to value and did not employ the cost or sales comparison approaches (as described below). In estimating the value of a property, appraisers typically consider three approaches to value: the cost approach, the sales comparison (or "market data") approach, and the income approach. The value estimate by the cost approach incorporates separate estimates of the value of the unimproved site under its highest and 3 324 ROBERT A. STANGER & CO., INC. best use and the value of the improvements less observed accrued depreciation resulting from physical wear and tear and functional and/or economic obsolescence. The sales comparison approach involves a comparative analysis of the subject property with other similar properties that have sold recently or that are currently offered for sale in the market. The income approach involves an economic analysis of the property based on its potential to provide future net annual income. With respect to leased and income producing properties, a discounted cash flow analysis ("DCF") is commonly utilized. The DCF method ascribes a present value to the future cash flows associated with operating the property and the ultimate reversion value of the property, based upon a discount rate commensurate with the risks inherent in ownership of the property and with rates of return offered by alternative investment opportunities. Pursuant to the terms of our engagement, the Portfolio Valuations were performed solely using the income approach. Since a primary buyer group for properties of the type appraised herein is investors, the income approach was deemed a reasonable valuation methodology. Further, given the primary criteria used by buyers of properties of the type appraised herein and the existence of generally long-term net leases on the properties, the cost approach was considered less reliable than the income approach. The sales comparison approach was also considered less reliable than the income approach given the primary criteria used by buyers of properties of the type appraised herein, the existence of generally long-term net leases on the properties, and the relative lack of sufficient reliable data from recent transactions involving properties comparable to the subject properties. Consequently, given these factors, the income approach was considered the most reliable approach to value the subject Portfolios. In addition, the properties have been valued utilizing a discounted cash flow analysis subject to existing leases. We have therefore valued net cash flows related to the lease without reversion to underlying real estate value until the primary lease term and any renewal or purchase options deemed favorable to the tenant and likely to be exercised have been exhausted. Changes in corporate financing rates generally, in individual tenant creditworthiness, in tenant motivation with respect to the exercise of renewal options, or in real estate property markets may result in higher or lower values of real property. The use of other valuation methodologies might produce a higher or lower value. Our opinion is subject to the assumptions and limiting conditions set forth herein. Departures -- Uniform Standards of Professional Practice -- With respect to limited appraisals. the departure provisions of the Uniform Standards of Professional Appraisal Practice permit departures from the specific guidelines of Standard 1. In this report the following departures were taken: Standard Rule 1-4(a)(b) The cost and sales comparison approaches are excluded and the conclusions are based solely on the income approach. The sales comparison approach and cost approach are not considered applicable given the long term net leases encumbering most of the properties within the Portfolios. (See Valuation Methodology.)
DATE OF VALUATION The date of valuation for the Portfolios is December 31, 2000. VALUE DEFINITION Market value, as used in this report and defined by the Appraisal Institute, is the most probable price as of a specified date, in cash, in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably and for self-interest, and assuming that neither is under undue duress. 4 325 ROBERT A. STANGER & CO., INC. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (a) buyer and seller are typically motivated; (b) both parties are well informed or well advised, and each acts in a manner he considers in his own best interest; (c) a reasonable time is allowed for exposure in the open market; (d) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (e) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. --------------- (Source: The Appraisal of Real Estate, 11(th) Edition.) The property rights appraised in this report are leased fee or, in the case of the vacant Everest & Jennings property, fee simple interests. Leased fee interest is defined as an ownership interest held by a landlord with the right to use and occupancy conveyed by lease to others and usually consists of the right to receive rent and the right to repossession at the termination of the lease. Fee simple interest is defined as absolute ownership, unencumbered by any other interest or estate, subject only to the limitations of eminent domain, escheat, police power and taxation. The appraisal includes the value of land, land improvements such as paving, fencing, on-site sewer and water lines, and the buildings as of December 31, 2000. The appraisal does not include supplies, materials on hand, inventories, furniture, equipment or other personal property, company records, or current or tangible assets that may exist. The appraisal pertains only to items considered as real estate. VALUATION METHODOLOGY Pursuant to the terms of this engagement, Stanger has estimated the aggregate value of each Partnership's leased fee or, in the case of the vacant Everest & Jennings property, fee simple interests in their respective Portfolio of properties based solely on the income approach to valuation. Appraisers typically consider three approaches in valuing real property: the cost approach, the income approach, and the sales comparison, or market data, approach. The type and age of a property, the nature of the leases, market conditions and the quantity and quality of data affect the applicability of each approach in a specific appraisal situation. The income approach is based on the assumption that the value of a property or portfolio of properties can be represented by the present worth of future cash flows. In these Portfolio Valuations, a discounted cash flow ("DCF") analysis is used to determine the value of the leased fee or, in the case of the vacant Everest & Jennings property, fee simple interests in each portfolio of properties based upon the lease that encumbers each property. In the case of the vacant Everest & Jennings property, the property was assumed to be re-leased at existing market net-lease rates and terms, and held for a ten-year period, with a reversion value determined as discussed below. The indicated value by the income approach represents the amount an investor would probably pay for the expectation of receiving the net cash flow from the Portfolio properties during the subject lease terms and the proceeds from the ultimate sale of the Portfolio properties. Unless otherwise noted, in applying the DCF analysis, we utilized pro forma statements of operations for each of the Portfolio properties prepared in accordance with the leases which currently encumber the properties. The properties are assumed to be sold after the expiration of the initial lease term and any renewal terms deemed favorable to the tenant and likely to be exercised by the tenants (e.g., where the tenant has an option to renew at a rental rate materially below the projected market rate rent at the time of the renewal 5 326 ROBERT A. STANGER & CO., INC. option, it is assumed that such option will be exercised and a renewal-probability weighted value is determined). The reversion value of the properties which can be realized upon sale is calculated based on the current economic rental rate deemed reasonable for each property, escalated at a rate indicative of current expectations in the marketplace for the property. The market-rate net income of the properties at the year of sale is then capitalized at an appropriate rate reflecting the age and anticipated functional and economic obsolescence and competitive position of the properties to determine the reversion value of the properties. Where properties were deemed to have reached the limit of functional utility and useful life at the time of lease expiration, the reversion is computed based on estimated escalated land value. Net proceeds of sale are determined by deducting appropriate costs anticipated to be incurred at the time of sale. Finally, the discounted present value of the cash flow stream from operations and the discounted present value of the net proceeds from sale are summed to arrive at a total estimated value for the properties. The following describes more fully the steps involved in the valuation methodology. SITE INSPECTIONS & DATA GATHERING In conducting the Portfolio Valuations, representatives of Stanger performed site inspections of the Portfolio properties during October 2000 through December 2000. In the course of these site visits, the physical facilities of each property were inspected, current market rental rates for competing properties were investigated, information on the local market was gathered, and where possible, the tenant's facilities manager was interviewed concerning the property, its role in company operations, and other factors. Information gathered during the site inspection was supplemented by telephonic surveys, a review of published information and by information provided by management. In conducting the Portfolio Valuations, Stanger also interviewed and relied upon Partnership and property management personnel to obtain information relating to the condition of each property, including any deferred maintenance, capital budgets, known environmental conditions, status of on-going or newly planned property additions, reconfigurations, improvements, and other factors affecting the physical condition of the property improvements. Stanger also interviewed the Partnerships' management personnel regarding competitive conditions in net lease property markets, tenant credit trends affecting the properties, certain lease factors, and historical and anticipated lease revenues and expenses. In addition, Stanger reviewed the acquisition criteria and parameters used by real estate investors. Such reviews included a search of real estate data sources and publications concerning real estate buyer's criteria and interviews with sources deemed appropriate in certain local markets (including local appraisers and real estate brokers). Stanger also compiled data on actual transactions involving net leased properties, from which acquisition criteria and parameters were extracted. Information on actual property transactions was also obtained during the site inspections and from direct telephonic interviews of local appraisers and real estate brokers, and/or investors, owners and managers of net leased properties. In addition, Stanger reviewed data provided by the Partnerships and management on acquisitions of properties involving the Partnerships. LEASE REVIEW Lease abstracts and updates, if applicable, were provided by the Partnerships and were relied upon in the preparation of operational projections for each property (as discussed below). Stanger reviewed such lease abstracts and updates and interviewed Partnership management personnel to ascertain any renegotiated terms and modifications and the status of any options and other factors. Provisions considered and incorporated into 6 327 ROBERT A. STANGER & CO., INC. the operational projections included current lease rate, escalation factors, percentage rent provisions, renewal options and terms, and purchase options and terms. MARKET RENTAL RATES During the course of the property site inspections available data on rental rates at competing properties in each local or regional market was collected. Information gathered during the site inspection was supplemented by telephonic surveys. HIGHEST AND BEST USE The term "highest and best use," as used in this report, is defined as follows: "The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value." --------------- (Source: Appraisal Institute, The Appraisal of Real Estate, 11(th) Edition.) The four criteria that highest and best use must meet are legal permissibility, physical possibility, financial feasibility, and maximum productivity. In conformity with the provisions of this engagement, a land use feasibility study was not performed and Stanger evaluated each site's highest and best use as currently improved. Based upon the property site inspection, the highest and best use of each of the properties remains as currently improved, unless otherwise noted. OPERATIONAL PROJECTIONS Based on the lease and market rent analysis, rental revenue projections were developed for each property in each of the Portfolios based on the terms of existing leases. Where lease terms included percentage rent provisions, available sales data were reviewed for each property and sales levels were projected based on escalation factors deemed appropriate in light of the current level of sales, area trends and parameters utilized by buyers of similar properties. Percentage rents were then calculated based on the resulting sales levels and contract provisions relating to sales breakpoints and percentage rent participations. Lease renewals were analyzed based on escalated current market rental rates. The annual market rent escalation rate utilized was based on local market conditions in the area of each property, inflation rates, and rental rate growth parameters applied by investors in similar type properties. Where projected market rental rates at the time of a renewal option materially exceeded the contractual lease renewal rate, the renewal option was assumed to be exercised and a renewal probability weighted value was determined. A property management fee deemed appropriate for retaining a professional real estate organization to manage net-leased properties was included in the projections. The fee utilized was one percent of rental revenues. Expenses relating solely to partnership administration, investor reporting and accounting were excluded. Finally, where the lease required the owner to be responsible for certain unreimbursed costs or where a capital expense reserve, deferred maintenance or extraordinary capital expenditures were required for an individual property, the cash flows and value were adjusted accordingly. REVERSION VALUE In the course of performing the appraisal, Stanger reviewed available sales transactions of similar investment properties as well as available market data relating to overall capitalization rates for properties similar to the properties in the Portfolios. As described above, acquisition criteria used by buyers of similar properties were also reviewed. Based upon these reviews and considering such factors as age, quality, 7 328 ROBERT A. STANGER & CO., INC. anticipated functional and economic obsolescence, competitive position of the property, the projected date of sale, and buyers' acquisition criteria, appropriate terminal capitalization rates were selected. Where properties were deemed to have reached the limit of functional utility and useful life at the time of lease expiration, the reversion value was computed based on escalated current land value. Based upon current market rate rents, estimated escalation factors, the estimated vacancy rate, if applicable, and other property operating expenses incurred by the owner, net operating income during the twelve months following the lease expiration was estimated. The resulting net operating income estimate was capitalized to determine a reversion value. The reversion value was discounted to a present value, after deducting appropriate costs likely to be incurred at the time of the sale (including probability-weighted costs of releasing the property at the time of lease expiration). The discount rate employed was based on current acquisition criteria and target rates of return among investors in properties such as those held by the Partnerships. Where any property lease included a purchase option for the lessee, the purchase option price was compared to the projected value of the property based on projected market rental rates (and where appropriate, contractual rent under the lease agreement). Where the purchase option price was projected to provide a material financial benefit to the tenant, the purchase option was deemed exercised; otherwise the purchase option was deemed expired. SELECTION OF DISCOUNT RATES Distinct discount rates were then applied to the operating cash flow projections and the reversion values. OPERATING CASH FLOW -- The selection of the appropriate discount rate for determining the present value of future operating cash flow streams from each net leased property was based primarily upon such factors as the creditworthiness of the tenant, the length of the lease term, and the general interest rate environment. Specifically, Stanger investigated each tenant's/guarantor's corporate debt rating, if any, issued by a Nationally Recognized Statistical Rating Organization (NRSRO) (for example, Standard & Poors and/or Moody's). For tenants/guarantors without NRSRO credit ratings, Stanger conducted an analytical review of the available financial statements of each of the tenants/guarantors under the subject leases. In the course of this review, Stanger analyzed the most recent available financial statements of the tenants/guarantors, focusing primarily on the balance sheet, profit and loss statement, cash flow statement and management's discussion of capital resources and liquidity. Various measures of financial strength were derived and reviewed to evaluate the tenant's ability to fulfill the lease obligation. These factors encompassed size, leverage, capital structure, profitability, cash flow, debt service and fixed charges coverage and liquidity. Stanger also reviewed the interest rate environment as of the date of the Portfolio Valuations, including long-term corporate bond yields. In particular, data sources were screened to determine the yield-to-maturity among corporate bonds based on various maturities and credit ratings. This analysis was conducted to establish a base discount rate, determined by the marketplace, to reflect the risk of holding corporate debt with credit quality commensurate with the lease guarantor's creditworthiness and a term approximately equal to the remaining lease term for each property. Premiums deemed appropriate were then added to the base discount rate to reflect the risks associated with real estate and, where appropriate, above-market lease rates or factors unique to the individual lease, tenant or property. In particular, where contract rent exceeded market rent, the base discount rate used to value the operating cash flow stream was adjusted to reflect the risk associated in realizing such excess rent. Where operating cash flows were comprised of base rent and percentage rent components, distinct discount rates were applied to the base rent and percentage rent reflective of the relative risk associated with each cash flow stream. REVERSION VALUE -- To determine appropriate discount rates to apply to the reversion value of the real estate upon final lease expiration, the acquisition criteria and projection parameters in use in the marketplace 8 329 ROBERT A. STANGER & CO., INC. by real estate investors for various property types (e.g. industrial/warehouse, retail, office, etc.) were reviewed (as described above). Discount rates deemed appropriate for the property type were applied to the reversion value of each property after adjusting for any unique property-related factors. The resulting discounted present value of operating cash flows and the discounted present value of net sale proceeds were then added to arrive at a final value for the properties. 9 330 ROBERT A. STANGER & CO., INC. PORTFOLIO VALUE CONCLUSIONS Based upon the review as described above, it is our opinion that the market value of the leased fee or, where applicable, fee simple interests in the portfolio of properties owned by Net 1 L.P. and Net 2 L.P., as encumbered by existing lease agreements, as of December 31, 2000 are as follows: -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- NET 1 L.P. PORTFOLIO $47,470,000 --------------------- FORTY-SEVEN MILLION FOUR HUNDRED SEVENTY THOUSAND DOLLARS --------------------- NET 2 L.P. PORTFOLIO $102,375,000 --------------------- ONE HUNDRED-TWO MILLION THREE HUNDRED SEVENTY-FIVE THOUSAND DOLLARS -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 10 331 ROBERT A. STANGER & CO., INC. NET 1 L.P. PORTFOLIO PROPERTIES
VALUE PROPERTY NAME ADDRESS TYPE CONCLUSION ------------- ------- ---- ---------- Circuit City Stores 2832 Chandler Mountain Rd Retail $ 830,000 Lynchburg, VA Greyhound Lines 121 S. Center Street Bus $ 1,350,000 Stockton, CA Terminal Scandinavian Swim & Fitness 12235 N. Cave Creek Rd Health $ 5,860,000 Phoenix, AZ Club Wal-Mart 853 Broad Street Retail $ 4,430,000 Sumter, SC Wal-Mart 2275 Browns Bridge Road Retail $ 2,740,000 Gainesville, GA Wal-Mart 1045 Mexico Boulevard Retail $ 3,540,000 Brownsville, TX Bull HN Information Systems 13430 N. Black Canyon Freeway Office $11,910,000 Phoenix, AZ Cymer 16275 Technology Drive Office/ $ 9,060,000 San Diego, CA Research & Development Corporate Express 1133 Poplar Creek Road Office/ $ 7,750,000 Henderson, NC Warehouse ----------- TOTAL VALUE OF NET 1 L.P. PORTFOLIO $47,470,000 ===========
11 332 ROBERT A. STANGER & CO., INC. NET 2 L.P. PORTFOLIO PROPERTIES
VALUE PROPERTY NAME ADDRESS TYPE CONCLUSION ------------- ------- ---- ------------ A Copy 183 Plains Road Office/ $ 2,950,000 Milford, CT Warehouse Ameritech 300 McCormick Blvd. Office/ $ 1,660,000 Columbus, OH Warehouse Everest & Jennings (vacant)* 3601 Rider Trail South Office/ $ 4,175,000 Earth City, MO Warehouse Kohis Department Stores, Inc. 3711 Gateway Drive Retail $ 4,480,000 Eau Claire, WI Robin Cable Systems of Tucson 1440 East 15th Street Office/ $ 3,420,000 Tucson, AZ Warehouse The Tranzonic Companies 730 W. Fairmont Drive Office/ $ 1,970,000 Tempe, AZ Warehouse The Tranzonic Companies 670 Alpha Drive Office/ $ 6,580,000 Highland Heights, OH Warehouse Sam's Club 35400 Cowan Road Retail $ 7,520,000 Westland, MI Best Buy 4831 Whipple Avenue Retail $ 4,600,000 Canton, OH Best Buy 399 Peachwood Centre Drive Retail $ 4,340,000 Spartangburg, SC Hollywood Entertainment 9275 SW Peyton Lane Office $ 13,880,000 Wilsonville, OR Associated Grocers of Florida 8305 S.E. 58th Street Industrial $ 19,800,000 Ocala, FL Wal-Mart 1555 S. Pelham Rd. (Hwy. 21) Retail $ 2,040,000 Jacksonville, AL Stone Container 128 Crews Drive Industrial $ 4,830,000 Columbia, SC Johnson Controls 46600 Port Street Industrial $ 7,980,000 Plymouth, MI Nextel Communications 400 Butler Farm Road Office $ 12,150,000 Hampton, VA ------------ TOTAL VALUE OF NET 2 L.P. PORTFOLIO $102,375,000 ============
--------------- * This property is not currently leased. 12 333 ROBERT A. STANGER & CO., INC. ASSUMPTIONS AND LIMITING CONDITIONS The appraisal is subject to the assumptions and limiting conditions as set forth below. 1. No responsibility is assumed for matters of a legal nature affecting the portfolio properties or the titles thereto. Titles to the properties are assumed to be good and marketable and the properties are assumed free and clear of all liens unless otherwise stated. 2. The Portfolio Valuations assume (a) responsible ownership and competent management of the properties; (b) there are no hidden or unapparent conditions of the properties' subsoil or structures that render the properties more or less valuable (no responsibility is assumed for such conditions or for arranging for engineering studies that may be required to discover them); (c) full compliance with all applicable federal, state and local zoning, access and environmental regulations and laws, unless noncompliance is stated, defined and considered in the appraisal; and (d) all required licenses, certificates of occupancy and other governmental consents have been or can be obtained and renewed for any use on which the value estimates contained in the Portfolio Valuations are based. 3. The Appraiser shall not be required to give testimony or appear in court because of having made the appraisals with reference to the portfolios in question unless arrangements have been previously made therefore. 4. The information contained in the Portfolio Valuations or upon which the Portfolio Valuations are based has been provided by or gathered from sources assumed to be reliable and accurate. Some of such information has been provided by the owners of the properties. The Appraiser shall not be responsible for the accuracy or completeness of such information, including the correctness of estimates, opinions, dimensions, exhibits and other factual matters. The Portfolio Valuations and the opinion of value stated therein are as of the date stated in the Portfolio Valuations. Changes since that date in the portfolio properties, external and market factors can significantly affect property values. 5. Disclosure of the contents of the appraisal report is governed by the Bylaws and Regulations of the professional appraisal organization with which the Appraiser is affiliated. 6. Neither all, nor any part of the content of the report, or copy thereof (including conclusions as to the portfolios' values, the identity of the Appraiser, professional designations, reference to any professional appraisal organizations, or the firm with which the Appraiser is connected) shall be used for any purpose by anyone other than the client specified in the report, including, but not limited to, the mortgagee or its successors and assignees, mortgage insurers, consultants, professional appraisal organizations, any state or federally approved financial institution, any department, agency or instrumentality without the previous written consent of the Appraiser; nor shall it be conveyed by anyone to the public through advertising, public relations, news sales or other media, without the written consent and approval of the Appraiser. 7. On all appraisals subject to completion, repairs or alterations, the appraisal report and value conclusions are contingent upon completion of the improvements in a workmanlike manner. 8. The physical condition of the improvements considered by the Portfolio Valuations is based on visual inspection by the Appraiser or other representatives of Stanger and on representations by the owner. Stanger assumes no responsibility for the soundness of structural members or for the condition of mechanical equipment, plumbing or electrical components. The Appraiser has made no survey of the portfolio properties. 9. The projections of income and expenses and the valuation parameters utilized are not predictions of the future. Rather, they are the Appraiser's best estimate of current market thinking relating to future income and expenses. The Appraiser makes no warranty or representations that these projections will materialize. The real estate market is constantly fluctuating and changing. It is not the Appraiser's task to predict or in any way warrant the conditions of a future real estate market; the 13 334 ROBERT A. STANGER & CO., INC. Appraiser can only reflect what the investment community, as of the date of the Appraisal, envisions for the future in terms of rental rates, expenses, supply and demand. We have used methods and assumptions deemed appropriate in our professional judgment; however, future events may demonstrate that the assumptions were incorrect or that other different methods or assumptions may have been more appropriate. 10. The Portfolio Valuations represent a normal consideration for the portfolio properties sold based on a cash, or financial arrangement comparable thereto, purchase and unaffected by special terms, services, fees, costs, or credits incurred in the transaction. 11. The Appraiser is not qualified to detect the existence of hazardous materials which may or may not be present on the portfolio properties. The presence of substances such as asbestos, urea-formaldehyde foam insulation, oil spills, or other potentially hazardous materials may affect the value of the portfolios. The portfolio value estimates are predicated on the assumption that there is no such material on or in the portfolio properties that would cause a loss of value. No responsibility is assumed for such conditions, or for any expertise or engineering knowledge required to discover them. The client is urged to retain an expert in this field, if desired. 12. For purposes of this report, it is assumed that each property is free of any negative impact with regard to the Environmental Cleanup Responsibility Act (ECRA) or any other environmental problems or with respect to non-compliance with the Americans with Disabilities Act (ADA). No investigation has been made by the Appraiser with respect to any potential environmental or ADA problems. Environmental and ADA compliance studies are not within the scope of this report. 13. Pursuant to the Engagement Agreements, the Portfolio Valuations have been prepared on a limited scope basis using a summary report format in conformity with the departure provisions of the Uniform Standards of Professional Appraisal Practice and the Standards of Professional Appraisal Practice of the Appraisal Institute, relying solely on the income approach to value utilizing discounted cash flow analysis assuming existing leases in place. Further, the engagement calls for delivery of a summary appraisal report in which the content has been limited to that data presented herein. As such, the summary appraisal report is not designed to meet the requirements of Title XI of the Federal Financial Institutions Reform, Recovery and Enforcement Act of 1989 and is not intended to serve as a substitute for a self-contained report. Therefore, federally regulated institutions should not rely on this report for financing purposes. 14. The Portfolio Valuations reported herein may not reflect the premium or discount a potential buyer may assign to an assembled portfolio of properties or to a group of properties in a particular local market. In addition, where properties are owned jointly with affiliated entities, minority interest discounts were not applied. 15. The appraisal is solely for the purpose of providing our opinion of the value of the Portfolios, and we make no representation as to the adequacy of such a review for any other purpose. The properties in the portfolios are generally leased to corporate tenants under long-term triple net leases. The owner has directed that the leased fee interests be valued (except for the vacant Everest & Jennings property for which the fee simple interest was valued) based on existing lease contracts using a discounted cash flow analysis applied to cash flow assuming the properties are free and clear of any debt. The use of other valuation methodologies might produce a higher or lower value. 16. In addition to these general assumptions and limiting conditions, assumptions and conditions applicable to specific properties have been retained in our files. 14 335 PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF TRUSTEES AND OFFICERS. The Company's trustees and officers are and will be indemnified under Maryland law, and the Declaration of Trust of the Company (the "Declaration") against certain liabilities. The Declaration requires the Company to indemnify its trustees and officers to the fullest extent permitted from time to time by the laws of Maryland. The Declaration also provides that, to the fullest extent permitted under Maryland law, trustees and officers of the Company will not be liable to the Company and its shareholders for money damages. Section 2-418 of the General Corporation Law of the State of Maryland generally permits indemnification of any director made a party to any proceedings by reason of service as a director unless it is established that (i) the act or omission of such person was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty; or (ii) such person actually received an improper personal benefit in money property or services; or (iii) in the case of any criminal proceeding, such person had reasonable cause to believe that the act or omission was unlawful. The indemnity may include judgments, penalties, fines, settlements and reasonable expenses actually incurred by the director in connection with the proceeding; but, if the proceeding is one by or in the right of the corporation, indemnification is not permitted with respect to any proceeding in which the director has been adjudged to be liable to the corporation, or if the proceeding is one charging improper personal benefit to the director, whether or not involving action in the director's official capacity, indemnification of the director is not permitted if the director was adjudged to be liable on the basis that personal benefit was improperly received. The termination of any proceeding by conviction or upon a plea of nolo contendere or its equivalent, or any entry of an order of probation prior to judgment, creates a rebuttable presumption that the director did not meet the requisite standard of conduct required for permitted indemnification. The termination of any proceeding by judgment, order or settlement, however, does not create a presumption that the director failed to meet the requisite standard of conduct for permitted indemnification. The foregoing reference is necessarily subject to the complete text of the Declaration of Trust and the statute referred to above and is qualified in its entirety by reference thereto. The Company has also entered into Indemnification Agreements with certain officers and trustees for the purpose of indemnifying such persons from certain claims and action in their capacities as such. II-1 336
EXHIBIT NO. EXHIBIT ------- ------- 2.1 Form of Agreement and Plan of Merger by and among Lexington Corporate Properties, Inc. ("Lexington"), Lepercq Corporate Income Fund L.P. ("LCIF I") and Lex M-1, L.P. (filed as Appendix C-I to Lexington's Registration Statement on Form S-4 (File No. 33-66858) (the "Form S-4"))* 2.2 Form of Agreement and Plan of Merger by and among Lexington, Lepercq Corporate Income Fund II L.P. ("LCIF II") and Lex M-2, L.P. (filed as Appendix C-II to the Form S-4)* 2.3 Form of Agreement and Articles of Merger between Lexington and Lexington Corporate Properties -- Maryland, Inc. (filed as Exhibit 2.3 to Lexington's Annual Report on Form 10-K for the year ended December 31, 1993 (the "1993 10-K"))* 2.4 Agreement and Plan of Merger between Lexington and Lexington Corporate Properties Trust (filed as Exhibit 2.1 to Lexington's Current Report on Form 8-K filed January 16, 1998 (the "1998 8-K"))* 2.5 Agreement and Plan of Merger by and among Lexington, Net 3 Acquisition LP ("Net 3") and Net 1 L.P. ("Net 1"), as amended ++ 2.6 Agreement and Plan of Merger by and among Lexington, Net 3 and Net 2 L.P. ("Net 2"), as amended ++ 3.1 Declaration of Trust of Lexington, dated December 31, 1997 (filed as Exhibit 3.1 to the 1998 8-K)* 3.2 By-Laws of Lexington (filed as Exhibit 3.2 to Lexington's Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 10-K")* 3.3 Articles of Amendment of Declaration of Trust of Lexington ++ 4.1 Specimen of Common Shares Certificate of the Trust (filed as Exhibit 3.2 to the 1997 10-K)* 4.2 Form of Indenture between Lexington and The Bank of New York, as Trustee, including the form of 7.75% Subordinated Note due 2000 (filed as Exhibit 4.2 to the Form S-4)* 4.3 Form of Indenture between Lexington and The Chase Manhattan Bank, as Trustee, including the form of 8.5% Senior Subordinated Debenture due 2009+ 5.1 Legal Opinion of Piper Marbury Rudnick & Wolfe with respect to the issuance of common shares and senior subordinated debentures of Lexington to limited partners of Net 1 and Net 2+ 8.1 Tax Opinion of Paul, Hastings, Janofsky & Walker LLP with respect to the mergers of Net 1 and Net 2 into Net 3+ 10.8 Form of 1994 Outside Director Shares Plan of Lexington (filed as Exhibit 10.8 to the 1993 10-K)* 10.24 Class A Mortgage Note to Pacific Mutual Life Insurance Company and Lexington Mortgage Company dated May 19, 1995 in the amount of $34,000,000 (filed as Exhibit 10.24 to Lexington's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 10-K"))* 10.25 Class B Mortgage Note to Pacific Mutual Life Insurance Company and Lexington Mortgage Company dated May 19, 1995 in the amount of $18,500,000 (filed as Exhibit 10.25 to the 1995 10-K)* 10.26 Class C Mortgage Note to Pacific Mutual Life Insurance Company and Lexington Mortgage Company dated May 19, 1995 in the amount of $17,500,000 (filed as Exhibit 10.26 to the 1995 10-K)* 10.28 Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Leases, Rents and Security Deposits to First American Title Insurance Company and Pacific Mutual Life Insurance Company and Lexington Mortgage Company dated May 19, 1995 (filed as Exhibit 10.28 to the 1995 10-K)*
II-2 337
EXHIBIT NO. EXHIBIT ------- ------- 10.29 Assignment of Leases, Rents, and Security Deposits to Pacific Mutual Life Insurance Company and Lexington Mortgage Company dated May 19, 1995 (filed as Exhibit 10.29 to the 1995 10-K)* 10.30 Cash Collateral Account, Security, Pledge and Assignment Agreement with the Bank of New York, as agent and Pacific Mutual Life Insurance Company and Lexington Mortgage Company dated May 19, 1995 (filed as Exhibit 10.30 to the 1995 10-K)* 10.31 Trust and Servicing Agreement with Pacific Mutual Life Insurance Company, LaSalle National Bank and ABN AMRO Bank N.V. dated May 19, 1995 (filed as Exhibit 10.31 to the 1995 10-K)* 10.33 Investment Agreement dated as of December 31, 1996 with Five Arrows Realty Securities L.L.C. (filed as Exhibit 10.33 to Lexington's Current Report on Form 8-K filed February 10, 1997 (the "1997 8-K"))* 10.34 Operating Agreement dated as of January 21, 1997 with Five Arrows Realty Securities L.L.C. (filed as Exhibit 10.34 to the 1997 8-K)* 10.35 Articles Supplementary Classifying 2,000,000 shares of Preferred Stock as Class A Senior Cumulative Convertible Preferred Stock and 2,000,000 shares of Excess Stock as Excess Class A Preferred Stock of Lexington (filed as Exhibit 10.35 to the 1997 8-K)* 10.38 Operating Agreement and Management Agreement between Lexington and Lexington Acquiport Company, LLC (filed as Exhibit 2 to Lexington's Current Report on Form 8-K filed August 31, 1999)* 10.39 Form of Employment Agreement between Lexington and E. Robert Roskind dated September 20, 1999 (filed as Exhibit 10.39 to Lexington's Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999 10-K"))* 10.40 Investment Advisory and Asset Management Agreement by and between AGAR International Holdings Ltd. and Lexington Realty Advisors, Inc. (filed as Exhibit 10.40 to Lexington's Annual Report on Form 10-K for the year ended December 31, 2000 (the "2000 10-K"))* 10.41 Underwriting Agreement between Lexington, First Union Securities, Inc., CIBC World Markets Corp., A. G. Edwards & Sons, Inc. and Raymond James & Associates, Inc., dated July 26, 2001 (filed as Exhibit 10.41 to Lexington's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001)* 10.42 Contribution Agreement between Net 3 and Lepercq Net 1 L.P., as amended ++ 10.43 Contribution Agreement between Net 3 and Lepercq Net 2 L.P. , as amended ++ 10.44 Unsecured Revolving Credit Agreement with Fleet National Bank dated March 30, 2001 in the amount of $35,000,000+ 12 Statement of Computation of Ratio of Earnings to Fixed Charges (filed as Exhibit 12 to the 2000 10-K)* 21 List of Subsidiaries of Lexington (filed as Exhibit 21 to the 2000 10-K)* 23.1 Consent of KPMG LLP -- Re: Lexington+ 23.2 Consent of KPMG LLP -- Re: Net 1+ 23.3 Consent of KPMG LLP -- Re: Net 2+ 25.1 Statement of Eligibility of Trustee+ 27 Financial Data Schedule as of and for the year ended December 31, 2000 (filed as Exhibit 27 to the 2000 10-K)* 99.1 Form of Amended and Restated Agreement of Limited Partnership of Net 3+
--------------- * Incorporated by reference + Filed herewith ++ Incorporated by reference from Annex A filed as part of this registration statement on S-4 II-3 338 (b) Financial Statement Schedules (c) Report, Opinion or Appraisal Fairness Opinion of Prudential Securities Incorporated dated as of July 19, 2001 is incorporated by reference from Annex B filed as part of this registration statement on S-4. Fairness Opinion of Cohen & Steers Capital Advisors, Inc. dated as of July 30, 2001 is incorporated by reference from Annex C filed as part of this registration statement on S-4. Appraisal Report of Robert A. Stanger & Co., Inc. dated as of May 21, 2001 is incorporated by reference from Annex D filed as part of this registration statement on S-4. ITEM 22. UNDERTAKINGS. (a) 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 acts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) herein do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in this registration statement; (2) That, for the purpose of determining any liability under the Securities Act, 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; and (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. (b) 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. (c) Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provision or otherwise, the Registrant has been advised that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the parties of expenses incurred or paid by a director, officer or controlling person 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 their respective counsel the matter has been settled by controlling precedent, II-4 339 submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (d) The undersigned registrants hereby undertake to respond to requests for information that is incorporated by reference into the prospectus within one business day of the receipt of such request, and to sent the incorporated documents by first class mall 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. (e) 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-5 340 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of New York, state of New York, on October 2, 2001. LEXINGTON CORPORATE PROPERTIES TRUST By: /s/ T. WILSON EGLIN ------------------------------------ T. Wilson Eglin President and Chief Operating Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints T. Wilson Eglin and E. Robert Roskind, jointly and severally, his attorneys-in-fact, each with power of substitution for him in any and all capacities, to sign any amendments to this Registration Statement, to file the same, with the exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ E. ROBERT ROSKIND Chairman of the Board, Co-Chief October 2, 2001 ------------------------------------------ Executive Officer and Trustee E. Robert Roskind (Principal Executive Officer) /s/ RICHARD J. ROUSE Vice Chairman, Co-Chief Executive October 2, 2001 ------------------------------------------ Officer and Trustee Richard J. Rouse /s/ T. WILSON EGLIN President, Chief Operating October 2, 2001 ------------------------------------------ Officer and Trustee T. Wilson Eglin /s/ PATRICK CARROLL Chief Financial Officer and October 2, 2001 ------------------------------------------ Treasurer Patrick Carroll /s/ PAUL R. WOOD Vice President, Chief Accounting October 2, 2001 ------------------------------------------ Officer and Secretary Paul R. Wood /s/ GEOFFREY DOHRMANN Trustee October 2, 2001 ------------------------------------------ Geoffrey Dohrmann /s/ CARL D. GLICKMAN Trustee October 2, 2001 ------------------------------------------ Carl D. Glickman
II-6 341
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ JOHN D. MCGURK Trustee October 2, 2001 ------------------------------------------ John D. McGurk /s/ SETH M. ZACHARY Trustee October 2, 2001 ------------------------------------------ Seth M. Zachary
II-7 342 EXHIBIT INDEX
EXHIBIT NO. ------- 2.1 Form of Agreement and Plan of Merger by and among Lexington Corporate Properties, Inc. ("Lexington"), Lepercq Corporate Income Fund L.P. ("LCIF I") and Lex M-1, L.P. (filed as Appendix C-I to Lexington's Registration Statement on Form S-4 (File No. 33-66858) (the "Form S-4"))* 2.2 Form of Agreement and Plan of Merger by and among Lexington, Lepercq Corporate Income Fund II L.P. ("LCIF II") and Lex M-2, L.P. (filed as Appendix C-II to the Form S-4)* 2.3 Form of Agreement and Articles of Merger between Lexington and Lexington Corporate Properties -- Maryland, Inc. (filed as Exhibit 2.3 to Lexington's Annual Report on Form 10-K for the year ended December 31, 1993 (the "1993 10-K"))* 2.4 Agreement and Plan of Merger between Lexington and Lexington Corporate Properties Trust (filed as Exhibit 2.1 to Lexington's Current Report on Form 8-K filed January 16, 1998 (the "1998 8-K"))* 2.5 Agreement and Plan of Merger by and among Lexington, Net 3 Acquisition LP ("Net 3") and Net 1 L.P. ("Net 1"), as amended ++ 2.6 Agreement and Plan of Merger by and among Lexington, Net 3 and Net 2 L.P. ("Net 2"), as amended ++ 3.1 Declaration of Trust of Lexington, dated December 31, 1997 (filed as Exhibit 3.1 to the 1998 8-K)* 3.2 By-Laws of Lexington (filed as Exhibit 3.2 to Lexington's Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 10-K")* 3.3 Articles of Amendment of Declaration of Trust of Lexington ++ 4.1 Specimen of Common Shares Certificate of the Trust (filed as Exhibit 3.2 to the 1997 10-K)* 4.2 Form of Indenture between Lexington and The Bank of New York, as Trustee, including the form of 7.75% Subordinated Note due 2000 (filed as Exhibit 4.2 to the Form S-4)* 4.3 Form of Indenture between Lexington and The Chase Manhattan Bank, as Trustee, including the form of 8.5% Senior Subordinated Debenture due 2009+ 5.1 Legal Opinion of Piper Marbury Rudnick & Wolfe with respect to the issuance of common shares and senior subordinated debentures of Lexington to limited partners of Net 1 and Net 2+ 8.1 Tax Opinion of Paul, Hastings, Janofsky & Walker LLP with respect to the mergers of Net 1 and Net 2 into Net 3+ 10.8 Form of 1994 Outside Director Shares Plan of Lexington (filed as Exhibit 10.8 to the 1993 10-K)* 10.24 Class A Mortgage Note to Pacific Mutual Life Insurance Company and Lexington Mortgage Company dated May 19, 1995 in the amount of $34,000,000 (filed as Exhibit 10.24 to Lexington's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 10-K"))* 10.25 Class B Mortgage Note to Pacific Mutual Life Insurance Company and Lexington Mortgage Company dated May 19, 1995 in the amount of $18,500,000 (filed as Exhibit 10.25 to the 1995 10-K)* 10.26 Class C Mortgage Note to Pacific Mutual Life Insurance Company and Lexington Mortgage Company dated May 19, 1995 in the amount of $17,500,000 (filed as Exhibit 10.26 to the 1995 10-K)* 10.28 Indenture of Mortgage, Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Leases, Rents and Security Deposits to First American Title Insurance Company and Pacific Mutual Life Insurance Company and Lexington Mortgage Company dated May 19, 1995 (filed as Exhibit 10.28 to the 1995 10-K)*
343
EXHIBIT NO. ------- 10.29 Assignment of Leases, Rents, and Security Deposits to Pacific Mutual Life Insurance Company and Lexington Mortgage Company dated May 19, 1995 (filed as Exhibit 10.29 to the 1995 10-K)* 10.30 Cash Collateral Account, Security, Pledge and Assignment Agreement with the Bank of New York, as agent and Pacific Mutual Life Insurance Company and Lexington Mortgage Company dated May 19, 1995 (filed as Exhibit 10.30 to the 1995 10-K)* 10.31 Trust and Servicing Agreement with Pacific Mutual Life Insurance Company, LaSalle National Bank and ABN AMRO Bank N.V. dated May 19, 1995 (filed as Exhibit 10.31 to the 1995 10-K)* 10.33 Investment Agreement dated as of December 31, 1996 with Five Arrows Realty Securities L.L.C. (filed as Exhibit 10.33 to Lexington's Current Report on Form 8-K filed February 10, 1997 (the "1997 8-K"))* 10.34 Operating Agreement dated as of January 21, 1997 with Five Arrows Realty Securities L.L.C. (filed as Exhibit 10.34 to the 1997 8-K)* 10.35 Articles Supplementary Classifying 2,000,000 shares of Preferred Stock as Class A Senior Cumulative Convertible Preferred Stock and 2,000,000 shares of Excess Stock as Excess Class A Preferred Stock of Lexington (filed as Exhibit 10.35 to the 1997 8-K)* 10.38 Operating Agreement and Management Agreement between Lexington and Lexington Acquiport Company, LLC (filed as Exhibit 2 to Lexington's Current Report on Form 8-K filed August 31, 1999)* 10.39 Form of Employment Agreement between Lexington and E. Robert Roskind dated September 20, 1999 (filed as Exhibit 10.39 to Lexington's Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999 10-K"))* 10.40 Investment Advisory and Asset Management Agreement by and between AGAR International Holdings Ltd. and Lexington Realty Advisors, Inc. (filed as Exhibit 10.40 to Lexington's Annual Report on Form 10-K for the year ended December 31, 2000 (the "2000 10-K"))* 10.41 Underwriting Agreement between Lexington, First Union Securities, Inc., CIBC World Markets Corp., A. G. Edwards & Sons, Inc. and Raymond James & Associates, Inc., dated July 26, 2001 (filed as Exhibit 10.41 to Lexington's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001)* 10.42 Contribution Agreement between Net 3 and Lepercq Net 1 L.P., as amended ++ 10.43 Contribution Agreement between Net 3 and Lepercq Net 2 L.P. , as amended ++ 10.44 Unsecured Revolving Credit Agreement with Fleet National Bank dated March 30, 2001 in the amount of $35,000,000+ 12 Statement of Computation of Ratio of Earnings to Fixed Charges (filed as Exhibit 12 to the 2000 10-K)* 21 List of Subsidiaries of Lexington (filed as Exhibit 21 to the 2000 10-K)* 23.1 Consent of KPMG LLP -- Re: Lexington+ 23.2 Consent of KPMG LLP -- Re: Net 1+ 23.3 Consent of KPMG LLP -- Re: Net 2+ 25.1 Statement of Eligibility of Trustee+ 27 Financial Data Schedule as of and for the year ended December 31, 2000 (filed as Exhibit 27 to the 2000 10-K)* 99.1 Form of Amended and Restated Agreement of Limited Partnership of Net 3+
--------------- * Incorporated by reference + Filed herewith ++ Incorporated by reference from Annex A filed as part of this registration statement on S-4 EX-4.3 3 y53433ex4-3.txt FORM OF INDENTURE 1 EXHIBIT 4.3 LEXINGTON CORPORATE PROPERTIES TRUST, AS ISSUER THE CHASE MANHATTAN BANK, AS TRUSTEE [FORM OF] INDENTURE Dated as of [October __, 2001] 8.5% Senior Subordinated Debentures due 2009 2
TABLE OF CONTENTS Page ---- ARTICLE I. DEFINITIONS AND INCORPORATION BY REFERENCE................................................................. 1 Section 1.1 Definitions............................................................................ 1 Section 1.2 Other Definitions...................................................................... 8 Section 1.3 Incorporation by Reference of Trust Indenture Act...................................... 8 Section 1.4 Rules of Construction.................................................................. 8 ARTICLE II. THE SECURITIES............................................................................................ 9 Section 2.1 Description of the Securities; Form and Dating......................................... 9 Section 2.2 Execution and Authentication........................................................... 9 Section 2.3 Registrar and Paying Agent............................................................. 10 Section 2.4 Paying Agent to Hold Money in Trust.................................................... 10 Section 2.5 Securityholder Lists................................................................... 11 Section 2.6 Transfer and Exchange.................................................................. 11 Section 2.7 Mutilated, Destroyed, Lost and Stolen Securities....................................... 11 Section 2.8 Outstanding Securities................................................................. 12 Section 2.9 Treasury Securities.................................................................... 12 Section 2.10 Temporary Securities................................................................... 13 Section 2.11 Cancellation........................................................................... 13 Section 2.12 Defaulted Interest..................................................................... 13 Section 2.13 CUSIP Numbers.......................................................................... 13 ARTICLE III. REDEMPTION............................................................................................... 14 Section 3.1 Prepayment; Optional Redemption........................................................ 14 Section 3.2 Mandatory Redemption................................................................... 14 Section 3.3 Notice to Trustee...................................................................... 14 Section 3.4 Redemption Date........................................................................ 14 Section 3.5 Notice of Redemption................................................................... 14 Section 3.6 Effect of Notice of Redemption......................................................... 15 Section 3.7 Deposit of Redemption Price............................................................ 16 Section 3.8 Securities Redeemed in Part............................................................ 16
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Page ---- ARTICLE IV. COVENANTS; SUBORDINATION.................................................................................. 16 Section 4.1 Payment of Principal and Interest...................................................... 16 Section 4.2 Reports................................................................................ 16 Section 4.3 Compliance Certificate................................................................. 16 Section 4.4 Corporate Existence.................................................................... 16 Section 4.5 Maintenance of Office or Agency........................................................ 17 Section 4.6 Securities Subordinate to Senior Indebtedness.......................................... 17 Section 4.7 Payment Over of Proceeds Upon Dissolution, Etc......................................... 17 Section 4.8 No Payment When Senior Indebtedness in Default......................................... 18 Section 4.9 Payment Permitted If No Default........................................................ 19 Section 4.10 Subrogation to Rights of Holders of Senior Indebtedness................................ 19 Section 4.11 Provisions Solely to Define Relative Rights............................................ 20 Section 4.12 Trustee to Effectuate Subordination.................................................... 20 Section 4.13 No Waiver of Subordination Provisions.................................................. 20 Section 4.14 Notice to Trustee...................................................................... 21 Section 4.15 Reliance on Judicial Order or Certificate of Liquidating Agent......................... 21 Section 4.16 Trustee Not Fiduciary for Holders of Senior Indebtedness............................... 22 Section 4.17 Rights of Trustee as Holder of Senior Indebtedness; Preservation of Trustee's Rights.................................................................... 22 Section 4.18 Article IV Applicable to Paying Agents................................................. 22 Section 4.19 Discharge of this Article IV........................................................... 22 ARTICLE V. SUCCESSORS................................................................................................. 22 Section 5.1 Merger, Consolidation or Sale.......................................................... 22 Section 5.2 Successor Person Substituted........................................................... 23 ARTICLE VI. DEFAULTS AND REMEDIES..................................................................................... 23 Section 6.1 Events of Default...................................................................... 23 Section 6.2 Acceleration of Maturity; Rescission and Annulment..................................... 24 Section 6.3 Collection of Indebtedness and Suits for Enforcement by Trustee........................ 25 Section 6.4 Trustee May File Proofs of Claim....................................................... 25 Section 6.5 Trustee May Enforce Claims Without Possession of the Securities........................ 26
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Page ---- Section 6.6 Application of Money Collected......................................................... 26 Section 6.7 Limitation on Suits.................................................................... 27 Section 6.8 Unconditional Right of Securityholders to Receive Principal and Interest............................................................................... 27 Section 6.9 Restoration of Rights and Remedies..................................................... 27 Section 6.10 Rights and Remedies Cumulative......................................................... 27 Section 6.11 Delay or Omission Not Waiver........................................................... 27 Section 6.12 Control by Securityholders............................................................. 28 Section 6.13 Waiver of Past Defaults................................................................ 28 Section 6.14 Undertaking for Costs.................................................................. 28 ARTICLE VII. TRUSTEE.................................................................................................. 29 Section 7.1 Duties of Trustee...................................................................... 29 Section 7.2 Rights of Trustee...................................................................... 30 Section 7.3 Individual Rights of Trustee........................................................... 31 Section 7.4 Trustee's Disclaimer................................................................... 31 Section 7.5 Notice of Defaults..................................................................... 31 Section 7.6 Reports by Trustee to Securityholders.................................................. 32 Section 7.7 Compensation and Indemnity............................................................. 32 Section 7.8 Replacement of Trustee................................................................. 33 Section 7.9 Successor Trustee by Merger, etc....................................................... 34 Section 7.10 Eligibility; Disqualification.......................................................... 34 Section 7.11 Preferential Collection of Claims Against Company...................................... 34 Section 7.12 Paying Agents.......................................................................... 34 ARTICLE VIII. SATISFACTION AND DISCHARGE; DEFEASANCE.................................................................. 34 Section 8.1 Satisfaction and Discharge of Indenture................................................ 34 Section 8.2 Application of Trust Funds; Indemnification............................................ 36 Section 8.3 Legal Defeasance of the Securities..................................................... 36 Section 8.4 Covenant Defeasance.................................................................... 38 Section 8.5 Repayment to Company................................................................... 39 Section 8.6 Reinstatement.......................................................................... 39
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Page ---- ARTICLE IX. AMENDMENTS AND SUPPLEMENTS................................................................................ 39 Section 9.1 Without Consent of Securityholders..................................................... 39 Section 9.2 With Consent of Securityholders........................................................ 40 Section 9.3 Limitations............................................................................ 40 Section 9.4 Compliance with Trust Indenture Act.................................................... 41 Section 9.5 Revocation and Effect of Consents...................................................... 41 Section 9.6 Notation on or Exchange of Securities.................................................. 42 Section 9.7 Trustee Protected...................................................................... 42 ARTICLE X. MISCELLANEOUS.............................................................................................. 42 Section 10.1 Trust Indenture Act Controls........................................................... 42 Section 10.2 Notices................................................................................ 42 Section 10.3 Communication by Securityholders with Other Securityholders............................ 43 Section 10.4 Certificate and Opinion as to Conditions Precedent..................................... 43 Section 10.5 Statements Required in Certificate or Opinion.......................................... 43 Section 10.6 Rules by Trustee and Agents............................................................ 44 Section 10.7 Legal Holidays......................................................................... 44 Section 10.8 No Recourse Against Others............................................................. 44 Section 10.9 Counterparts........................................................................... 44 Section 10.10 Governing Laws......................................................................... 45 Section 10.11 No Adverse Interpretation of Other Agreements.......................................... 45 Section 10.12 Successors............................................................................. 45 Section 10.13 Severability........................................................................... 45 Section 10.14 Table of Contents, Headings, Etc....................................................... 45
-iv- 6 INDENTURE Indenture, dated as of [October __, 2001] (the "Indenture"), by and between Lexington Corporate Properties Trust, a Maryland statutory real estate investment trust (the "Company"), and The Chase Manhattan Bank, a New York banking corporation, as Trustee (the "Trustee"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Securityholders issued under this Indenture. ARTICLE I. DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.1 Definitions. "Acquired Indebtedness" means Indebtedness of a Person existing at the time such Person becomes a Subsidiary of the Company, or is merged into or consolidated with any Person, or which is assumed in connection with an Asset Acquisition and not incurred in connection with or in contemplation or anticipation of such event, provided that Indebtedness of such Person which is redeemed, defeased (including the deposit of funds in a valid trust for the exclusive benefit of Securityholders and the trustee thereof, sufficient to repay such Indebtedness in accordance with its terms), retired or otherwise repaid at the time of or immediately upon consummation of the transactions by which such Person becomes a Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness. "Administrative Agent" means any agent of a Person acting on behalf of trustee with respect to any Indebtedness of the Company. "Affiliate" means any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company. For purposes of this definition, the term "control" means the power to direct the management and policies of a Person, directly or through one or more intermediaries, whether through the ownership of voting Securities, by contract, or otherwise; provided that a beneficial owner of 10% or more of the total Voting Stock of a Person, either directly or indirectly, shall for such purposes be deemed to constitute control. "Agent" means any Registrar, Paying Agent or Service Agent. "Asset Acquisition" means (i) an investment by the Company or any of its Subsidiaries in any other Person pursuant to which such Person shall become a Subsidiary or shall be merged or consolidated into or with the Company or any of its Subsidiaries or (ii) an acquisition by the Company or any of its Subsidiaries from any other Person that constitutes all or substantially all of a division or line of business, or one or more real estate properties, of such Person. "Bankruptcy Law" means title 11 of the U.S. Code or any similar Federal or State law for the relief of debtors. 1 7 "Board" means (i) with respect to any corporation, the board of directors of such corporation or any committee of the board of directors of such corporation authorized, with respect to any particular matter, to exercise the power of the board of directors of such corporation, (ii) with respect to any partnership, any partner (including, without limitation, in the case of any partner that is a corporation, the board of directors of such corporation or any authorized committee thereof) with the authority to cause the partnership to act with respect to the matter at issue, (iii) in the case of a trust, any trustee or board of trustees with the authority to cause the trust to act with respect to the matter at issue, (iv) in the case of a limited liability company (an "LLC"), the managing member, management committee or other Person or group with the authority to cause the LLC to act with respect to the matter at issue, and (v) with respect to any other entity, the Person or group exercising functions similar to a board of directors of a corporation. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary or equivalent authorized person of the Company to have been duly adopted by the Board or pursuant to authorization by the Board and to be in full force and effect on the date of the certificate (and delivered to the Trustee, if appropriate). "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York, New York are authorized or obligated by law or executive order to close. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations, or other equivalents (however designated, whether voting or non-voting), including partnership interests, whether general or limited, in the equity of such Person, whether outstanding on the Closing Date or issued thereafter, including, without limitation, all Common Stock, Preferred Stock and Units. "Capitalized Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) of which the discounted present value of the rental obligations of such Person as lessee, in conformity with GAAP, is required to be capitalized on the balance sheet of such Person. "Capitalized Lease Obligations" means, with respect to any Person, the discounted present value of the rental obligations under a Capitalized Lease as reflected on the balance sheet of such Person in accordance with GAAP. "Closing Date" means ________________, 2001. "Code" means the Internal Revenue Code of 1986, as amended. "Common Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting), which have no preference on liquidation or with respect to distributions over any other class of Capital Stock, including partnership interests, whether general or limited, of such Person's equity, whether outstanding on the Closing Date or issued thereafter, including, without limitation, all series and classes of common stock. 2 8 "Company" means Lexington Corporate Properties Trust, a Maryland statutory real estate investment trust, and all of its Subsidiaries, unless otherwise expressly stated or the context otherwise requires, until a successor shall have become such pursuant to the applicable provisions of this Indenture, and thereafter means such successor. "Company Order" means a written order signed in the name of the Company by two Officers, one of whom must be the Company's principal executive officer, principal financial officer or principal accounting officer, and delivered to the Trustee. "Company Request" means a written request signed in the name of the Company by its Chairman of the Board, a President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee. "Consolidated" or "consolidated" means, with respect to any Person, the consolidation of the accounts of the Subsidiaries of such Person with those of such Person; provided that (i) "consolidation" will not include consolidation of the accounts of any other Person other than a Subsidiary of such Person with such Person and (ii) "consolidation" will include consolidation of the accounts of any Subsidiary, whether or not such consolidation would be required or permitted under GAAP (it being understood that the accounts of such Person's Subsidiaries shall be consolidated only to the extent of such Person's proportionate interest therein). The terms "consolidated" and "consolidating" have correlative meanings to the foregoing. "Consolidation" means the merger of the Net Partnerships into the Company or one or more of its Subsidiaries. "Corporate Trust Office" means the office of the Trustee at which any particular time its corporate trust business shall be principally administered, which office at the date of this Indenture is located at 450 West 33rd Street, New York, New York 10001. "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. "Default" means any condition or event that is or after notice or passage of time (other than with respect to payment or performance not due at the time of determination) or both would be an Event of Default. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Closing Date, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession in the United States of America. 3 9 "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services (unless such purchase arrangements are on arm's-length terms and are entered into in the ordinary course of business), to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Incur" or "incur" means, with respect to any Indebtedness, to incur (by conversion, exchange or otherwise), create, issue, assume, Guarantee or otherwise become liable for or with respect to (including as a result of an acquisition), or become responsible for, the payment of, contingently or otherwise, such Indebtedness (including Acquired Indebtedness); provided that neither the accrual of interest nor the accretion of original issue discount shall be considered an Incurrence of Indebtedness. "Indebtedness" of any Person means, without duplication, (i) all liabilities and obligations, secured or unsecured, contingent or otherwise, of such Person, (a) in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), (b) evidenced by bonds, notes, debentures or similar instruments, (c) representing the balance deferred and unpaid of the purchase price of any property or services, except those incurred in the ordinary course of its business that would constitute ordinarily a trade payable to trade creditors, (d) evidenced by bankers' acceptances, (e) for the payment of money relating to a Capitalized Lease Obligation, or (f) evidenced by a letter of credit or a reimbursement obligation of such Person with respect to any letter of credit; (ii) all net obligations of such Person under Interest Swap and Hedging Obligations; and (iii) all liabilities and obligations of others of the kind described in the preceding clause (i) or (ii) that such Person has guaranteed or that is otherwise its legal liability or which are secured by any assets or property of such Person. "Indenture" means this Indenture as amended or supplemented from time to time and shall include the form and terms of the Securities established as contemplated hereunder, "Interest Payment Date" means the stated due date of an installment of interest on the Securities. "Interest Swap and Hedging Obligation" means any obligation of any Person pursuant to any interest rate swaps, caps, collars and similar arrangements providing protection against fluctuations in interest rates. For purposes of this Indenture, the amount of such obligations shall be the amount determined in respect thereof as of the end of the then most recently ended fiscal quarter of such Person, based on the assumption that such obligation had terminated at the end of such fiscal quarter, and in making such determination, if any agreement relating to such obligation provides for the netting of amounts payable by and to such Person 4 10 thereunder or if any such agreement provides for the simultaneous payment of amounts by and to such Person, then in each such case, the amount of such obligations shall be the net amount so determined, plus any premium due upon default by such Person. "Limited Partner" means any limited partner of either of the Net Partnerships. "Maturity" when used with respect to any Security or installment of principal thereof, means the date on which the principal of such Security or such installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption, notice of option to elect repayment or otherwise. "Net Partnerships" means Net 1 L.P., a Delaware limited partnership, and Net 2 L.P., a Delaware limited partnership, collectively. "Officer" means the Chairman of the Board, President, any Vice President, the Treasurer, the Secretary, any Assistant Treasurer or any Assistant Secretary of the Company. "Officers' Certificate" means a certificate signed on behalf of the Company by any two Officers of the Company one of whom must be the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of the Company. "Operating Partnership" means Net 3 Acquisition, L.P., a wholly-owned limited partnership of the Company. "Opinion of Counsel" means a written opinion, in form and substance reasonably satisfactory to the Trustee, of legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Company. "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint stock company, trust, REIT, unincorporated organization or government or any agency or political subdivision thereof. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participation or other equivalents (however designated, whether voting or non-voting), which have a preference on liquidation or with respect to distributions over any other class of Capital Stock, including preferred partnership interests, whether general or limited and whether outstanding on the Closing Date or issued thereafter, including, without limitation, all series and classes of such Preferred Stock. "Property" means a property owned by a Net Partnership prior to the Consolidation. "Record Date" means the Record Date specified in the Securities, whether or not such Record Date is a Business Day, which shall be the date 14 calendar days prior to an Interest Payment Date. "Redemption Date" when used with respect to any Security to be redeemed, means the date fixed for such redemption pursuant to Article III of this Indenture. 5 11 "Redemption Price" means, with respect to the redemption of any Securities, the sum of the principal amount of the Securities being redeemed plus accrued interest thereon to the Redemption Date, if any. "REIT" means a real estate investment trust as defined in Section 856 of the Code. "Responsible Officer" means any officer of the Trustee in its Corporate Trust Office with direct responsibility for the administration of this Indenture and also means, with respect to a particular corporate trust matter, any other officer to whom any corporate trust matter is referred because of his or her knowledge of and familiarity with a particular subject. "SEC" means the Securities and Exchange Commission. "Securityholder" means a Person in whose name a Security is registered. "Security" or "Securities" means the senior subordinated debentures of the Company authenticated and delivered under this Indenture. "Senior Indebtedness" means the principal of (and premium, if any) and interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company, whether or not a claim for post-petition interest is allowed in such proceeding) on any Indebtedness which is not by its terms expressly subordinated to the Securities, provided, however, the following shall not constitute Senior Indebtedness: (A) any Indebtedness owed to a Person when such Person is a Subsidiary of the Company, (B) any Indebtedness which by the terms of the instrument creating or evidencing the same is not superior in right of payment to the Securities, (C) any Indebtedness Incurred in violation of this Indenture (but, as to any such Indebtedness, no such violation shall be deemed to exist for purposes of this Clause (C) if the holder(s) of such Indebtedness or their representative and the Trustee shall have received an Officers' Certificate to the effect that the incurrence of such Indebtedness does not violate this Indenture) or (D) any Indebtedness which is subordinated in right of payment to any other Indebtedness of the Company. "Securities Act" means the Securities Act of 1933, as amended from time to time. "Significant Subsidiary" means any Subsidiary which is a "significant subsidiary" of the Company as defined by Regulation S-X promulgated under the Securities Act. "Stated Maturity" means (i) with respect to any debt security, the date specified in such debt security as the fixed date on which the final installment of principal of such debt security is due and payable and (ii) with respect to any scheduled installment of principal of or interest on any debt security, the date specified in such debt security as the fixed date on which such installment is due and payable. "Subsidiary" means (i) a corporation, partnership, limited liability company, trust, REIT or other entity a majority of the voting power of the voting equity Securities of which are owned, directly or indirectly, by the Company or by one or more subsidiaries of the Company, (ii) a partnership, limited liability company, trust, REIT or other entity not treated as a 6 12 corporation for federal income tax purposes, a majority of the equity interests of which are owned, directly or indirectly, by the Company or a subsidiary of the Company, or (iii) one or more corporations which, either individually or in the aggregate, would be Significant Subsidiaries (as defined above, except that the investment, asset and equity thresholds for purposes of this definition shall be 5%), the majority of the value of the equity interests of which are owned, directly or indirectly, by the Company or by one or more subsidiaries. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean or include each Person who is then a Trustee hereunder. "Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S. Code ss.ss. 77aaa77bbbb), as amended from time to time, and as in effect on the date of this Indenture; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, "TIA" means, to the extent required by any such amendment, the Trust Indenture Act as amended. "Units" means the limited partnership units of the Operating Partnership. "U.S. Government Obligations" means securities which are (i) direct obligations of The United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of The United States of America and the payment of which is unconditionally guaranteed as a full faith and credit obligation by The United States of America, and which in the case of (i) and (ii) are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation evidenced by such depository receipt. "Voting Stock" means, with respect to any Person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors, managers or other voting members of the governing body of such Person. 7 13 Section 1.2 Other Definitions.
DEFINED IN TERM SECTION "Event of Default" 7.1 "Legal Holiday" 11.7 "Net Cash Proceeds" 3.2 "Paying Agent" 2.3 "Payment Blockage Period" 4.8 "Proceeding" 4.7 "Registrar" 2.3 "Securities Payment" 4.7 "Senior Nonmonetary Default" 4.8 "Senior Payment Default" 4.8 "Service Agent" 2.3
Section 1.3 Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the Trust Indenture Act, the provision is incorporated by reference in and made a part of this Indenture. The following Trust Indenture Act term used in this Indenture has the following meaning: "Obligor" on the Securities means the Company and any successor obligor upon the Securities. All other terms used in this Indenture that are defined by the Trust Indenture Act, defined by Trust Indenture Act reference to another statute or defined by SEC rule under the Trust Indenture Act and not otherwise defined herein are used herein as so defined. Section 1.4 Rules of Construction. Unless the context otherwise requires: (a) a term has the meaning assigned to it; (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (c) references to "GAAP" shall mean GAAP in effect as of the Closing Date; (d) "or" is not exclusive; (e) words in the singular include the plural, and in the plural include the singular; and (f) provisions apply to successive events and transactions. 8 14 ARTICLE II. THE SECURITIES Section 2.1 Description of the Securities; Form and Dating. The Securities shall be issued to the Limited Partners of each Net Partnership who have properly elected to receive them in connection with the Consolidation.. All Securities shall be identical except as may be set forth in a Board Resolution, a supplemental indenture or an Officers' Certificate detailing the adoption of the terms thereof pursuant to the authority granted under a Board Resolution. The Securities shall be expressly subordinated to all Indebtedness of the Company outstanding on the Closing Date and any other Indebtedness of the Company issued in the future which is not, by its terms, expressly subordinated to the Securities. The Securities are senior in right and priority of payment to the Company's Class A Senior Cumulative Convertible Preferred Shares and to all other classes of the Company's Capital Stock currently authorized or authorized in the future. The Securities shall bear interest equal to 8.5% per annum, on a day-to-day basis, based upon a 365 day year and actual days elapsed, from the Closing Date. Interest shall be paid semi-annually in cash in arrears, to the Persons in whose names the Securities are registered on the Record Date. The Securities, and the Trustee's certificate of authentication in respect thereof, shall be substantially in the form of Exhibit A hereto, which Exhibit is part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule or usage. The Company shall approve the form of the Securities and any notation, legend or endorsement on them. Any such notations, legends or endorsements not contained in the form of Security attached as Exhibit A hereto shall be delivered in writing to the Trustee. Each Security shall be dated the date of its authentication. The terms and provisions contained in the form of the Securities shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. The Securities may be presented for registration of transfer and exchange at the offices of the Registrar. Section 2.2 Execution and Authentication. Two Officers, each of which shall have been duly authorized by all requisite corporate actions, shall sign, or one Officer shall sign and one Officer shall attest to, the Securities for the Company by manual or facsimile signature. If an Officer whose signature is on a Security no longer holds that office at the time the Security is authenticated, the Security shall nevertheless be valid. A Security shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent appointed by the Trustee. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall at any time, and from time to time, authenticate the Securities for original issue in the principal amount provided in the related Board Resolution, supplemental 9 15 indenture hereto or Officers' Certificate, upon receipt by the Trustee of a Company Order. Such Company Order may authorize authentication and delivery pursuant to oral or electronic instructions from the Company or its duly authorized agent or agents, which oral instructions shall be promptly confirmed in writing. Each Security shall be dated the date of its authentication unless otherwise provided by a Board Resolution, a supplemental indenture hereto or an Officers' Certificate. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate the Securities. Such an authenticating agent may authenticate the Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate. Section 2.3 Registrar and Paying Agent. The Company shall maintain, with respect to the Securities, an office or agency in _________________________, where the Securities may be presented or surrendered for payment ("Paying Agent"), where the Securities may be surrendered for registration of transfer or exchange ("Registrar"), and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served ("Service Agent"). The Registrar shall keep a register with respect to the Securities and to their transfer and exchange. The Company will give prompt written notice to the Trustee of the name and address, and any change in the name or address, of each Registrar, Paying Agent or Service Agent. If at any time the Company shall fail to maintain any such required Registrar, Paying Agent or Service Agent or shall fail to furnish the Trustee with the name and address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more co-registrars, additional paying agents or additional service agents and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligations to maintain a Registrar, Paying Agent and Service Agent as specified in this Section 2.3. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the name or address of any such co-registrar, additional paying agent or additional service agent. The term "Registrar" includes any co-registrar; the term "Paying Agent" includes any additional paying agent; and the term "Service Agent" includes any additional service agent. The Company hereby appoints the Trustee the initial Registrar, Paying Agent and Service Agent for the Securities. Section 2.4 Paying Agent to Hold Money in Trust. The Company shall require each Paying Agent for the Securities other than the Trustee to agree in writing that the Paying Agent will hold in trust, for the benefit of Securityholders, or the Trustee, all money held by the Paying Agent for the payment of principal 10 16 of or interest on such Securities, and will notify the Trustee of any Default by the Company in making any such payment as specified in Section 7.1(a), (b) or (c). While any such Default continues and subsequent to the occurrence of any Event of Default, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company or a Subsidiary) shall have no further liability for the money. If the Company or its Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of Securityholders all money, the Securities and investments held by it as Paying Agent. Section 2.5 Securityholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders and shall otherwise comply with Section 312(a) of the Trust Indenture Act. If the Trustee is not the Registrar, the Company shall furnish to the Trustee at least ten days before each interest payment date and at such other times as the Trustee may request in writing a list, in such form and as of such date as the Trustee may reasonably require, of the names and addresses of Securityholders. Section 2.6 Transfer and Exchange. Where the Securities are presented to the Registrar or a coregistrar with a request to register a transfer or to exchange them for an equal principal amount of the Securities, the Registrar shall register the transfer or make the exchange if its requirements for such transactions are met. To permit registrations of transfers and exchanges, the Trustee shall authenticate the Securities at the Registrar's request. No service charge shall be made for any registration of transfer or exchange (except as otherwise expressly permitted herein), but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable by the Securityholder in connection therewith (other than any such transfer tax or similar governmental charge payable upon exchanges pursuant to Section 2.10, 3.7 or 9.6). Neither the Company nor the Registrar shall be required for the period beginning at the opening of business fifteen Business Days immediately preceding the mailing of a notice of redemption of the Securities selected for redemption and ending at the close of business on the day of such mailing to issue, register the transfer of, or exchange the Securities. Section 2.7 Mutilated, Destroyed, Lost and Stolen Securities. If any mutilated Security is surrendered to the Registrar or the Trustee, the Company shall execute and issue and the Trustee shall authenticate and deliver in exchange therefor a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (i) evidence to their reasonable satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a protected purchaser (as defined in Article 8 of the Uniform Commercial 11 17 Code), the Company shall issue and execute and upon its request the Trustee shall authenticate and make available for delivery, in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay to the related Securityholder the principal and interest and any other obligations with respect to such Security. Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. Section 2.8 Outstanding Securities. The Securities outstanding at any time are all the Securities authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation and those described in this Section as not outstanding. If a Security is replaced pursuant to Section 2.7, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Security is held by a protected purchaser. If the Paying Agent (other than the Company, a Subsidiary or an Affiliate of any thereof) holds, for the benefit of Securityholders, on the Maturity of the Securities, money or other sufficient investments sufficient to pay in full such Securities payable on that date, then on and after that date such Securities cease to be outstanding and interest on them ceases to accrue. A Security does not cease to be outstanding because the Company or an Affiliate holds the Security. Section 2.9 Treasury Securities. In determining whether the Securityholders of the required principal amount of the Securities have concurred in any request, demand, authorization, direction, notice, consent or waiver, the Securities owned by the Company or an Affiliate shall be disregarded, except that for 12 18 the purposes of determining whether the Trustee shall be protected in relying on any such request, demand, authorization, direction, notice, consent or waiver, only the Securities that a Responsible Officer of the Trustee knows are so owned shall be so disregarded. Section 2.10 Temporary Securities. Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities upon a Company Order. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee upon request shall authenticate definitive Securities and date of maturity in exchange for temporary Securities. Until so exchanged, temporary Securities shall have the same rights under this Indenture as the definitive Securities. Section 2.11 Cancellation. The Company at any time may deliver the Securities to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange or payment. The Trustee shall cancel all the Securities surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall dispose of such canceled Securities (subject to the record retention requirement of the Exchange Act) in accordance with its customary practices, unless the Company otherwise directs. The Company may not issue new Securities to replace the Securities that it has paid or delivered to the Trustee for cancellation. Section 2.12 Defaulted Interest. If the Company defaults in a payment of principal of or interest on the Securities, it shall pay interest on overdue principal and overdue installments on interest, plus (to the extent permitted by law) any interest payable on the defaulted interest, pursuant to Section 4.1, to the Persons who are Securityholders on a subsequent special record date, which date shall be at least five days prior to the last payment date. The Company shall fix the record date and payment date. At least 30 days before the record date, the Company shall mail to the Trustee and to each Securityholder a notice that states the record date, the payment date and the amount of interest to be paid. The Company may pay defaulted interest in any other lawful manner. Section 2.13 CUSIP Numbers. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if the Company does so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Securityholders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other elements of identification printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any changes in "CUSIP" numbers. 13 19 ARTICLE III. REDEMPTION Section 3.1 Prepayment; Optional Redemption. The Securities may be prepaid or redeemed, in whole or in part, at any time at the Redemption Price. Section 3.2 Mandatory Redemption. In the event that the Company (or any Subsidiary), in a transaction which causes the Company to recognize gain for federal income tax purposes, (a) sells or otherwise disposes of any Property owned by any of the Net Partnerships immediately prior to the Consolidation and realizes net cash proceeds in excess of (i) the amount required to repay mortgage Indebtedness (outstanding immediately prior to the Consolidation) secured by such Property or otherwise required to be applied to the reduction of Indebtedness of the Company and (ii) the costs incurred by the Company in connection with such sale or other disposition or (b) refinances (whether at maturity or otherwise) any Indebtedness secured by any Property and realizes net cash proceeds in excess of (i) the amount of Indebtedness secured by such Property at the time of the Consolidation, calculated prior to any repayment or other reduction in the amount of such Indebtedness in the Consolidation, and (ii) the costs incurred by the Company in connection with such refinancing (in either case, the "Net Cash Proceeds"), the Company shall be required within 90 days of the receipt of the total Net Cash Proceeds to redeem at the Redemption Price an aggregate amount of principal of the Securities which were issued to the Persons who were Limited Partners of such Net Partnerships immediately prior to the Consolidation equal to 80% of such Net Cash Proceeds. Section 3.3 Notice to Trustee. If the Company elects to redeem the Securities pursuant to Section 3.1 or is required to redeem Securities or any part thereof pursuant to Section 3.2, it shall notify the Trustee of the Redemption Date and the principal amount of the Securities to be redeemed. The Company shall give the notice at least 45 days before the Redemption Date (or such shorter notice as may be acceptable to the Trustee). Any such notice may be canceled at any time prior to notice of such redemption being mailed to any Securityholder and shall thereby be void and of no effect. Section 3.4 Redemption Date. If the Paying Agent (other than the Company or an Affiliate thereof) holds, on the Redemption Date of any Securities, funds sufficient to pay such Securities, then on and after that date such Securities shall cease to be outstanding and interest on them shall cease to accrue. Section 3.5 Notice of Redemption. At least 30 days but not more than 60 days before a Redemption Date, the Company shall mail a notice of redemption by first-class mail to each Securityholder. 14 20 The notice shall identify the Securities to be redeemed and shall state: (a) the Redemption Date; (b) the Redemption Price; (c) the name and address of the Paying Agent; (d) that the Securities called for redemption must be surrendered to the Paying Agent to collect the Redemption Price; (e) the principal amount of the Securities to be redeemed; (f) that the notice is being sent pursuant to this Section 3.5 and pursuant to the optional or mandatory redemption provisions of Section 3.1 or 3.2, as the case may be; (g) that, unless the Company defaults in paying the Redemption Price, interest on the Securities called for redemption ceases to accrue on and after the Redemption Date; (h) that, if any Security is being redeemed in part, the portion of the principal amount of such Security to be redeemed and that, on and after the Redemption Date, upon surrender of such Security, a new Security or Securities in principal amount equal to the unredeemed portion thereof will be issued upon cancellation of the original Security; (i) that, if any Security contains a CUSIP number as provided in Section 2.13, no representation is being made as to the correctness of the CUSIP number either as printed on the Security or as contained in the notice of redemption and that reliance may be placed only on the other identification numbers printed on the Security; and (j) any other information as may be required by the terms of the Securities being redeemed. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at its expense. Section 3.6 Effect of Notice of Redemption. Once notice of redemption is mailed or published as provided in Section 3.5, the Securities or the applicable part of such Securities, called for redemption become due and payable on the Redemption Date and at the Redemption Price. A notice of redemption may not be conditional. Upon surrender to the Paying Agent, such Securities shall be paid at the Redemption Price. 15 21 Section 3.7 Deposit of Redemption Price. On or before 10:00 a.m., New York City time, on the Redemption Date, the Company shall deposit with the Paying Agent money sufficient to pay the Redemption Price and accrued interest, if any, on all the Securities to be redeemed on that date. The Paying Agent shall promptly return to the Company any money so deposited which is in excess of the amounts required therefor after payment to the Securityholders to be redeemed. Section 3.8 Securities Redeemed in Part. Upon surrender of a Security that is redeemed in part in connection with a mandatory redemption pursuant to Section 3.2, the Company shall issue and the Trustee shall authenticate for the Holder a new Security of the same Series and the same maturity equal in principal amount to the unredeemed portion of the Security surrendered. ARTICLE IV. COVENANTS; SUBORDINATION The following covenants shall be applicable with respect to the Securities. Section 4.1 Payment of Principal and Interest. The Company covenants and agrees for the benefit of the Securityholders that it will duly and punctually pay the principal of and interest on the Securities in accordance with the terms of such Securities and this Indenture. The Company shall pay interest on overdue principal and overdue interest on the Securities, to the extent permitted by law, at the rate specified in such Securities. Section 4.2 Reports. The Company shall at all times comply with Trust Indenture Act, Section 314(a). Section 4.3 Compliance Certificate. The Company shall deliver to the Trustee, within 120 days after the end of its fiscal year, an Officers' Certificate complying with Trust Indenture Act, Section 314(a)(4). Such Officers' Certificate shall state whether or not such Officers have knowledge of any Default under this Indenture, and if so, specifying each such Default and the nature and status thereof. Section 4.4 Corporate Existence. The Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence in accordance with its organizational documents (as the same may be amended from time to time) and the rights (charter and statutory) and franchises of the Company; provided, however, that the Company shall not be required to preserve any such right, franchise or existence if the Board shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries taken as a whole. 16 22 Section 4.5 Maintenance of Office or Agency. The Company shall maintain in the Borough of Manhattan, The City of New York, an office or agency where the Securities may be presented or surrendered for payment, where the Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company shall give prompt written notice to the Trustee and the Paying Agent of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee and the Paying Agent, if different, with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 9.2. The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York, for such purposes. The Company shall give prompt written notice to the Trustee and the Paying Agent, if different, of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby initially designates the corporate trust office of the Paying Agent as such office. Section 4.6 Securities Subordinate to Senior Indebtedness. The Company covenants and agrees, and each Securityholder, by his acceptance thereof, likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in Sections 4.6 to 4.19 (subject to the provisions of Article VIII), the payment of the principal of (and premium, if any) and interest on each and all of the Securities are hereby expressly made subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness. Section 4.7 Payment Over of Proceeds Upon Dissolution, Etc. In the event of (a) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, relative to the Company or to its creditors, as such, or to its assets, or (b) any liquidation, dissolution or other winding-up of the Company, whether voluntary or involuntary and whether or not involving insolvency or bankruptcy, or (c) any assignment for the benefit of creditors or any other marshaling of assets and liabilities of the Company, then and in any such event specified in (a), (b) or (c) above (each such event, if any, herein sometimes referred to as a "Proceeding"), the holders of Senior Indebtedness shall be entitled to receive payment in full of all amounts due or to become due on or in respect of all Senior Indebtedness, or provision shall be made for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Indebtedness, before the Securityholders are entitled to receive any payment or distribution of any kind or character, whether in cash, property or securities, on account of principal of (or premium, if any) or interest on or other obligations in respect of the 17 23 Securities or other Indebtedness of the Company that is pari passu or subordinate in right of payment to the Securities or on account of any purchase or other acquisition of Securities or such other Indebtedness by the Company or any Subsidiary of the Company (all such payments, distributions, purchases and acquisition herein referred to, individually and collectively, as a "Securities Payment"), and to that end the holders of Senior Indebtedness shall be entitled to receive, for application to the payment thereof, any Securities Payment which may be payable or deliverable in respect of the Securities in any such Proceeding. In the event that, notwithstanding the foregoing provisions of this Section 4.7, the Trustee or any Securityholder shall have received any Securities Payment before all Senior Indebtedness is paid in full or payment thereof has been provided for in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Indebtedness, and if such fact shall, at or prior to the time of such Securities Payment, have been made known to the Trustee by delivery to the Trustee of any notice set forth in Section 4.14 or, as the case may be, such Securityholder, then and in such event such Securities Payment shall be paid over or delivered forthwith by the Trustee (if any notice set forth in Section 4.14 has been delivered to the Trustee) or by the Securityholder to the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other Person making payment or distribution of assets of the Company (which may be the Administrative Agent) for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. For purposes of this Article IV only, the words "any payment or distribution of any kind or character, whether in cash, property or securities" shall not be deemed to include a payment or distribution of stock or securities of the Company provided for by a plan of reorganization or readjustment authorized by an order or decree of a court of competent jurisdiction in a reorganization proceeding under any applicable bankruptcy law or of any other corporation provided for by such plan of reorganization or readjustment which stock or securities are subordinated in right of payment to all then outstanding Senior Indebtedness to substantially the same extent as the Securities are so subordinated as provided in this Article IV. Section 4.8 No Payment When Senior Indebtedness in Default. In the event that any Senior Payment Default (as defined below) shall have occurred and be continuing, or the maturity of any Senior Indebtedness shall have been accelerated, then no Securities Payment shall be made unless and until such Senior Payment Default shall have been cured or waived or shall have ceased to exist and any acceleration of Senior Indebtedness shall have been rescinded or annulled. "Senior Payment Default" means any default in the payment of principal of (or premium, if any) or interest on any Senior Indebtedness when due, whether at the Stated Maturity of any such payment or by declaration of acceleration, call for redemption or otherwise. In the event that any Senior Nonmonetary Default (as defined below) shall have occurred and be continuing, then, upon the receipt by the Company and the Trustee of written notice of such Senior Nonmonetary Default from parties expressly authorized to provide such notice under the terms of such Senior Indebtedness or, if there is no outstanding Senior Indebtedness, any representative of a holder of Senior Indebtedness, no Securities Payment shall 18 24 be made during the period (the "Payment Blockage Period") commencing on the date of such receipt of such written notice and ending on the earlier of (i) the date on which such Senior Nonmonetary Default shall have been cured or waived or shall have ceased to exist and any acceleration of Senior Indebtedness shall have been rescinded or annulled or the Senior Indebtedness to which such Senior Nonmonetary Default relates shall have been discharged or (ii) the 179th day after the date of such receipt of such written notice. No more than one Payment Blockage Period may be commenced with respect to the Securities during any 360-day period and there shall be a period of at least 181 consecutive days in each 360-day period when no Payment Blockage Period is in effect. For all purposes of this Section 4.8, no Senior Nonmonetary Default that was known to the holders of Senior Indebtedness to exist or be continuing on the date of commencement of any Payment Blockage Period shall be, or be made, the basis for the commencement of a subsequent Payment Blockage Period by an Administrative Agent unless such Senior Nonmonetary Default shall have been cured for a period of not less than 90 consecutive days. "Senior Nonmonetary Default" means the occurrence or existence and continuance of any event of default, or of any event which, after notice or lapse of time or both, would become an event of default, under the terms of any instrument pursuant to which any Senior Indebtedness is outstanding, permitting (after notice or lapse of time or both) one or more holders of such Senior Indebtedness (or an administrative agent on behalf of the holders thereof) to declare such Senior Indebtedness due and payable prior to the date on which it would otherwise become due and payable, other than a Senior Payment Default. Section 4.9 Payment Permitted If No Default. Nothing contained in this Article IV or elsewhere in this Indenture or in any of the Securities shall prevent (a) the Company, at any time except during the pendency of any Proceeding referred to in Section 4.7 or under the conditions described in Section 4.8, from making Securities Payments, or (b) the application by the Trustee of any money deposited with it hereunder to Securities Payments or the retention of such Securities Payment by the Holders, if, at the time of such application by the Trustee, it had not received any notice set forth in Section 4.14. Section 4.10 Subrogation to Rights of Holders of Senior Indebtedness. Subject to the payment in full of all amounts due or to become due on or in respect of Senior Indebtedness, or the provision for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Indebtedness, the Securityholders shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments and distributions of cash, property and securities applicable to the Senior Indebtedness until the principal of (and premium, if any) and interest on the Securities shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of the Senior Indebtedness of any cash, property or securities to which the Securityholders or the Trustee would be entitled except for the provisions of this Article IV, and no payments over pursuant to the provisions of this Article IV to the holders of Senior Indebtedness by Securityholders or the Trustee, shall, as among the Company, its creditors other than holders of Senior Indebtedness and the Securityholders, be deemed to be a payment or distribution by the Company to or on account of the Senior Indebtedness. 19 25 Section 4.11 Provisions Solely to Define Relative Rights. The provisions of this Article IV are and are intended solely for the purpose of defining the relative rights of the Securityholders on the one hand and the holders of Senior Indebtedness on the other hand. Nothing contained in this Article IV or elsewhere in this Indenture or in the Securities is intended to or shall (a) impair, as among the Company, its creditors other than holders of Senior Indebtedness and the Securityholders, the obligation of the Company, which is absolute and unconditional (and which, subject to the rights under this Article IV of the holders of Senior Indebtedness, is intended to rank equally with all other general obligations of the Company), to pay to the Securityholders the principal of (and premium, if any) and interest on the Securities as and when the same shall become due and payable in accordance with their terms; or (b) affect the relative rights against the Company of the Securityholders and creditors of the Company other than the holders of Senior Indebtedness; or (c) prevent the Trustee or the Securityholders from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article IV of the holders of Senior Indebtedness to receive cash, property and securities otherwise payable or deliverable to the Trustee or such Securityholder. Section 4.12 Trustee to Effectuate Subordination. Each Securityholder by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article IV and appoints the Trustee his attorney-in-fact for any and all such purposes. Section 4.13 No Waiver of Subordination Provisions. No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Securityholders, without incurring responsibility to the Securityholders and without impairing or releasing the subordination provided in this Article IV or the obligations hereunder of the Securityholders to the holders of Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Indebtedness, or otherwise amend or supplement in any manner Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any Person liable in any manner for the collection of Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company and any other Person. 20 26 Section 4.14 Notice to Trustee. The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment to or by the Trustee in respect of the Securities. Notwithstanding the provisions of this Article IV or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee in respect of the Securities, unless and until the Trustee shall have received written notice thereof from the Company or a holder of Senior Indebtedness or from any trustee, representative or Administrative Agent therefor; and, prior to the receipt of any such written notice, the Trustee, subject to the provisions of Section 8.1, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section 4.14 at least 5 Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (and premium, if any) or interest on any Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purpose for which such money was received and shall not be affected by any notice to the contrary which may be received by it within 5 Business Days prior to such date. Subject to the provisions of Section 8.1, the Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee or Administrative Agent therefor) to establish that such notice has been given by a holder of Senior Indebtedness (or a trustee or Administrative Agent therefor). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article IV, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article IV, and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. Section 4.15 Reliance on Judicial Order or Certificate of Liquidating Agent. Upon any payment or distribution of assets of the Company referred to in this Article IV, the Trustee, subject to the provisions of Section 8.1, and the Securityholders shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which a Proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Securityholders, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article IV. 21 27 Section 4.16 Trustee Not Fiduciary for Holders of Senior Indebtedness. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and it undertakes to perform and observe only such of its covenants and obligations with respect to the Senior Indebtedness as are specifically set forth in this Indenture, and no implied covenants or obligations with respect to the Senior Indebtedness shall be read into this Indenture against the Trustee and the Trustee shall not be liable to any such holders if it shall in good faith mistakenly pay over or distribute to Securityholders or to the Company or to any other Person cash, property or securities to which any holders of Senior Indebtedness shall be entitled by virtue of this Article IV or otherwise. Section 4.17 Rights of Trustee as Holder of Senior Indebtedness; Preservation of Trustee's Rights. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article IV with respect to any Senior Indebtedness which may at any time be held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. Nothing in this Article IV shall apply to claims of, or payments to, the Trustee under or pursuant to Section 8.7. Section 4.18 Article IV Applicable to Paying Agents. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article IV shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article IV in addition to or in place of the Trustee; provided, however, that Section 4.17 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as Paying Agent. Section 4.19 Discharge of this Article IV. The subordination of the Securities provided by this Article IV is expressly made subject to the provisions set forth in Article IX and, anything herein to the contrary notwithstanding, upon the effectiveness of satisfaction of this Indenture, the Securities then outstanding shall thereupon cease to be subordinated pursuant to this Article IV. ARTICLE V. SUCCESSORS Section 5.1 Merger, Consolidation or Sale. The Company will not merge or consolidate with or into, or sell, lease, convey, transfer or otherwise dispose of all or substantially all of its property and assets (as an entirety or 22 28 substantially as an entirety in one transaction or a series of related transactions) to any Person or permit any Person to merge or consolidate with or into the Company, unless: (a) either the Company shall be the continuing Person or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or that acquired such property and assets of the Company shall be an entity organized and validly existing under the laws of the United States of America or any state or jurisdiction thereof and shall expressly assume, by a supplemental indenture, executed and delivered to the Trustee, all of the obligations of the Company on the Securities and under this Indenture; (b) immediately after giving effect, on a pro forma basis, to such transaction, no Default or Event of Default shall have occurred and be continuing; and (c) the Company will have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel stating that such consolidation, merger or transfer and such supplemental indenture complies with such conditions. Section 5.2 Successor Person Substituted. Upon any consolidation or merger or any transfer of all or substantially all of the assets of the Company, in accordance with Section 5.1, the successor Person formed by such consolidation or into which the Company is merged or to which such transfer is made, shall succeed to, be substituted for, and may exercise every right and power of the Company under this Indenture with the same effect as if such successor Person had been named therein as the Company and the Company shall be released from the obligations under the Securities and this Indenture. ARTICLE VI. DEFAULTS AND REMEDIES Section 6.1 Events of Default. "Event of Default," wherever used herein with respect to Securities means any one of the following events: (a) Default for 30 days in the payment of any installment of interest on any Security; (b) Default in the payment of the principal of any Security when due and payable at maturity, redemption, by acceleration or otherwise; (c) Default in the payment of any mandatory redemption of principal on or before the date 90 days after the receipt of the total Net Cash Proceeds from the applicable sale or other disposition or refinancing of a Property giving rise to the obligation to make such redemption pursuant to Section 3.2; 23 29 (d) Default in the performance of any other covenant or agreement of the Company contained in this Indenture, such default having continued for 60 days after written notice as provided in this Indenture; and (e) an event of bankruptcy, insolvency or reorganization, or court appointment of a receiver, liquidator, assignee or trustee of the Company or any Significant Subsidiary or any of their respective property. Section 6.2 Acceleration of Maturity; Rescission and Annulment. If an Event of Default under this Indenture occurs and is continuing, then in every such case other than an Event of Default specified in Section 6.1(e), Securityholders will have the following remedies: (a) the rate of interest on the Securities will increase to 10%, provided that if such Event of Default is cured or waived, the rate of interest will be reduced, from the date of such cure or waiver, to 8.5%; and (b) acceleration of Maturity upon vote by Securityholders holding a majority of the principal amount of the Securities outstanding; provided, however, that written notice thereof is given to the Company. If an Event of Default specified in Section 6.1(e) shall occur, the principal amount of the Securities shall become immediately due and payable. At any time after such a declaration of acceleration with respect to the Securities has been made, and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter provided in this Article VI, the Securityholders of not less than a majority of the principal amount of outstanding the Securities may rescind and annul such declaration and its consequences if: (a) the Company shall have paid or deposited with the Trustee all required payments of the principal of and interest on the Securities, plus all fees, expenses, disbursements and advances of the Trustee and other amounts due the Trustee under Section 7.7; and (b) all Events of Default, other than the non-payment of accelerated principal of (or specified portion thereof) and interest on the Securities, have been cured or waived as provided in Section 6.13. The Securityholders of not less than a majority of the principal amount of the outstanding Securities may waive any past Default with respect to such Securities and its consequences, except a Default in the payment of the principal of or interest on any Security, or in respect of a covenant or other provision, contained in this Indenture that cannot be modified or amended without the consent of the Securityholder of each outstanding Security affected thereby. 24 30 Section 6.3 Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if: (a) Default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days; or (b) Default is made in the payment of principal of any Security at the Maturity thereof; then, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Securityholders, the whole amount then due and payable on such Securities for principal and interest at the rate or rates prescribed therefor in such Securities or in this Indenture, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and any other amounts due the Trustee under Section 7.7. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon such Securities and collect the monies adjudged or deemed to be payable in the manner provided by law out of the property of the Company or any other obligor upon such Securities, wherever situated. If an Event of Default occurs and is continuing or if an acceleration has occurred, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Securityholders by such appropriate judicial proceedings as the Trustee shall deem most effective to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. Section 6.4 Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise: (a) to file and prove a claim for the whole amount of principal and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, 25 31 disbursements and advances of the Trustee, its agents and counsel and any other amounts due the Trustee under Section 7.7) and of the Securityholders allowed in such judicial proceeding; and (b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same, and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Securityholder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and any other amounts due the Trustee under Section 7.7. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Securityholder thereof or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. Section 6.5 Trustee May Enforce Claims Without Possession of the Securities. All rights of action and claims under this Indenture or Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Securityholder in respect of which such judgment has been recovered. Section 6.6 Application of Money Collected. Any money collected by the Trustee pursuant to this Article VII shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: First: To the Trustee, the payment of all amounts due the Trustee under Section 7.7; and Second: Subject to Section 4.7, to the Securityholder, the payment of the amounts then due and unpaid for principal of and interest (including default interest) on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal and interest, respectively; and Third: To the Company. 26 32 Section 6.7 Limitation on Suits. Subject to Section 6.8, no Securityholder may institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, except in the case of the failure of the Trustee, for 60 days, to act after it has received a written request to institute proceedings in respect of an Event of Default from the Securityholders of not less than 25% in principal amount of the outstanding Securities, as well as an offer of indemnity reasonably satisfactory to it. Section 6.8 Unconditional Right of Securityholders to Receive Principal and Interest. Notwithstanding any other provision in this Indenture, the Securityholder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of and interest, if any, on such Security on the Stated Maturity or Stated Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Securityholder. Section 6.9 Restoration of Rights and Remedies. If the Trustee or any Securityholder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Securityholder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Securityholders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Securityholders shall continue as though no such proceeding had been instituted. Section 6.10 Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in Section 2.7, no right or remedy herein conferred upon or reserved to the Trustee or to the Securityholder is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Section 6.11 Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Securityholder to exercise any right or remedy accruing upon any Default or Event of Default shall impair any such right or remedy or constitute a waiver of any such Default or Event of Default or an acquiescence therein. Every right and remedy given by this Article VI or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Securityholders, as the case may be. 27 33 Section 6.12 Control by Securityholders. Securityholders of not less than a majority in principal amount of the outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, with respect to the Securities provided that the Trustee may refuse to follow any direction that: (a) is conflict with any law or with this Indenture; and (b) that the Trustee determines in good faith may involve the Trustee in personal liability or be unduly prejudicial to Securityholders. Section 6.13 Waiver of Past Defaults. The Securityholders of a majority in aggregate principal amount of the outstanding Securities may waive on behalf of all the Securityholders any Default with respect to such Securities and its consequences, except a Default with respect to any provision requiring supermajority approval to amend, which Default may only be waived by such a supermajority with respect to such Securities, and except a Default in the payment of principal of or interest on any Security not yet cured or a Default with respect to any covenant or provision which cannot be modified or amended without the consent of the Securityholder of each outstanding Security, provided, however, that Securityholders of a majority or a supermajority (as the case may be) in aggregate principal amount of the Securities may rescind an acceleration and its consequences including any payment default that resulted from such acceleration only pursuant to Section 6.2. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. Section 6.14 Undertaking for Costs. All parties to this Indenture agree, and each Securityholder by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Company, to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholder, holding in the aggregate more than 10% in principal amount of the outstanding Securities, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of or interest on any Security on or after the Stated Maturity or Stated Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date). 28 34 ARTICLE VII. TRUSTEE Section 7.1 Duties of Trustee. (a) If an Event of Default has occurred and has not been properly waived or rescinded, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default that has occurred and that has not been properly waived or rescinded: (i) the Trustee need perform only those duties that are specifically set forth in this Indenture and no others; (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon Officers' Certificates or Opinions of Counsel furnished to the Trustee and conforming to the requirements of this Indenture; however, in the case of any such Officers' Certificates or Opinions of Counsel which by any provisions hereof are specifically required to be furnished to the Trustee, the Trustee shall examine such Officers' Certificates and Opinions of Counsel to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section 7.1; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; (iii) the Trustee shall not be liable with respect to any action taken, suffered or omitted to be taken by it with respect to the Securities in good faith in accordance with the direction of the Securityholders of a majority in principal amount of the outstanding Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture with respect to the Securities. 29 35 (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section. (e) Subject to the provisions of this Article and the rest of this Indenture relating to the duties of the Trustee, the Trustee will be under no obligation to exercise any of its rights or powers under this Indenture at the request, order or direction of any of the Securityholders, unless such Securityholders have offered to the Trustee reasonable security or indemnity against the cost, expenses and liabilities which might be incurred by it in compliance with such request, order or direction. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (g) No provision of this Indenture shall require the Trustee to risk its own funds or otherwise incur any financial liability in the performance of any of its duties, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk is not reasonably assured to it. (h) Unless an Affiliate of the Company, the Paying Agent, the Registrar and any authenticating agent shall be entitled to the protections, immunities and standard of care as are set forth in paragraphs (a), (b) and (c) of this Section and Section 7.2 with respect to the Trustee. (i) Whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officer's Certificate. Section 7.2 Rights of Trustee. (a) The Trustee may rely on and shall be protected in acting or refraining from acting upon any document reasonably believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. 30 36 (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which action or inaction it believes to be authorized or within its rights or powers. (e) The Trustee may consult with counsel and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (f) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, notice, request, direction, consent, order, bond, debenture, or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit. (g) The Trustee shall not be required to give any bond or surety in respect of the performance of its powers and duties hereunder. (h) The permissive rights of the Trustee to do things enumerated in this Indenture shall not be construed as duties. (i) The Trustee shall not be charged with knowledge of any Default or Event of Default or of the identity of any Subsidiary unless either (i) a Responsible Officer shall have actual knowledge thereof or (ii) the Trustee shall have received written notice thereof from the Company or any Securityholder. Section 7.3 Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of the Securities and may otherwise deal with the Company or an Affiliate with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. The Trustee is also subject to Sections 7.10 and 7.11. Section 7.4 Trustee's Disclaimer. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement of the Company in this Indenture or the Securities other than its certificate of authentication. Section 7.5 Notice of Defaults. If a Default or Event of Default occurs and is continuing with respect to the Securities and if it is known to a Responsible Officer of the Trustee, the Trustee shall mail to each Securityholder notice of a Default or Event of Default within 90 days after it occurs, unless such Default or Event of Default has been cured or waived. Except in the case of a Default or Event of Default in payment of principal of or interest on the Securities or a default in the 31 37 payment of any mandatory redemption installment in respect of any Security, the Trustee may withhold the notice if and so long as its corporate trust committee or a committee of the Responsible Officers of the Trustee in good faith determines that withholding the notice is in the interests of Securityholder. Section 7.6 Reports by Trustee to Securityholders. Within 60 days after May 15 in each year, the Trustee shall transmit by mail to all Securityholder, as their names and addresses appear on the register kept by the Registrar, a brief report dated as of such date, in accordance with, and to the extent required under, Section 313 of the Trust Indenture Act. A copy of each report at the time of its mailing to Securityholder shall be filed with the SEC and each stock exchange, if any, on which the Securities are listed in accordance with Section 313(d) of the Trust Indenture Act. The Company shall promptly notify the Trustee when the Securities are listed on any stock exchange. Section 7.7 Compensation and Indemnity. The Company shall pay to the Trustee from time to time reasonable compensation for its services in accordance with the Trustee's customary fees for providing such services. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred by it. Such expenses shall include the reasonable compensation and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee (including the cost of defending itself) against any loss, liability or expense incurred by it (including in the enforcement of this Section 7.7), except as set forth in the next paragraph, arising out of or in connection with the acceptance or administration of this trust or in the performance of its duties under this Indenture as Trustee or Agent. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. This indemnification shall apply to officers, directors, employees, shareholders and agents of the Trustee. Notwithstanding the foregoing, the Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee or by any officer, director, employee, shareholder or agent of the Trustee through negligence or bad faith. To secure the Company's payment obligations in this Section, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee, except that which is held in trust to pay principal and interest on the Securities. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.1 (e) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. 32 38 The provisions of this Section 7.7 shall survive the resignation or removal of the Trustee and the termination of this Indenture. Section 7.8 Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.8. The Trustee may resign by so notifying the Company. The Securityholders of a majority in principal amount of the Securities may remove the Trustee by so notifying the Trustee and the Company. The Company may remove the Trustee with respect to the Securities if: (a) The Trustee fails to comply with Section 7.10; (b) The Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (c) a Custodian or public officer takes charge of the Trustee or its property; or (d) The Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Securityholders of a majority in principal amount of the outstanding Securities may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Securityholders of at least 10% in principal amount of the Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Immediately after that, the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee subject to the lien provided for in Section 8.7, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail a notice of its succession to each Securityholder. Notwithstanding replacement of the Trustee pursuant to this Section 7.8, the Company's obligations under Section 7.7 shall continue for the benefit of the retiring trustee with respect to expenses and liabilities incurred by it prior to such replacement. 33 39 Section 7.9 Successor Trustee by Merger, etc. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, subject to Section 8.10, the successor corporation without any further act shall be the successor Trustee; provided such entity shall otherwise be eligible under this Article VII. Section 7.10 Eligibility; Disqualification. This Indenture shall always have a Trustee who satisfies the requirements of Trust Indenture Act Sections 310(a)(1), (2) and (5). The Trustee shall always have a combined capital and surplus of at least $100,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with Trust Indenture Act Section 310(b). Section 7.11 Preferential Collection of Claims Against Company. The Trustee is subject to Trust Indenture Act Section 311(a), excluding any creditor relationship listed in Trust Indenture Act Section 311(b). A Trustee who has resigned or been removed shall be subject to Trust Indenture Act Section 31l(a) to the extent indicated. Section 7.12 Paying Agents. The Company shall cause each Paying Agent other than the Trustee to execute and deliver to it and the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section 7.12: (a) that it will hold all sums held by it as agent for the payment of principal of or interest on the Securities in trust for the benefit of the Securityholder or the Trustee; (b) that it will at any time during the continuance of an Event of Default, upon written request of the Trustee, deliver to the Trustee all sums held by it in trust together with a full accounting thereof; and (c) that it will give the Trustee written notice within three (3) Business Days of any failure by the Company to pay any installment of principal of or interest on the Securities when the same shall be due and payable. ARTICLE VIII. SATISFACTION AND DISCHARGE; DEFEASANCE Section 8.1 Satisfaction and Discharge of Indenture. This Indenture shall (upon Company Order) cease to be of further effect (except as hereinafter provided in this Section 8.1), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging such satisfaction and discharge of this Indenture, when: 34 40 (a) either: (i) all the Securities theretofore authenticated and delivered (other than the Securities that have been destroyed, lost or stolen and that have been replaced or paid) have been delivered to the Trustee for cancellation; or (ii) all such Securities not theretofore delivered to the Trustee for cancellation: (1) have become due and payable; or (2) will become due and payable at their Stated Maturity within one year; or (3) will be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company; or (4) are deemed paid and discharged pursuant to Section 8.3, as applicable; and the Company, in the case of (1), (2) or (3) above, has deposited or caused to be deposited (in U.S. legal tender or U.S. Government Obligations or a combination thereof) with the Trustee as trust funds in trust an amount sufficient for the purpose of paying and discharging the entire Indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal and interest to the date of such deposit (in the case of Securities which have become due and payable on or prior to the date of such deposit) or to the Stated Maturity or Redemption Date, as the case may be; (b) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (c) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 7.7, and, if money shall have been deposited with the Trustee pursuant to clause (a) of this Section 8.1, the provisions of Sections 2.3, 2.6, 2.7, 2.10, 7.1, 8.1, 8.2 and 8.5 shall survive. 35 41 Section 8.2 Application of Trust Funds; Indemnification. (a) Subject to the provisions of Section 8.5, all money and U.S. Government Obligations deposited with the Trustee pursuant to Section 8.1, 8.3 or 8.4 and all money received by the Trustee in respect of U.S. Government Obligations deposited with the Trustee pursuant to Section 8.1, 8.3 or 8.4, shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and interest for whose payment such money has been deposited with or received by the Trustee or to make analogous payments as contemplated by Section 8.3 or 8.4. (b) The Company shall pay and shall indemnify the Trustee against any tax, fee or other charge imposed on or assessed against U.S. Government Obligations deposited pursuant to Section 8.1, 8.3 or 8.4 or the interest and principal received in respect of such obligations other than any tax, fee or other charge payable by or on behalf of Securityholders. (c) The Trustee shall deliver or pay to the Company from time to time upon Company Request any U.S. Government Obligations or money held by it as provided in Section 8.1, 8.3 or 8.4 which, in the opinion of a nationally recognized firm of independent certified public accountants expressed in a written certification thereof delivered to the Trustee, are then in excess of the amount thereof which then would have been required to be deposited for the purpose for which such U.S. Government Obligations or money were deposited or received. This provision shall not authorize the sale by the Trustee of any U.S. Government Obligations held under this Indenture. Section 8.3 Legal Defeasance of the Securities. The Company shall be deemed to have paid and discharged the entire Indebtedness on all the outstanding Securities on the 91st day after the date of the deposit referred to below, and the provisions of this Indenture, as it relates to such outstanding Securities, shall no longer be in effect (and the Trustee, at the expense of the Company, shall, at Company Request, execute proper instruments acknowledging the same), except as to: (a) the rights of Securityholders to receive, from the trust funds described below, payment of the principal of and each installment of principal of and interest on the outstanding Securities on the Stated Maturity of such principal or installment of principal or interest on the day on which such payments are due and payable in accordance with the terms of this Indenture and the Securities; (b) the provisions of Sections 2.4, 2.6, 2.7, 2.10, 4.5 and this Article VIII; and (c) the rights, powers, trust and immunities of the Trustee hereunder; 36 42 provided that, the following conditions shall have been satisfied: (i) the Company must irrevocably deposit with the Trustee, in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Securityholders, U.S. legal tender or U.S. Government Obligations, or any combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay the entire principal of and interest (including default interest) on such Securities at Maturity and on each payment date or on the Redemption Date of such principal or installment of principal of (or interest on) the Securities in accordance with the terms of this Indenture and the Securities; (ii) the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to Trustee confirming that (A) the Company has received from, or there has been published by the Internal Revenue Service, a ruling or (B) since the date of this Indenture, there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Securityholders will not recognize income, gain or loss for Federal income tax purposes as a result of such legal defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such legal defeasance had not occurred; (iii) no Default or Event of Default shall have occurred with respect to such Securities and be continuing on the date of such deposit or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (iv) such legal defeasance shall not result in a breach or violation of, or constitute a default under this Indenture or any other material agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (v) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Securityholders over any other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company or others; and 37 43 (vi) the Company shall have delivered to the Trustee an Officers' Certificate stating that the conditions precedent provided for have been complied with. Section 8.4 Covenant Defeasance. On and after the 91st day after the date of the deposit referred to in subparagraph 8.4(a), the Company may omit to comply with any term, provision or condition set forth under Sections 4.2, 4.3, and 4.4 and Article V (and the failure to comply with any such covenants shall not constitute a Default or Event of Default under Section 6.1) with respect to the Securities, provided that the following conditions shall have been satisfied: (a) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Securityholders, U.S. legal tender or U.S. Government Obligations, or any combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay the principal of and interest on such Securities at Maturity and on each payment date or on the Redemption Date of such principal or installment of principal of (or interest on) the Securities in accordance with the terms of this Indenture and the Securities; (b) the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to such Trustee confirming that the Securityholders will not recognize income, gain or loss for Federal income tax purposes as a result of the defeasance contemplated by this Section 8.4 and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (c) no Default or Event of Default shall have occurred with respect to such Securities and be continuing on the date of such deposit or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (d) such defeasance shall not result in a breach or violation of, or constitute a default under this Indenture or any other material agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (e) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Securityholders over any other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company or others; and 38 44 (f) the Company shall have delivered to the Trustee an Officers' Certificate stating that the conditions precedent provided for have been complied with. Section 8.5 Repayment to Company. The Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of principal and interest that remains unclaimed for two years. After that, Securityholder entitled to the money must look to the Company for payment as general creditors unless an applicable abandoned property law designates another Person. Section 8.6 Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with this Article VIII by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to this Article VIII until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with this Article VIII; provided that if the Company has made any payment of interest on or principal of any Securities because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Securityholders to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE IX. AMENDMENTS AND SUPPLEMENTS Section 9.1 Without Consent of Securityholders. The Company, when authorized by Board Resolution, and the Trustee may amend or supplement this Indenture or the Securities without the consent of any Securityholder: (a) to cure any ambiguity, defect or inconsistency; (b) to evidence the succession of another Person to the Company as obligor under this Indenture; (c) to permit or facilitate the issuance of the Securities in uncertificated form; (d) to make any change that does not adversely affect the rights of any Securityholder; (e) to provide for the issuance of and establish the form and terms and conditions of the Securities as permitted by this Indenture; 39 45 (f) to add to the covenants of the Company or to add Events of Default for the benefit of Securityholder or to surrender any right or power conferred upon the Company in this Indenture; (g) to evidence and provide for the acceptance of appointment by a successor Trustee or facilitate the administration of the trusts under this Indenture by more than one Trustee; (h) to provide for guarantors or collateral for the Securities; or (i) to comply with requirements of the SEC in order to effect or maintain the qualification of this Indenture under the Trust Indenture Act. Section 9.2 With Consent of Securityholders. Except as provided elsewhere in this Article IX, the Company, when authorized by Board Resolution, and the Trustee may enter into a supplemental indenture with the written consent of the Securityholders of not less than a majority in aggregate principal amount of the outstanding Securities affected by such supplemental indenture (including consents obtained in connection with a tender offer or exchange offer for the Securities) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the Securityholder. Except as provided in Section 6.13, the Securityholders of at least a majority in principal amount of the outstanding Securities affected by such waiver by notice to the Trustee (including consents obtained in connection with a tender offer or exchange offer for the Securities) may waive compliance by the Company with any provision of this Indenture or the Securities. It shall not be necessary for the consent of the Securityholders under this Section 9.2 to approve the particular form of any proposed supplemental indenture or waiver, but it shall be sufficient if such consent approves the substance thereof. After a supplemental indenture or waiver under this Section 9.2 becomes effective, the Company shall mail to the Securityholders affected thereby a notice briefly describing the supplemental indenture or waiver. Any failure by the Company to mail or publish such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture or waiver. Section 9.3 Limitations. Without the consent of each Securityholder affected, an amendment or waiver may not: (a) change the Stated Maturity of the principal of, or any installment of interest on, any Security; (b) reduce the principal amount of or interest on any Security; (c) change the place of payment, or the coin or currency, for the payment of principal of or interest on any Security; 40 46 (d) impair the right to institute suit for the enforcement of any payment on or with respect to any Security; (e) waive a default in the payment of principal of or interest on the Securities (except a rescission of acceleration of the Securities and a waiver of the payment default that resulted from such acceleration pursuant to Section 6.2); or (f) reduce the percentages of outstanding Securities necessary to modify or amend this Indenture or to waive compliance with Section 6.8, 6.13 or this 9.3. Section 9.4 Compliance with Trust Indenture Act. Every amendment to this Indenture or the Securities shall be set forth in a supplemental indenture hereto that complies with the Trust Indenture Act as then in effect. Section 9.5 Revocation and Effect of Consents. Until an amendment, supplement or waiver becomes effective, a consent to it by a Securityholder is a continuing consent by the Securityholder and every subsequent Securityholder or portion of a Security that evidences the same debt as the consenting Securityholder's Security, even if notation of the consent is not made on any Security. However, any such Securityholder or subsequent Securityholder may revoke the consent as to his Security or portion of a Security if the Trustee receives the notice of revocation before the date on which the Trustee receives an Officers' Certificate certifying that the Securityholders of the requisite principal amount of the Securities have consented (and not theretofore revoked such consent) to the amendment, supplement or waiver. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Securityholders entitled to consent to any amendment, supplement or waiver, which record date shall be the date so fixed by the Company, notwithstanding the provisions of the Trust Indenture Act. If a record date is fixed, then notwithstanding the last sentence of the immediately preceding paragraph, those Persons who were Securityholders at such record date, and only those Persons (or their duly designated proxies), shall be entitled to revoke any consent previously given (up to the time such consent becomes non-revocable in accordance with such sentence), whether or not such Persons continue to be Securityholders after such record date. No such consent shall be valid or effective for more than 90 days after such record date unless the consent of the requisite number of Securityholders has been obtained. Any amendment or waiver once effective shall bind every Securityholder affected by such amendment or waiver unless it is of the type described in Section 9.3. In that case, the amendment or waiver shall bind each Securityholder who has consented to it and every subsequent Securityholder or portion of a Security that evidences the same debt as the consenting Securityholder's Security. 41 47 Section 9.6 Notation on or Exchange of Securities. The Trustee shall place an appropriate notation about an amendment or waiver on any Security thereafter authenticated, upon the request by the Trustee that the Securityholder of such Security deliver such Security to the Trustee therefor. The Company in exchange for the Securities may issue and the Trustee shall authenticate upon request new Securities that reflect the amendment or waiver. Any failure to make any appropriate notation or to issue a new Security shall not affect the validity of such amendment or waiver. Section 9.7 Trustee Protected. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article IX or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 7.1) shall be fully protected in relying upon, an Opinion of Counsel complying with Section 10.4(b) and stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee shall sign all supplemental indentures, except that the Trustee need not sign any supplemental indenture that adversely affects its rights. ARTICLE X. MISCELLANEOUS Section 10.1 Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies, or conflicts with another provision which is required or deemed to be included in this Indenture by the Trust Indenture Act, such required or deemed provision shall control. Section 10.2 Notices. Any notice or communication by the Company or the Trustee to the other is duly given if in writing and delivered in person or mailed by first-class mail: if to the Company: Lexington Corporate Properties Trust 355 Lexington Avenue, 14th Floor New York, New York 10017 Attention: T. Wilson Eglin if to the Trustee: The Chase Manhattan Bank 450 West 33rd Street New York, New York 10001 Attention: Institutional Trust Services 42 48 The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication to a Securityholder shall be mailed by first-class mail to his address shown on the register kept by the Registrar. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholder. If a notice or communication is mailed or published in the manner provided above, within the time prescribed, it shall be deemed duly given, whether or not the Securityholder receives it, on the third day after the record date. If the Company mails a notice or communication to Securityholder, it shall mail a copy to the Trustee and each Agent at the same time. Section 10.3 Communication by Securityholders with Other Securityholders. Securityholder may communicate pursuant to Trust Indenture Act Section 312(b) with other Securityholder with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of Trust Indenture Act Section 312(c). Section 10.4 Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (b) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Section 10.5 Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to Trust Indenture Act 314 Section(a)(4)) shall comply with the provisions of Trust Indenture Act Section 314(e) and shall include: (a) a statement that the person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; 43 49 (c) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. Section 10.6 Rules by Trustee and Agents. The Trustee may make reasonable rules for action by or a meeting of Securityholders. Any Agent may make reasonable rules and set reasonable requirements for its functions. Section 10.7 Legal Holidays. Unless otherwise provided by Board Resolution, Officers' Certificate or supplemental indenture, a "Legal Holiday" is any day that is not a Business Day. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue with respect to such payment for the intervening period. Section 10.8 No Recourse Against Others. No recourse for the payment of the principal of or interest on the Securities or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture, or in the Securities or because of the creation of any Indebtedness represented thereby, shall be had against any incorporator, partner, stockholder, officer, director, employee or controlling Person of the Company or any successor Person thereof, except as an obligor of the Securities pursuant to this Indenture. Each Securityholder, by accepting the Securities, waives and releases all such liability. Section 10.9 Counterparts. This Indenture may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. A facsimile, telecopy or other reproduction of this Indenture may be executed by one or more parties hereto, and an executed copy of this Indenture may be delivered by one or more parties hereto by facsimile or similar instantaneous electronic transmission device pursuant to which the signature of or on behalf of such party can be seen, and such execution and delivery shall be considered valid, binding and effective for all purposes as of the date first written above. At the request of any party hereto, all parties hereto agree to execute an original of this Indenture as well as any facsimile, telecopy or other reproduction hereof. 44 50 Section 10.10 Governing Laws. THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, INCLUDING, WITHOUT LIMITATION, SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW AND NEW YORK CIVIL PRACTICE LAWS AND RULES 327(B). THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE AND THE SECURITIES, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID COURTS. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE TRUSTEE OR ANY SECURITYHOLDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION. Section 10.11 No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or a Subsidiary. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. Section 10.12 Successors. All agreements of the Company in this Indenture and the Securities shall bind its successor. All agreements of the Trustee in this Indenture shall bind its successor. Section 10.13 Severability. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 10.14 Table of Contents, Headings, Etc. The Table of Contents, reconciliation between the Trust Indenture Act, and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. 45 51 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written. LEXINGTON CORPORATE PROPERTIES TRUST By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- THE CHASE MANHATTAN BANK, as Trustee By: -------------------------------------------------- Name: ------------------------------------------------ Title: ----------------------------------------------- 46 52 EXHIBIT A 8.5% SENIOR SUBORDINATED DEBENTURES DUE ,2009 CUSIP No. ___________ No._ [$___________] Lexington Corporate Properties Trust, a Maryland statutory real estate investment trust (hereinafter called the "Company," which term includes any successors under the Indenture hereinafter referred to), for value received, hereby promises to pay to __________________, or registered assigns, the principal sum of [$____________], on _____________. This Security is one of the 8.5% Senior Subordinated Debentures due ____, 2009 referred to in such Indenture (hereinafter referred to collectively as the "Securities.") Interest Payment Dates: _______ and ___________ Record Dates: _______ and ___________ Reference is made to the further provisions of this Security on the reverse side, which will, for all purposes, have the same effect as if set forth at this place. IN WITNESS WHEREOF, the Company has caused this Instrument to be duly executed. Dated: _____ __, 2001. LEXINGTON CORPORATE PROPERTIES TRUST By: ________________________________ Name: ______________________________ Title: _____________________________ Attest: By: __________________________ Name: ________________________ Title: _______________________ A-1 53 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities designated therein referred to in the within-mentioned Indenture. THE CHASE MANHATTAN BANK, as Trustee By: ___________________________________ Authorized Officer A-2 54 LEXINGTON CORPORATE PROPERTIES TRUST 8.5% Senior Subordinated Debentures due ____, 2009 Section 1 Interest. Lexington Corporate Properties Trust, a Maryland real estate investment trust (hereinafter called the "Company," which term includes any successors under the Indenture hereinafter referred to), promises to pay interest on the principal amount of this Security at the rate of 8.5% per annum from _______, 2001 (the "Closing Date") until maturity. The Company will pay interest semi-annually on June 15 and December 15 of each year (each, an "Interest Payment Date"), commencing _____________. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid on the Securities, from ______ __, ____. Interest will be paid on a day-to-day basis, based upon a 365 day year and actual days elapsed, from the Closing Date. Interest will be paid semi-annually in cash in arrears. Interest on overdue principal and, to the extent permitted by law, on overdue installments of interest will accrue, until such principal and overdue interest are paid or duly provided for, at the rate of ___% per annum. Section 2 Method of Payment. The Company shall pay interest on the Securities to the Persons who are the registered Securityholders at the close of business on the Record Date immediately preceding the Interest Payment Date. Securityholders must surrender the Securities to a Paying Agent to collect principal payments. Principal of and interest on the Securities will be payable in United States dollars at the office or agency of the Company maintained for such purpose, in the Borough of Manhattan, The City of New York or at the option of the Company, payment of interest may be made by check mailed to the Securityholders at the addresses set forth upon the registry books of the Company. Section 3 Paying Agent and Registrar. Initially, the Trustee will act as Paying Agent and Registrar. The Company may change any Paying Agent, Registrar or co-Registrar without notice to the Securityholders. The Company or any of its Subsidiaries may, subject to certain exceptions, act as Paying Agent, Registrar or co-Registrar. Section 4 Indenture. The Company issued the Securities under an Indenture, dated as of _______ __, 2001 (the "Indenture"), between the Company and the Trustee. Capitalized terms herein are used as defined in the Indenture unless otherwise defined herein. The Indenture is available for inspection at the Corporate Trust Office and a copy may obtained upon the written request of any Securityholder, at such Securityholder's sole cost and expense, to such address and to the attention of Institutional Trust Services. The Securities are limited in aggregate principal amount B-1 55 to $20.0 million, subject to waiver by the Company. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act, as in effect on the date of the Indenture. The Securities are subject to all such terms, and Securityholders are referred to the Indenture and said Act for a statement of them. The Securities are subordinated, general and unsecured obligations of the Company. Each Securityholder, by accepting the same, (a) agrees to and shall be bound by the provisions of the Indenture and (b) authorizes and directs the Trustee on his behalf to take such action as may be provided in the Indenture. Section 5 Redemption. The Securities may be redeemed at any time at the option of the Company in whole or from time to time in part, at a redemption price equal to the sum of the principal amount of the Securities being redeemed plus accrued interest thereon to the Redemption Date (the "Redemption Price"). In the event that the Company (or any Subsidiary), in a transaction which causes the Company to recognize gain for federal income tax purposes, (a) sells or otherwise disposes of any Property owned by any of the Net Partnerships immediately prior to the Consolidation and realizes net cash proceeds in excess of (i) the amount required to repay mortgage Indebtedness (outstanding immediately prior to the Consolidation) secured by such Property or otherwise required to be applied to the reduction of Indebtedness of the Company and (ii) the costs incurred by the Company in connection with such sale or other disposition or (b) refinances (whether at maturity or otherwise) any Indebtedness secured by any Property and realizes net cash proceeds in excess of (i) the amount of Indebtedness secured by such Property at the time of the Consolidation, calculated prior to any repayment or other reduction in the amount of such Indebtedness in the Consolidation, and (ii) the costs incurred by the Company in connection with such refinancing (in either case, the "Net Cash Proceeds"), the Company shall be required within 90 days of the receipt of the total Net Cash Proceeds to redeem at the Redemption Price an aggregate amount of principal of the Securities which were issued to the Persons who were Limited Partners of such Net Partnerships immediately prior to the Consolidation equal to 80% of such Net Cash Proceeds. Any such redemption will comply with Article III of the Indenture. Section 6 Notice of Redemption. Notice of redemption will be sent by first class mail, at least 30 days and not more than 60 days prior to the Redemption Date to the Securityholder to be redeemed at such Securityholder's last address as then shown upon the registry books of the Registrar. Except as set forth in the Indenture, from and after any Redemption Date, if monies for the redemption of the Securities called for redemption shall have been deposited with the Paying Agent on such Redemption Date, the Securities called for redemption will cease to bear interest and the only right of the Securityholders will be to receive payment of the Redemption Price. B-2 56 Section 7 Transfer and Exchange. A Securityholder may register the transfer of, or exchange the Securities in accordance with, the Indenture. The Registrar may require a Securityholder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange any Securities (a) selected for redemption except the unredeemed portion of any Security being redeemed in part or (b) for a period beginning 15 Business Days before the mailing of a notice of an offer to repurchase or redemption and ending at the close of business on the day of such mailing. Section 8 Persons Deemed Owners. The registered Securityholder may be treated as the owner of it for all purposes. Section 9 Unclaimed Money. If money for the payment of principal or interest remains unclaimed for two years, the Trustee and the Paying Agent(s) will pay the money back to the Company at its request. After that, all liability of the Trustee and such Paying Agent(s) with respect to such money shall cease, and Securityholders entitled to the money must look to the Company for payment as general creditors unless an applicable abandoned property law designates another Person. Section 10 Discharge Prior to Redemption or Maturity. As set forth in the Indenture, if the Company irrevocably deposits with the Trustee, in trust, for the benefit of the Securityholders, U.S. legal tender, U.S. Government Obligations or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of and interest on such Securities on the stated date for payment thereof or on the Redemption Date of such principal or installment of principal of or interest on such Securities, the Company will be discharged from certain provisions of the Indenture and the Securities (including the covenant described in Section 11, but excluding its obligation to pay the principal of and interest on the Securities). Upon satisfaction of certain additional conditions set forth in the Indenture, the Company may elect to have its obligations discharged with respect to outstanding Securities. Section 11 Amendment; Supplement; Waiver. The Company and the Trustee may amend the Indenture or enter into a supplemental indenture without the consent of the Securityholders for certain limited purposes including, among other things, to cure any ambiguity, defect or inconsistency, or to make any other change that does not adversely affect the rights of any Securityholder. Subject to certain exceptions, the Indenture or the Securities may be amended or supplemented with the written consent of the Securityholders of at least a majority in aggregate principal amount of the outstanding Securities of each Series affected by such amendment or supplement, and any existing Default or Event of Default with respect to a Series or compliance with any provision with respect to a Series may be waived with the consent of the Securityholders of a majority in aggregate principal amount of the outstanding Securities of such Series. B-3 57 Section 12 Limitation on Incurrence of Indebtedness. Section 13 Successor. When a successor assumes all the obligations of its predecessor under the Securities and the Indenture, the predecessor will be released from those obligations. Section 14 Defaults and Remedies. If an Event of Default with respect to the Securities occurs and is continuing (other than an Event of Default relating to bankruptcy, insolvency or reorganization of the Company), then either the Trustee or the Securityholders of a majority in aggregate principal amount of the Securities then outstanding may declare all the Securities to be due and payable immediately in the manner and with the effect provided in the Indenture. Securityholders may not enforce the Indenture or the Securities, except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, Securityholders of a majority in principal amount of the outstanding Securities may direct the Trustee in its exercise of any trust or power with respect to such Securities. The Trustee may withhold from Securityholders notice of any continuing Default or Event of Default (except a Default in payment of principal or interest) if it determines that withholding notice is in their interest. Section 15 Trustee and Agent Dealings with Company. The Trustee and each Agent under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company, any of its Subsidiaries or any of their respective Affiliates, and may otherwise deal with such Persons as if it were not the Trustee or such Agent. Section 16 No Recourse Against Others. No recourse for the payment of the principal of or interest on the Securities or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture, or in the Securities or because of the creation of any Indebtedness represented thereby, shall be had against any stockholder of the Company or of any successor Person thereof, except as an obligor of the Securities pursuant to the Indenture. Each Securityholder, by accepting the Securities, waives and releases all such liability. Section 17 Authentication. This Security shall not be valid until the Trustee or authenticating agent signs the certificate of authentication on the other side of this Security. Section 18 Abbreviations and Defined Terms. Customary abbreviations may be used in the name of a Securityholder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), B-4 58 JT TEN (=joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). Section 19 CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company will cause CUSIP numbers to be printed on the Securities as a convenience to the Securityholders. No representation is made as to the accuracy of such numbers as printed on the Securities and reliance may be placed only on the other identification numbers printed hereon. Section 20 Governing Law. THE INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, INCLUDING, WITHOUT LIMITATION, SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW AND NEW YORK CIVIL PRACTICE LAWS AND RULES 327(B). B-5 59 [FORM OF ASSIGNMENT] I or we assign this Security to_________________________________________________ (Print or type name, address and zip code of assignee) Please insert Social Security or other identifying number of assignee and irrevocably appoint ________________ agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Dated: __________________ Signed: _____________________________________________ (Sign exactly as name appears on the other side of this Security) Signature Guarantee* _____________________________________________ NOTICE: The Signature must be guaranteed by an Institution which is a member of one of the following recognized signature Guarantee Programs: (i) the Securities Transfer Agent Medallion Program (STAMP); (ii) The New York Stock Exchange Medallion Program (MNSP); (iii) The Stock Exchange Medallion Program (SEMP); or (iv) in such other guarantee program acceptable to the Trustee. B-6 EX-5.1 4 y53433ex5-1.txt LEGAL OPINION OF PIPER MARBURY RUDNICK & WOLFE 1 [PIPER MARBURY RUDNICK & WOLFE LLP LETTERHEAD] EXHIBIT 5.1 August 28, 2001 LEXINGTON CORPORATE PROPERTIES TRUST 355 Lexington Avenue New York, New York 10017 Ladies and Gentlemen: We have acted as special Maryland counsel to Lexington Corporate Properties Trust, a Maryland statutory real estate investment trust (the "Trust"), in connection with the registration under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement, as amended, on Form S-4 of the Trust (the "Registration Statement") filed on August 28, 2001 with the Securities and Exchange Commission (the "Commission"), of up to 2,298,214 Common Shares (the "Shares"), par value $.001 per share, and up to $20,000,000 Senior Subordinated Debentures (the "Debentures") as described in the Registration Statement to be issued to the limited partners of Net 1 L.P. ("Net 1") and Net 2 L.P. ("Net 2") in connection with the merger of Net 1 and Net 2 into Net 3 Acquisition L.P., a subsidiary of the Trust. This opinion is being furnished to you at your request in connection with the filing of the Registration Statement. In rendering the opinion expressed herein, we have reviewed originals or copies, certified or otherwise identified to our satisfaction, of the Registration Statement, the Declaration of Trust and Bylaws of the Trust, the proceedings of the Board of Trustees of the Trust or committees thereof relating to the organization of the Trust and to the authorization and issuance of the Shares and the Debentures, the form of Indenture related to the Debentures as filed as an exhibit to the Registration Statement on the date hereof (the "Indenture"), an Officer's Certificate of the Trust (the "Certificate"), and such other statutes, certificates, instruments, and documents relating to the Trust and matters of law as we have deemed necessary to the issuance of this opinion. In our examination of the aforesaid documents, we have assumed, without independent investigation, the genuineness of all signatures, the legal capacity of all individuals who have executed any of the aforesaid documents, the authenticity of all 2 PIPER MARBURY RUDNICK & WOLFE LLP LEXINGTON CORPORATE PROPERTIES TRUST August 28, 2001 Page 2 documents submitted to us as originals, the conformity with originals of all documents submitted to us as copies (and the authenticity of the originals of such copies), and the accuracy and completeness of all public records reviewed by us. In making our examination of documents executed by parties other than the Trust, we have assumed that such parties had the power, corporate or other, to enter into and perform all obligations thereunder, and we have also assumed the due authorization by all requisite action, trust or other, and the valid execution and delivery by such parties of such documents and the validity, binding effect, and enforceability thereof with respect to such parties. As to any facts materials to this opinion which we did not independently establish or verify, we have relied solely upon the Certificate. We further assume that any Debentures will be issued under a validly executed and delivered Indenture that conforms in all material respects to the form thereof filed as an exhibit to the Registration Statement and to the description thereof set forth in the Prospectus or the applicable Prospectus Supplement. We further assume that the debentures, notes, bonds, and/or other evidences of indebtedness evidencing the Debentures will (i) conform in all material respects to the forms thereof filed as exhibits to the Indenture, (ii) be executed and authenticated in accordance with the Indenture, and (iii) be delivered upon the issuance and sale of the Debentures. Based upon the foregoing, having regard for such legal considerations as we deem relevant, and limited in all respects to applicable Maryland law, we are of the opinion and advise you that: (1) The Trust has been duly formed and is validly existing as a statutory real estate investment trust in good standing under the laws of the State of Maryland. (2) The Shares have been duly authorized and, when issued as contemplated by the resolutions authorizing their issuance, will be validly issued, fully paid, and non-assessable. (3) The execution and delivery by the Trust of the Indenture, and the issuance of the Debentures by the Trust under the Indenture, have been duly authorized by the Trust, and, upon due execution and delivery of the Indenture and due execution, authentication and delivery of the Debentures against payment therefor as contemplated by the resolutions authorizing their issuance and in accordance with the terms and provisions of the Indenture, the Debentures will be legally issued, and the Debentures and the Indenture will constitute binding obligations of the Trust. 3 [PIPER MARBURY RUDNICK & WOLFE LLP] Lexington Corporate Properties Trust August 28, 2001 Page 3 In addition to the qualifications set forth above, this opinion is subject to the qualification that we express no opinion as to the laws of any jurisdiction other than the State of Maryland. We assume that the issuance of the Shares will not cause (i) the Trust to issue Common Shares in excess of the number of Common Shares authorized by the Trust's Declaration of Trust at the time of their issuance or (ii) any person to violate any of the Ownership Limit provisions of the Trust's Declaration of Trust (as defined in Article Ninth thereof). This opinion concerns only the effect of the laws (exclusive of the securities or "blue sky" laws and the principles of conflict of laws) of the State of Maryland as currently in effect. We assume no obligation to supplement this opinion if any applicable laws change after the date hereof or if any facts or circumstances come to our attention after the date hereof that might change this opinion. To the extent that any documents referred to herein are governed by the laws of a jurisdiction other than the State of Maryland, we have assumed that the laws of such jurisdiction are the same as the laws of the State of Maryland. This opinion is limited to the matters set forth herein, and no other opinion should be inferred beyond the matters expressly stated. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the heading "Legal Matters" in the Prospectus included in the Registration Statement. In giving our consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the securities Act or the rules and regulations of the Commission thereunder. Very truly yours. PIPER MARBURY RUDNICK & WOLFE LLP EX-8.1 5 y53433ex8-1.txt TAX OPINION 1 Exhibit 8.1 October 2, 2001 Lexington Corporate Properties Trust Net 3 Acquisition L.P. 355 Lexington Avenue New York, NY 10022 Net 1 L.P. and Net 2 L.P. 355 Lexington Avenue, 14th Floor New York, NY 10022 Ladies and Gentlemen: We have acted as counsel to Lexington Corporate Properties Trust, a Maryland statutory real estate investment trust (the "Company"), in connection with the Form S-4 Registration Statement (No. 333-____) filed by the Company with the Securities and Exchange Commission (the "Commission") on October 1, 2001 and the Joint Consent and Proxy Solicitation Statement/Prospectus (the "Prospectus") filed with the Commission under the Securities Act of 1933 and dated October 1, 2001 (collectively, the "Registration Statement"). In such capacity, you have requested our opinion concerning (i) the mergers of Net 1 L.P., a Delaware limited partnership, ("Net 1") and Net 2 L.P., a Delaware limited partnership, ("Net 2") into Net 3 Acquisition L.P., a Delaware limited partnership and a subsidiary of the Company, ("Net 3") for federal income tax purposes; and (ii) the qualification for federal income tax purposes of the Company as a real estate investment trust under the Internal Revenue Code of 1986, as amended, (the "Code"). In rendering our opinions, we have examined and relied upon the Registration Statement, the Declaration of Trust and By-Laws of the Company, the Company's federal income tax returns on Form 1120-REIT for its taxable years ending December 31, 1993, December 31, 1994, December 31, 1995, December 31, 1996, December 31, 1997, December 31, 1998 and December 31, 1999, the Agreement and Plan of Merger among Net 1, Net 3 and the Company dated as of November 13, 2000, as amended July 19, 2001, the Agreement and Plan of Merger among Net 2, Net 3 and the Company dated as of November 13, 2000, as amended July 19, 2001, as well as other documents and information we have deemed appropriate. In addition, we have relied upon the factual representations of a duly appointed officer of the Company dated October 1, 2001 regarding the organization and actual and proposed operation of the Company and the factual representations of the respective general partner of each of Net 1, Net 2 and Net 3, each dated October 1, 2001 (collectively, the "Officer's Certificates"). 2 For purposes of our opinion, we have made such factual and legal inquiries, including examination of the documents set forth above, as we have deemed necessary or appropriate for purposes of our opinion. However, we have not made an independent investigation of the facts set forth in any of the above-referenced documents, including the Officer's Certificates. We have, consequently, relied upon your representations that the information presented in such documents or otherwise furnished to us accurately and completely describes all material facts relevant to our opinion. No facts have come to our attention, however, that would cause us to question the accuracy or completeness of such facts or documents in a material way. In addition, to the extent that any of the representations provided to us in the Officer's Certificates are with respect to matters set forth in the Code or Treasury Regulations thereunder, we have reviewed with the individuals making such representations the relevant portion of the Code and the applicable Regulations. This opinion is based on the assumption that the Company has operated and will continue to be operated in the manner described in the Officer's Certificates, the Registration Statement, and the applicable organizational documents and that all terms and provisions of such documents have been and will continue to be complied with. In our examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, and the authenticity of the originals of such copies. On the basis of the foregoing, and in reliance thereon, subject to the limitations, qualifications and exceptions set forth therein, it is our opinion that: 1. The description of law and legal conclusions contained in the Prospectus under the caption, "Federal Income Tax Considerations," is a fair and accurate summary under current law of the material United States federal income tax consequences to the limited partners of the mergers described in the Prospectus. 2. Commencing with its taxable year ended December 31, 1993, the Company has been organized and has operated in conformity with the requirements for qualification as a real estate investment trust pursuant to Sections 856 through 860 of the Code, and the Company's current and proposed method of operation, taking into account the anticipated mergers of Net 1 and Net 2 with and into Net 3, a subsidiary of the Company, as set forth in the Officer's Certificates, the Registration Statement and other applicable documents, will enable it to continue to meet the requirements for qualification and taxation as a real estate investment trust under the Code. For a summary of the legal analysis underlying the opinions set forth in this letter, we incorporate by reference the discussion of federal income tax issues under the captions "Summary - Federal Income Tax Considerations" and "Federal Income Tax Considerations" in the Prospectus. The above opinions are based on the Code, Treasury Regulations promulgated thereunder, administrative pronouncements and judicial interpretations thereof, in each case as in 3 effect on the date hereof, all of which are subject to change. An opinion of counsel merely represents counsel's best judgment with respect to the probable outcome on the merits and is not binding on the Internal Revenue Service or the courts. Accordingly, there can be no assurance that the Internal Revenue Service will not take a contrary position, that the applicable law will not change, or that any such change will not have retroactive effect. We assume no obligation to advise you of any changes in our opinion subsequent to the delivery of this opinion letter. Moreover, the Company's qualification and taxation as a REIT depend upon the Company's ability to meet, on a continuing basis, through actual annual operating and other results, the various requirements under the Code with regard to, among other things, the sources of its gross income, the composition of its assets, the level of its distributions to stockholders, and the diversity of its stock ownership. Paul, Hastings, Janofsky & Walker LLP will not review the Company's compliance with these requirements on a continuing basis. Accordingly, no assurance can be given that the actual results of the Company's operations for any one taxable year will satisfy such requirements. We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to the reference to us under the captions "Summary - Federal Income Tax Considerations" and "Federal Income Tax Considerations" in the Prospectus. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission thereunder. Very truly yours, /s/ Paul, Hastings, Jarofsky & Walkes LLP EX-10.44 6 y53433ex10-44.txt UNSECURED REVOLVING CREDIT AGREEMENT 1 Exhibit 10.44 $35,000,000 UNSECURED REVOLVING CREDIT AGREEMENT among LEXINGTON CORPORATE PROPERTIES TRUST, LEPERCQ CORPORATE INCOME FUND, L.P., LEPERCQ CORPORATE INCOME FUND II L.P., Jointly and Severally; and FLEET NATIONAL BANK Dated as of March 30, 2001 2 SECTION 1. DEFINITIONS ............................................................ 1 DEFINED TERMS ................................................................... 1 1.2. COMPUTATION OF TIME PERIODS ................................................ 1 1.3. ACCOUNTING TERMS ........................................................... 1 1.4. OTHER TERMS ................................................................ 2 SECTION 2. AMOUNT AND TERMS OF LOANS .............................................. 2 2.1. LOAN FACILITY .............................................................. 2 2.2. AUTHORIZED AGENTS .......................................................... 2 2.3. PROMISE TO REPAY; EVIDENCE OF INDEBTEDNESS; BORROWERS' OBLIGATIONS; ........ 3 2.4. JOINT AND SEVERAL LIABILITY OF THE BORROWERS AND GUARANTORS ................ 5 2.5. PROCEDURE FOR BORROWING UNDER THE REVOLVING CREDIT FACILITY ................ 7 2.6. INTENTIONALLY OMITTED ...................................................... 8 2.7. INTEREST ON THE LOANS AND OTHER OBLIGATIONS ................................ 8 2.8. DURATION AND DETERMINATION OF INTEREST PERIOD; DETERMINATION OF INTEREST ... 9 2.9. OPTIONAL PREPAYMENTS; MANDATORY PREPAYMENTS ................................ 11 2.10. COMPUTATION OF INTEREST AND FEES .......................................... 11 2.11. PAYMENTS .................................................................. 11 2.12. USE OF LOAN PROCEEDS AND LETTERS OF CREDIT ................................ 13 2.13. INCREASED COSTS ........................................................... 13 2.14. CHANGE IN LAW RENDERING LIBOR LOANS UNLAWFUL .............................. 15 2.15. LIBOR AVAILABILITY ........................................................ 15 2.16. INDEMNITIES ............................................................... 16 2.17. FEES ...................................................................... 16 2.18. USURY ..................................................................... 17
3 2.19. UNENCUMBERED ELIGIBLE PROPERTIES .......................................... 17 2.20. WITHDRAWAL OF UNENCUMBERED ELIGIBLE PROPERTY .............................. 22 2.21. EXCLUSION OF UNENCUMBERED ELIGIBLE PROPERTIES ............................. 22 SECTION 3. LETTERS OF CREDIT ...................................................... 22 3.1. LETTERS OF CREDIT .......................................................... 22 SECTION 4. REPRESENTATIONS AND WARRANTIES ......................................... 26 4.1. FINANCIAL CONDITION ........................................................ 26 4.2. NO MATERIAL ADVERSE EFFECT ................................................. 27 4.3. EXISTENCE; BORROWER'S AND GUARANTOR'S COMPLIANCE WITH LAW .................. 27 4.4. POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS .............................. 27 4.5. NO LEGAL BAR ............................................................... 28 4.6. NO MATERIAL LITIGATION ..................................................... 28 4.7. NO DEFAULT ................................................................. 28 4.8. OWNERSHIP OF PROPERTY; LIENS ............................................... 28 4.10. FEDERAL REGULATIONS ....................................................... 30 4.11. ERISA ..................................................................... 30 4.12. STATUS AS REIT ............................................................ 31 4.13. INVESTMENT COMPANY ACT .................................................... 31 4.14. SUBSIDIARIES; OWNERSHIP OF CAPITAL STOCK AND PARTNERSHIP INTERESTS ........ 31 4.15. POLLUTION; HAZARDOUS MATERIALS ............................................ 31 4.16. DECLARATION OF TRUST, PARTNERSHIP AGREEMENT, ETC .......................... 32 4.17. DISCLOSURES ............................................................... 32 4.18. GUARANTORS ................................................................ 32 SECTION 5. CONDITIONS PRECEDENT ................................................... 32
-ii- 4 5.1. CONDITIONS TO LOANS ........................................................ 32 5.2. CONDITIONS PRECEDENT TO ALL SUBSEQUENT LOANS ............................... 35 SECTION 6. AFFIRMATIVE COVENANTS .................................................. 36 6.1. FINANCIAL STATEMENTS ....................................................... 36 6.2. CERTIFICATES; OTHER INFORMATION ............................................ 37 6.3. PUNCTUAL PAYMENT ........................................................... 38 6.4. PAYMENT OF OTHER OBLIGATIONS ............................................... 38 6.5. CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE ........................... 38 6.6. LEASES ..................................................................... 38 6.7. MAINTENANCE OF PROPERTY, INSURANCE ......................................... 39 6.8. INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS ..................... 39 6.9. NOTICES .................................................................... 39 6.10. REIT REQUIREMENTS ......................................................... 40 6.11. ENVIRONMENTAL ACTIONS ..................................................... 40 6.12. CHANGES IN GAAP ........................................................... 41 6.13. NYSE LISTING .............................................................. 42 6.14. INTENTIONALLY OMITTED ..................................................... 42 6.15. MANAGEMENT OF BORROWER AND UNENCUMBERED ELIGIBLE PROPERTY ................. 42 6.16. SUBORDINATION OF PAYABLES TO AFFILIATES ................................... 42 6.17. SUBORDINATED DEBT ......................................................... 42 6.18. ERISA NOTICES ............................................................. 42 6.19. ERISA COMPLIANCE .......................................................... 44 6.20. PAYMENT OF TAXES AND CLAIMS ............................................... 44 6.21. INTER-BORROWER OR GUARANTOR ADVANCES OF LOAN PROCEEDS ..................... 44
-iii- 5 6.22. SOLVENCY OF GUARANTORS .................................................... 44 6.23. NO AMENDMENTS TO CERTAIN DOCUMENTS ........................................ 44 6.24. YEAR 2000 ................................................................. 44 SECTION 7. NEGATIVE COVENANTS ..................................................... 45 7.1. FINANCIAL COVENANTS ........................................................ 45 7.2. COVENANT CALCULATIONS ...................................................... 46 7.3. RESTRICTED PAYMENTS ........................................................ 47 7.4. DISSOLUTION; MERGER; SALE OF ASSETS; TERMINATION AND OTHER ACTIONS ......... 47 7.5. TRANSACTIONS WITH AFFILIATES ............................................... 47 7.6. ACCOUNTING CHANGES ......................................................... 47 7.7. NO LIENS ................................................................... 47 7.8. FISCAL YEAR ................................................................ 47 7.9. CHIEF EXECUTIVE OFFICE ..................................................... 47 7.10. SELF-DIRECTED REIT ........................................................ 48 7.11. LIMITATIONS ON CERTAIN ACTIVITIES ......................................... 48 7.12. DISTRIBUTIONS ............................................................. 48 7.13. ERISA ..................................................................... 48 7.14. COMPLIANCE WITH ENVIRONMENTAL LAWS ........................................ 49 7.15. LIMITATION ON DEBT AND ACTION ............................................. 49 SECTION 8. EVENTS OF DEFAULT ...................................................... 49 8.1. EVENTS OF DEFAULT .......................................................... 49 8.2. REMEDIES ................................................................... 51 8.3. ANNULMENT OF ACCELERATION .................................................. 51 8.4. COOPERATION BY EACH BORROWER AND GUARANTOR ................................. 52
-iv- 6 SECTION 9. INTENTIONALLY OMITTED .................................................. 52 SECTION 10. GENERAL ............................................................... 52 10.1. AMENDMENTS AND WAIVERS .................................................... 52 10.2 MARSHALING; PAYMENTS SET ASIDE ............................................. 52 10.3 COUNTERPARTS; EFFECTIVENESS; INCONSISTENCIES ............................... 52 10.4 DISCLAIMER BY LENDER ....................................................... 53 10.5 NOTICES; CERTAIN PAYMENTS .................................................. 53 10.6 NO WAIVERS; CUMULATIVE REMEDIES; ENTIRE AGREEMENT; HEADINGS ................ 54 10.7 SURVIVAL ................................................................... 54 10.8 PAYMENT OF EXPENSES AND TAXES .............................................. 55 10.9 FURTHER ASSURANCES ......................................................... 55 10.10 NO BROKERS ................................................................ 55 10.11 CONFIDENTIALITY ........................................................... 56 10.12 CAPTIONS .................................................................. 56 10.13 GENDER .................................................................... 56 10.14 SUCCESSORS ................................................................ 56 10.15 ENTIRE AGREEMENT .......................................................... 56 10.16 DELAY NOT WAIVER .......................................................... 56 10.17 SETOFF .................................................................... 56 10.18 SEVERABILITY .............................................................. 57 10.19 LENDER'S RIGHT TO PARTICIPATE, ASSIGN AND PLEDGE .......................... 57 10.19.1 LENDER'S RIGHT TO SELL A PORTION OF A LOAN TO A PROSPECTIVE PARTICIPANT 57 10.19.2 LENDER'S RIGHT TO SELL A LOAN TO A THIRD PARTY ........................ 57 10.19.3 LENDER'S RIGHT TO PLEDGE .............................................. 58 10.20 LOST OR DAMAGED LOAN DOCUMENTS ............................................ 58 10.21 CLAIMS AGAINST LENDER ..................................................... 58
-v- 7 10.21.1 BORROWERS MUST NOTIFY ................................................ 58 10.21.2 REMEDIES ............................................................. 58 10.22 TIME OF THE ESSENCE ....................................................... 59 10.23 PLACE OF DELIVERY ......................................................... 59 10.24 GOVERNING LAW ............................................................. 59 10.25 CONSENT TO JURISDICTION ................................................... 59 10.26 JURY TRIAL WAIVER ......................................................... 59 10.27 USE OF PROCEEDS (REGULATION U) ............................................ 60 10.28 INTEGRATION ............................................................... 60 SECTION 11. THE BORROWERS' REPRESENTATIVE ......................................... 60 11.1. APPOINTMENT OF BORROWERS' REPRESENTATIVE .................................. 60
EXHIBITS EXHIBIT A - DEFINITIONS EXHIBIT B - FORM OF NOTE EXHIBIT C - FORM OF NOTICE OF BORROWING EXHIBIT D - FORM OF CERTIFICATE OF UNENCUMBERED ELIGIBLE PROPERTIES EXHIBIT E - FORM OF NOTICE OF CONTINUATION/CONVERSION EXHIBIT F - LIST OF ENVIRONMENTAL REPORTS EXHIBIT G - RENT ROLL EXHIBIT H - ORGANIZATIONAL STRUCTURE AND RELATED MATTERS EXHIBIT I - CERTIFICATE OF COVENANT COMPLIANCE EXHIBIT J - FORM OF TENANT ESTOPPEL CERTIFICATE EXHIBIT K - ERISA MATTERS EXHIBIT L - FORM OF GUARANTY -vi- 8 SCHEDULES SCHEDULE 1 INITIAL APPROVED UNENCUMBERED ELIGIBLE PROPERTIES AND THEIR OWNERS -vii- 9 UNSECURED REVOLVING CREDIT AGREEMENT DATED AS OF MARCH 30, 2001 This UNSECURED REVOLVING CREDIT AGREEMENT (the "AGREEMENT") is made as of the 30th day of March, 2001, by and among LEXINGTON CORPORATE PROPERTIES TRUST ("LEXINGTON"), LEPERCQ CORPORATE INCOME FUND L.P. ("LCIF") AND LEPERCQ CORPORATE INCOME FUND II L.P. ("LCIF II"), jointly and severally (collectively, the "BORROWERS" and individually, a "BORROWER") acting by and through LEXINGTON CORPORATE PROPERTIES TRUST ("BORROWERS' REPRESENTATIVE") and FLEET NATIONAL BANK, a national banking association ("LENDER"), WHEREAS, the Borrowers desire to obtain a Revolving Credit Commitment from Lender pursuant to which Lender will make Loans (as hereinafter defined) to and for the benefit of one or more of the Borrowers in an amount not to exceed $35,000,000 (minus the face amount of any Letter of Credit outstanding or requested hereunder) at any one time; and WHEREAS, Lender is willing, on the terms and conditions hereinafter set forth, to extend a Revolving Credit Commitment and to make Loans to and for the benefit of the Borrowers. NOW, THEREFORE, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1. DEFINED TERMS. As used in this Agreement all capitalized terms not otherwise defined shall have the meanings set forth on Exhibit A, applicable both to the singular and the plural forms of the terms defined. 1.2. COMPUTATION OF TIME PERIODS. In this Agreement, in the computation of periods of time from a specified date to a later specified date, the word "FROM" means "FROM AND INCLUDING" and the words "TO" and "UNTIL" each mean "TO BUT EXCLUDING". Periods of days referred to in this Agreement shall be counted in calendar days unless Business Days are expressly prescribed. Any period determined hereunder by reference to a month or months or year or years shall end on the day in the relevant calendar month in the relevant year, if applicable, immediately preceding the date numerically corresponding to the first day of such subsequent period, provided that if such period commences on the last day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month during which such period is to end), such period shall, unless otherwise expressly required by the other provisions of this Agreement, end on the last day of the calendar month. 1.3. ACCOUNTING TERMS. Subject to Section 6.12, for purposes of this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with GAAP. 10 1.4. OTHER TERMS. All other terms contained in this Agreement shall, unless the context indicates otherwise, have the meanings assigned to such terms by the Uniform Commercial Code to the extent the same are defined therein. SECTION 2. AMOUNT AND TERMS OF LOANS 2.1. LOAN FACILITY. (a) AVAILABILITY. Subject to the terms and conditions set forth in this Agreement, Lender hereby agrees to make Revolving Credit Loans to any Borrower from time to time during the period from the Initial Funding Date to the Business Day next preceding the Revolving Credit Termination Date, in an amount not to exceed $35,000,000 (minus the face amount of any Letter of Credit requested or outstanding hereunder) at such time. Subject to the provisions of this Agreement, any Borrower may repay any outstanding Revolving Credit Loan on any day which is a Business Day and any amounts so repaid may be reborrowed by any Borrower, up to the amount available under this Section 2.1(a), at the time of such Borrowing, until the Business Day next preceding the Revolving Credit Termination Date. (b) REVOLVING CREDIT TERMINATION DATE. The Revolving Credit Commitment shall terminate, and all outstanding Obligations shall be paid in full on the Revolving Credit Termination Date. Lender's obligation to make Loans shall terminate on the Business Day next preceding the Revolving Credit Termination Date. 2.2. AUTHORIZED AGENTS. On the Closing Date and from time to time thereafter, the Borrowers' Representative shall deliver to the Lender a certificate from a Responsible Officer setting forth the names of the employees and agents authorized to request Loans and Letters of Credit for each Borrower and to request a conversion/continuation of any Loan and containing a specimen signature of each such employee or agent. The employees and agents so authorized shall also be authorized to act for any Borrower in respect of all other matters relating to the Loan Documents. The Lender shall be entitled to rely conclusively on such employee's or agent's authority to request such Loan or Letter of Credit or such conversion/continuation until the Lender receive written notice to the contrary. The Lender shall not have any duty to verify the authenticity of the signature appearing on any written Notice of Borrowing or Notice of Conversion/Continuation or any other document, and, with respect to an oral request for such a Loan or Letter of Credit or such conversion/continuation, the Lender shall have no duty to verify the identity of any person representing himself or herself as one of the employees or agents authorized to make such request or otherwise to act on behalf of such Borrower. Lender shall not incur any liability to any Borrower or any other Person in acting upon any telephonic or facsimile notice referred to above which the Lender believes to have been given by a person duly authorized to act on behalf of such Borrower and such Borrower hereby indemnifies and holds harmless the Lender from any loss or expense Lender might incur in acting in good faith as provided in this Section 2.2. 2.3. PROMISE TO REPAY; EVIDENCE OF INDEBTEDNESS; BORROWERS' OBLIGATIONS; - 2 - 11 JOINT AND SEVERAL LIABILITY. (a) PROMISE TO REPAY. Each Borrower hereby, jointly and severally, agrees to pay when due the principal amount of each Loan, and further agrees to pay all unpaid interest accrued thereon, in accordance with the terms of this Agreement and the Note. Each Borrower shall execute and deliver to Lender on the Closing Date, a joint and several promissory note, substantially in the form of Exhibit B, with appropriate insertions, evidencing the Loans and thereafter shall execute and deliver such other promissory notes substantially in the form of Exhibit B as are necessary to evidence the Loans owing to the Lender after giving effect to any assignment thereof. (b) LOAN RECORDS. Lender shall maintain in accordance with its usual practice a record (a "LOAN ACCOUNT") evidencing the Indebtedness of the Borrowers to Lender resulting from each Loan owing to Lender from time to time, including the amount of principal and interest payable and paid to Lender from time to time hereunder and under the Note. (c) ENTRIES BINDING. The entries made in the Loan Account shall be conclusive and binding for all purposes, absent manifest error. (d) BORROWERS' OBLIGATIONS. (i) Upon any Event of Default each Borrower jointly, severally and unconditionally promises to pay to the Lender such amounts as are necessary to cure the Event of Default or, at the option of the Lender as provided in Section 8.2, to pay the outstanding Obligations in full. (ii) Each Borrower's Obligation is unconditional except as expressly set forth herein, and each Borrower agrees that the Lender, upon the occurrence of an Event of Default, shall not be required to assert any claim or cause of action against the Borrowers' Representative or any other Borrower or Guarantor before asserting any claim or cause of action against a specific Borrower under this Agreement. Each Borrower further agrees that the Lender shall not be required to pursue or foreclose on any Collateral that it may receive from any Borrower or Guarantor as security for any of the Obligations before making a claim or asserting a cause of action against a specific Borrower under this Agreement. (iii) Lender's failure to perfect (by recording or otherwise), protect, secure or insure any security interest or lien in any Collateral given as security for the Obligations or any other collateral now or hereafter securing all or any part of the Obligations shall not release any Borrower from its liabilities and obligations under this Agreement. (iv) Except as otherwise expressly provided herein or in the Loan Documents, presentment, protest, demand, and notice of protest and demand, and notice of receipt of any and all Collateral, and of the exercise of possessory remedies or foreclosure on any and all Collateral received by Lender from any Borrower or Guarantor are hereby waived. - 3 - 12 (v) No Borrower's Obligation under this Agreement shall be affected, modified, or impaired by the voluntary or involuntary liquidation, dissolution, sale, or other disposition of all or substantially all of the assets, marshaling of assets and liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangements, composition with creditors or readjustment of, or other similar proceedings affecting any other Borrower or Guarantor or the Borrowers' Representative, or any of the assets belonging to any of them, nor shall this Agreement be affected, modified, or impaired by the invalidity of the Note or any of the other Loan Documents. (vi) Without notice to any other Borrower or Guarantor or the Borrowers' Representative, without the consent of a specific Borrower or Borrowers' Representative, the Lender may: (a) grant a specific Borrower or Guarantor extensions of the time for payment of the Obligations or any part hereof; (b) renew any of the Obligations; (c) grant a specific Borrower or Guarantor extensions of time for performance of agreements or other indulgences; (d) at any time release any Collateral, or any mortgage, deed of trust or security interest in any Collateral, that may hereafter secure any of the Obligations; (e) compromise, settle, release, or terminate any or all of the obligations, covenants, or agreements of any specific Borrower or Guarantor under the Note or other Loan Documents; (f) at any time release any Guarantor from its Guaranty of any of the Obligations; and (g) with a specific Borrower's written consent, modify or amend any obligation, covenant, or agreement of such Borrower as set forth in its Note or any of the other Loan Documents (and such amendments shall nevertheless be binding upon the other Borrowers). (vii) This Agreement shall continue to be effective, or be reinstated, as the case may be, if at time any whole or partial payment or performance of any Obligations is or is sought to be rescinded or must otherwise be restored or returned by the Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of any Borrower or Guarantor upon or as a result of the appointment of a receiver, intervenor, or conservator of, or trustee or similar officer for, any Borrower or Guarantor or for any substantial part of its property, or - 4 - 13 otherwise, all as though such payments and performance had not been made, in any case to the extent of the performance rescinded or payments restored or returned. This Agreement and each Borrower's Obligations hereunder shall not be affected in any way by the transfer or other disposition of any Collateral granted to Lender whether by deed, operation of law, or otherwise. (viii) Notwithstanding any provision contained in this Agreement or any Loan Document to the contrary, in the event of any bankruptcy or insolvency proceeding involving LCIF, LCIFII, or any Guarantor or in the event of any challenge to the full enforceability of all or any of the Loan Documents by any creditor of LCIF, LCIFII, or any Guarantor or a trustee, receiver or debtor-in-possession of, for or in respect of LCIF, LCIFII, or any Guarantor the liability of LCIF, LCIFII, or any Guarantor under the Loan Documents shall be limited to the lesser of the following amounts minus, in either case, one dollar ($1.00): (a) the lowest amount which would render the undertakings of LCIF, LCIFII, or any Guarantor under the Loan Documents a fraudulent conveyance under the laws of the State of New York or other similar or analogous law or statute of the state having jurisdiction over the subject matter; or (b) the lowest amount which would render the undertakings of LCIF, LCIFII, or any Guarantor under the Loan Documents a fraudulent transfer under Section 548 of the Bankruptcy Code of 1978, as amended. Section 2.3 (d) (viii) shall control every other provision of the Loan Documents except, however, this provision shall not be construed to prohibit a valuation of the assets of LCIF LCIFII, or any Guarantor for an amount exceeding (a) or (b) above, minus $1.00, at a date subsequent to the date hereof, whereupon the individual liability of LCIF LCIFII, or any Guarantor under the Loan Documents shall increase with the value of such assets up to a maximum of $35,000,000. 2.4 JOINT AND SEVERAL LIABILITY OF THE BORROWERS AND GUARANTORS. (a) Each of the Borrowers and Guarantors is or will be accepting joint and several liability hereunder and under the other Loan Documents in consideration of the financial accommodations to be provided by the Lender under this Agreement, for the mutual benefit, directly and indirectly, of each of the Borrowers and Guarantors and in consideration of the undertakings of each other Borrower and Guarantor to accept joint and several liability for the Obligations. (b) Each of the Borrowers and Guarantors, jointly and severally, hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other Borrowers, with respect to the payment and performance of all of the Obligations (including, without limitation, any Obligations arising under this Section 2.4(b)), it being the intention of the parties hereto that all the Obligations shall be the joint and several -5- 14 Obligations of each of the Borrowers and Guarantors without preferences or distinction among them. (c) If and to the extent that any of the Borrowers or Guarantors shall fail to make any payment with respect to any of the Obligations as and when due or to perform any of the Obligations in accordance with the terms thereof, then in each such event, subject to the grace periods set forth therein, the other Borrowers and Guarantors will make such payment with respect to, or perform, such Obligation. (d) The Obligations of each of the Borrowers and Guarantors under the provisions of this Section 2.4 constitute full recourse Obligations of each of the Borrowers and Guarantors enforceable against each such Person to the full extent of its properties and assets, irrespective of the validity, regularity or enforceability of this Agreement or any other circumstance whatsoever. (e) Except as otherwise expressly provided in this Agreement or the other Loan Documents, each of the Borrowers and Guarantors hereby waives notice of acceptance of its joint and several liability, notice of any Loans made under this Agreement, notice of any action at any time taken or omitted by the Lender under or in respect of any of the Obligations, and, generally, to the extent permitted by applicable law, all demands, notices and other formalities of every kind in connection with this Agreement. Except as otherwise expressly provided in this Agreement or the other Loan Documents, each of the Borrowers and Guarantors hereby assents to, and waives notice of, any extension or postponement of the time for the payment of any of the Obligations, the acceptance of any payment of any of the Obligations, the acceptance of any partial payment thereon, any waiver, consent or other action or acquiescence by the Lender at any time or times in respect of any default by any of the Borrowers or Guarantors in the performance or satisfaction of any term, covenant, condition or provision of this Agreement, any and all other indulgences whatsoever by the Lender in respect of any of the Obligations, and the taking, addition, substitution or release, in whole or in part, at any time or times, of any security for any of the Obligations or the addition, substitution or release, in whole or in part, of any of the Borrowers or Guarantors. Without limiting the generality of the foregoing, each of the Borrowers and Guarantors assents to any other action or delay in acting or failure to act on the part of the Lender with respect to the failure by any of the Borrowers or Guarantors to comply with any of its respective Obligations, including, without limitation, any failure strictly or diligently to assert any right or to pursue any remedy or to comply fully with applicable laws or regulations thereunder, which might, but for the provisions of this Section 2.4, afford grounds for terminating, discharging or relieving any of the Borrowers or Guarantors, in whole or in part, from any of its Obligations under this Section 2.4, it being the intention of each of the Borrowers and Guarantors that, so long as any of the Obligations hereunder remain unsatisfied, the obligations of such Borrowers and Guarantors under this Section 2.4 shall not be discharged except by performance and then only to the extent of such performance. The Obligations of each of the Borrowers and Guarantors under this Section 2.4 shall not be diminished or rendered unenforceable by any winding up, reorganization, arrangement, liquidation, re-construction or similar proceeding with respect to any of the Borrowers and - 6 - 15 Guarantors or the Lender. The joint and several liability of the Borrowers and Guarantors hereunder shall continue in full force and effect notwithstanding any absorption, merger, amalgamation or any other change whatsoever in the name, membership, constitution or place of formation of any of the Borrowers and Guarantors or the Lender. (f) The provisions of this Section 2.4 are made for the benefit of the Lender and their permitted successors and assigns, and may be enforced against any or all of the Borrowers and Guarantors as often as occasion therefor may arise and without requirement on the part of the Lender first to marshal any of its claims or to exercise any of its rights against any other Borrower or Guarantor or to exhaust any remedies available to them against any other Borrower or Guarantor or to resort to any other source or means of obtaining payment of any of the Obligations hereunder or to elect any other remedy. The provisions of this Section 2.4 shall remain in effect until all of the Obligations shall have been paid in full or otherwise fully satisfied. If at any time, any payment, or any part thereof, made in respect of any of the Obligations, is rescinded or must otherwise be restored or returned by the Lender upon the insolvency, bankruptcy or reorganization of any of the Borrowers or Guarantor or otherwise, the provisions of this Section 2.4 will forthwith be reinstated in effect, as though such payment had not been made. 2.5. PROCEDURE FOR BORROWING UNDER THE REVOLVING CREDIT FACILITY. (a) NOTICE OF BORROWING. Whenever any Borrower desires to borrow under Section 2.1, Borrowers' Representative shall deliver to Lender a notice of borrowing (a "NOTICE OF BORROWING") substantially in the form of Exhibit C accompanied by a Certificate of Unencumbered Eligible Properties no later than 10:00 A.M. (New York time) at least three (3) Business Days in advance of the proposed Funding Date for any Libor Loan and no later than the Business Day immediately preceding the proposed Funding Date for any Base Rate Loan. The Notice of Borrowing shall specify and include (as appropriate): (i) the Borrower and proposed Funding Date (which shall be a Business Day); (ii) the amount of the proposed Borrowing (which amount shall be in a minimum aggregate amount of $1,000,000 and integral multiples of $100,000 in excess of that amount); (iii) whether such Loans will be Base Rate Loans or Libor Loans and, if Libor Loans are specified, the initial Interest Period requested for such Libor Loans; (iv) the account into which the net proceeds of the requested Borrowing are to be credited; - 7 - 16 (v) a statement as to whether the representations and warranties contained in the Loan Documents are true, correct and accurate in all material respects to the same extent as though made on and as of the date of such Notice of Borrowing; (vi) a statement as to whether any Default or Event of Default has occurred and is continuing or would result from the proposed Borrowing; and (vii) a statement as to whether the Borrowers have met and maintained the Preferred Interest Rate Standard and if so for what period of time. If Borrowers' Representative fails to specify the type of Revolving Credit Loan (i.e. Base Rate Loan or Libor Loan) or an initial Interest Period, Borrowers' Representative will be deemed, in each case, to have requested a Base Rate Loan. (b) MAKING OF REVOLVING CREDIT LOANS. Subject to the fulfillment of the conditions precedent set forth in Section 5.1 or Section 5.2, as applicable, the Lender shall make the proceeds of each Loan available to the Borrowers' Representative at the Lender's office in Boston, Massachusetts on such Funding Date and shall disburse such proceeds in accordance with the Borrowers' Representative's disbursement instructions set forth in the applicable Notice of Borrowing. 2.6. INTENTIONALLY OMITTED. 2.7. INTEREST ON THE LOANS AND OTHER OBLIGATIONS. (a) GENERALLY. Each Revolving Credit Loan shall be (i) a Libor Loan or a Base Rate Loan as selected or deemed to have been selected by Borrowers' Representative initially at the time a Notice of Borrowing is given pursuant to Section 2.5(a); or (ii) as selected pursuant to Section 2.8(c); except in each case for any portion of a Libor Loan which is converted to a Base Rate Loan pursuant to Section 2.1 or 2.5. All Loans and the outstanding principal balance of all other Obligations shall bear interest on the unpaid principal amount thereof from the date such Loans are made and such other Obligations are due and payable until paid in full but excluding the date of repayment (whether by acceleration or otherwise), at the interest rates specified as follows (the "APPLICABLE RATE"): (iii) in the case of a Libor Loan, at an interest rate per annum for and during each Interest Period equal to the Libor Rate for such Interest Period; and (iv) in the case of the Base Rate Loan or any other Obligation, at an interest rate per annum equal to the Base Rate in effect from time to time. The applicable basis for determining the rate of interest on the Loans shall be selected by the Borrowers' Representative at the time a Notice of Borrowing or a Notice of Conversion/Continuation is delivered by the Borrowers' Representative to the Lender; provided, - 8 - 17 however, the Borrowers' Representative may not select the Libor Rate as the applicable basis for determining the rate of interest on any Loan if at the time of such selection a Default or Event of Default would occur from such Borrowing or conversion or continuation or has occurred and is continuing and provided further that, from and after the occurrence and during the continuance of an Event of Default, each Libor Loan then outstanding may, at the Lender's option, convert to a Base Rate Loan. If on any day any Revolving Credit Loan is outstanding with respect to which a Notice of Continuation/Conversion has not been delivered to the Lender in accordance with the terms of this Agreement specifying the basis for determining the rate of interest on that day, then for that day interest on that Revolving Credit Loan shall be determined by reference to the Base Rate. (b) INTEREST PAYMENTS. (i) Interest accrued on each Loan shall be payable in arrears (A) on each Interest Payment Date, (B) upon the payment or prepayment thereof in full or in part, and (C) if not previously paid in full, (whether by acceleration or otherwise) on the Revolving Credit Termination Date. (ii) Interest accrued on the principal balance of any outstanding Reimbursement Obligation shall be calculated on the last day of each calendar month and shall be payable in arrears (A) on the first day of the calendar month, commencing on the first such day following the incurrence of such Reimbursement Obligation, (B) upon repayment thereof in full or in part, and (C) if not previously paid in full, at the time such other Reimbursement Obligations become due and payable (whether by acceleration or otherwise). (c) LATE CHARGE; DEFAULT INTEREST. If any payment of principal or interest on any portion of a Loan or any other Obligation becoming due hereunder or under any of the Loan Documents is not made within ten (10) days of the date such payment is due, Borrowers shall be subject to a late charge of five percent (5%) of the amount of such payment. Borrowers shall be entitled to a one-time waiver of the late charge prior to the Revolving Credit Termination Date. Subsequent waivers during the term of the Loan shall be at the Lender's discretion. Upon the occurrence and during the continuance of an Event of Default, Borrowers shall pay interest (to the extent permitted by law in the case of interest on overdue interest) on such defaulted amount accruing from and including the date of such Event of Default up to but excluding the date of actual payment (after as well as before judgment) at a rate per annum which is the sum of (i) four percent (4%) plus (ii) the Applicable Rate otherwise payable. All payments due under this Section 2.7(c) shall be payable upon demand. 2.8. DURATION AND DETERMINATION OF INTEREST PERIOD; DETERMINATION OF INTEREST RATE; CONTINUATION/CONVERSION OF LOANS. (a) DURATION AND DETERMINATION OF INTEREST PERIOD. Each notice as set forth in Section 2.5(a) (with respect to a Borrowing of Libor Rate Loans) or Section 2.8(c) (with respect to a conversion into or continuation of Libor Loans) shall designate an Interest Period, provided, that no more than six (6) Interest Periods shall be in effect at any one time for any Libor Loans or Base Rate Loans or any combination of the two. - 9 - 18 (b) DETERMINATION OF INTEREST RATE. As soon as practicable on the second Business Day prior to the first day of each Interest Period in the case of a Libor Rate Loan (the "Interest Rate Determination Date"), the Lender shall determine (pursuant to the procedures set forth in the definition of Libor Base in the case of a Libor Rate Loan) the interest rate which shall apply to the Loans for which an interest rate is then being determined for the applicable Interest Period and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to the Borrowers' Representative and to each Lender. The Lender's determination shall be presumed to be correct, absent manifest error, and shall be binding upon each Borrower. Any failure by Lender to take into account any reserve percentage when calculating interest due on Libor Loans shall not constitute, whether by course of dealing or otherwise, waiver by such Lender of its right to collect such amount for any future period. (c) CONVERSION/CONTINUATION OF LOANS. (i) Subject to the provisions of Sections 2.14 and 2.15, Borrowers' Representative shall have the option (A) to convert at any time all or any part of outstanding Base Rate Loans to Libor Loans or (B) to convert all or any part of outstanding Libor Loans having Interest Periods which expire on the same date to Base Rate Loans on such expiration date; or (C) to continue all or any part of outstanding Libor Loans having Interest Periods which expire on the same date as Libor Loans, and the succeeding Interest Period of such continued Libor Loans shall commence on such expiration date; provided, however, no such outstanding Libor Loan may be continued as, or be converted into, a Libor Loan (i) if the continuation of, or the conversion into, would violate any of the provisions of Section 2.14 or 2.15 or (ii) if a Default or Event of Default would occur as a result thereof or has occurred and is continuing. Any conversion into or continuation of Libor Rate Loans under this Section 2.8(c) shall be in a minimum amount of $1,000,000 and in integral multiples of $100,000 in excess of that amount. (ii) To convert or continue a Loan Borrowers' Representative shall deliver a Notice of Continuation/Conversion substantially in the form of Exhibit E to Lender no later than 10:00 A.M. (New York City time) at least three (3) Business Days in advance of the proposed continuation/conversion date in the case of a conversion to, or a continuation of, Libor Loans or at least one (1) Business Day in advance of the proposed continuation/conversion date in the case of a conversion to a Base Rate Loan. A Notice of Continuation/Conversion shall specify (A) the proposed continuation/conversion date (which shall be a Business Day), (B) the principal amount of the Loans to be continued/converted, (C) whether such Loan shall be converted and/or continued, (D) in the case of a continuation of, or conversion to, a Libor Loan, the requested Interest Period, and (E) that no Default or Event of Default has occurred and is continuing or would result from the proposed continuation/conversion and (F) a statement as to whether the Borrowers have met and maintained the Preferred Interest Rate Standard and if so for what period of time. Except as otherwise provided in Sections 2.14 and 2.15, a Notice of Continuation/Conversion shall be irrevocable on and after the related Interest Rate Determination -10- 19 Date, and Borrowers shall be bound to effect a continuation and/or conversion (as applicable) in accordance therewith. If Borrowers' Representative fails to give a valid Notice of Continuation/Conversion in respect of any portion of a Libor Loan which is not repaid in accordance with the terms hereof at the end of the relevant Interest Period, such portion shall be converted automatically into a Base Rate Loan; provided that if Borrowers' Representative subsequently gives a valid Notice of Continuation/Conversion in respect of such Base Rate Loan, it shall be converted into a Libor Loan in accordance with the requirements for a continuation/conversion under this Section 2.8. 2.9. OPTIONAL PREPAYMENTS; MANDATORY PREPAYMENTS. (a) Subject to Section 2.9(c), Borrowers may, at their option, prepay any Loans on (i) the last day of the applicable Interest Period, in whole or in part, without premium or penalty or additional cost or expense, or (ii) any other time subject to the indemnification obligations contained in Section 2.16; upon, in each case, at least three (3) Business Days' prior written notice to Lender, specifying the amount of prepayment. Base Rate Loans may be prepaid without premium or penalty or additional cost or expense at any time. Each notice of prepayment pursuant to this clause (a) shall be irrevocable and the payment amount specified in such notice shall be due and payable on the date specified, together with accrued interest to such date on the Loans and all amounts (if any) payable pursuant to Section 2.16. Partial prepayments of the Loans pursuant to this clause (a) shall be in an aggregate principal amount of $100,000 or an integral multiple thereof. (b) The Loans shall be subject to certain mandatory repricing pursuant to and upon the occurrence of the events described in the provisions of Sections 2.14 and 2.15. (c) Subject to the provisions of Section 2.11, Borrowers' Representative may designate the application of any prepayments to be applied to principal on the Revolving Credit Loans to the Libor Loans or Base Rate Loans as it may select, provided that if Borrowers' Representative does not designate such application, such prepayments shall be applied (i) first to outstanding Base Rate Loans, and (ii) second to outstanding Libor Loans. 2.10. COMPUTATION OF INTEREST AND FEES. Interest, fees and other amounts calculated on the basis of a rate per annum shall be computed on the basis of a 360-day year for the actual number of days elapsed. In computing interest on any Loan, the date of the making of the Loan or the first day of an Interest Period, as the case may be, shall be included and the date of payment or the expiration date of an Interest Period, as the case may be, shall be excluded; provided, however, if a Loan is repaid on the same day on which it is made, one (1) day's interest shall be paid on such Loan. 2.11. PAYMENTS. -11- 20 (a) MANNER AND TIME OF PAYMENT. All payments of principal of and interest on the Loans and Reimbursement Obligations and other Obligations (including, without limitation, fees and expenses) which are payable to the Lender shall be made without condition or reservation of right, in immediately available funds, delivered to the Lender not later than 3:00 p.m. (New York time) on the date and at the place due, to such account of the Lender as it may designate, for the account of the Lender and funds received by the Lender, including, without limitation, funds in respect of any Loans to be made on that date, not later than 3:00 p.m. (New York time) on any given Business Day shall be credited against payment to be made that day and, for purposes of calculation of interest, funds received by the Lender after that time shall be deemed to have been paid on the next succeeding Business Day. (b) APPORTIONMENT OF PAYMENTS. (i) All payments of principal and interest in respect of outstanding Libor Loans and Base Rate Loans, all payments in respect of Reimbursement Obligations shall be applied in the following order: (A) First, to pay principal of and interest on Letter of Credit Obligations (or, to the extent such Obligations are contingent, deposited with the Lender to provide cash collateral in respect of such Obligations which cash collateral shall be released and applied in accordance with the provisions of this Section 2.11(b) in the event such Letter of Credit shall expire undrawn upon); (B) Second, to pay Obligations in respect of any fees, expenses reimbursements or indemnities then due to the Lender; (C) Third, to pay interest due in respect of Loans; (D) Fourth, to the ratable payment or prepayment of principal outstanding on Loans; and (E) Fifth, to the ratable payment of all other Obligations. (iii) The Lender, in its sole discretion subject only to the terms of this Section 2.11(b)(iii), may pay from the proceeds of Loans made to the Borrower hereunder if made pursuant to a deemed request as provided in this Section 2.11(b)(iii), all amounts payable by the Borrower hereunder, including, without limitation, amounts payable with respect to payments of principal, interest, Reimbursement Obligations and fees and all reimbursements for expenses pursuant to Section 10.12 in any case, after the occurrence and during the continuance of an Event of Default with respect to nonpayment of such amounts. Each Borrower hereby irrevocably authorizes the Lender to make Loans, which Loans shall be Base Rate Loans, in each case, upon notice from the Lender as described in the following sentence for the purpose of paying principal, interest, Reimbursement Obligations and fees due from any Borrower, reimbursing expenses pursuant to Section 10.12 and paying any and all other amounts due and payable by any Borrower hereunder, under the Note or under any other Loan Document, from -12- 21 and after the occurrence and during the continuance of an Event of Default with respect to nonpayment of such amounts, and agrees that all such Loans so made shall be deemed to have been requested by it pursuant to Section 2.1 as of the date of the aforementioned notice. Any Loans made under this Section 2.11(b)(iii) shall cure the Event of Default for which such Loans were advanced to the extent such Event of Default can be cured by the payment of money and the making of such a Loan does not create a Default or Event of Default. (c) PAYMENTS ON NON-BUSINESS DAYS. Whenever any payment to be made by any Borrower hereunder or under the Note is stated to be due on a day which is not a Business Day, the payment shall instead be due on the next succeeding Business Day (or, as set forth in Section 2.7(b), the next preceding Business Day), and any such extension of time shall be included in the computation of the payment of interest and fees hereunder. 2.12. USE OF LOAN PROCEEDS AND LETTERS OF CREDIT. Except for any amounts advanced by Lender under Section 2.11(b)(iii), the proceeds of the Loans and the Letters of Credit issued for the account of any Borrower hereunder shall be used directly (or indirectly in the case of Letters of Credit) only (i) to refinance existing indebtedness; (ii) to provide financing for income-producing properties; (iii) to fund leasehold improvements, renovation, expansion and construction of income-producing properties; or (iv) for working capital purposes. 2.13. INCREASED COSTS. (a) If any change in existing law or future applicable law, which expression, as used herein, includes statutes, rules and regulations thereunder and interpretations thereof by any competent court or by any governmental or other regulatory body or official charged with the administration or the interpretation thereof and requests, directives, instructions and notices at any time or from time to time hereafter made upon or otherwise issued to Lender by any central bank or other fiscal, monetary or other authority (whether or not having the force of law), shall: (i) subject Lender to any tax, levy, impost, duty, charge, fee, deduction or withholding of any nature with respect to this Agreement, the Loan Documents, Revolving Credit Commitment or the Loans (other than Excluded Taxes); or (ii) materially change the basis of taxation (except for changes in taxes on income or profits) of payments to Lender of the principal of or the interest on any Loans or any other amounts payable to Lender under this Agreement or the other Loan Documents; or (iii) impose or increase or render applicable (other than to the extent specifically provided for elsewhere in this Agreement) any special deposit, reserve, assessment, liquidity, capital adequacy or other similar requirements (whether or not having the force of law) against assets held by, or deposits in or for the account of, or loans by, or commitments of Lender; or -13- 22 (iv) impose on any party any other conditions or requirements with respect to this Agreement, the Loan Documents, the Loans, the Revolving Credit Commitment, or any class of loans or commitments of which any of the Loans or the Revolving Credit Commitment forms a part; and the result of any of the foregoing is: (A) to increase the cost to Lender of making, funding, issuing, renewing, extending or maintaining any of the Loans; or (B) to reduce the amount of principal, interest or other amount payable to such Lender hereunder; or (C) to require Lender to make any payment or to forgo any interest or other sum payable hereunder, the amount of which payment or foregone interest or other sum is calculated by reference to the gross amount of any sum receivable or deemed received by Lender from the Borrowers hereunder; then, and in each such case, the Borrowers will, within thirty (30) days after written demand made by Lender at any time and from time to time and as often as the occasion therefor may arise, pay to Lender, such additional amounts as Lender shall determine in good faith will be sufficient to compensate Lender for such additional cost, reduction, payment or foregone interest or other sum. It is agreed that Lender shall make a reasonable allocation of additional costs, reductions, payments or foregone interest amounts or other sums among its Loans made hereunder and loans to other borrowers affected thereby; shall treat the Borrowers hereunder in a manner substantially the same as its treatment of its other customers under other loan facilities affected thereby and shall notify Borrowers' Representative of any such event as soon as reasonably possible after Lender's discovery thereof. (b) If any change in existing law or future law, governmental rule, regulation, policy, guideline or directive (whether or not having the force of law) or the interpretation thereof by a court or governmental authority with appropriate jurisdiction affects the amount of capital required or expected to be maintained by banks or bank holding companies and as a result thereof a Lender determines in good faith that the amount of capital required to be maintained by it must be increased as a result of the Loans made or deemed to be made pursuant hereto, then such Lender shall notify the Borrowers' Representative of such fact as soon as reasonably possible after the discovery thereof, and the Borrowers' Representative shall pay to Lender from time to time within 30 days after written demand, as an additional fee payable hereunder, such amount as Lender shall determine in good faith and certify in a notice to the Borrowers' Representative to be an amount that will adequately compensate such Lender in light of these circumstances for its increased costs of maintaining such capital. -14- 23 2.14. CHANGE IN LAW RENDERING LIBOR LOANS UNLAWFUL. Notwithstanding anything to the contrary herein contained, in the event that any Requirements of Law or any change in any existing Requirements of Law or in the interpretation thereof by any Governmental Authority charged with the administration thereof, in any case adopted, issued or effective after the date hereof, shall make it unlawful for Lender to fund any portion of the Libor Loans or to give effect to its obligations as contemplated hereby with respect to its making Libor Loans Lender shall, upon the happening of such event, notify Borrowers' Representative thereof in writing stating the reason therefor and the effective date of such event, and upon the effectiveness of any such event the obligation of Lender to make or maintain its Libor Loans to any Borrower shall forthwith be suspended for the duration of such illegality and during such illegality Lender shall, upon payment of any amounts owing under Section 2.16 with respect to such conversion, convert its share of the Libor Loans to (upon effectiveness of any such event and during the continuance of such event) Base Rate Loans. If and when such illegality with respect thereto ceases to exist, such suspension shall cease and Lender shall notify Borrowers' Representative that the Base Rate Loan into which such share of the Libor Loans was converted pursuant to this Section 2.11 was converted to a Libor Loan, respectively, on the first day of the next succeeding Interest Period. 2.15. LIBOR AVAILABILITY. In the event, and on each occasion, that on the Business Day two Business Days prior to the commencement of any Interest Period for the Libor Loans, Lender shall have determined in good faith (which determination shall, in the absence of manifest error, be conclusive and binding upon Borrowers) that U.S. Dollar deposits in the amount of the principal amount of the Libor Loans which is to have such Interest Period are not generally available in the London interbank market, or that the rate at which such U.S. Dollar deposits are being offered will not accurately reflect the cost to Lender making or funding such principal amount of such Libor Loans during such Interest Period, or that reasonable means do not exist for ascertaining the Libor Rate, Lender shall, as soon as practicable thereafter, give written or telephonic notice of such determination to Borrowers' Representative and (i) such principal amount of such Libor Loans shall automatically be converted, as of the last day of the Interest Period during which such determination is made, to Base Rate Loans and (ii) any request by Borrowers' Representative for such Libor Loans pursuant to Section 2.5 hereof shall thereupon, and until the circumstances giving rise to such notice no longer exist (as notified by Lender to Borrowers' Representative) be deemed a request for the making of Base Rate Loans. If at any time Lender shall have determined in good faith (which determination shall, in the absence of manifest error, be conclusive and binding upon Borrowers) that any contingency has occurred which adversely affects the London interbank market or that any Requirement of Law or any change in any existing Requirement of Law or in the interpretation thereof, in any case adopted, issued or effective after the date hereof, or other circumstance affecting Lender or the London interbank market makes the funding of the Libor Loans impracticable, Lender shall, as soon as practicable thereafter, give written or telephonic notice of such determination to Borrowers' Representative and (i) the Libor Loans shall automatically be converted, as of the last day of each Interest Period during which such determination is made and in each case in respect of the principal amount of the Libor Loans having an Interest Period ending on such date, to Base Rate Loans and (ii) any request by Borrowers' Representative for the Libor Loans pursuant to -15- 24 Section 2.5 hereof shall thereupon, and until the circumstances giving rise to such notice no longer exist (as notified by Lender to Borrowers' Representative), be deemed a request for the making of Base Rate Loans. Upon such circumstances no longer existing, Borrowers' Representative may thereafter request Libor Loans in accordance with the terms hereof. 2.16. INDEMNITIES. Each Borrower hereby jointly and severally agrees to indemnify Lender on demand against any actual loss or expense (including but not limited to any loss or expense sustained or incurred in liquidating or employing or redeploying deposits from third parties acquired to effect or maintain any Loan or any portion thereof other than loss of profit or margin) and reasonable administrative costs which any Lender or its branch or Affiliate may sustain or incur as a consequence of (i) any default in payment or prepayment of the principal amount of any Loan or any portion thereof or interest accrued thereon, as and when due and payable (at the due date thereof, by irrevocable notice of payment or prepayment, or otherwise), (ii) the effect of the occurrence of any Event of Default upon any Loan, (iii) the payment or prepayment of any principal amount of any Loan or the conversion of any portion of any Libor Loan to Base Rate Loans on any day other than the last day of an Interest Period or the payment of any interest on such Loan, or portion thereof, on a day other than an Interest Payment Date for the Loan or (iv) any failure of any Borrower to accept or make a Borrowing of the Loans or continue or convert a Loan after delivery of a notice requesting a Loan under Section 2.5 or, as the case may be, a notice requesting a continuation or conversion under Section 2.8(c) or any failure by any Borrower to satisfy any of the conditions precedent to the making of Loans hereunder after it has requested the borrowing thereof (other than any such conditions that are waived in accordance with the provisions hereof). The determination of Lender of any amount payable under this Section 2.16 shall, in the absence of manifest error, be conclusive and binding upon each Borrower. 2.17. FEES. (a) STANDBY FEE. The Borrowers' Representative shall pay to the Lender an annual fee (the "STANDBY FEE"), on the daily amount by which the Revolving Credit Commitment exceeds the Outstanding Amount, for the period commencing on the Closing Date and ending on the Revolving Credit Termination Date, such fee being payable quarterly, in arrears, commencing on the first day of the calendar quarter next succeeding the Closing Date. If the Outstanding Amount equals or exceeds 50% of the Revolving Commitment the Standby Fee shall be fifteen (15) basis points (.15%) per annum of the daily unused portion of the Maximum Revolving Credit Commitment. If the Outstanding Amount is less than 50% of the Maximum Revolving Commitment, the Standby Fee shall be twenty five (25) basis points (.25%) per annum of the daily unused portion of the Maximum Revolving Credit Commitment. (b) LETTER OF CREDIT FEE. In addition to any charges paid pursuant to Section 3.1(g), the Borrowers' Representative shall pay to the Lender a fee (the "LETTER OF CREDIT FEE") accruing at a per annum rate equal to the undrawn face amount of each outstanding Letter of Credit multiplied by the Applicable Libor Margin and payable monthly, in advance, on the date such Letter of Credit is issued and the first day of each calendar month thereafter; provided, -16- 25 however, upon the occurrence of an Event of Default and for so long thereafter as such Event of Default shall be continuing, the rate at which the Letter of Credit Fee shall accrue and be payable shall be equal to three percent (3%) per annum. (c) COMMITMENT FEE. Borrowers jointly and severally agree to pay to the Lender a commitment fee (the "COMMITMENT FEE") as set forth in that certain letter agreement dated December 4, 2000, as revised on March 28, 2001 between the Borrowers' Representative and the Lender. (d) CALCULATION AND PAYMENT OF FEES. The Standby Fee shall be calculated on the basis of the actual number of days elapsed in a 360 day year. All such fees shall be payable in addition to, and not in lieu of, interest, expense reimbursements, indemnification and other Obligations. All fees shall be payable to the Lender in immediately available funds and shall be fully earned and nonrefundable when paid. All fees specified or referred to in this Agreement due to the Lender, including, without limitation, those referred to in this Section 2.17, shall bear interest at the interest rate specified in Section 2.7(c) upon the occurrence and during the continuance of an Event of Default with respect to the nonpayment thereof and shall constitute Obligations. 2.18. USURY. All agreements between Borrower, each Guarantor and Lender are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of the indebtedness evidenced hereby or otherwise, shall the amount paid or agreed to be paid to Lender for the use or the forbearance of the indebtedness evidenced hereby exceed the maximum permissible under applicable law. As used herein, the term "applicable law" shall mean the law in effect as of the date hereof, provided, however, that in the event there is a change in the law which results in a higher permissible rate of interest, then this Note shall be governed by such new law as of its effective date. In this regard, it is expressly agreed that it is the intent of each Borrower and Lender in the execution, delivery and acceptance of this Note to contract in strict compliance with the laws of the State of New York from time to time in effect. If, under or from any circumstances whatsoever, fulfillment of any provision hereof or of any of the Loan Documents or the Security Documents at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by applicable law, then the obligation to be fulfilled shall automatically be reduced to the limit of such validity, and if under or from any circumstances whatsoever Lender should ever receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the principal debt balance evidenced hereby and not to the payment of interest. This provision shall control every other provision of all agreements between each Borrower, each Guarantor and the Lender. 2.19. UNENCUMBERED ELIGIBLE PROPERTIES. (a) "UNENCUMBERED ELIGIBLE PROPERTY" means a Property which is and continues to be at all times: -17- 26 (i) wholly owned in fee simple or ground leased pursuant to a Financeable Ground Lease by a Borrower or Guarantor; and (ii) unencumbered, free and clear of any Liens and other matters effecting title other than for Permitted Exceptions and Customary Permitted Liens; and (iii) leased by Borrower or Guarantor to a single Class I or Class II Credit Tenant subject to an Approved Lease; and (iv) shall not be used for the following purposes: restaurants, hotels, movie theaters, parking facilities (except for on-site parking made available to tenants and visitors of the Property), car dealerships, gambling enterprises, convenience stores or gas stations or any other purpose which is not acceptable to the Lender; it being acknowledged and agreed by the Lender that the following uses shall be permitted uses hereunder: office, retail, industrial, warehouse, distribution, research and development or data processing. (b) In addition, no Property shall be accepted as or continue to be an Unencumbered Eligible Property unless the following are true, correct and accurate in all material respects: (i) TITLE. The Borrower or Guarantor owning or ground leasing such Property has good, record, marketable and indefeasible Fee Interest or Leasehold Interest in such Property except for Permitted Exceptions and Customary Permitted Liens. (ii) LEASES. Each of the Approved Leases and each Financeable Ground Lease is in full force and effect and is a legally valid and binding obligation of the Borrower or Guarantor who owns the Property and the other parties thereto. None of the Approved Leases or any Financeable Ground Lease has been amended, modified or terminated, nor has there been any change in or waiver of any obligation contained in any such Approved Lease or Financeable Ground Lease nor any set-off or counterclaim asserted by any tenant (or landlord) that in any such case could result in a MAC. Such Borrower or Guarantor has not mortgaged, pledged or otherwise encumbered any Approved Lease or Financeable Ground Lease or its right to obtain rental, interest or other payments under any Approved Lease. Rent has not been collected more than 30 days in advance (except for security deposits in an amount not in excess of one month's installment of rent). No material default beyond any applicable grace period or notice of termination under any Approved Lease or Financeable Ground Lease is outstanding. Such Borrower or Guarantor has performed all of its material repair and maintenance obligations (if any) and, to the knowledge and belief of such Borrower or Guarantor, each tenant under each Approved Lease and each ground lessor under any Financeable Ground Lease has performed all of its material repair, maintenance or other obligations. -18- 27 (iii) SURVEYS. There have not been any encumbrances, encroachments or other survey matters materially and adversely affecting such Property after the date of the most recent Survey of such Property furnished to Lender that would result in a change to such Survey. (iv) OFF-SITE UTILITIES. All water, sewer, electric, gas, telephone and other utilities are available to be installed or installed to the property lines of such Property and, except in the case of drainage facilities, are connected to the Buildings located thereon with valid permits and are adequate to service the Buildings in material compliance with applicable law; and the Buildings are properly and legally connected directly to, and served exclusively by, public water and sewer systems. No easements over land of others are required for any such utilities, and no drainage of surface or other water across land of others is required except in either case as disclosed in the Title Policy or the Surveys accepted by Lender. (v) ACCESS; ETC. The streets abutting such Property are public roads, to which the Property has direct access by trucks and other motor vehicles and by foot, or are private ways (with direct access by trucks and other motor vehicles and by foot to public roads) to which the Property has direct access without charge or liability for maintenance or repair except as required in connection with the payment of association or owner's fees pursuant to recorded instruments. No easements over land of others are required for such means of access and egress except as disclosed in the Title Policy or Surveys. (vi) INDEPENDENT BUILDINGS. The Buildings are fully independent in all respects from any other buildings or improvements not located on the Property including, without limitation, in respect of structural integrity, heating, ventilating and air conditioning, plumbing, mechanical and other operating and mechanical systems, all of which are connected directly to off-site utilities located in recorded easements or public streets or ways. The Buildings are located on lots which are separately assessed for purposes of real estate tax assessment and payment. The Buildings, all Building Service Equipment and all paved or landscaped areas related to or used in connection with the Buildings are located wholly within the perimeter lines of the lot or lots on which the Properties are located except any real property covered by any easement benefiting the Property or as disclosed in the Surveys. (vii) CONDITION OF BUILDING; NO ASBESTOS. There are no material defects in the roof, foundation, structural elements and masonry walls of the Buildings or their heating, ventilating and air conditioning, electrical, sprinkler, plumbing or other mechanical systems or their Building Service Equipment; the Buildings are fully sprinklered; and no asbestos is located in or on the Buildings except as may be disclosed in the Environmental Reports. (viii) BUILDING COMPLIANCE WITH LAW; PERMITS. The Buildings as presently constructed and used do not materially violate any applicable federal or state law or governmental regulation, or any local ordinance, order or regulation, including but not limited to laws, regulations, or ordinances relating to zoning, building use and occupancy, subdivision control, fire protection, health and sanitation; zoning laws permit use of the Buildings for their current use; there is a sufficient number of parking spaces on the lot or lots on which the Property -19- 28 is located or on any real property covered by any easement benefiting such Property or to permit the Buildings to be used under the zoning laws for their current use; and all private ways providing access to such Property are zoned in a manner which will permit access to the Buildings over such ways by trucks and other commercial and industrial vehicles. All permits (collectively, the "PERMITS") required for the operation and maintenance of the Property, including without limitation, building permits, curb-cut permits, water connection permits, sewer extension or connection permits and other permits (if any) required under the Federal Clean Air Act, as amended, the Federal Clean Water Act, as amended (including, without limitation a so-called "404 PERMIT"), and by state law or regulations consistent with the requirements of said Acts, have been validly issued by the appropriate Governmental Authority and are now in full force and effect. (ix) NO REQUIRED REAL PROPERTY CONSENTS, PERMITS, ETC. No Borrower or Guarantor has received any notice of, nor has any knowledge of, any Permits, utility installations and connections (including, without limitation, drainage facilities, curb cuts and street openings), or private consents required for the maintenance, operation, servicing and use of such Property for its current use which have not been granted, effected, or performed and completed (as the case may be) or any fees or charges therefor which have not been fully paid. (x) SUITS; JUDGMENTS. There are no outstanding notices, suits, orders, decrees or judgments relating to zoning, building use and occupancy, subdivision control, fire protection, health, sanitation, or other violations affecting, against, or with respect to, such Property or any part thereof. (xi) INSURANCE. No Borrower or Guarantor has received any notices from any insurer or its Lender requiring performance of any work with respect to such Property. (xii) REAL PROPERTY TAXES; SPECIAL ASSESSMENTS. There are no unpaid or outstanding real estate or other taxes or assessments on or against such Property or any part thereof (except only real estate taxes not yet due and payable). There are no betterment assessments or other special assessments presently pending with respect to any portion of such Property and no Borrower or Guarantor has received any notice of any such special assessment being contemplated. (xiii) HISTORIC STATUS. No Building is a historic structure or landmark, and no Property is within any historic district pursuant to any federal, state or local law or governmental regulations. (xiv) EMINENT DOMAIN. There are no pending eminent domain proceedings against such Property or any part thereof, and, to the best of each Borrower's and Guarantor's knowledge, no such proceedings are presently threatened or contemplated by any taking authority. -20- 29 (xv) COMPLIANCE WITH ENVIRONMENTAL LAWS. Except as specifically set forth in the Environmental Reports accepted for such Property delivered to Lender and listed on Exhibit L, to the knowledge of each Borrower or Guarantor each tenant is in compliance with all applicable statutes, laws, rules, regulations and orders of all Governmental Authorities relating to environmental protection, pollution control and Hazardous Materials and with respect to the conduct of its business and the ownership of its properties, except for such noncompliance which would not result in imposition of Liens, fines, penalties, injunctive relief or other civil or criminal liabilities or which, in the aggregate, could not have a MAC. (xvi) POLLUTION; HAZARDOUS MATERIALS. In connection with the acquisition and ownership of its interests in such Property, the Borrower or Guarantor who owns such Property has made and will continue to make such inquiries, and has and will continue to cause such testing, surveying, inspection or other action, with respect to such Property as is necessary or desirable in connection with Hazardous Materials which might be present in the air, soil, surface water or groundwater at such Property. Except as set forth in the Environmental Reports listed on Exhibit F, to the best of such Borrower's or Guarantor's knowledge there are no Hazardous Materials present in the air, soil, surface water or groundwater at such Property and no Hazardous Materials (except (i) Hazardous Materials maintained in accordance with all Requirements of Law and necessary for the business operations of any such Property, including, without limitation, petroleum used for heating oil and (ii) Hazardous Materials that are not reasonably likely to result in a MAC in respect of such Property or to have a material adverse effect on the value of such Property as security for the Loans) are used in the operation of such Property. (xvii) MATERIALS PROVIDED TO LENDER. The Borrower or Guarantor who is the owner of the applicable Property submitted for acceptance as an Unencumbered Eligible Property has satisfied the requirements of paragraphs (g), (h) and (i), of Section 5.1 in respect of such Property. (xviii) UNENCUMBERED ELIGIBLE PROPERTY APPLICATION. In order to achieve or maintain the Preferred Interest Rate Standard any Borrower or Guarantor may submit to Lender from time to time one or more Unencumbered Eligible Property Applications which Lender shall review as promptly as possible but nothing contained in this Agreement shall be construed as to require Lender to approve any Unencumbered Eligible Property Application made by any Borrower or Guarantor. All information submitted in connection with an Unencumbered Eligible Property Application is subject to the reasonable approval of the Lender. The Borrowers' Representative shall be notified of such Property's rejection as an Unencumbered Eligible Property together with the basis for such rejection in reasonable detail by the Lender as promptly as possible and in any event within ten (10) Business Days after receipt of a complete Unencumbered Eligible Property Application. If Lender has not accepted or rejected an Unencumbered Eligible Property Application within five (5) Business Days after receipt, Borrowers' Representative shall send a written reminder notice to Lender and Lender's failure to reject an Unencumbered Eligible Property within five (5) Business Days after receipt of such reminder notice shall be deemed acceptance of same by Lender. In the event information -21- 30 required to be submitted in connection with an Unencumbered Eligible Property Application is submitted on a piecemeal basis, the ten (10) Business Day review period shall not commence until Lender receives a transmittal letter from the Borrowers' Representative accompanying the final submission stating that the Borrowers' Representative now considers the Unencumbered Eligible Property Application to be complete. Each Property listed on Schedule 1 has been approved by the Lender as an Unencumbered Eligible Property. (xix) GUARANTIES. In the event an Unencumbered Eligible Property Application is submitted for any Property that is not owned by a Borrower or existing Guarantor, such Property shall only be accepted as an Unencumbered Eligible Property pursuant to this Section 2.19 if a Guaranty has been executed by the owner of such Unencumbered Eligible Property and delivered to the Lender. (xx) APPROVED UNENCUMBERED ELIGIBLE PROPERTIES. Subject to the continued requirements of Sections 2.19(a) and (b), the Properties identified on Schedule 1 hereto are hereby approved as Unencumbered Eligible Properties. 2.20. WITHDRAWAL OF UNENCUMBERED ELIGIBLE PROPERTY. Borrowers' Representative shall have the ability to withdraw any Unencumbered Eligible Property from the terms of this Agreement so long as no Default or Event of Default exists or occurs as a result (and upon such withdrawal, the applicable Borrower or Guarantor (other than Lexington, LCIF and LCIFII) which owns such Unencumbered Eligible Property (provided that same is the only Unencumbered Eligible Property owned by such Borrower or Guarantor) shall be released from all obligations in respect of this Agreement). 2.21 EXCLUSION OF UNENCUMBERED ELIGIBLE PROPERTIES. If any Unencumbered Eligible Property fails to continue to meet the requirements of Sections 2.19(a) and (b), then such Unencumbered Eligible Property shall no longer be considered to be an Unencumbered Eligible Property for the purposes of determining whether Borrowers have met or maintained the Preferred Interest Rate Standard. Within two (2) Business Days after any Unencumbered Eligible Property fails to continue to meet the requirements of Section 2.19(a) or Section 2.19(b), the Borrowers' Representative shall submit a new Certificate of Unencumbered Eligible Property to the Lender. SECTION 3. LETTERS OF CREDIT 3.1. LETTERS OF CREDIT. Subject to the terms and conditions set forth in this Agreement hereby agrees to issue for the account of any Borrower one or more Letters of Credit having an aggregate undrawn face amount of up to the lesser of (i) the Revolving Credit Commitment minus the Outstanding Amount or (ii) $5,000,000, subject to the following provisions: (a) TYPES AND AMOUNTS. Lender shall not have any obligation to issue, amend or extend, and shall not issue, amend or extend, any Letter of Credit at any time: -22- 31 (i) if the aggregate Letter of Credit Obligations with respect to Lender, after giving effect to the issuance, amendment or extension of the Letter of Credit requested hereunder, shall exceed any limit imposed by law or regulation upon Lender; (ii) if on the date of the proposed issuance, amendment or extension of such Letter of Credit (A) immediately after giving effect to the issuance, amendment or extension of such Letter of Credit the Letter of Credit Obligations at such time would exceed $5,000,000 at such time, or (B) one or more of the conditions precedent contained in Section 5.2 would not on such date be satisfied, unless such conditions are thereafter or have previously been satisfied and written notice of such satisfaction is given to the Issuing Bank by the Lender (and an Issuing Bank shall not otherwise be required to determine that, or take notice whether, the conditions precedent set forth in Section 5.2, have been satisfied): (iii) which has an expiration date later than the earlier of (A) the date one (1) year after the date of issuance or (B) the Business Day next preceding the scheduled Revolving Credit Termination Date; or (iv) which is in a currency other than Dollars. (b) CONDITIONS. In addition to being subject to the satisfaction of the conditions precedent contained in Sections 5.1 and 5.2, as applicable, the obligation of Lender to issue, amend or extend any Letter of Credit is subject to the satisfaction in full of the following conditions: (i) if Lender so requests, the Borrower on whose behalf the Letter of Credit has been issued and the Borrowers' Representative shall have executed and delivered to Lender a Letter of Credit Reimbursement Agreement and such other documents and materials as may be required pursuant to the terms thereof; provided, however, that such Letter of Credit Reimbursement Agreement and other documents and agreements shall in no event require delivery of any additional security by any Borrower or otherwise increase the obligations or reduce the rights of the Borrowers hereunder or otherwise be inconsistent with such rights or obligations; and (ii) the terms of the proposed Letter of Credit shall otherwise be satisfactory to the Lender in its reasonable discretion. (c) ISSUANCE OF LETTERS OF CREDIT The Borrowers' Representative shall give Lender written notice to issue or cause to be issued a Letter of Credit not later than 10:00 a.m. (New York time) on the third (3rd) Business Day preceding the requested date for issuance thereof under this Agreement, or such shorter notice as may be acceptable to Lender. Such notice shall be irrevocable unless and until such request is denied by the Lender and shall include a Notice of Borrowing which complies with the requirements of Section 2.5(a) (modified as appropriate) and specify (A) that such Letter of Credit is solely for the account of and the name of a specific Borrower, (B) the stated amount of the Letter of Credit requested, (C) the effective - 23 - 32 date (which shall be a Business Day) of issuance of such Letter of Credit, (D) the date on which such Letter of Credit is to expire (which shall be a Business Day and no later than the Business Day immediately preceding the then existing Revolving Credit Termination Date), (E) the Person for whose benefit such Letter of Credit is to be issued, (F) all other relevant terms of such Letter of Credit, (G) the Current Availability at such time, and (H) the amount of the then outstanding Letter of Credit Obligations. (d) REIMBURSEMENT OBLIGATIONS. (i) Notwithstanding any provisions to any Letter of Credit Reimbursement Agreement: (A) provided that no Event of Default shall be continuing hereunder and provided that there is then unfunded availability hereunder, the Lender shall make Loan advances to repay amounts drawn under such Letter of Credit, or if either of the foregoing conditions are not satisfied, the Borrowers' Representative shall reimburse the Lender for amounts drawn under such Letter of Credit, in Dollars, no later than the date (the "REIMBURSEMENT DATE") which is the 10 Business Days after the Borrowers' Representative receives written notice from the Lender that payment has been made under such Letter of Credit; and (B) all Reimbursement Obligations with respect to any Letter of Credit shall bear interest at the rate applicable to Base Rate Loans in accordance with Section 2.7(a) from the date of the relevant drawing under such Letter of Credit until the Reimbursement Date and thereafter at the rate applicable to Base Rate Loans in accordance with Section 2.7(c). (ii) No action taken or omitted in good faith by Lender under or in connection with any Letter of Credit shall put Lender under any resulting liability to any Borrower. (iii) If requested, an Issuing Bank shall furnish to the Lender and each Lender, copies of any Letter of Credit, Letter of Credit Reimbursement Agreement, and related amendment to which such Issuing Bank is party and such other documentation as may be requested by Lender or such Lender. (iv) The obligations Borrower to make payments to the Lender with respect to a Letter of Credit shall be irrevocable, shall not be subject to any qualification or exception whatsoever except willful misconduct or gross negligence of Lender, and shall be honored in accordance with this entire Section 3 (irrespective of the satisfaction of the conditions described in Sections 5.1 and 5.2, as applicable) under all circumstances, including, without limitation, any of the following circumstances: - 24 - 33 (A) any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (B) the existence of any claim, setoff, defense or other right which any Borrower may have at any time against a beneficiary named in a Letter of Credit or any transferee of a beneficiary named in a Letter of Credit (or any Person for whom any such transferee may be acting), the Lender, or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transactions between the account party and beneficiary named in any Letter of Credit); (C) any draft, certificate or any other document presented under the Letter of Credit having been determined to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (D) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; or (E) the occurrence of any Default or Event of Default. (f) PAYMENT OF REIMBURSEMENT OBLIGATIONS. Unless paid with a Loan advance hereunder, each Borrower unconditionally agrees, on a joint and several basis, to pay to Lender, in Dollars, the amount of all Reimbursement Obligations, interest and other amounts payable to Lender under or in connection with the Letters of Credit when such amounts are due and payable, irrespective of any claim, setoff, defense or other right which any Borrower may have at any time against Lender or any other Person. (g) LENDER'S CHARGES. Borrowers' Representative shall pay to Lender, solely for its own account, the standard administrative charges assessed by Lender (not to exceed $500 each) in connection with the issuance, administration, amendment and payment or cancellation of Letters of Credit and such compensation in respect of such Letters of Credit for the Borrowers' Representative's account as may be agreed upon by the Borrowers' Representative and Lender from time to time. (h) INTENTIONALLY OMITTED. (i) INDEMNIFICATION; EXONERATION. (a) In addition to all other amounts payable to Lender, each Borrower hereby agrees to defend (by counsel selected by Borrowers' Representative and reasonably acceptable to Lender), indemnify, and save the Lender harmless from and against any and all claims, demands, liabilities, penalties, damages, losses (other than loss of profits), costs, charges and expenses (including reasonable attorneys' fees but excluding - 25 - 34 taxes) which the Lender may incur or be subject to as a consequence, direct or indirect, of (A) the issuance of any Letter of Credit other than as a result of the gross negligence or willful misconduct of the Lender, as determined by a court of competent jurisdiction, or (B) the failure of the Lender to honor a drawing under such Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or Governmental Authority. (b) As between each Borrower on the one hand and the Lender on the other hand, each Borrower assumes all risks of the acts and omissions of, or misuse of Letters of Credit by, the respective beneficiaries of the Letters of Credit. In furtherance and not in limitation of the foregoing, subject to the provisions of the Letter of Credit Reimbursement Agreements, the Lender shall not be responsible, for: (A) the form, validity, legality, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of the Letters of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (B) the validity, legality or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (C) failure of the beneficiary of a Letter of Credit to duly comply with conditions required in order to draw upon such Letter of Credit; provided, however that with respect to any Letter of Credit, the foregoing subclause (C) shall not relieve the Lender of any liability it may have to any Borrower for any actual damages sustained by such Borrower arising from a wrongful payment under such Letter of Credit made as a result of the Lender's gross negligence or willful misconduct; (D) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (E) errors in interpretation of technical terms; (F) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit or of the proceeds thereof (other than anything for which Lender would be liable under clause (C)); (G) the misapplication by the beneficiary of a Letter of Credit of the proceeds of any drawing under such Letter of Credit. (j) EXISTING LETTERS OF CREDIT. Two Letters of Credit aggregating approximately $3,200,000 are currently outstanding on behalf of the Borrowers' Representative under the Fleet Revolving Loan. Such Letters of Credit shall be transferred to and deemed to be issued under this Agreement as of the Closing Date. SECTION 4. REPRESENTATIONS AND WARRANTIES In order to induce the Lender and each Lender to enter into this Agreement and to make the Loans herein provided for, each Borrower on behalf of itself and each Guarantor hereby covenants, represents and warrants to Lender and each Lender that: 4.1. FINANCIAL CONDITION The consolidated balance sheet of Lexington as of December 31, 1999 and the related statements of income, stockholders' equity and cash flows for the fiscal years ended on such dates, certified by KPMG LLP, copies of which have heretofore - 26 - 35 been furnished to Lender, are complete and correct and present fairly the financial condition and performance of Lexington as at such dates and fiscal periods. The unaudited consolidated balance sheet of Lexington as of 9/30/00 and the related unaudited statements of income, for the three month period ended on 9/30/00 certified by a Responsible Officer, copies of which have heretofore been furnished to Lender, are complete and correct and present fairly the financial condition of Lexington as at such date, and the stockholders' equity and cash flows for the three month period then ended (subject to normal year-end audit adjustment). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except for changes in GAAP compliance methods as approved by such accountants or Responsible Officer, as the case may be, and as disclosed therein). Lexington does not have any material Contingent Obligation, contingent liabilities or liability for taxes, long-term leases or unusual forward or long-term commitment, which is not reflected in the foregoing statements or in the notes thereto. Lexington has previously delivered to Lender copies of its annual report on Form 10-K for the fiscal year ended 1999 filed with the Commission. 4.2. NO MATERIAL ADVERSE EFFECT. Since the date of the most recent financial statements delivered to Lender there has been no Material Adverse Effect, and no event has occurred and no condition exists which could reasonably be expected to have a Material Adverse Effect on any Borrower or Guarantor. 4.3. EXISTENCE; BORROWER'S AND GUARANTOR'S COMPLIANCE WITH LAW. Lexington is a trust duly organized, validly existing and in good standing under the laws of the State of Maryland. Each Borrower and Guarantor is duly organized and validly existing in its jurisdiction of organization. Each Borrower and Guarantor (a) has full power and authority and the legal right to own and lease its property and to conduct the business in which it is currently engaged, (b) is duly qualified or licensed and is in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business require such qualification, and (c) is in compliance with all Requirements of Law, except to the extent that the failure to comply therewith is not reasonably likely to have, in the aggregate, a Material Adverse Effect. 4.4. POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. Each Borrower and Guarantor has the power and authority and the legal right to execute, deliver and perform each of the Loan Documents and to borrow hereunder and has taken all necessary action to authorize the borrowings hereunder on the terms and conditions of the Loan Documents and to authorize the execution, delivery and performance of each of the Loan Documents. No consent or authorization of, filing with, or other act by or in respect of any Governmental Authority is required to be made or obtained by the Borrowers or Guarantors in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of the Loan Documents. The Agreement has been, and each Loan Document will be, duly executed and delivered on behalf of each Borrower and Guarantor and this Agreement constitutes, and each other Loan Document when executed and delivered will constitute, a legal, valid and binding obligation of each Borrower and Guarantor enforceable against such Borrower and - 27 - 36 Guarantor in accordance with its terms subject to the effect of bankruptcy, reorganization, insolvency and similar laws and general principles of equity. 4.5. NO LEGAL BAR. The execution, delivery and performance of this Agreement and the other Loan Documents, the borrowing hereunder and the use of the proceeds thereof, will not violate any Requirement of Law or any Contractual Obligation of any Borrower or Guarantor and will not result in, or require, the creation or imposition of any Lien on any of its properties or revenues pursuant to any Requirement of Law or Contractual Obligation other than the Liens for the benefit of Lender expressly contemplated by this Agreement and the Security Documents. 4.6. NO MATERIAL LITIGATION. No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the best knowledge and belief of each Borrower and Guarantor, threatened against any Borrower or Guarantor or against any of its properties or revenues (a) with respect to this Agreement or the other Loan Documents, the Leases, or any of the transactions contemplated hereby or thereby, or (b) relating to the Properties, or the ownership or the operation thereof or the conduct of business thereon as presently conducted, which, in the case of (a) or (b), is reasonably likely to have, in the aggregate, a Material Adverse Effect. 4.7. NO DEFAULT. No Default or Event of Default has occurred and is continuing. 4.8. OWNERSHIP OF PROPERTY; LIENS. (a) Schedule 1 accurately sets forth the ownership of each Unencumbered Eligible Property. Each Borrower and Guarantor that is shown by Schedule 1 to be the owner of an Unencumbered Eligible Property is the sole owner of such Unencumbered Eligible Property and has a good record, marketable and indefeasible Fee Interest or a valid Leasehold Interest in such Unencumbered Eligible Property, in each case free and clear of all Liens and other matters affecting title except for Permitted Exceptions and Customary Permitted Liens. (b) To the best of each Borrower's and Guarantor's knowledge, the Buildings located on each Unencumbered Eligible Property are in good operating condition and repair, free of any structural or engineering defects known to any Borrower or Guarantor on the date hereof and are suitable for their present uses, subject to such exceptions which are not reasonably likely to have, in the aggregate, a Material Adverse Effect. (c) To the best of each Borrower's and Guarantor's knowledge, all water, sewer, gas, electricity, telephone and other utilities serving each Unencumbered Eligible Property are supplied directly to such Unencumbered Eligible Property by public utilities and enter such Unencumbered Eligible Property through adjoining public streets or, if they pass through adjoining private land, do so in accordance with valid public easements which inure to Borrower's or Guarantor's benefit subject to such exceptions which are not reasonably likely to have, in the aggregate, a Material Adverse Effect. All of such utilities are presently installed and operating and are in good and safe condition, subject to such exceptions which are not reasonably - 28 - 37 likely to have, in the aggregate, a Material Adverse Effect. All assessments for public improvements that have been made against the Unencumbered Eligible Properties have been paid or provided for, except that in the case of any assessments that are payable in installments, all installments due as of the date hereof have been paid or provided for, subject to such exceptions which are not reasonably likely to have, in the aggregate, a Material Adverse Effect. (d) No Borrower or Guarantor has received notice of any pending, threatened or contemplated condemnation proceeding or similar taking affecting any of the Unencumbered Eligible Properties, or any portion thereof, or any sale or other disposition of any of the Unencumbered Eligible Properties or any portion thereof in lieu of condemnation or similar taking, in each case, subject to such exceptions which are not reasonably likely to have, in the aggregate, a Material Adverse Effect. (e) All Permits from all Governmental Authorities having jurisdiction over any Unencumbered Eligible Property or any portion thereof, the absence of which could impair the use of any Unencumbered Eligible Property for the purposes for which it is currently used have been issued and are in full force and effect, subject to such exceptions which are not reasonably likely to have, in the aggregate, a Material Adverse Effect. No Borrower or Guarantor has received or been informed by a third party, of the receipt by it of any notice from any Governmental Authority having jurisdiction over any of the Unencumbered Eligible Properties or any portion thereof or from any insurance company or fire rating or similar board or organization threatening a suspension, revocation, modification or cancellation of any Permit, subject to such exceptions which are not reasonably likely to have, in the aggregate, a Material Adverse Effect. (f) A true, correct and complete copy of each Approved Lease and a true, correct and complete copy of any Financeable Ground Lease identified on Exhibit G and has been delivered to Lender. The Approved Leases (and any subleases permitted thereunder) constitute the sole and complete agreements and understandings relating to leasing or licensing of space in the Buildings or otherwise at such Unencumbered Eligible Properties. There are no occupancies, rights, privileges or licenses in or to the Buildings or any other part of the Unencumbered Eligible Properties other than pursuant to the Approved Leases, Financeable Ground Leases or pursuant to Permitted Exceptions. Except as set forth in Exhibit G, the Approved Leases and Financeable Ground Leases are in full force and effect, in accordance with their respective terms, without any payment default or any other material default thereunder beyond applicable grace periods, nor to the best of each Borrower's or Guarantor's knowledge are there any defenses, counterclaims, offsets, concessions or rebates available to any tenant thereunder except as may be provided in the Approved Leases, and the landlord has not given or made, or received, any notice of default, or any claim, which remains uncured or unsatisfied, with respect to any of the Approved Leases or Financeable Ground Leases and, to the best of each Borrower's or Guarantor's knowledge there is no basis for any such claim or notice of default by any tenant which would have a Material Adverse Effect. No tenant has paid more than one month's rent in advance except for any security deposits. Except as set forth on the rent roll, all tenants under all Approved Leases are in occupancy and operating the premises covered - 29 - 38 by Approved Leases within the permitted uses under such Approved Leases. No Borrower or Guarantor has mortgaged, pledged or otherwise encumbered any of the Approved Leases or any Financeable Ground Lease except for Permitted Exceptions or Customary Permitted Liens. 4.9. TAXES. Each Borrower and Guarantor has filed or caused to be filed all tax returns which to the best knowledge and belief of each Borrower are required to be filed, and has paid or caused to be paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than Customary Permitted Liens and those the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of each). 4.10. FEDERAL REGULATIONS. No Borrower or Guarantor is engaged and will not engage, principally or as one of its important activities, in the business of extending credit for the purpose of "PURCHASING" or "CARRYING" any "MARGIN STOCK" within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. No part of the proceeds of the Loans hereunder will be used for "PURCHASING" or "CARRYING" "MARGIN STOCK" as so defined or for any purpose which violates, or which would be inconsistent with, the provisions of the Regulations of such Board of Governors. If requested by Lender, each Borrower will furnish to Lender a statement in conformity with the requirements of Federal Reserve Form U-1 referred to in said Regulation U to the foregoing effect. 4.11. ERISA. No Borrower or Guarantor nor any ERISA Affiliate maintains or contributes to any Plan or Multiemployer Plan other than those listed on Exhibit K hereto. Each such Plan which is intended to be qualified under Section 401(a) of the Internal Revenue Code as currently in effect has been determined by the IRS to be so qualified, and each trust related to any such Plan has been determined to be exempt from federal income tax Section 501(a) of the Internal Revenue Code as currently in effect. Except as disclosed in Exhibit K, no Borrower or Guarantor or any of its Subsidiaries maintains or contributes to any employee welfare benefit plan within the meaning of Section 3(1) of ERISA. Each Borrower or Guarantor and its Subsidiaries are in compliance in all material respects with the responsibilities, obligations and duties imposed on it by ERISA, the Internal Revenue Code and regulations promulgated thereunder with respect to all Plans. No Benefit Plan has incurred any accumulated funding deficiency (as defined in Sections 302 (a) (2) of ERISA and 412 (a) of the Internal Revenue Code) whether or not waived. No Borrower or Guarantor nor any ERISA Affiliate nor any fiduciary of any Plan which is not a Multiemployer Plan (i) has engaged in an nonexempt prohibited transaction described in Sections 406 of ERISA or 4975 of the Internal Revenue Code or (ii) has taken or failed to take any action which would constitute or result in a Termination Event. Neither the Borrower nor any ERISA Affiliate is subject to any liability under Sections 4063, 4064, 4069, 4204 or 4212 (c) or ERISA. No Borrower or Guarantor nor any ERISA Affiliate has incurred any liability to the PBGC which remains outstanding other than the payment of premiums. Schedule B to the most recent annual report filed with the IRS with - 30 - 39 respect to each Plan is complete and accurate in all material respects. Since the date of each such Schedule B, there has been no material adverse change in funding status or financial condition of the Plan relating to such Schedule B. No Borrower or Guarantor nor any ERISA Affiliate has (i) failed to make a required contribution or payment to a Multiemployer Plan or (ii) made a complete or partial withdrawal under Sections 4203 or 4205 of ERISA from a Multiemployer Plan. No Borrower or Guarantor nor any ERISA Affiliate has failed to make a required installment or any other required payment under Section 412 of the Internal Revenue Code on or before the due date for such installment or other payment. No Borrower or Guarantor nor any ERISA Affiliate is required to provide security to a Plan under Section 401 (a) (29) of the Internal Revenue Code due to a Benefit Plan amendment that results in an increase in current liability for the plan year. Except as disclosed on Exhibit K, no Borrower or Guarantor or any of its Subsidiaries has, by reason of the transactions contemplated hereby, any obligation to make any payment to any employee pursuant to any Plan or existing contract or arrangement. 4.12. STATUS AS REIT. Lexington has been organized in conformity with the requirements for qualification as a real estate investment trust under the Code and has met such requirements since 1993. Lexington is in a position to qualify for its current fiscal year as a real estate investment trust under the Code and its proposed methods of operation will enable it to so qualify. 4.13. INVESTMENT COMPANY ACT. No Borrower or Guarantor is an "INVESTMENT COMPANY" or a company "CONTROLLED" by an "INVESTMENT COMPANY," within the meaning of the Investment Company Act of 1940, as amended. 4.14. SUBSIDIARIES; OWNERSHIP OF CAPITAL STOCK AND PARTNERSHIP INTERESTS. (i) Exhibit H (A) contains diagrams and schedules indicating the corporate structure of Lexington, each Borrower, and any other Person in which Lexington or any Borrower holds a direct or indirect partnership, joint venture or other equity interest indicating the percentage and nature of such interest with respect to each Person included in such diagram; and (B) accurately sets forth the correct legal name of such Person, the jurisdiction of its incorporation or organization and the jurisdictions in which it is qualified to transact business as a foreign corporation, or otherwise. (ii) Except where any failure or breach would not have a Material Adverse Effect on any of the Borrowers, each Subsidiary: (A) is a corporation, partnership or limited liability company, as indicated on Exhibit H, duly organized, validly existing and, if applicable, in good standing under the laws of the jurisdiction of its organization, (B) is duly qualified to do business and, if applicable, is in good standing under the laws of each jurisdiction required to conduct its business as presently conducted and (C) has all requisite power and authority to own, operate and encumber its Property and to conduct its business as presently conducted. 4.15. POLLUTION; HAZARDOUS MATERIALS. In connection with the acquisition and ownership of their interests in the Unencumbered Eligible Properties, the Borrowers and - 31 - 40 Guarantors have made and will continue to make such inquiries, and has and will continue to cause such testing, surveying, inspection or other action, with respect to the Unencumbered Properties as is reasonably necessary or desirable in connection with Hazardous Materials which might be present in the air, soil, surface water or groundwater at such Unencumbered Eligible Property. Except as specifically set forth in the Environmental Reports listed on Exhibit F (as amended or supplemented from time to time by additional Environmental Reports with respect to future Unencumbered Eligible Properties or otherwise amended or supplemented with the consent of the Lender) and except for such exceptions which are not reasonably likely to have, in the aggregate, a Material Adverse Effect, to the best of any Borrower's or Guarantor's knowledge, there are no Hazardous Materials present in the air, soil, surface water or groundwater at any Unencumbered Eligible Property and no Hazardous Materials (except Hazardous Materials maintained in accordance with all Requirements of Law and necessary for the business operations of any such Unencumbered Eligible Property, including, without limitation, petroleum used for heating oil) are used in the operation of any Unencumbered Eligible Property. 4.16. DECLARATION OF TRUST, PARTNERSHIP AGREEMENT, ETC. The copies of the Declaration of Trust of Lexington and the organizational documents of each Borrower which have been furnished to Lender are true, correct and complete copies thereof as in effect on the date of this Agreement and will be true, correct and complete in the case of each Guarantor when submitted to Lender under Section 5.2. 4.17. DISCLOSURES. The financial statements referred to in Section 4.1 do not, nor does this Agreement, the other Loan Documents, or any other written statement furnished by or on behalf of any Borrower to Lender in connection with the transactions contemplated hereby or thereby, contain any untrue statement of a material fact or omit a material fact necessary to make the statement contained therein or herein not misleading. 4.18 GUARANTORS. The representations and warranties in Sections 4.2 through 4.11, 4.15 through 4.17, shall be true, correct and complete with respect to each Guarantor. SECTION 5. CONDITIONS PRECEDENT 5.1. CONDITIONS TO LOANS. The obligation of Lender to make a Loan hereunder on the Initial Funding Date is subject to the satisfaction of the following conditions precedent: (a) NOTE; LOAN DOCUMENTS. On or before the Closing Date Lender shall have received a Note executed by a Responsible Officer of each Borrower and each of the other Loan Documents shall have been duly executed and delivered by the respective parties thereto and all shall be in full force and effect. (b) REPRESENTATIONS AND WARRANTIES. The representations and warranties made by each Borrower or Guarantor herein or in the other Loan Documents or which are contained in any certificate, document or financial or other statement furnished at any time under - 32 - 41 or in connection with any of the Loan Documents, shall be true, correct and accurate on and as of the Funding Date for the Loan as if made on and as of such date unless stated to relate to a specific earlier date, in which case such representations and warranties shall have been true, correct and complete in all material respects as of such earlier dates. (c) NO DEFAULT OR EVENT OF DEFAULT. No Default or Event of Default shall have occurred and be continuing on such date either before or after giving effect to the Loan to be made on the Funding Date. (d) LEGAL OPINION. Lender shall have received a favorable opinion of counsel to each Borrower and each Guarantor indicating the enforceability of the Loan Documents, addressed to Lender as of the Closing Date and covering such other matters as are customarily required by Lender in similar transactions, all in form and substance reasonably satisfactory to Lender. (e) ORGANIZATIONAL DOCUMENTS; RESOLUTIONS; INCUMBENCY CERTIFICATE; AUTHORIZED SIGNERS. Lender shall have received certified copies of the Declaration of Trust of Lexington and a copy of the Partnership Agreement and Certificate of Limited Partnership or Certificate of Incorporation and by laws or other organizational documents of each Borrower and Guarantor (as appropriate) and all resolutions of the Board of Trustees of Lexington and a certificate of partnership, corporate or limited liability company action of each Borrower authorizing the transactions described herein and evidencing the due authorization, execution and delivery of and this Agreement and the other Loan Documents, and all required approvals, if any, of Governmental Authorities with respect to this Agreement and the other Loan Documents. Lender shall have received from each of the Borrowers and for each of the Guarantors an incumbency certificate, dated as of the Closing Date, signed by a duly authorized offer of such Person and giving the name of each individual who shall be authorized: (a) to sign, in the name and on behalf of such Person, each of the Loan Documents to which such person is or is to be come a party; (b) in the case of the Borrowers' Representative, to submit Notices of Borrowings on behalf of the Borrowers; and (c) in the case of the Borrowers' Representative, to give notices to take other action on behalf of the Borrowers or Guarantors under the Loan Documents. (f) CERTIFICATIONS FROM GOVERNMENT OFFICIALS; UCC SEARCHES. Lender shall have received (i) certifications from government officials evidencing the legal existence and good standing of each Borrower and any Guarantor in its state of organization and as to the foreign qualification of each Borrower or Guarantor in the respective states in which it owns Unencumbered Eligible Properties, along with a certified copy of the certificate of limited partnership or certificate of incorporation of each Borrower and Guarantor, all as of the most recent practicable date; and (ii) UCC Searches from the appropriate jurisdictions for each Borrower and Guarantor with respect to the Unencumbered Eligible Properties. (g) UNENCUMBERED ELIGIBLE PROPERTIES. - 33 - 42 (i) Subject to the provisions of Section 2.19(b)(xviii), Lender shall have received and approved and shall have such access to each of the Unencumbered Eligible Properties as it shall have requested. (ii) Lender shall have received and approved a completed Certificate of Unencumbered Eligible Properties. (h) CERTIFICATES OF INSURANCE. Lender shall have received (a) current certificates of insurance as to all of the insurance maintained by each Borrower on each Unencumbered Eligible Property (including flood insurance if applicable) from the insurer or an independent insurance broker, identifying insurers, types of insurance, insurance limits, and policy terms; and (b) such further information and certificates from the Borrowers, their insurers and insurance brokers as the Lender may reasonably request. (i) ESTOPPEL CERTIFICATES. Unless waived or receipt is deferred by Lender, an original copy of an estoppel certificate executed by each tenant and each lease guarantor in respect of each Approved Lease in the form attached hereto as Exhibit J to this Agreement or as may otherwise be accepted by the Lender in its reasonable discretion. (j) NO MATERIAL ADVERSE EFFECT. No Material Adverse Effect shall have occurred. (k) SOLVENCY OF EACH BORROWER AND GUARANTOR. Both after and immediately before the making of the Loan on any Funding Date, each Borrower and Guarantor shall be Solvent. (l) FEES. All obligations of Borrowers to pay fees and provide compensation and reimbursement of costs and expenses to Lender or their designees as of the Funding Date hereunder or otherwise in connection with the financing contemplated hereby shall have been satisfied. (m) LEGALITY OF LOANS. The making of the Loans hereunder by Lender and the acquisition of the Notes shall be permitted as of the Funding Date by all applicable Requirements of Law and shall not subject Lender to any penalty or other onerous condition in or pursuant to any such Requirement of Law or result in a Material Adverse Effect. (n) NOTICE OF BORROWING. Lender shall have received a Notice of Borrowing as provided in Section 2.5(a), and each other certificate or document required under Section 2.5 with appropriate insertions and attachments reasonably satisfactory in form and substance to Lender and its counsel, executed by a Responsible Officer of Borrowers' Representative. (o) PAY-OFF OF EXISTING LOANS. Upon the initial funding of the Loans the Borrowers shall payoff and terminate that certain $100,000,000 Unsecured Revolving Credit Agreement, dated as of July 22, 1998, (the "FLEET REVOLVING LOAN"), between the Borrowers and -34- 43 Fleet, as Lender, and Fleet shall execute, acknowledge and deliver satisfactions and reconveyances of all mortgages and deeds of trust, (if any) UCC-3's, and any and all other documents and instruments necessary to terminate and release all liens and security interest created thereunder. Once such indebtedness under the Fleet Revolving Loan has been paid in full Borrowers' original promissory notes for such loan facility shall be marked "canceled" or "paid in full" and returned to Borrowers' Representative. (p) CERTIFICATE OF COVENANT COMPLIANCE. Lender shall have received a Certificate of Covenant Compliance in the form attached as Exhibit I to this Agreement. 5.2. CONDITIONS PRECEDENT TO ALL SUBSEQUENT LOANS. The obligation of Lender to make any Loan requested to be made by it on any date after the Initial Funding Date is subject to the following conditions precedent as of each such date: (a) REPRESENTATIONS AND WARRANTIES. As of such date, both before and after giving effect to the Loans to be made on such date, all of the representations and warranties of each Borrower and Guarantor contained in this Loan Agreement and in any other Loan Document (other than representations and warranties which expressly speak as of a different date) shall be true and correct in all material respects. (b) NO DEFAULTS. No Default or Event of Default shall have occurred and be continuing or would result from the making of the requested Loan. (c) NO LEGAL IMPEDIMENTS. No law, regulation, order, judgment or decree of any Governmental Authority shall, and no Lender shall have received notice that, in the reasonable judgment of such Lender, litigation is pending or threatened which is likely to, enjoin, prohibit or restrain, or impose or result in the imposition of any material adverse condition upon, such Lender's making of the requested Loan. (d) NO MATERIAL ADVERSE EFFECT. No Borrower or Guarantor shall have received written notice that an event has occurred since the date of this Agreement which has had and continues to have, or is reasonably likely to have, a Material Adverse Effect. (e) SOLVENCY OF EACH BORROWER AND GUARANTOR. Both after and immediately before the making of the Loan on any Funding Date, each Borrower and Guarantor shall be Solvent. (f) FEES. All obligations of Borrowers and Guarantors to pay fees and provide compensation and reimbursement of costs and expenses to Lender or their designees as of the Funding Date hereunder or otherwise in connection with the financing contemplated hereby shall have been satisfied. (g) NOTICE OF BORROWING. Lender shall have received a Notice of Borrowing, and each other certificate or document required under Section 2.5 with appropriate insertions and -35- 44 attachments reasonably satisfactory in form and substance to Lender and its counsel, executed by a Responsible Officer of Borrowers' Representative. (h) GUARANTORS. Each Guarantor shall deliver the documents, agreements, instruments and opinions as the Lender shall require as to such Guarantor and the Unencumbered Eligible Property owned by such Guarantor that are required to be delivered by the Borrowers as of the Closing Date pursuant to Sections 5.1 (b) and (d) through (j). (i) NEW UNENCUMBERED ELIGIBLE PROPERTIES. Borrowers' Representative shall have complied with Section 5.1(g),(h) and (i) for any Unencumbered Eligible Property Applications submitted after the Closing Date. (j) CERTIFICATE OF UNENCUMBERED ELIGIBLE PROPERTIES. Borrower's Representative shall have delivered to Lender an updated Certificate of Unencumbered Eligible Properties. Each submission of a Notice of Borrowing with respect to any Loan and each acceptance by a Borrower of the proceeds of each Loan made hereunder, shall constitute a representation and warranty by each Borrower and Guarantor as of the date of funding in respect of such Loan, that all the conditions contained in this Section 5.2 have been satisfied or waived in accordance with Section 10.1 and that no MAC has occurred and is continuing as of the relevant date in respect of the facts, circumstances or laws relevant to the conditions precedent set forth in paragraphs (d), (e), (f), and (k) of Section 5.1. SECTION 6. AFFIRMATIVE COVENANTS Each Borrower hereby agrees that, so long as the Revolving Credit Commitment remains in effect, any Note remains outstanding and unpaid or any other amount is owing to Lender, such Borrower shall and shall cause each Guarantor (to the extent applicable) to: 6.1. FINANCIAL STATEMENTS. Furnish to Lender or cause Borrowers' Representative to furnish to Lender: (a) ANNUAL. As soon as available, but in any event within ninety (90) days after the end of each fiscal year (A) audited consolidated financial statements of Lexington consisting of (i) a balance sheet; (ii) an income statement; (iii) a statement of cash flow; (iv) a statement of retained earnings; and (v) changes in stockholders' equity, for such year, setting forth in each case in comparative form the figures for the previous year, certified without material qualification by its certified public accountants of nationally recognized standing; and (B) unaudited consolidating financial statements of Lexington certified by a Responsible Officer of Lexington; and (b) QUARTERLY. As soon as available, but in any event not later than sixty (60) days after the end of each fiscal quarter of Lexington, copies of each of the following for -36- 45 Lexington: (i) an unaudited balance sheet prepared on a consolidated and consolidating basis as at the end of each such quarter and the related unaudited statements of income for the fiscal quarter; (ii) stockholders' equity and cash flows for such quarterly period, and the portion of the fiscal year through such date; (iii) operating statements and a rent roll certified by Lexington (including a schedule of the aging of all rent payments and indicating whether any tenant is no longer in occupancy) for each Unencumbered Eligible Property for such quarterly period, the portion of the fiscal year through such date, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer of such entity (subject to normal year-end audit adjustments); all such financial statements referred to in Section 5.1 (a) and (b) to be complete and correct in all material respects and be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein (except as disclosed therein and for normal year-end adjustments). 6.2. CERTIFICATES; OTHER INFORMATION. Furnish to Lender or cause Borrowers' Representative to furnish to Lender: (a) concurrently with the delivery of Lexington's financial statements referred to in Section 6.1(a) and (b) above, (i) a certificate of a Responsible Officer stating that he or she has no knowledge of any Default or Event of Default except as specified in such certificate, (ii) a Certificate of Covenant Compliance, (iii) a Certificate of Unencumbered Eligible Properties; and (iv) that the representations and warranties contained in the Loan Documents are true, correct and accurate in all material respects to the same extent as though made on and as of the date of such delivery. (b) (i) whenever additional debt in excess of $10,000,000 is incurred by any Borrower or Guarantor, a Certificate of Covenant Compliance; (ii) upon the sale of any Property owned by a Borrower or Guarantor, a Certificate of Covenant Compliance and an updated Certificate of Unencumbered Eligible Properties; and (iii) at any other time as Borrowers' Representative wishes to submit an updated Certificate of Covenant Compliance or Certificate of Unencumbered Eligible Properties. (c) within ten days of receipt thereof, copies of any financial statements or other information furnished to a Borrower or Guarantor pursuant to the Approved Leases; (d) on an annual basis, a copy of a one year projected operating statement of Lexington including a projected operating budget and cash flow of Lexington; (e) promptly after the same are sent, copies of all financial statements and reports which Lexington sends to its holders of its equity securities, and promptly after the same are filed by Lexington, copies of all financial statements and reports which Lexington may make to, or file with, the NYSE and the Commission or any successor or analogous Governmental Authority; -37- 46 (f) upon request by Lender, no later than thirty (30) days after the same are filed with the Internal Revenue Service ("IRS") and other applicable taxing authorities, copies of its income tax returns and all related correspondence; (g) Within ten (10) days after the filing thereof, evidence indicating that Lexington has maintained its status as a real estate investment trust ("REIT") under the applicable provisions of the Code such evidence to consist of annual tax returns certified by its independent public accounting firm or such other national accounting firm which is a "Big 5" firm or otherwise reasonably acceptable to Lender; and (h) promptly thereafter, such additional financial and other information respecting the financial or other condition of any Borrower or Guarantor or the status or condition of the Unencumbered Eligible Properties or the operation thereof which such Borrower or Guarantor is entitled to or can otherwise reasonably obtain and as Lender may from time to time reasonably request. 6.3 PUNCTUAL PAYMENT. The Borrowers will duly and punctually pay or cause to be paid the principal and interest on the Loans and all interest, fees, charges and other amounts provided for in this Agreement and the other Loan Documents, all in accordance with the terms of this Agreement and the Note, and the other Loan Documents. 6.4. PAYMENT OF OTHER OBLIGATIONS. Discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its Indebtedness and other obligations of whatever nature except when the amount or validity thereof is currently being contested in good faith by appropriate proceedings, and reserves in conformity with GAAP with respect thereto have been provided on the books of such Borrower or Guarantor or where the failure to do so does not violate Section 8.1(e). 6.5. CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. Continue to engage in business of the same general type as now conducted by it, and preserve, renew and keep in full force and effect its existence and take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business; and comply with all Contractual Obligations and Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, have a Material Adverse Effect. 6.6. LEASES. (a) Maintain the Approved Leases and any Financeable Ground Lease in full force and effect and enforce the obligations of the tenants under the Approved Leases and the landlord under each Financeable Ground Lease, in a timely manner and obtain the consent of the Lender in connection with any change in or waiver of any obligation of any tenant or landlord, contained in, or any right or remedy of any Borrower under any Approved Lease or Financeable Ground Lease (as appropriate) which alone or together with any other such change or waiver could reasonably be expected to have a Material Adverse Effect on such Unencumbered Eligible Property; and (b) give notice to Lender, together with a copy thereof, of each renewal, -38- 47 amendment, modification or termination of the Approved Leases or any Financeable Ground Lease. 6.7. MAINTENANCE OF PROPERTY, INSURANCE. Keep or cause the tenants to keep all Property in good condition, working order and repair; maintain or cause the tenants of its Properties to maintain with financially sound and reputable insurance companies, such hazard, liability and other insurance with respect to its Property and its business against such casualties and contingencies in amounts and minimum scope of coverage as shall be in accordance with the general practices of businesses having similar operations in similar geographic location; and furnish to Lender, on the Closing Date and upon written request, full information as to the insurance carried. 6.8. INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS. Keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and permit representatives of Lender and any Lender to visit and inspect any of its properties for any purpose including performing environmental inspections and examine and make abstracts from any of its books and records at any reasonable time and on reasonable notice and as often as may reasonably be desired (subject to applicable provisions of any lease affecting any Unencumbered Eligible Property), and to discuss the business, operations, properties, prospects and financial and other condition of such Borrower with officers and employees of such Borrower and with its independent certified public accountants. 6.9. NOTICES. Promptly, and in any event within ten (10) Business Days after an officer of any Borrower or Guarantor obtains knowledge thereof (except as set forth below) give notice to Lender: (a) of the occurrence of any Default or Event of Default; (b) of (i) any default or event of default or termination under any (a) Approved Lease or any other Contractual Obligation of or in favor of any Borrower or Guarantor which is reasonably likely to have a Material Adverse Effect or (b) Financeable Ground Lease as to which any Borrower has received notice from the ground lessor and which remains uncured and (ii) any litigation, investigation or proceeding which may exist at any time between any Borrower or any tenant and any Governmental Authority or other Person, which if adversely determined is reasonably likely to have a Material Adverse Effect; (c) of any litigation or proceeding pending or any judgment against any Borrower, Guarantor or Unencumbered Eligible Property in which the amount involved which is not covered by insurance is $100,000 or more or in which injunctive or similar relief is sought; or (d) of the occurrence or existence of any event or condition which would cause any of the representations and warranties set forth in Section 4.8 to be untrue. -39- 48 (e) of any setoff, claims, withholdings or other defenses to which any of the Unencumbered Eligible Properties are subject, which (i) would have a Material Adverse Effect on (x) the business, assets or financial condition of any Borrower, any Guarantor or any of their respective Subsidiaries, or (y) the value of such Unencumbered Eligible Property, or (ii) with respect to such Unencumbered Eligible Property, which is not a Permitted Exception or a Customary Permitted Lien. Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action a Borrower or Guarantor proposes to take with respect thereto. 6.10. REIT REQUIREMENTS. Cause Lexington to operate its business at all times so as to satisfy or be deemed to have satisfied all requirements necessary to qualify as a real estate investment trust under the Code. Lexington shall maintain adequate records so as to comply with all record-keeping requirements relating to the qualification of Lexington as a real estate investment trust as required by the Code and applicable regulations of the Department of the Treasury promulgated thereunder and will properly prepare and timely file with the IRS all returns and reports required thereby. Lexington shall request from its shareholders all shareholder information required by the Code and applicable regulations of the Department of Treasury promulgated thereunder. 6.11. ENVIRONMENTAL ACTIONS. (a) INDEMNIFICATION. On a joint and several basis, indemnify, defend (with counsel reasonably acceptable to the indemnified party) and hold Lender and the directors, officers, shareholders, employees and agents of Lender harmless from any claims (including without limitation third party claims for personal injury or real or personal property damage), actions, administrative proceedings, judgments, damages, punitive damages, penalties, fines, reasonable costs, liabilities (including sums paid in settlements of claims), interest or losses, including reasonable attorneys' fees, consultant fees and expert fees, that arise directly or indirectly from or in connection with the presence, suspected presence, release or suspected release of any Hazardous Material in the air, soil, surface water or groundwater at or from the real property or any portion thereof with respect to a Property, or any other real property in which any Borrower has any interest (all of the foregoing real property shall be referred to collectively as the "REAL PROPERTY") or any violation of any Environmental Law. Without limiting the generality of the foregoing, the indemnification provided by this Section shall specifically cover (i) costs, including capital, operating and maintenance costs, incurred in connection with any investigation or monitoring of site conditions or any clean-up, remedial, removal or restoration work required or performed by any federal, state or local governmental agency or political subdivision or performed by any non-governmental Person, including any tenant of a Property, because of the presence, suspected presence, release or suspected release of Hazardous Material in the air, soil, surface water or groundwater at or from the Real Property; and (ii) costs incurred in connection with (A) Hazardous Material present or suspected to be -40- 49 present in the air, soil, surface water or groundwater at the Real Property before the date of this Agreement, or (B) Hazardous Material that migrates, flows, percolates, diffuses or in any way moves onto or under or from the Real Property, or (C) Hazardous Material present at the Real Property as a result of any release, discharge, disposal, dumping, spilling or leaking (accidental or otherwise) (any of the foregoing, a "RELEASE") onto or from the Property before or after the date of this Agreement by any Person; provided, however, that the indemnification provided by this Section shall not include claims to the extent arising from the gross negligence or willful misconduct of any party seeking indemnification. The indemnification provided in this Section 6.11 shall survive the termination of this Agreement; provided, however, that no Borrower shall have any liability under the foregoing indemnity in connection with any Release of any Hazardous Materials on, under or about any Property which occurs after the date of any transfer of the Property to Lender, or its designee or any other Person(s), by foreclosure deed-in-lieu thereof or otherwise which was not present on the Property prior to such date. (b) RESPONSE ACTIONS. Each Borrower and Guarantor covenants and agrees that if any Release or disposal of Hazardous Material shall occur or shall have occurred on any Real Property owned by it, such Borrower or Guarantor will cause the prompt containment and removal of such Hazardous Material and remediation of such Real Property as necessary to comply with all Environmental Laws or to preserve the value of such Real Property. (c) ENVIRONMENTAL ASSESSMENTS. If Lender has reasonable grounds to believe that an adverse environmental event which could have a Material Adverse Effect has occurred with respect to any Unencumbered Eligible Property, after reasonable notice by the Lender, whether or not a Default or an Event of Default shall have occurred, the Lender may determine that the affected Unencumbered Eligible Property no longer qualifies as an Unencumbered Eligible Property; provided that prior to making such determination, the Lender shall give the Borrowers' Representative (i) reasonable notice and the opportunity to obtain one or more environmental assessments or audits of such Unencumbered Eligible Property prepared by a hydrogeologist, an independent engineer or other qualified consultant or expert approved by the Lender, which approval will not be unreasonably withheld, to evaluate or confirm (A) whether any Release of Hazardous Materials has occurred in the soil or water at such Unencumbered Eligible Property and (B) whether the use and operation of such Unencumbered Eligible Property materially complies with all Environmental Laws (including not being subject to a matter that is a material environmental event) and (ii) if such assessments or audits discloses that a Release has occurred, a reasonable period to clean up or remediate such condition in accordance with applicable Environmental Laws unless such Release could reasonably be expected to have a Material Adverse Effect on the operation, value or financeability of such Property, in which event the consent of the Lender must be obtained. Such assessments and audits will then be used by the Lender to determine whether a Material Adverse Effect has in fact occurred with respect to such Unencumbered Eligible Property. All such environmental assessments shall be at the sole cost and expense of the Borrowers. 6.12. CHANGES IN GAAP. In the event of a change in GAAP which would cause the financial covenants set forth in Section 7.1 to provide less protection to Lender or be more -41- 50 restrictive for the Borrowers than presently provided for hereunder, cause such financial covenants to be reset, in good faith, by Lender and the Borrowers to maintain the protection to each Lender equivalent to that in place prior to such change and Lender and each Borrower shall execute one or more amendments to this Agreement to effect such reset. 6.13. NYSE LISTING. Cause Lexington at all times to keep its common stock duly listed on the NYSE and to file all reports on a timely basis required by the NYSE. 6.14. INTENTIONALLY OMITTED. 6.15. MANAGEMENT OF BORROWER AND UNENCUMBERED ELIGIBLE PROPERTY. Insure that the management of Lexington shall be self-directed and self-administered. 6.16. SUBORDINATION OF PAYABLES TO AFFILIATES. After the occurrence and continuance of a Default or Event of Default, make no payments on any loans owed by any Borrower or Guarantor to any Affiliate or Subsidiary and all such amounts shall be fully subordinated to the Loans pursuant to the terms of an agreement in form and substance satisfactory to the Lender. 6.17. SUBORDINATED DEBT. Not amend, modify or obtain a waiver of any provision of any document or instrument evidencing or relating to subordinated indebtedness (including, but not limited to the $25,000,000 of exchangeable notes issued by LCIF in March, 1997) which would move up the maturity date on such subordinated indebtedness prior to the Revolving Credit Termination Date or otherwise have a Material Adverse Effect on the Lender, or purchase, redeem (except redemptions made in connection with the conversion of any subordinate indebtedness to preferred stock or common stock pursuant to the terms of the documentation evidencing such subordinated indebtedness), retire or otherwise acquire or make any payment or prepayment of the principal of or any other amount owing in respect of any subordinated indebtedness except for payments (but not prepayments) permitted or required under the present provisions of the documentation evidencing the subordinated indebtedness (without amendment) and redemptions of the exchangeable notes and prepayments made with proceeds of the Loans, or incur subordinated indebtedness after the Closing Date, without the prior written consent of Lender, which consent will not be unreasonably withheld under the provisions of documentation approved by the Lender. 6.18. ERISA NOTICES. Deliver or cause to be delivered to the Lender, at such Borrower's expense, the following information and notices as soon as reasonably possible, and in any event: (a) within thirty (30) Business Days after Borrower or any ERISA Affiliate knows or has reason to know that a Termination Event has occurred, a written statement of the chief financial officer of the Borrower describing such Termination Event and the action, if any, which such Borrower or any ERISA Affiliate has taken, is taking or proposes to take with respect thereto, and when known, any action taken or threatened by the IRS, DOL or PBGC with respect thereto; -42- 51 (b) within thirty (30) Business Days after the Borrower knows or has reason to know that a prohibited transaction (defined in Sections 406 of ERISA and Section 4975 of Code) has occurred, a statement of the chief financial officer of the Borrower describing such transaction and the action which the Borrower or any ERISA Affiliate has taken, is taking or proposes to take with respect thereto; (c) within thirty (30) Business Days after the filing of the same with the DOL, IRS or PBGC, copies of each annual report (form 5500 series), including Schedule B thereto, filed with respect to each Plan; (d) within thirty (30) Business Days after receipt by such Borrower or any ERISA Affiliate of each actuarial report for any Plan or Multiemployer Plan and each annual report for any Multiemployer Plan, copies of each such report; (e) within thirty (30) Business Days after the filing of the same with the IRS, a copy of each funding waiver request filed with respect to any Plan and all communications received by such Borrower or any ERISA Affiliate with respect to such request; (f) within thirty (30) Business Days after the occurrence any material increase in the benefits of any existing Plan or Multiemployer Plan or the establishment of any new Plan or the commencement of contributions to any Plan or Multiemployer Plan to which such Borrower or any ERISA Affiliate to which such Borrower or any ERISA Affiliate was not previously contributing, notification of such increase, establishment or commencement; (g) within thirty (30) Business Days after such Borrower or any ERISA Affiliate receives notice of the PBGC's intention to terminate a Plan or to have a trustee appointed to administer a Plan, copies of each such notice; (h) within thirty (30) Business Days after such Borrower or any of its Subsidiaries receives notice of any unfavorable determination letter from the IRS regarding the qualification of a Plan under Section 401(a) of the Code, copies of each such letter; (i) within thirty (30) Business Days after such Borrower or any ERISA Affiliate receives notice from a Multiemployer Plan regarding the imposition of withdrawal liability, copies of each such notice; (j) within thirty (30) Business Days after such Borrower or any ERISA Affiliate fails to make a required installment or any other required payment under Section 412 of Code on or before the due date for such installment or payment, a notification of such failure; and (k) within thirty (30) Business Days after such Borrower or any ERISA Affiliate knows or has reason to know (i) a Multiemployer Plan has been terminated, (ii) the -43- 52 administrator or plan sponsor of a Multiemployer Plan intends to terminate a Multiemployer Plan, or (iii) the PBGC has instituted or will institute proceedings under Section 4042 of ERISA to terminate a Multiemployer Plan, notification of such termination, intention to terminate or institution of proceedings. 6.19. ERISA COMPLIANCE. Cause, and shall cause each of its Subsidiaries and ERISA Affiliates to, establish, maintain and operate all Plans to comply in all material respects with the provisions of ERISA, the Code, all other applicable laws, and the regulations and interpretations thereunder and the respective requirements of the governing documents for such Plans. 6.20. PAYMENT OF TAXES AND CLAIMS (a) Pay or cause to be paid, and cause each of its Subsidiaries to pay or cause to be paid, (i) all taxes, assessments and other governmental charges imposed upon it or on any of its property or assets or in respect of any of its franchises, licenses, receipts, sales, use, payroll, employment, business, income or property before any penalty or interest accrues thereon, and (ii) all claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by law have or may become a Lien on an Unencumbered Eligible Property (other than a Lien permitted by Section 7.7) ; provided, however, that no such taxes, assessments, fees and governmental charges referred to in clause (i) above or claims referred to in clause (ii) above need be paid if being contested in good faith by appropriate proceedings diligently instituted and conducted and if such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor. 6.21. INTER-BORROWER OR GUARANTOR ADVANCES OF LOAN PROCEEDS Cause all transfers of Loan proceeds from one Borrower or Guarantor to another or any Affiliate or Subsidiary thereof to be documented and treated for all purposes by the lending and receiving Borrower or Guarantor, Affiliate or Subsidiary as an intercorporate loan transaction. 6.22. SOLVENCY OF GUARANTORS. Lexington, LCIF or LCIFII shall cause each of the Guarantors to remain Solvent and shall provide each of the Guarantors with such funds and assets as such Guarantor shall require in the operation of its business, all in consideration of such Guarantor's execution and delivery of its Guaranty. 6.23. NO AMENDMENTS TO CERTAIN DOCUMENTS. The Borrowers will not, and will not permit any Guarantor to, at any time cause or permit its certificate of limited partnership, agreement of limited partnership, articles of incorporation, by-laws or other charter documents, as the case may be, to be modified, amended or supplemented in any respect whatever, without (in each case) the express prior written consent or approval of the Lender, if such changes would adversely affect Lexington's REIT status or otherwise materially adversely affect the rights of the Lender hereunder or under any other Loan Document. 6.24. YEAR 2000. The Borrowers and each Guarantor and their Subsidiaries shall notify the Lender promptly upon detecting any occurrence whereby the representation contained in Section 4.18 above becomes untrue. -44- 53 SECTION 7. NEGATIVE COVENANTS Each Borrower hereby agrees that, so long as the Revolving Credit Commitment remains in effect or any Note remains outstanding and unpaid or any other amount is owing to Lender hereunder or under any other Loan Document, such Borrower shall not and shall not permit any Guarantor to directly or indirectly: 7.1. FINANCIAL COVENANTS. Fail to comply with the covenants set forth in this Section 7.1 on a consolidated basis, tested as of the end of each fiscal quarter. (a) MINIMUM ESTIMATED NET WORTH OF BORROWERS AND GUARANTORS. Suffer or permit the Minimum Estimated Net Worth of the Borrowers on a consolidated basis to be less than the aggregate of (i) $350,000,000, plus (ii) 75% of the Net Securities Proceeds of all issues of any Common Shares, Preferred Shares or other equity securities by Lexington in one or more transactions received after the date hereof, excluding Net Securities Proceeds used to redeem Preferred Shares or other equity securities of Lexington. (b) DEBT SERVICE COVERAGE. Suffer or permit the ratio of EBIDA less non-incremental revenue generating capital expenditures to Debt Service obligations (including principal and interest on the Loans) for the two (2) most recent fiscal quarters to be less than 1.60:1.0 from the date of closing through the Revolving Credit Termination Date, all as determined within 60 days of the close of each fiscal quarter. (c) MAXIMUM TOTAL DEBT TO CAPITALIZED VALUE. Suffer or permit Total Debt to Capitalized Value to exceed 65%. (d) MINIMUM UNENCUMBERED LIQUIDITY. Suffer or permit the total sum of (i) unrestricted cash, (ii) unrestricted Cash Equivalents and (iii) Current Availability under the Revolving Credit Commitment, to be less than $2,500,000 on a consolidated basis. (e) MAXIMUM SECURED RECOURSE DEBT TO CAPITALIZED VALUE. Suffer or permit secured Recourse debt in respect of money borrowed or guarantees in respect thereof by the Borrowers and Guarantors on a consolidated basis to (i) exceed (a) 7.5% of Capitalized Value from the date of closing through September 30, 2002 and (b) 5% from October 1, 2002 through the Revolving Credit Termination Date or (ii) have a scheduled maturity date prior to the Revolving Credit Termination Date (other than the maturity date of $25,000,000 of exchangeable notes issued by LCIF in March 1977 (the "LCIF Debt")). The maximum Loan to Value of secured Recourse debt for any Property as of the date such secured Recourse debt is incurred, (excluding the LCIF Debt or any renewal or replacement thereof up to $25,000,000), shall not exceed 75% (value for purposes of the foregoing shall be determined by multiplying the net operating income for the two (2) most recent fiscal quarters for such Property as of the date such secured Recourse debt is incurred by two (2) and dividing by 9.5%). Such net operating income shall be adjusted for any -45- 54 newly acquired Property or any Property as to which two (2) fiscal quarters of earnings information is not available in accordance with the last two (2) sentences of Section 7.2 below. (f) MAXIMUM PERMITTED INVESTMENTS. Suffer or permit investments in (i) notes or mortgages or (ii) unimproved real estate to exceed 5% of Capitalized Value in each case. (g) INTEREST RATE PROTECTION. Fail to maintain in effect interest rate protection arrangements, in form and substance reasonably satisfactory to Lender, for all variable rate Indebtedness in excess of 12.5% of Capitalized Value, providing for the rate of interest applicable to such indebtedness to be capped at a rate satisfactory to Lender. Such arrangements shall be maintained in full force and effect until all Obligations are repaid in full or until and so long as variable rate Indebtedness shall be less than 12.5% of Capitalized Value. (h) LIMITATION ON CONSTRUCTION ACTIVITY. Have construction in process (defined as total estimated completed cost of new construction, expansions and redevelopment in process, excluding tenant improvements and property renovation and refurbishment) whose value exceeds 10% of Capitalized Value. (i) MINIMUM FIXED CHARGE COVERAGE. Suffer or permit the ratio of EBIDA less non-incremental revenue generating capital expenditures to Debt Service plus dividends on Preferred Stock or other preferred securities for the two (2) most recent fiscal quarters to be less than 1.50 to 1.0. (j) LIMITATIONS ON DISTRIBUTIONS TO FFO. Suffer or permit distributions to shareholders of Lexington to exceed 85% of Lexington's funds from operations over the four (4) most recent fiscal quarters. Notwithstanding the foregoing, Lexington may make distributions that are necessary to preserve its REIT status. (k) JOINT VENTURE OWNERSHIP INTEREST. Suffer or permit Joint Venture Ownership Interest Value to exceed 15% of Capitalized Value at the end of any fiscal quarter. 7.2 COVENANT CALCULATIONS. For purposes of Section 7.1 hereof (with the exception of subsections 7.1(b) and 7.1(i)), EBIDA and Unencumbered Eligible Property NOI (and all defined terms and calculations using such terms) shall be adjusted to (i) deduct the actual results of any Property disposed of by a Borrower or Guarantor during the relevant fiscal period, and (ii) include the pro forma results of any Property (including sale/leasebacks) acquired by a Borrower or Guarantor or any existing Property on which new construction is completed, in each case during the relevant fiscal period, with such pro forma results being calculated by (x) using the Borrower's or Guarantor's pro forma projections for such acquired Property, subject to the Lender's reasonable approval, if such Property has been owned by a Borrower or Guarantor for less than the relevant fiscal period or (y) using the actual results for such acquired Property and adjusting such results for the appropriate period of time required by the applicable financial covenant, if such Property has been owned by a Borrower or a Guarantor for at least one complete fiscal quarter. -46- 55 7.3. RESTRICTED PAYMENTS. (a) Declare, make or pay any Restricted Payment while any Event of Default is continuing either before or after giving effect to such Restricted Payment, unless Borrowers have sufficient funds or availability under its credit facilities (including this Agreement) to pay the next installment of principal or interest payable in respect of the Obligations and except for minimum distributions necessary to maintain Lexington's REIT status; or (b) While any Event of Default is continuing, make any payment of Indebtedness of Borrowers in contravention of the terms of any agreement or instrument subordinating or purporting to subordinate any rights to receive payments in respect of any Indebtedness of Borrowers to any rights to receive payments under this Agreement. 7.4. DISSOLUTION; MERGER; SALE OF ASSETS; TERMINATION AND OTHER ACTIONS. Become a party to any dissolution, merger, consolidation or reorganization without the approval of the Lender; or (b) convey, sell, lease or otherwise dispose of (i) any of the Unencumbered Eligible Properties unless withdrawn under Section 2.20 or (ii) any substantial part of its property or assets (other than the Unencumbered Eligible Properties) unless, in the case of this clause (b), no Default or Event of Default results therefrom. 7.5. TRANSACTIONS WITH AFFILIATES. Enter into or be a party to any transaction directly or indirectly with or for the benefit of any Affiliate of any Borrower or Guarantor, other than (i) in the ordinary course of business and (ii) for fair consideration and on terms no less favorable to any Borrower or Guarantor than are available in an arm's-length transaction from unaffiliated third parties. 7.6. ACCOUNTING CHANGES. Make any significant change in accounting treatment and reporting practices, except as required by GAAP or with which Borrowers' or Guarantors' independent certified public accountants have agreed. Such Borrower or Guarantor shall advise Lender sufficiently in advance of any change to permit representatives of Lender to discuss the proposed change with the officers of such Borrower or Guarantor. 7.7. NO LIENS. Until withdrawal under Section 2.20, suffer or permit after the date hereof any Lien on any Unencumbered Eligible Property other than Permitted Exceptions or Customary Permitted Liens. 7.8. FISCAL YEAR. Change the fiscal year end of any Borrower or Guarantor from December 31 to any other date without the prior written consent of Lender. 7.9. CHIEF EXECUTIVE OFFICE. Change the name of any Borrower or Guarantor or the chief executive office of such Borrower or Guarantor or the address where such Borrower's or Guarantor's books and records are maintained unless such Borrower or Guarantor gives Lender prompt written notice of any such change thereafter. -47- 56 7.10. SELF-DIRECTED REIT. Suffer or permit Lexington to be other than self-directed and self-administered or fail to obtain the consent of Lender prior to any change to third-party management or leasing. 7.11. LIMITATIONS ON CERTAIN ACTIVITIES. Except in connection with withdrawals of Unencumbered Eligible Properties under Section 2.20 or sales, transfers or encumbrances to another Borrower or Guarantor (i) no sale, transfer, pledge or assignment of more than 49% of the ownership interests in any of the Borrowers or Guarantors excluding Lexington; and (ii) no material changes in any Borrower's or Guarantor's business of owning, managing and investing in predominantly (75% or more by value) net-lease, office, industrial and retail properties. 7.12. DISTRIBUTIONS. Suffer or permit Lexington to use any portion of the Loans to make any distributions to partners or shareholders which exceed 95% of the greater of Lexington's (a) Funds From Operations or (b) taxable income. 7.13. ERISA. No Borrower, Guarantor nor any of its Subsidiaries or ERISA Affiliates shall: (a) engage in any prohibited transaction described in Sections 406 of ERISA or 4975 of the Code for which a statutory or class exemption is not available or a private exemption has not been previously obtained from the DOL; (b) permit to exist any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of the Code), with respect to any Plan, whether or not waived; (c) fail to pay timely required contributions or annual installments due with respect to any waived funding deficiency to any Plan; (d) terminate any Plan which would result in any liability of any Borrower or any ERISA Affiliate under Title IV of ERISA; (e) fail to make any contribution or payment to any Multiemployer Plan which any Borrower or any ERISA Affiliate may be required to make under any agreement relating to such Multiemployer Plan, or any law pertaining thereto; (f) fail to pay any required installment or any other payment required under Section 412 of the Internal Revenue Code on or before the due date for such installment or other payment; or (g) amend a Benefit Plan resulting in an increase in current liability for the plan year such that any Borrower or any ERISA Affiliate is required to provide security to such Plan under Section 401 (a) (29) of the Code. -48- 57 7.14 COMPLIANCE WITH ENVIRONMENTAL LAWS. Do any of the following: (a) use any of its Real Property or any portion thereof as a facility for the handling, processing, storage or disposal of Hazardous Materials except for quantities of Hazardous Materials used in the ordinary course of business and in compliance with all applicable Environmental Laws, (b) cause or permit to be located on any of its Real Property any underground tank or other underground storage receptacle for Hazardous Materials except in full compliance with Environmental Laws, (c) generate any Hazardous Materials on any of its Real Property except in full compliance with Environmental Laws, or (d) conduct any activity at any Real Property or use any Real Property in any manner so as to cause a Release or a violation of any Environmental Law; provided that a breach of this covenant shall result in the exclusion of the affected Real Property from the calculation of the covenants set forth in Section 7.1, but shall only constitute an Event of Default hereof if such breach has a Material Adverse Effect on the Borrowers or Guarantors, taken as a whole, or materially impairs the ability of any Borrower or Guarantor to fulfill their obligations to the Lender under the Loan Documents. 7.15. LIMITATION ON DEBT AND ACTION. Without the prior written consent of the Lender incur any Recourse debt other than (i) the Loans, (ii) the limited secured recourse debt permitted at Section 7.1(e) herein, or (iii) subordinated debt provided that the terms, conditions and level of subordination of such subordinated debt are approved by Lender (such approval in this instance not to be unreasonably withheld). SECTION 8. EVENTS OF DEFAULT 8.1. EVENTS OF DEFAULT. Upon the occurrence of any of the following events (each an "EVENT OF DEFAULT"): (a) PAYMENTS. Any Borrower or Guarantor shall fail to pay any principal of or interest on any Note or Loan within ten (10) days after the due date thereof, or any other amount payable hereunder shall not be paid within ten (10) days after notice from Lender; or (b) REPRESENTATIONS AND WARRANTIES. Any representation or warranty made or deemed made by any Borrower or Guarantor herein or in any other Loan Document or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Agreement or any other Loan Document shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (c) CERTAIN COVENANT DEFAULTS. Any Borrower shall default in the observance or performance of any agreement contained in Section 7.1 of this Agreement and such default shall continue unremedied for a period of 45 days after notice to Borrowers' Representative by Lender; or (d) CERTAIN OTHER COVENANT DEFAULTS. Any Borrower or Guarantor shall default in the observance or performance of any other covenant or provision of this Agreement or any of the other Loan Documents, and such default shall continue unremedied for the period of -49- 58 time set forth in such covenant or provision, if any, or, if not, a period of 30 days after notice from Lender or such longer period as may be reasonably necessary to cure such default (but in no event more than ninety (90) days in total) provided such Borrower or Guarantor commences such cure within said thirty (30) day period and diligently prosecutes same to completion; or (e) CROSS-DEFAULT. Any Borrower or Guarantor shall (i) default in any payment of principal of or interest on any recourse Indebtedness, beyond the period of grace, if any, provided in the instrument or agreement under which such recourse Indebtedness was created; or (ii) default beyond applicable grace periods in the observance or performance of any other agreement or condition relating to any non-recourse Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur, the effect of which default beyond applicable grace periods or other event is to cause, or to permit the holder or holders non-recourse Indebtedness of such Borrower individually or together with defaults beyond applicable grace periods of other Borrowers to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity. (f) QUALIFICATION AS REIT. Lender shall have determined in good faith, and shall have so given notice to Borrowers' Representative that Lexington has at any time ceased to qualify, or has not qualified, as a real estate investment trust for any of the purposes of the provisions of the Code applicable to real estate investment trusts; provided, however, that no Event of Default under this Section (f) shall be deemed to have occurred and be continuing if, within thirty (30) days after notice of any such determination is given Borrowers' Representative shall have furnished Lender with an opinion of Borrowers' Representative's tax counsel (who shall be reasonably satisfactory to Lender provided that the Lender may not unreasonably withhold its approval) to the effect that the Lexington is then in a position to so qualify, or has so qualified, as the case may be, which opinion shall not contain any material qualification unsatisfactory to the Lender; or (g) INSOLVENCY, ETC. There shall be an Insolvency Event with respect to any Borrower or Guarantor; or (h) ERISA. (i) Any Borrower, Guarantor or ERISA Affiliate shall engage in any "PROHIBITED TRANSACTION" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "ACCUMULATED FUNDING DEFICIENCY" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan, (iii) a Termination Event shall occur or (iv) any other event or condition shall occur or exist with respect to a Plan or a Multiemployer Plan; and in each case in clauses (i) through (iv) above, such event or condition, together with all other such events or conditions, if any, could subject any Borrower to any tax, penalty or other liabilities in the aggregate material in relation to the business, operations, property or financial or other condition of any Borrower or Guarantor and any of the foregoing are not corrected or cured within 30 days after notice to such Borrower or Guarantor; or (i) CERTAIN JUDGMENTS. One or more judgments or decrees shall be entered against any Borrower or Guarantor involving in the aggregate a liability (not paid or fully covered -50- 59 by insurance) of $5,000,000 or more and all such judgments or decrees shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (j) MANAGEMENT. Prior to the Revolving Credit Termination Date any change in the identity of the persons holding a majority of the Board of Trustees of Lexington (other than due to death, retirement, disability or similar causes and so long as the replacement trustee is approved by the remaining trustees who were trustees prior to such change in the composition of the Board of Trustees) without Lender approval. (k) LOAN DOCUMENTS. From and after the Closing Date, any Loan Document shall be terminated or otherwise shall cease to be in full force and effect except in accordance with this Agreement or shall cease to give the Lender any Liens purported to be given thereby or any party thereto other than a Lender shall cease to be, or shall assert that it is not, bound thereby in accordance with its terms and in the case of any party other than a Borrower or Guarantor, Borrowers' Representative shall not have taken such steps as may be reasonably necessary to enforce such Loan Document promptly after notice thereof by Lender. 8.2 REMEDIES. In the event that one or more Events of Default shall have occurred and be continuing, then (i) if such event is an Event of Default specified in paragraph (g) above, the Revolving Credit Commitment shall automatically and immediately terminate and the Obligations hereunder (with accrued interest thereon) and all other amounts owing under this Agreement, any Note and any other Loan Documents shall immediately become due and payable, and (ii) if such event is any other Event of Default, any of the following actions may be taken: (a) Lender may, by notice to Borrowers' Representative, declare the Revolving Credit Commitment to be terminated forthwith, whereupon the Revolving Credit Commitment shall immediately terminate; (b) Lender may by notice of default to Borrowers' Representative, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement, any Note and any other Loan Document to be due and payable forthwith, whereupon the same shall immediately become due and payable or (c) Lender may exercise any other right or remedy available at law or in equity or by statute. Except as expressly provided above in Section 8.1, presentment, demand, protest and all other notices of any kind are hereby expressly waived; or 8.3. ANNULMENT OF ACCELERATION. If payment on the Loans and any Note is accelerated in accordance with Section 8.2 of this Agreement, then and in every such case, the Lender may by an instrument delivered to Borrowers' Representative annul such acceleration and the consequences thereof, provided, that at the time such acceleration is annulled: (a) all arrears of interest on the Loans and any Note and all other sums payable in respect of the Loans and pursuant to this Agreement, any Note and each other Loan Document (except any principal of or interest or premium on the Loans and any Note and other sums which have become due and payable only by reason of such acceleration) shall have been duly paid; and -51- 60 (b) every other Default or Event of Default shall have been duly waived or otherwise cured; provided, further, that no such annulment shall extend to or affect any subsequent Default or Event of Default or impair any right consequent thereon. The provisions of this Section 8.3 is for the sole benefit of the Lender and is not intended to benefit any Borrower or Guarantor and does not give any Borrower or Guarantor the right to require Lender to rescind or annul any acceleration hereunder, even if the conditions set forth herein are met. 8.4. COOPERATION BY EACH BORROWER AND GUARANTOR. To the extent that it lawfully may, each Borrower agrees and shall cause each Guarantor to agree that it will not at any time insist upon or plead, or in any manner whatever claim or take any benefit or advantage of any applicable present or future stay, extension or moratorium law, which may affect observance or performance of the provisions of this Agreement or of any Note or any other Loan Document. SECTION 9. INTENTIONALLY OMITTED SECTION 10. GENERAL 10.1. AMENDMENTS AND WAIVERS. Unless otherwise provided for or required in this Agreement, no amendment or modification of any provision of this Agreement or any of the other Loan Documents shall be effective without the written agreement of the Lender and the Borrowers' Representative. No termination or waiver of any provision of this Agreement or any of the other Loan Documents, or consent to any departure by any Borrower or Guarantor therefrom, shall be effective without the written concurrence of the Lender, which Lender shall have the right to grant or withhold in their sole discretion. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on any Borrower or Guarantor in any specific instance shall entitle such Borrower or Guarantor to any other or further notice or demand in similar or other circumstances. 10.2 MARSHALING; PAYMENTS SET ASIDE. Lender shall not be under any obligation to marshall any assets in favor of any Borrower or Guarantor or any other party or against or in payment of any or all of the Obligations. To the extent that such Borrower or Guarantor makes a payment or payments to the Lender or any such Person exercise its rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party, then to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, right and remedies therefor, shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. 10.3 COUNTERPARTS; EFFECTIVENESS; INCONSISTENCIES. This Agreement and any amendments, waivers, consents, or supplements hereto may be executed in counterparts, each of -52- 61 which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. This Agreement shall become effective against each Borrower and Lender on the Closing Date. This Agreement and each of the other Loan Documents shall be construed to the extent reasonable to be consistent one with the other, but to the extent that the terms and conditions of this Agreement are actually inconsistent with the terms and conditions of any other Loan Document, this Agreement shall govern. 10.4 DISCLAIMER BY LENDER. Lender shall not be liable to any contractor, subcontractor, supplier, laborer, architect, engineer, tenant or other party for services performed or materials supplied in connection with any work performed on any of the Properties. Lender shall not be liable for any debts or claims accruing in favor of any such parties against any Borrower or Guarantor or others or against any of the Properties. No Borrower is nor shall be an Lender of the Lender for any purposes and the Lender, shall not be deemed a partner or joint venturer with any Borrower or Guarantor or any of its Affiliates or Subsidiaries. Lender shall not be deemed to be in privity of contract with any contractor or provider of services to any of the Properties, nor shall any payment of funds directly to a contractor or subcontractor or provider of services be deemed to create any third party beneficiary status or recognition of same by Lender and each of the Borrowers agree to hold the Lender harmless from any of the damages and expenses resulting from such a construction of the relationship of the parties or any assertion thereof. 10.5 NOTICES; CERTAIN PAYMENTS. (a) All notices, consents and other communications to Borrowers, Lender or any Lender relating hereto to be effective shall be in writing and shall be deemed made (i) if by certified mail, return receipt requested, four (4) Business Days after deposit in the United States mail, or if by facsimile, when received (in each case unless otherwise specified in this Agreement), (ii) if delivered by hand or overnight courier, when receipted for, in each case addressed to them as follows or at such other address as either of them may designate by written notice to the other in the manner set forth in this Section 10.10; (x) any Borrower or Guarantor or the Borrowers' Representative: c/o Lexington Corporate Properties Trust, 355 Lexington Avenue, New York, New York 10017 Attention : T. Wilson Eglin with a copy to Richard C. Hamlin, Esq., Paul, Hastings, Janofsky & Walker LLP, 75 East 55th Street, New York, NY 10022; or to (y) Lender: Fleet National Bank, 100 Federal Street, Boston, Massachusetts 02110 Attention: James B. McLaughlin with a copy to Lorne W. McDougall, Esq., Edwards & Angell, LLP, 101 Federal Street, Boston, MA 02110; or to (z) any Lender: at the address set forth below each Lender's name on the signature pages hereof or the signature page of any applicable Assignment and Acceptance. (b) All payments on account of the Loans and the Note pursuant hereto or pursuant to the other Loan Documents shall be made for the account of Lender at: By mail: Fleet National Bank, 100 Federal Street, Boston, Massachusetts 02110, Mail Code MA DE 10009A, Attn: Dwayne Nelson. By wire: Fleet National Bank, ABA #011-000-138, Credit Account #15103566156, Re: Lexington Attn: Dwayne Nelson (617) 434-2098. (c) Notices to the Lender pursuant to Section 2 or 9 shall not be effective until received by the Lender. -53- 62 Lender may by written notice to Borrowers' Representative specify or change its account and address for payment instructions hereunder. 10.6 NO WAIVERS; CUMULATIVE REMEDIES; ENTIRE AGREEMENT; HEADINGS. No action, failure, delay or omission by Lender in exercising any rights and remedies under this Agreement, any Note or any other Loan Document, or otherwise, shall constitute a waiver of, or impair, any of the rights or privileges of Lender hereunder or thereunder. No single or partial exercise of any such right or remedy shall preclude any other or further exercise thereof or the exercises of any other right or remedy. Such rights and remedies are cumulative and not exclusive of any rights and remedies provided by law or otherwise available, including, but not limited to, rights to specific performance (to the extent permitted by law) or any covenant or agreement contained in this Agreement or any of the Loan Documents. No waiver of any such right or remedy shall be effective unless given in writing or as otherwise provided in Section 10.2. No waiver of any such right or remedy shall be deemed a waiver of any other right or remedy hereunder or thereunder. Except as otherwise specifically provided in this Agreement, every right and remedy given by this Agreement or by applicable law to Lender may be exercised from time to time and as often as may be deemed expedient by Lender. This Agreement, Note and the other Loan Documents constitute the entire agreement of the parties relating to the subject matter hereof and thereof and there are no verbal agreements relating hereto or thereto. Section headings herein shall have no legal effect. This Agreement, Note and the other Loan Documents (including all covenants, representations, warranties, privileges, rights, and remedies made or granted herein or therein) shall inure to the benefit of, and be enforceable by Lender or any Lender and its respective successors and assigns, except as otherwise expressly provided in this Agreement. Borrowers may not directly or indirectly assign or transfer (whether by agreement, by operation of law or otherwise) any of their rights or obligations and liabilities hereunder without the prior written consent of Lender affected thereby. Subject to the provisions of Section 10.1, Lender may make, carry or transfer the Loans at, to or for the account of, any of its branch offices or the office of one or more of its Affiliates. 10.7 SURVIVAL. The obligations of each Borrower under Sections 2.13, 2.16, 2.17, 2.18, 6.11, 10.11 and 10.13 (and all other indemnification and expense reimbursement obligations of Borrower under this Agreement) shall survive the repayment of the Loans and the cancellation of the Notes and the termination of the other obligations of such Borrower hereunder and under the other Loan Documents for a period of three (3) years after the date of such payment, except in the case of Section 6.11 and any other indemnification obligations which shall survive for a period of five (5) years; provided, however, that the Borrowers shall not be liable for any liability, claim, loss, cost or expense arising from any act or omission of any Lender or other indemnified party after the transfer of any Property by foreclosure, deed-in-lieu thereof or otherwise which doesn't arise from or deal with pre-existing conditions. The receipt by Borrowers' Representative, prior to the expiration of the above three (3) and five (5) year limitation periods, of a notice, in good faith, of any liability, claim, loss, cost or expense arising from the obligations of Borrowers referenced above shall toll the running of the above limitation periods with regard to such liability, claim, loss, cost or expense. -54- 63 10.8 PAYMENT OF EXPENSES AND TAXES. Each Borrower agrees (a) to pay or reimburse Lender within fifteen (15) Business Days after demand for all its out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement, the Note and any other Loan Documents or other documents prepared in connection herewith, and the consummation of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to Lender, (b) to pay or reimburse Lender, within fifteen (15) Business Days after demand for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the Note and any Loan Documents, or the satisfaction or review of conditions precedent to any borrowing other than that occurring on the Closing Date, including, without limitation, reasonable fees and disbursements of counsel to Lender and (c) to pay, indemnify, and to hold Lender, and its officers, directors, employees and agents (the "Indemnified Parties") harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the Notes the Loan Documents and any such other documents, and (d) to pay, indemnify, and hold Lender, and its officers, directors, employees and agents harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, reasonable costs, reasonable expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement or the other Loan Documents except to the extent resulting from the gross negligence or willful misconduct of any of the Indemnified Parties (all the foregoing, collectively, the "INDEMNIFIED LIABILITIES"). 10.9 FURTHER ASSURANCES. Each Borrower and Guarantor will, on request of Lender, (a) promptly correct any defect, error or omission in any Loan Document; (b) execute, acknowledge, deliver, procure, record or file such further instruments and do such further acts deemed reasonably necessary, desirable or proper by Lender to carry out the purposes of the Loan Documents and to identify and subject to the liens and security interests of the Loan Documents any property intended to be covered thereby, including any renewals, additions, substitutions, replacements, or appurtenances to any such Property; and (c) provide such certificates, documents, reports, information, affidavits and other instruments and do such further acts deemed reasonably necessary, desirable or proper by Lender to comply with the requirements of any agency having jurisdiction over Lender. 10.10 NO BROKERS. Each Borrower hereby agrees to indemnify Lender from any liability, claim or loss arising by reason of claims for any brokerage commission made by any Person claiming to have dealt with and Borrower or any Affiliate of such Borrower in connection with the Loans. Lender agrees to indemnify each Borrower from any liability, claim or loss arising by reason of claims for any brokerage commission made by any Person claiming to have dealt with Lender in connection with the Loans. The provisions of this Section shall survive the -55- 64 repayment of the Loan and shall continue in full force and effect so long as the possibility of such liability (including attorneys' fees), claim or loss exists. 10.11 CONFIDENTIALITY. Subject to Section 10.11, Lender shall hold all confidential information obtained pursuant to the requirements of this Agreement in accordance with such party's customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices and in any event may make disclosure reasonably required by a bona fide offeree, transferee or participant in connection with the contemplated transfer or participation or as required or requested by any Governmental Authority or representative thereof or pursuant to legal process and shall require any such offeree, transferee or participant to agree (and require any of its offerees, transferees or participants to agree) to comply with this Section 10.15. In no event shall Lender be obligated or required to return any materials furnished by any Borrower. 10.12 CAPTIONS. The captions in this instrument are for convenience and reference only and do not define, limit or describe the scope of the provisions hereof. 10.13 GENDER. Whenever the context so requires, reference herein to the neuter gender shall include the masculine and/or feminine gender, and the singular number shall include the plural and, in each case, vice versa. 10.14 SUCCESSORS. The terms, covenants, agreements and conditions contained herein shall extend to, include, and inure to the benefit of and be binding upon the respective successors and assigns of each Borrower and the successors and assigns of Lender. 10.15 ENTIRE AGREEMENT. This Agreement, the Note, the Guaranty, the Security Documents, and the other documents being executed in connection herewith express the entire understanding of the parties with respect to the transactions contemplated thereby. No modification or waiver of any provision of this Agreement, the Note, or any related documents nor consent to any departure by any Borrower therefrom, shall in any event be effective unless the same shall be in writing, and then such waiver of consent shall be effective only in the specific instance, and for the purpose, for which given. No notice to, or demand on any Borrower, in any case, shall entitle such Borrower to any other or future notice of demand in the same, similar or other circumstances. 10.16 DELAY NOT WAIVER. Neither any failure nor any delay on the part of Lender in exercising any right, power or privilege hereunder, or under the Note, or any other instrument given as security therefor, shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or future exercise, or the exercise of any other right, power or privilege. 10.17 SET-OFF. Each Borrower and any Guarantor hereby grant to Lender, a continuing lien, security interest and right of setoff as security for all liabilities and obligations to Lender, whether now existing or hereafter arising, upon and against all deposits, credits, collateral and property, now existing or hereafter arising, upon and against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of Lender or any entity under the control of FleetBoston Financial Corporation and its successors or assigns or in transit to any of them except for that certain Lease dated November 13, 1997 between Lepercq Corporate Income Fund L.P., as landlord and Fleet Mortgage Group, Inc., as tenant. At any time, -56- 65 without demand or notice (any such notice being expressly waived by each Borrower), Lender may set off the same or any part thereof and apply the same to any liability or obligation of such Borrower and any Guarantor even though unmatured and regardless of the adequacy of any other collateral securing the Loan. ANY AND ALL RIGHTS TO REQUIRE LENDER TO EXERCISE ITS RIGHTS TO REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE LOAN, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER OR ANY GUARANTOR, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED. 10.18 SEVERABILITY. In case any one or more of the provisions contained in this Agreement or any related document shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof or thereof, and this Agreement or any such related document shall be construed as if such invalid, illegal or unenforceable provision had never been included. 10.19 LENDER'S RIGHT TO PARTICIPATE, ASSIGN AND PLEDGE. 10.19.1 LENDER'S RIGHT TO SELL A PORTION OF A LOAN TO A PROSPECTIVE PARTICIPANT. Lender shall have the unrestricted right any time and from time to tie, and without the consent of or notice of any Borrower or any Guarantor, to grant to one or more Lenders or other financial institutions (each, a "Participant") participating interests in Lender's obligation to lend hereunder and/or any or all of the loans held by Lender hereunder. In the event of such grant by Lender of a participating interest to a Participant, whether or not upon notice to Borrowers, Lender shall remain responsible for the performance of its obligations hereunder and Borrowers shall remain responsible for the performance of its obligations hereunder and Borrowers shall continue to deal solely and directly with Lender in connection with Lender's rights and obligations hereunder. Lender may furnish any information concerning Borrowers in its possession from time to time to prospective Participants, provided that Lender shall require any such prospective Participant to agree in writing to maintain the confidentiality of such information. 10.19.2 LENDER'S RIGHT TO SELL A LOAN TO A THIRD PARTY. Lender shall have the unrestricted right at any time or from time to time and without any Borrower's or any Guarantor's consent, to assign all or any portion of its rights and obligations hereunder to one or more Lenders or other financial institutions (each, an "Assignee"), and each Borrower and each Guarantor agrees that it shall execute, or cause to be executed, such documents, including without limitation, amendments to this Agreement and to any other documents, instruments and agreements executed in connection herewith as Lender shall deem necessary to effect the foregoing. In addition, at the request of Lender and any such Assignee, each Borrower shall issue one or more promissory notes, as applicable, to any such Assignee and, if Lender has retained any of its rights and obligations hereunder following such assignment, to Lender, which new promissory notes shall be issued in replacement of but not in discharge of, the liability evidenced by the promissory note held by Lender and loans held by such Assignee and Lender after giving effect to such assignment. Upon the execution and delivery of appropriate assignment documentation, amendments and any other documentation required by Lender in -57- 66 connection with such assignment, and the payment by Assignee of the purchase price agreed to by Lender, and such Assignee, such Assignee shall be a party to this Agreement and shall have all of the rights and obligations of Lender hereunder (and under any and all other guaranties, documents, instruments and agreements executed in connection herewith) to the extent that such rights and obligations have been assigned by Lender pursuant to the assignment documentation between Lender and such Assignee, and Lender shall be released from its obligations hereunder and thereunder to a corresponding extent. Lender may furnish any information concerning Borrower in its possession from time to time to prospective Assignees, provided that Lender shall require any such prospective Assignees to agree in writing to maintain the confidentiality of such information. 10.19.3 LENDER'S RIGHT TO PLEDGE. Lender may at any time pledge or assign all or any portion of its rights under the loan documents including any portion of the promissory note to any of the twelve (12) Federal Reserve Lenders organized under Section 4 of the Federal Reserve Act, 12 U.S.C. Section 341. No such pledge or assignment or enforcement thereof shall release Lender from its obligations under any of the loan documents. 10.20 LOST OR DAMAGED LOAN DOCUMENTS. Upon receipt of an affidavit of an officer of Lender as to the loss, theft, destruction or mutilation of the Note or any other Loan Document which is not of public record, and, in the case of any such loss, theft, destruction or mutilation, upon surrender and cancellation of such Note or other Loan Document, each Borrower will issue, in lieu thereof, a replacement Note or other Loan Document in the same principal amount thereof and otherwise of like tenor. 10.21 CLAIMS AGAINST LENDER. 10.21.1 BORROWERS MUST NOTIFY. Lender shall not be in default under this Agreement, or under any other Loan Document, unless a written notice specifically setting forth the claim of any Borrower shall have been given to Lender within six (6) months after such Borrower first had knowledge or notice of the occurrence of the event which such Borrower alleges gave rise to such claim and Lender do not remedy or cure the default, if any there be, with reasonable promptness thereafter. 10.21.2 REMEDIES. If it is determined by the final order of a court of competent jurisdiction, which is not subject to further appeal, that Lender has breached any of its obligations under the Loan Documents and has not remedied or cured the same with reasonable promptness following notice thereof, Lender's responsibilities shall be limited to: (i) where the breach consists of the failure to grant consent or give approval in violation of the terms and requirements of a Loan Document, the obligation to grant such consent or give such approval and to pay such Borrower's reasonable costs and expenses including, without limitation, reasonable attorneys' fees and disbursements in connection with such court proceedings; and (ii) the case of any such failure to grant such consent or give such approval, or in the case of any other such default by Lender, where it is also so determined that Lender acted in bad faith, the payment of any actual, direct, compensatory damages sustained by such Borrower as a result thereof plus -58- 67 such Borrower's reasonable costs and expenses, including, without limitation, reasonable attorneys' fees and disbursements in connection with such court proceedings. 10.22 TIME OF THE ESSENCE. Time is of the essence for each provision of this Agreement and each other Loan Document. 10.23 PLACE OF DELIVERY. Each Borrower agrees to furnish to Lender at the Lender's office in Boston, Massachusetts all further instruments, certifications and documents to be furnished hereunder. 10.24 GOVERNING LAW. This Agreement and each of the other Loan Documents shall in all respects be governed, construed, applied and enforced in accordance with the internal laws of the State of New York (excluding the laws applicable to conflicts or choice of law). 10.25 CONSENT TO JURISDICTION. Each Borrower hereby irrevocably submits generally and unconditionally for itself and in respect of its property to the jurisdiction of the courts in the State of New York and to the jurisdiction of any court sitting in the province in which any of the Property is located, over any suit, action or proceeding arising out of or relating to this Agreement or the Loan. Each Borrower hereby irrevocably waives, to the fullest extent permitted by law, any objection that such Borrower may now or hereafter have to the laying of venue in any such court and any claim that any such court is an inconvenient forum. Each Borrower hereby agrees and consents that, in addition to any methods of service or process provided for under applicable law, all service of process in any such suit, action or proceeding in any court sitting in the State of New York may be made by certified or registered mail, return receipt requested, directed to Borrowers' Representative at its address for notice stated in the Loan Documents, or at a subsequent address of which Lender received actual notice from Borrowers' Representative in accordance with the Loan Documents, and service so made shall be complete five (5) days after the same shall have been so mailed. Nothing herein shall affect the right of Lender to serve process in any manner permitted by law or limit the right of Lender to bring proceedings against any Borrower in any other court or jurisdiction. 10.26 JURY TRIAL WAIVER. EACH BORROWER AND LENDER MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENTS CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR ACTION OF LENDER RELATING TO THE ADMINISTRATION OF THE LOAN OR ENFORCEMENT OF THE LOAN DOCUMENTS, AND AGREE THAT NO PARTY WILL SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. EXCEPT AS PROHIBITED BY LAW, -59- 68 EACH BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. EACH BORROWER CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF LENDER HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT LENDER WOULD NOT IN THE EVENT OF LITIGATION SEEK TO ENFORCE THE FOREGOING WAIVER. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR LENDER TO ACCEPT THIS AGREEMENT AND MAKE THE LOAN. 10.27 USE OF PROCEEDS (REGULATION U). No portion of the proceeds of the loan shall be used, in whole or in part, for the purpose of the purchasing or carrying any "margin stock" as such term is defined in Regulation U of the Board of Governors of the Federal Reserve System. 10.28 INTEGRATION. This Agreement is intended by the parties as the final, complete and exclusive statement of the transactions evidenced by this Agreement. All prior or contemporaneous promises, agreements and understandings, whether oral or written, are deemed to be superceded by this Agreement, and no party is relying on any promise, agreement or understanding not set forth in this Agreement. This Agreement may not be amended or modified except by Borrower and Lender. SECTION 11. THE BORROWERS' REPRESENTATIVE 11.1. APPOINTMENT OF BORROWERS' REPRESENTATIVE. (a) Each Borrower hereby irrevocably designates and appoints Lexington (sometimes referred to in this Agreement as Borrowers' Representative), as its agent under this Agreement and the Loan Documents and the other documents or instruments delivered pursuant to or in connection herewith or therewith and each Borrower hereby authorizes Lexington, for such Borrower, to take such action on behalf of such Borrower under the provisions of the Loan Documents and to exercise such powers and perform such duties as are expressly delegated to Lexington or Borrowers' Representative by the terms of the Loan Documents, together with such other powers as are reasonably incidental thereto. (b) Lender shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation reasonably believed by it to be genuine and correct and to have been signed, sent or made by the Borrowers' Representative in connection with this Agreement or any of the Loan Documents and upon advice and statements of legal counsel (including, without limitation, counsel to Borrowers), independent accountants and other experts selected by Borrowers' Representative in connection with the Loan Documents. -60- 69 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their proper and duly authorized officers as of the day and year first above written. BORROWERS: LEXINGTON CORPORATE PROPERTIES TRUST By: /s/ T. Wilson Eglin ----------------------------------------- T. Wilson Eglin Its: President LEPERCQ CORPORATE INCOME FUND L.P. BY: LEX GP-1, Inc. its general partner By: /s/ T. Wilson Eglin ------------------------------- T. Wilson Eglin Its: Vice President LEPERCQ CORPORATE INCOME FUND II L.P. BY: LEX GP-1, Inc., its general By: /s/ T. Wilson Eglin ------------------------------- T. Wilson Eglin Its: Vice President -61- 70 REVOLVING CREDIT LENDER: ADDRESS: COMMITMENT FLEET NATIONAL BANK 100 Federal Street $35,000,000 Boston, Massachusetts 02110 By: /s/ James B. McLaughlin ---------------------------- James B. McLaughlin -62- 71 ACKNOWLEDGMENT BY BORROWERS' REPRESENTATIVE We hereby acknowledge and accept the designation of Borrowers' Representative and agree to discharge the duties and responsibilities of Borrowers' Representative as set forth in the Loan Agreement until the Loans are paid in full. LEXINGTON CORPORATE PROPERTIES TRUST By: /s/ T. Wilson Eglin ----------------------------------- T. Wilson Eglin Its: President -63- EX-23.1 7 y53433ex23-1.txt CONSENT OF KPMG LLP - RE: LEXINGTON 1 Exhibit 23.1 ACCOUNTANTS' CONSENT The Shareholders Lexington Corporate Properties Trust: We consent to the use of our report dated January 23, 2001 with respect to the consolidated financial statements and related consolidated financial statement schedule, included in Lexington Corporate Properties Trust's Annual Report on Form 10-K for the year ended December 31, 2000, incorporated by reference in this Proxy Solicitation Statement/Prospectus, and to the reference to our firm under the heading "Experts" in the Proxy Solicitation Statement/Prospectus. /s/ KPMG LLP New York, New York October 2, 2001 EX-23.2 8 y53433ex23-2.txt CONSENT OF KPMG LLP - RE: NET 1 1 Exhibit 23.2 ACCOUNTANTS' CONSENT The Partners Net 1 L.P.: We consent to the use of our report dated March 9, 2001 with respect to the consolidated financial statements and related consolidated financial statement schedule, included in Net 1 L.P.'s Annual Report on Form 10-K/A-1 for the year ended December 31, 2000, incorporated by reference in this Proxy Solicitation Statement/Prospectus, and to the reference to our firm under the heading "Experts" in the Proxy Solicitation Statement/Prospectus. /s/ KPMG LLP New York, New York October 2, 2001 EX-23.3 9 y53433ex23-3.txt CONSENT OF KPMG LLP - RE: NET 2 1 Exhibit 23.3 ACCOUNTANTS' CONSENT The Partners Net 2 L.P.: We consent to the use of our report dated March 9, 2001 with respect to the consolidated financial statements and related consolidated financial statement schedule, included in Net 2 L.P.'s Annual Report on Form 10-K/A-1 for the year ended December 31, 2000, incorporated by reference in this Proxy Solicitation Statement/Prospectus, and to the reference to our firm under the heading "Experts" in the Proxy Solicitation Statement/Prospectus. /s/ KPMG LLP New York, New York October 2, 2001 EX-25.1 10 y53433ex25-1.txt STATEMENT OF ELIGIBILITY OF TRUSTEE 1 Exhibit 25.1 ------------------------------------------------ SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ------------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE ------------------------------------------- CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) ________ ---------------------------------------- THE CHASE MANHATTAN BANK (Exact name of trustee as specified in its charter) NEW YORK 13-4994650 (State of incorporation (I.R.S. employer if not a national bank) identification No.) 270 PARK AVENUE NEW YORK, NEW YORK 10017 (Address of principal executive offices) (Zip Code) William H. McDavid General Counsel 270 Park Avenue New York, New York 10017 Tel: (212) 270-2611 (Name, address and telephone number of agent for service) --------------------------------------------- LEXINGTON CORPORATE PROPERTIES TRUST (Exact name of obligor as specified in its charter) MARYLAND 133717318 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification No.) 355 LEXINGTON AVENUE NEW YORK, NEW YORK 10017 (Address of principal executive offices) (Zip Code) 8.5% SENIOR SUBORDINATED DEBENTURES DUE 2009 (TITLE OF THE INDENTURE SECURITIES) 2 GENERAL Item 1. General Information. Furnish the following information as to the trustee: (a)Name and address of each examining or supervising authority to which it is subject. New York State Banking Department, Suite 2310, 5 Empire State Plaza, Albany, New York 12223. Board of Governors of the Federal Reserve System, 20th and C Street NW, Washington, D.C., 20551 Federal Reserve Bank of New York, District No. 2, 33 Liberty Street, New York, N.Y. Federal Deposit Insurance Corporation, 550 Seventeenth Street, Washington, D.C., 20429. (b) Whether it is authorized to exercise corporate trust powers. Yes. Item 2. Affiliations with the Obligor. If the obligor is an affiliate of the trustee, describe each such affiliation. None. -2- 3 Item 16. List of Exhibits List below all exhibits filed as a part of this Statement of Eligibility. 1. A copy of the Articles of Association of the Trustee as now in effect, including the Organization Certificate and the Certificates of Amendment dated February 17, 1969, August 31, 1977, December 31, 1980, September 9, 1982, February 28, 1985, December 2, 1991 and July 10, 1996 (see Exhibit 1 to Form T-1 filed in connection with Registration Statement No. 333-06249, which is incorporated by reference). 2. A copy of the Certificate of Authority of the Trustee to Commence Business (see Exhibit 2 to Form T-1 filed in connection with Registration Statement No. 33-50010, which is incorporated by reference. On July 14, 1996, in connection with the merger of Chemical Bank and The Chase Manhattan Bank (National Association), Chemical Bank, the surviving corporation, was renamed The Chase Manhattan Bank). 3. None, authorization to exercise corporate trust powers being contained in the documents identified above as Exhibits 1 and 2. 4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to Form T-1 filed in connection with Registration Statement No. 333-76439, which is incorporated by reference). 5. Not applicable. 6. The consent of the Trustee required by Section 321(b) of the Act (see Exhibit 6 to Form T-1 filed in connection with Registration Statement No. 33-50010, which is incorporated by reference. On July 14, 1996, in connection with the merger of Chemical Bank and The Chase Manhattan Bank (National Association), Chemical Bank, the surviving corporation, was renamed The Chase Manhattan Bank). 7. A copy of the latest report of condition of the Trustee, published pursuant to law or the requirements of its supervising or examining authority. 8. Not applicable. 9. Not applicable. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee, The Chase Manhattan Bank, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York and the state of New York on the 1st day of October, 2001. THE CHASE MANHATTAN BANK By /s/ James D. Heaney ------------------------------------------ James D. Heaney, Vice President -3- 4 Item 16. List of Exhibits List below all exhibits filed as a part of this Statement of Eligibility. 1. A copy of the Articles of Association of the Trustee as now in effect, including the Organization Certificate and the Certificates of Amendment dated February 17, 1969, August 31, 1977, December 31, 1980, September 9, 1982, February 28, 1985, December 2, 1991 and July 10,1996(see Exhibit 1 to Form T-1 filed in connection with Registration Statement No. 333-06249, which is incorporated by reference). 2. A copy of the Certificate of Authority of the Trustee to Commence Business (see Exhibit 2 to Form T-1 filed in connection with Registration Statement No. 33-50010, which is incorporated by reference. On July 14, 1996, in connection with the merger of Chemical Bank and The Chase Manhattan Bank (National Association), Chemical Bank, the surviving corporation, was renamed The Chase Manhattan Bank). 3. None, authorization to exercise corporate trust powers being contained in the documents identified above as Exhibits 1 and 2. 4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to Form T-1 filed in connection with Registration Statement No. 333-06249, which is incorporated by reference). 5. Not applicable. 6. The consent of the Trustee required by Section 321(b) of the Act (see Exhibit 6 to Form T-1 filed in connection with Registration Statement No. 33-50010, which is incorporated by reference. On July 14, 1996, in connection with the merger of Chemical Bank and The Chase Manhattan Bank (National Association), Chemical Bank, the surviving corporation, was renamed The Chase Manhattan Bank). 7. A copy of the latest report of condition of the Trustee, published pursuant to law or the requirements of its supervising or examining authority. 8. Not applicable. 9. Not applicable. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee, The Chase Manhattan Bank, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York and the State of New York on the 1st day of October, 2001. THE CHASE MANHATTAN BANK By /s/ James D. Heaney ------------------------------------- James D. Heaney, Vice President -3- 5 Exhibit 7 to Form T-1 Bank Call Notice RESERVE DISTRICT NO. 2 CONSOLIDATED REPORT OF CONDITION OF The Chase Manhattan Bank of 270 Park Avenue, New York, New York 10017 and Foreign and Domestic Subsidiaries, a member of the Federal Reserve System, at the close of business June 30, 2001, in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act.
DOLLAR AMOUNTS IN MILLIONS ASSETS Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin................. $ 21,536 Interest-bearing balances ......................................... 31,428 Securities: Held to maturity securities .......................................... 481 Available for sale securities ........................................ 60,903 Federal funds sold and securities purchased under agreements to resell 42,824 Loans and lease financing receivables: Loans and leases held for sale .................................... 3,856 Loans and leases, net of unearned income $155,575 Less: Allowance for loan and lease losses 2,276 Loans and leases, net of unearned income and allowance ............ 153,299 Trading Assets ....................................................... 66,636 Premises and fixed assets (including capitalized leases) ............. 4,468 Other real estate owned .............................................. 45 Investments in unconsolidated subsidiaries and associated companies .. 353 Customers' liability to this bank on acceptances outstanding ......... 346 Intangible assets Goodwill ..................................................... 1,785 Other Intangible assets ...................................... 4,365 Other assets ......................................................... 19,923 -------- TOTAL ASSETS ......................................................... $412,248 ========
- 4 - 6 LIABILITIES Deposits In domestic offices ............................................................ $ 137,865 Noninterest-bearing ............................................ $ 56,799 Interest-bearing .................................................. 81,066 In foreign offices, Edge and Agreement subsidiaries and IBF's .................. 113,924 Noninterest-bearing............................................. $ 6,537 Interest-bearing................................................ 107,387 Federal funds purchased and securities sold under agreements to repurchase ........ 65,474 Trading liabilities ............................................................... 39,611 Other borrowed money (includes mortgage indebtedness and obligations under capitalized leases)....................................... 10,573 Bank's liability on acceptances executed and outstanding .......................... 346 Subordinated notes and debentures ................................................. 6,355 Other liabilities ................................................................. 14,772 TOTAL LIABILITIES ................................................................. 388,920 Minority Interest in consolidated subsidiaries .................................... 89 EQUITY CAPITAL Perpetual preferred stock and related surplus ..................................... 0 Common stock ...................................................................... 1,211 Surplus (exclude all surplus related to preferred stock)........................... 12,715 Retained earnings ............................................................. 9,985 Accumulated other comprehensive income ........................................ (672) Other equity capital components ................................................... 0 TOTAL EQUITY CAPITAL .............................................................. 23,239 --------- TOTAL LIABILITIES, MINORITY INTEREST, AND EQUITY CAPITAL .......................... $ 412,248 =========
I, Joseph L. Sclafani, E.V.P. & Controller of the above-named bank, do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the appropriate Federal regulatory authority and is true to the best of my knowledge and belief. JOSEPH L. SCLAFANI We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us, and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the appropriate Federal regulatory authority and is true and correct. WILLIAM B. HARRISON JR. ) DOUGLAS A. WARNER III ) DIRECTORS WILLIAM H. GRAY III ) -5- EX-99.1 11 y53433ex99-1.txt FORM OF AMENDED AND RESTATED AGREEMENT 1 EXHIBIT 99.1 -------------------------------------------------------------------------------- FORM OF AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF NET 3 ACQUISITION L.P. Dated as of [October __, 2001] -------------------------------------------------------------------------------- 2 [FORM OF] AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF NET 3 ACQUISITION LP THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP, dated as of [October __, 2001], is entered into by and among Lex GP-1, Inc. ("GP-1"), a Delaware corporation, as the general partner (the "General Partner"), Lex LP-1, Inc. ("LP-1"), a Delaware corporation, as the initial limited partner, (the "Initial Limited Partner"), Lexington Corporate Properties Trust, a Maryland statutory real estate investment trust, as an additional signatory ("LXP"), and the Persons whose names will be hereinafter set forth on Exhibit A hereto as special limited partners (collectively, the "Special Limited Partners"), with any other Persons who become Partners in the Partnership as provided herein. WHEREAS, the General Partner caused to be filed on November 3, 2000, a certificate of limited partnership on behalf of Net 3 Acquisition LP (the "Partnership") and thereafter GP-1 and LP-1 entered into an Agreement of Limited Partnership of the Partnership, dated ________, 2000; WHEREAS, on November 13, 2000, GP-1, in its capacity as the General Partner of the Partnership, and LP-1, in its capacity as the sole limited partner of the Partnership, authorized and approved the Net 3 Merger and the execution and delivery of the Net 3 Merger Agreement by the Partnership; WHEREAS, at the Effective Time, (i) Net 1 and Net 2 merged with and into Net 3, whereupon the separate existence of Net 1 and Net 2 ceased and (ii) Net 3, also referred to as the Partnership in this Agreement, was the surviving limited partnership of the Net 3 Merger; and WHEREAS, in connection with the consummation of the Net 3 Merger pursuant to the Net 3 Merger Agreement, GP-1, LP-1, LXP and the Special Limited Partners set forth on Exhibit A hereby entered into this Amended and Restated Agreement of Limited Partnership of Net 3 Acquisition LP on the terms and conditions set forth below. ARTICLE 1 DEFINED TERMS The following definitions shall for all purposes be applied to the following terms used in this Agreement. "Act" means the Delaware Revised Uniform Limited Partnership Act, as it may be amended from time to time. "Additional Limited Partners" means the Special Limited Partners and any other limited partner admitted to the Partnership pursuant to Section 4.2.A. 3 "Adjusted Capital Account" means the Capital Account maintained for each Partner as of the end of each Partnership Year (i) increased by any amounts which such Partner is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5) and (ii) decreased by the items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. "Adjusted Capital Account Deficit" means, with respect to any Partner, the deficit balance, if any, in such Partner's Adjusted Capital Account as of the end of the relevant Partnership Year. "Adjusted Property" means any property the Carrying Value of which has been adjusted pursuant to Exhibit B hereof. Once an Adjusted Property is deemed distributed by, and re-contributed to, the Partnership for federal income tax purposes upon a termination thereof pursuant to Section 708 of the Code, such property shall thereafter constitute a Contributed Property until the Carrying Value of such property is further adjusted pursuant to Exhibit B hereof. "Affiliate" means, with respect to any Person, any Person directly or indirectly controlling, controlled by or under common control with such Person. "Agreed Value" means (i) the 704(c) Value of such property or other consideration in the case of any Contributed Property as of the time of its contribution to the Partnership, reduced by any liabilities either assumed by the Partnership upon such contribution or to which such property is subject when contributed, and (ii) in the case of any property distributed to a Partner by the Partnership, the Partnership's Carrying Value of such property at the time such Property is distributed, reduced by any indebtedness either assumed by such Partner upon such distribution or to which such property is subject at the time of distribution under Section 752 of the Code and the Regulations thereunder. "Agreement" means this Amended and Restated Agreement of Limited Partnership, as it may be amended, supplemented or restated from time to time. "Assignee" means a Person to whom one or more Partnership Units held by an Additional Limited Partner have been transferred in a manner permitted under this Agreement, but who has not become a Substituted Additional Limited Partner and who has the rights set forth in Section 11.5. "Book-Tax Disparities" means, with respect to any item of Contributed Property or Adjusted Property, as of the date of any determination, the difference between the Carrying Value of such Contributed Property or Adjusted Property and the adjusted basis thereof for federal income tax purposes as of such date. A Partner's share of the Partnership's Book-Tax Disparities in all of its Contributed Property and Adjusted Property will be reflected by the difference between such Partner's Capital Account balance as maintained pursuant to Exhibit B 2 4 and the hypothetical balance of such Partner's Capital Account computed as if it had been maintained strictly in accordance with federal income tax accounting principles. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized or required by law to close. "Cash Redemption Amount" means an amount equal to the product of (i) the number of Partnership Units offered for redemption by the Redeeming Partner, multiplied by (ii)(a) the average Daily Market Price of the REIT Shares for the twenty (20) Business Days preceding the Specified Redemption Date multiplied by (b) the Redemption Factor. "Capital Account" means the Capital Account maintained for a Partner pursuant to Exhibit B hereof. "Capital Contributions" means, with respect to any Partner, any cash, cash equivalents or the Agreed Value of Contributed Property which such Partner contributes or is deemed to contribute to the Partnership pursuant to Section 4.1 or 4.2 hereof. "Capital Event" means the sale, refinancing or other disposition of a Partnership asset outside the ordinary course of the Partnership's business. "Carrying Value" means (i) with respect to a Contributed Property or Adjusted Property, the 704(c) Value of such property reduced (but not below zero) by all Depreciation with respect to such property charged to the Partners' Capital Accounts and (ii) with respect to any other Partnership property, the adjusted basis of such property for federal income tax purposes, all as of the time of determination. The Carrying Value of any property shall be adjusted from time to time in accordance with Exhibit B hereof, and to reflect changes, additions or other adjustments to the Carrying Value for dispositions and acquisitions of Partnership properties, as deemed appropriate by the General Partner. "Certificate" means the Certificate of Limited Partnership relating to the Partnership filed in the office of the Delaware Secretary of State, as amended from time to time in accordance with the terms hereof and the Act. "Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of future law. "Common Unit" means a fractional, undivided share of the Partnership Interests of all Partners issued pursuant to Sections 4.1 and 4.2, other than the Special Limited Partner Units. "Contributed Property" means each property or other asset, in such form as may be permitted by the Act, but excluding cash, contributed or deemed contributed to the Partnership (or deemed contributed to the Partnership on termination and reconstitution thereof pursuant to Section 708 of the Code). Once the Carrying Value of a Contributed Property is adjusted pursuant to Exhibit B hereof, such property shall no longer constitute a Contributed 3 5 Property for purposes of Exhibit B hereof, but shall be deemed an Adjusted Property for such purposes. "Daily Market Price" means the price of REIT Shares on the relevant date, determined (a) on the basis of the last reported trading price of REIT Shares as reported on the New York Stock Exchange (the "NYSE"), or if the REIT Shares are not then listed on the NYSE, as reported on such national securities exchange upon which the REIT Shares are listed, or (b) if there is no reported sale or trade on the day in question, on the basis of the average of the closing bid and asked quotations regular way so reported, or (c) if REIT Shares are not listed on the NYSE or on any national securities exchange, on the basis of the high bid and low asked quotations regular way on the day in question in the over-the-counter market as reported by the National Association of Securities Dealers Automated Quotation System, or, if not so quoted, as reported by the National Quotation Bureau, Incorporated, or a similar organization. "Declaration of Trust" means the Declaration of Trust of LXP, as amended or restated from time to time. "Depreciation" means, for each fiscal year, an amount equal to the federal income tax depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year, except that if the Carrying Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Carrying Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Carrying Value using any reasonable method selected by the General Partner. "Effective Date" shall mean the date of the filing of the Net 3 Merger Certificate with the Secretary of State of the State of Delaware. "Effective Time" shall mean the time of the filing of the Net 3 Merger Certificate with the Secretary of State of Delaware. "General Partner" means the General Partner or its successors as general partner of the Partnership. "General Partner Interest" means a Partnership Interest held by the General Partner that is a general partner interest. A General Partner Interest shall be expressed as a number of Partnership Units. "Immediate Family" means, with respect to any natural Person, such natural Person's spouse and such natural Person's natural or adoptive parents, descendants, nephews, nieces, brothers, and sisters. "Incapacity" or "Incapacitated" means (i) as to any individual Partner, death, total physical disability or entry by a court of competent jurisdiction adjudicating him incompetent to manage his Person or his estate; (ii) as to any corporation which is a Partner, the filing of a 4 6 certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter; (iii) as to any partnership which is a Partner, the dissolution and commencement of winding up of the partnership; (iv) as to any estate which is a Partner, the distribution by the fiduciary of the estate's entire interest in the Partnership; (v) as to any trustee of a trust which is a Partner, the termination of the trust (but not the substitution of a new trustee); or (vi) as to any Partner, the bankruptcy of such Partner. For purposes of this definition, bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner commences a voluntary proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect, (b) the Partner is adjudged as bankrupt or insolvent, or a final and nonappealable order for relief under any Bankruptcy, insolvency or similar law now or hereafter in effect has been entered against the Partner, (c) the Partner executes and delivers a general assignment for the benefit of the Partner's creditors, (d) the Partner files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Partner in any proceeding of the nature described in clause (b) above, (e) the Partner seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for the Partner or for all or any substantial part of the Partner's properties, (f) any proceeding seeking liquidation, reorganization or other relief of or against such Partner under any bankruptcy, insolvency or other similar law now or hereafter in effect has not been dismissed within one hundred twenty (120) days after the commencement thereof, (g) the appointment without the Partner's consent or acquiescence of a trustee, receiver or liquidator for the assets of the Partner which such appointment has not been vacated or stayed within ninety (90) days of such appointment, or (h) an appointment referred to in clause (g) is not vacated within ninety (90) days after the expiration of any such stay. "Indemnitee" means (i) any Person made a party to a proceeding by reason of his status as (A) the General Partner, or (B) a director or officer of the Partnership, the General Partner, the Initial Limited Partner or LXP, and (ii) such other Persons (including Affiliates of the Partnership, the General Partner, the Initial Limited Partner or LXP) as the General Partner may designate from time to time (whether before or after the event giving rise to potential liability), in its sole and absolute discretion. "Initial Limited Partner" means Lex LP-1, Inc. "Initial Redemption Date" means _____, 2006 (five years from Closing Date). "IRS" means the Internal Revenue Service, which administers the internal revenue laws of the United States. "Net 1" means Net 1 L.P., a Delaware limited partnership. "Net 2" means Net 2 L.P., a Delaware limited partnership. "Limited Partner Interest" means a Partnership Interest held by a Limited Partner in the Partnership that is a limited partner interest. A Limited Partner Interest shall be expressed as a number of Partnership Units. "Limited Partners" means the Initial Limited Partner and the Special Limited Partners. 5 7 "Liquidator" has the meaning set forth in Section 13.2. "Liquidating Event" has the meaning set forth in Section 13.1. "LXP" means Lexington Corporate Properties Trust, a Maryland statutory real estate investment trust. "Net 3 Merger" means the merger of Net 1 and Net 2 with and into Net 3 which Mergers became effective on __________, 2001. "Net Income" means, for any taxable period, the excess, if any, of the Partnership's items of income and gain for such taxable period over the Partnership's items of loss and deduction for such taxable period. The items included in the calculation of Net Income shall be determined in accordance with Exhibit B. Once an item of income, gain, loss or deduction that has been included in the initial computation of Net Income is subjected to the special allocation rules in Exhibit C, Net Income or the resulting Net Loss, whichever the case may be, shall be recomputed without regard to such item. "Net Loss" means, for any taxable period, the excess, if any, of the Partnership's items of loss and deduction for such taxable period over the Partnership's items of income and gain for such taxable period. The items included in the calculation of Net Loss shall be determined in accordance with Exhibit B. Once an item of income, gain, loss or deduction that has been included in the initial computation of Net Loss is subjected to the special allocation rules in Exhibit C, Net Loss or the resulting Net Income, whichever the case may be, shall be recomputed without regard to such item. "Nonrecourse Built-in Gain" means, with respect to any Contributed Properties or Adjusted Properties that are subject to a mortgage or negative pledge securing a Nonrecourse Liability, the amount of any taxable gain that would be allocated to the Partners pursuant to Section 2.B of Exhibit C if such properties were disposed of in a taxable transaction in full satisfaction of such liabilities and for no other consideration. "Nonrecourse Deductions" has the meaning set forth in Regulations Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a Partnership Year shall be determined in accordance with the rules of Regulations Section 1.704-2(c). "Nonrecourse Liability" has the meaning set forth in Regulations Section 1.752-1(a)(2). "Notice of Redemption" means the Notice of Redemption substantially in the form of Exhibit D-1 to this Agreement. "Operating Cash Flow" means, for any period, operating revenue from leases on real property investments, partnership distributions with respect to partnerships in which the Partnership has interests, and interest on uninvested funds and other cash investment returns, less operating expenses, capital expenditures and regularly scheduled principal and interest payments (exclusive of balloon payments due at maturity) on outstanding mortgage and other indebtedness. The General Partner may, in its discretion, reduce Operating Cash Flow for any 6 8 period by an amount determined by the General Partner to be necessary to fund reserves required by the Partnership. "Partner" means the General Partner, the Initial Limited Partner, or any Special Limited Partner, and "Partners" means, collectively, the General Partner, the Initial Limited Partner and all of the Special Limited Partners. "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3). "Partner Nonrecourse Debt" has the meaning set forth in Regulations Section 1.704-2(b)(4). "Partner Nonrecourse Deductions" has the meaning set forth in Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Partnership Year shall be determined in accordance with the rules of Regulations Section 1.704-2(i)(2). "Partnership" shall have the meaning set forth in Section 2.3 of this Agreement. "Partnership Interest" means an ownership interest in the Partnership and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Partnership Interest shall be expressed as a number of Partnership Units. "Partnership Minimum Gain" has the meaning set forth in Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in Partnership Minimum Gain, for a Partnership Year shall be determined in accordance with the rules of Regulations Section 1.704-2(d). "Partnership Record Date" means the record date established by the General Partner for the distribution of Operating Cash Flow pursuant to Section 5.1 hereof, which record date shall be the same as the record date established by LXP for a distribution to its stockholders of some or all of such distribution. "Partnership Unit" means a fractional, undivided share of the Partnership Interests of all Partners issued pursuant to Sections 4.1 and 4.2; provided, that the Partnership Units represented by the Special Limited Partner Units shall be entitled solely to the Special Limited Partner Unit Distribution Amounts. "Partnership Year" means the fiscal year of the Partnership, which shall be the calendar year. "Percentage Interest" means, as to a Partner, its interest in the Partnership as determined by dividing the Partnership Units owned by such Partner by the total number of 7 9 Partnership Units then outstanding and as specified in Exhibit A attached hereto, as such Exhibit may be amended from time to time. "Person" means an individual or a corporation, partnership, trust, unincorporated organization, association, limited liability company or other entity. "Prior Agreement" means the Agreement of Limited Partnership of Net 3 Acquisition L.P., dated as of October __, 2000. "Recapture Income" means any gain recognized by the Partnership upon the disposition of any property or asset of the Partnership, which gain is characterized as ordinary income because it represents the recapture of deductions previously taken with respect to such property or asset. "Redeeming Partner" has the meaning set forth in Section 8.4. "Redemption Amount" means the Share Redemption Amount or Cash Redemption Amount, as applicable. "Redemption Factor" means 1.0, provided that in the event that LXP (i) declares or pays a dividend on its outstanding REIT Shares in REIT Shares or makes a distribution to all holders of its outstanding REIT Shares in REIT Shares, (ii) subdivides its outstanding REIT Shares, or (iii) combines its outstanding REIT Shares into a smaller number of REIT Shares, the Redemption Factor shall be adjusted by multiplying the Redemption Factor in effect immediately before such event by a fraction, the numerator of which shall be the number of REIT Shares issued and outstanding on the record date for such dividend, distribution, subdivision or combination (assuming for such purposes that such dividend, distribution, subdivision or combination has occurred as of such time), and the denominator of which shall be the actual number of REIT Shares (determined without the above assumption) issued and outstanding on the record date for such dividend distribution, subdivision or combination. Any adjustment to the Redemption Factor shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. "Redemption Right" has the meaning set forth in Section 8.4.A. hereof. "Regulations" means the Income Tax Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "REIT" means a real estate investment trust under Section 856 of the Code. "REIT Share" shall mean a common share of LXP, $.0001 par value. A REIT Share shall also mean an excess share of LXP, $.0001 par value, issued in exchange or upon conversion of a common share of LXP under the circumstances contemplated by the Declaration of Trust. "Relative Interest" means the percentage determined by a fraction, the numerator of which is the Capital Contributions deemed to be made by the General Partner, the Initial 8 10 Limited Partner and the Special Limited Partners on the Effective Date to the Partnership and the denominator of which is such Capital Contributions plus the capital contributions deemed to be made by the partners of Net 3 to Net 3 on the Effective Date. LXP may require the Partnership to adjust the Relative Interest from time to time, in its discretion (provided that the sum of the Relative Interest of the Partnership and the relative interest of Net 3 continue to total one (1.0)), so that each Partnership Unit held by the Special Limited Partners remains substantially equivalent to each partnership unit held by the special limited partners in Net 3 with regard to (i) allocations of income, gain, loss, deduction and credit, (ii) distributions from Operating Cash Flow and (iii) distributions upon dissolution and liquidation of the Partnership and Net 3. "Residual Gain" or "Residual Loss" means any item of gain or loss, as the case may be, of the Partnership recognized for federal income tax purposes resulting from a sale, exchange or other disposition of Contributed Property or Adjusted Property, to the extent such item of gain or loss is not allocated pursuant to Section 2.B.l(a) or 2.B.2(a) of Exhibit C to eliminate Book-Tax Disparities. "704(c) Value" of any Contributed Property means the fair market value of such property or other consideration at the time of contribution as determined by the General Partner using such reasonable method of valuation as it may adopt; provided that the 704(c) Value of any property deemed contributed to the Partnership for federal income tax purposes upon termination and reconstitution thereof pursuant to Section 708 of the Code shall be determined in accordance with Exhibit B hereof. Subject to Exhibit B hereof, the General Partner shall, in its sole and absolute discretion, use such method as it deems reasonable and appropriate to allocate the aggregate of the 704(c) Values of Contributed Properties in a single or integrated transaction among the separate properties on a basis proportional to their respective fair market values. "Share Redemption Amount" means the number of REIT Shares equal to the product of the number of Partnership Units offered for redemption by a Redeeming Partner, multiplied by the Redemption Factor; provided that in the event the General Partner issues to all holders of REIT Shares rights, options, warrants or convertible or exchangeable securities entitling the stockholders to subscribe for or purchase REIT Shares, or any other securities or property (collectively, the "rights") then the Redemption Amount shall also include such rights that a holder of that number of REIT Shares would be entitled to receive. "Special Limited Partner" means a Person admitted to the Partnership as a Special Limited Partner and who is shown as such on the books and records of the Partnership. "Special Limited Partner Interest" means a Partnership Interest of the Special Limited Partners in the Partnership representing a fractional part of the Partnership Interests of all Special Limited Partners and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. A Special Limited Partner Interest may be expressed as a number of Partnership Units. "Special Limited Partner Units" shall mean those Special Limited Partner Units issued pursuant to Section 4.1 and 4.2 having the Special Limited Partner Exchange Rights, such 9 11 Special Limited Partner Units being entitled to receive Special Limited Partner Unit Distribution Amounts. "Special Limited Partner Unit Distribution Amounts" means such amounts of distributions for each Special Limited Partner Unit which is equal to the amount of distributions made in respect of one REIT Share outstanding on any given date multiplied by the Conversion Ratio (as defined in the Articles Supplementary of LXP, dated January 17, 1997), such amount of Special Limited Partner Unit Distribution Amounts being adjusted from time to time pursuant to Section ___. "Specified Redemption Date" means the tenth (10th) Business Day after receipt by the General Partner and LXP of a Notice of Redemption. "Subsequent Partner" means a Person admitted to the Partnership as a Partner after the date hereof through the sale or issuance by the Partnership of additional Partnership Interests and not through the transfer of existing Partnership Interests. "Subsidiary" means, with respect to any Person, any corporation, partnership or other entity of which a majority of (i) the voting power of the voting equity securities or (ii) the outstanding equity interests is owned, directly or indirectly, by such Person. "Substituted Additional Limited Partner" means a Person who is admitted as an Additional Limited Partner to the Partnership pursuant to Section 11.4. "Terminating Capital Transaction" means any sale or other disposition of all or substantially all of the assets of the Partnership or a related series of transactions that, taken together, result in the sale or other disposition of all or substantially all of the assets of the Partnership. "Unrealized Gain" attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (i) the fair market value of such property (as determined under Exhibit B hereof) as of such date, over (ii) the Carrying Value of such property (prior to any adjustment to be made pursuant to Exhibit B hereof) as of such date. "Unrealized Loss" attributable to any item of Partnership property means, as of any date of determination, the excess, if any, of (i) the Carrying Value of such property (prior to any adjustment to be made pursuant to Exhibit B hereof) as of such date, over (ii) the fair market value of such property (as determined under Exhibit B hereof) as of such date. ARTICLE 2 ORGANIZATIONAL MATTERS Section 2.1 Organization. A. The Partnership is a limited partnership formed pursuant to the provisions of the Act and upon the terms and conditions set forth in the Prior Agreement. The Partners hereby amend and restate the Prior Agreement in its entirety as of the date hereof to reflect the 10 12 admission of the Special Limited Partner(s) into the Partnership. Except as expressly provided herein to the contrary, the rights and obligations of the Partners and the administration and termination of the Partnership shall be governed by the Act. The Partnership Interest of each Partner shall be personal property for all purposes. Section 2.2 Net 3 Merger. A. The General Partner, in its capacity as the General Partner of the Partnership, and each of the other Partners in their respective capacities as such, hereby authorizes and approves the consummation of the Net 3 Merger and reaffirms all the terms and conditions set forth in the Net 3 Merger Agreement by the Partnership. At the Effective Time, (i) Net 1 and Net 2 merged with and into Net 3, whereupon the separate existence of Net 1 and Net 2 ceased and (ii) Net 3, also referred to as the Partnership in this Agreement, was the surviving limited partnership of the Net 3 Merger. B. At the Effective Time: (1) Each limited partner interest in Net 1 and Net 2 outstanding immediately prior to the Effective Time has been exchanged, pursuant to the terms of the Net 3 Merger Agreement, for either (a) common shares of LXP and cash or (b) 8.5% senior subordinated debentures of LXP due 2009. (2) The general partnership interests in each of Net 1 and Net 2 outstanding immediately prior to the Effective Time have been exchanged for Special Limited Partner Interests in Net 3 which are being issued pursuant to this Agreement, and the general partners of Net 1 and Net 2 are each hereby admitted to the Partnership as a Special Limited Partner. Section 2.3 Name. The name of the Partnership is Net 3 Acquisition LP. The Partnership's business may be conducted under any other name or names deemed advisable by the General Partner, including the name of the General Partner or any Affiliate thereof. The words "Limited Partnership," "L.P.," "Ltd." or similar words or letters shall be included in the Partnership's name where necessary for the purposes of complying with the laws of any jurisdiction that so requires. The General Partner in its sole and absolute discretion may change the name of the Partnership at any time. Section 2.4 Registered Office and Agent Principal Office. The address of the registered office of the Partnership in the State of Delaware is located at 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801, and the registered agent for service of process on the Partnership in the State of Delaware at such registered office is The Corporation Trust Company. The principal office of the Partnership is located at 355 Lexington Avenue, New York, New York 10017, and may be changed to such other place as the General Partner may from time to time designate. The Partnership may maintain offices at such other place or places within or outside the State of Delaware as the General Partner deems advisable. 11 13 Section 2.5 Term. The term of the Partnership commenced on October __, 2000, the date the Certificate was filed in the office of the Secretary of State of Delaware in accordance with the Act and shall continue until [December 31, 2093], unless the Partnership is dissolved sooner pursuant to the provisions of Article 13 or as otherwise provided by law. ARTICLE 3 PURPOSE Section 3.1 Purpose and Business. The purpose and nature of the business to be conducted by the Partnership is (i) to conduct any business that may be lawfully conducted by a limited partnership organized pursuant to the Act; provided that such business shall be limited to and conducted in such a manner as to permit LXP at all times to be classified as a REIT, unless LXP ceases to qualify as a REIT for reasons other than the conduct of the business of the Partnership, (ii) to enter into any partnership, joint venture or other similar arrangement to engage in any of the foregoing or to own interests in any entity engaged in any of the foregoing and (iii) to do anything necessary or incidental to the foregoing. In connection with the foregoing, and without limiting the General Partner's right in its sole discretion to cease qualifying as a REIT, the Partners acknowledge that LXP's status as a REIT inures to the benefit of all the Partners and not solely to LXP. Section 3.2 Powers. The Partnership shall be empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described herein and for the protection and benefit of the Partnership; provided that the Partnership shall not take, or refrain from taking, any action which, in the judgment of LXP, in its sole and absolute discretion, (i) could adversely affect the ability of LXP to continue to qualify as a REIT under Section 857 of the Code, (ii) could subject LXP to any additional taxes under any Section of the Code or (iii) could violate any law or regulation of any governmental body or agency having jurisdiction over LXP or its securities, unless such action (or inaction) shall have been specifically consented to by LXP in writing. Notwithstanding anything to the contrary that may be contained herein, the Partnership had and continues to have the power and authority to execute, acknowledge, verify, deliver, file and record any and all documents and instruments, including the Net 3 Merger Agreement and the Net 3 Merger Certificate, and to perform any and all acts required by applicable law or which were or may be necessary or advisable in order to give effect to the consummation of the Net 3 Merger. 12 14 ARTICLE 4 CAPITAL CONTRIBUTIONS Section 4.1 Capital Contributions of the Partners. As of the date of this Agreement, (i) the Partners shall be deemed to have made the Capital Contributions set forth in Exhibit A to this Agreement and (ii) each Partner shall own Common Units or Special Limited Partner Units in the amount set forth for such Partner in Exhibit A and shall have a Percentage Interest in the Partnership as set forth for such Partner in Exhibit A, which Percentage Interest shall be adjusted in Exhibit A from time to time by the General Partner to the extent necessary to reflect accurately redemptions, Capital Contributions, Capital Events, the issuance of additional Common Units or similar events having an effect on a Partner's Percentage Interest. Except as provided in Sections 4.2 and 10.4, the Partners shall have no obligation to make any additional Capital Contributions or loans to the Partnership. Section 4.2 Issuances of Additional Partnership Interests. A. The General Partner is hereby authorized to cause the Partnership from time to time to issue to the Partners or other Persons additional Common Units, Special Limited Partner Units, Partnership Units or other Partnership Interests in one or more classes, or one or more series of any of such classes, with such designations, preferences and relative, participating, optional or other special rights, powers and duties, including rights, powers and duties senior to existing Partnership Interests, all as shall be determined by the General Partner in its sole and absolute discretion, including, without limitation, (i) the allocations of items of Partnership income, gain, loss, deduction and credit to each such class or series of Partnership Interests, (ii) the right of each such class or series of Partnership Interests to share in Partnership distributions, and (iii) the rights of each such class or series of Partnership Interests upon dissolution and liquidation of the Partnership. B. Notwithstanding any provision of Section 4.2.A to the contrary, no such additional Partnership Units or other Partnership Interests shall be issued to the General Partner, the Initial Limited Partner, LXP or any of their Subsidiaries unless (1) (a) the additional Partnership Interests are issued in connection with an issuance of shares of LXP, which shares have designations, preferences and other rights, all such that the economic interests are substantially similar to the designations, preferences and other rights of the additional Partnership Interests issued to the General Partner, the Initial Limited Partner, LXP or any of their Subsidiaries in accordance with Section 4.2.A, and (b) LXP through the General Partner or the Limited Partner shall make a Capital Contribution to the Partnership in an amount equal to the proceeds raised in connection with the issuance of such shares of LXP, or (2) the additional Partnership Interests are issued to all Partners in proportion to their respective Percentage Interests. 13 15 ARTICLE 5 DISTRIBUTIONS Section 5.1 Requirement and Characterization of Distributions. A. Common Units. The General Partner shall distribute from time to time, but not less than semi-annually, to the Partners who are Partners of the Partnership for such relevant period an amount equal to 100% of the Operating Cash Flow generated by the Partnership during such relevant period in accordance with their respective Percentage Interest on such applicable Partnership Record Date for such distributions; provided, that in no event may a Partner receive a distribution of Operating Cash Flow with respect to a Common Unit if such Partner is entitled to receive a distribution from the Partnership with respect to any (i) Equivalent Units, or (ii) any REIT Share for which such Partnership Unit has been redeemed or exchanged; and further provided, that in no event shall the General Partner make any distributions to any Partner unless and until all distributions, present or accrued, have been first paid in respect of such Equivalent Unit. B. Special Limited Partner Units. Notwithstanding Section 5.1.A, each Partner's share of Operating Cash Flow with respect to Special Limited Partner Units held by such Partner shall be equal to the Special Limited Partner Distribution Amount. Section 5.2 Amounts Withheld. All amounts withheld pursuant to the Code or any provisions of any state or local tax law and Section 10.4 hereof with respect to any allocations, payment or distribution to the Partners or the Assignees shall be treated as amounts distributed to the Partners or the Assignees pursuant to Section 5.1 for all purposes under this Agreement. Section 5.3 Distributions Upon Liquidation. Proceeds from a Terminating Capital Transaction, and any other cash received or reductions in reserves made after commencement of the liquidation of the Partnership, shall be distributed to the Partners in accordance with Section 13.2. ARTICLE 6 ALLOCATIONS Section 6.1 Allocations For Capital Account Purposes. For purposes of maintaining the Capital Accounts and in determining the rights of the Partners among themselves, the Partnership's items of income, gain, loss and deduction (computed in accordance with Exhibit B hereof) shall be allocated among the Partners in each taxable year (or portion thereof) as provided herein below. A. Net Income. After giving effect to the special allocations set forth in Section 1 of Exhibit C, Net Income shall be allocated to the holders of Special Limited Partner Units with respect to such Special Limited Partner Units only in an amount equal to cash 14 16 distributions received with respect to such Special Limited Partner Units, and the remainder to the holder of Common Units pro rata in the proportion that each holder's Common Units bear to the total number of Common Units outstanding; provided, that following (i) the Effective Date and (ii) the sale or other disposition (in which gain or loss is recognized) of real properties representing at least fifty (50%) percent of the Carrying Value of such properties as of the Effective Date, gains from the sale or other disposition of partnership assets shall be allocated to the Partners having negative Capital Accounts, to the extent and in accordance with such negative Capital Accounts and thereafter to all Partners in accordance with their Percentage Interests, provided, further, that Partners holding Special Limited Partner Units shall only be allocated taxable income with respect to such Special Limited Partner Units in an amount equal to the cash distributions received in respect of such Special Limited Partner Units. B. Net Losses. After giving effect to the special allocations set forth in Exhibit C, Net Losses shall be allocated first, to any Partner having a positive Capital Account pro rata in the ratio that each such Partner's positive Capital Account balance bears to the total aggregate positive Capital Account balance, and thereafter to the Limited Partners in accordance with their respective Percentage Interests. C. For purposes of Regulations Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of the Partnership in excess of the sum of the amount of Partnership Minimum Gain and the total amount of Nonrecourse Built-in Gain shall be allocated first to account for any income or gain to be allocated among the Partners in accordance with their respective Percentage Interests. D. Any gains upon the sale or other taxable disposition of any Partnership asset shall, to the extent possible, after taking into account other required allocations of gain pursuant to Exhibit C that are characterized as Recapture Income, be allocated to Partners in the same proportions and to the same extent as such Partners have been allocated any deductions directly or indirectly giving rise to the treatment of such gains as Recapture Income. ARTICLE 7 MANAGEMENT AND OPERATIONS OF BUSINESS Section 7.1 Management. A. Except as otherwise expressly provided in this Agreement, all management powers over the business and affairs of the Partnership are and shall be exclusively vested in the General Partner. The Limited Partners shall not have any right to participate in or exercise control or management power over the business and affairs of the Partnership. The General Partner may not be removed by the Limited Partners. In addition to the powers now or hereafter granted to a general partner of a limited partnership under applicable law or which are granted to the General Partner under any other provision of this Agreement, the General Partner, subject to Section 7.3 hereof, shall have full power and authority to do all things deemed necessary or desirable by it to conduct the business of the Partnership, to exercise all powers set forth in Section 3.2 hereof and to effectuate the purposes set forth in Section 3.1 hereof, including, without limitation: 15 17 (1) the execution, acknowledgment, verification, delivery, filing and recording, for and in the name of the Partnership, and any and all documents and instruments, including the Net 3 Merger Agreement and the performance of any and all acts required by applicable law or which the General Partner deems necessary or advisable in order to give effect to the consummation of the Net 3 Merger; (2) the making of any expenditures, the lending or borrowing of money (including, without limitation, making prepayments on loans and borrowing money to permit the Partnership to make distributions to its Partners in such amounts as will permit LXP (so long as LXP qualifies as a REIT) to avoid the payment of any federal income tax (including, for this purpose, any excise tax pursuant to Section 4981 of the Code) and to make distributions to its stockholders sufficient to permit LXP to maintain REIT status) and the assumption or guarantee of, or other contracting for, indebtedness and other liabilities; (3) the acquisition, disposition, mortgage, pledge, encumbrance, hypothecation or exchange of any assets of the Partnership or the merger or other combination of the Partnership with or into another entity (all of the foregoing subject to any prior approval only to the extent required by Section 7.3 hereof); (4) the use of the assets of the Partnership for any purpose consistent with the terms of this Agreement and on any terms the General Partner sees fit, and the making of capital contributions or loans to its Subsidiaries; (5) the management, operation, leasing, landscaping, repair, alteration, demolition or improvement of any real property or improvements owned by the Partnership or any Subsidiary of the Partnership; (6) the negotiation, execution and performance of any contracts, conveyances or other instruments that the General Partner considers useful or necessary to the conduct of the Partnership's operations or the implementation of the General Partner's powers under this Agreement; (7) the distribution of Partnership cash or other Partnership assets in accordance with this Agreement; (8) the formation of, or acquisition of an interest in, and the contribution of property to, any further limited or general partnerships or joint ventures that the General Partner deems desirable; (9) the undertaking of any action in connection with the Partnership's direct or indirect investment in its Subsidiaries or any other Person (including, without limitation, the contribution or loan of funds by the Partnership to such Persons); (10) the determination of the fair market value of any Partnership property distributed in kind using such reasonable method of valuation as the General Partner may adopt; 16 18 (11) the exercise, directly or indirectly, through any attorney-in-fact acting under a general or limited power of attorney, of any right, including the right to vote, appurtenant to any asset or investment held by the Partnership; and (12) the making, execution and delivery of any and all deeds, leases, notes, deeds to secure debt, mortgages, deeds of trust, security agreements, conveyances, contracts, guarantees, warranties, indemnities, waivers, releases or legal instruments or agreements in writing necessary or appropriate in the judgment of the General Partner for the accomplishment of any of the powers of the General Partner enumerated in this Agreement. B. At all times from and after the date hereof, the General Partner may cause the Partnership to obtain and maintain (i) casualty, liability and other insurance on the properties of the Partnership and (ii) liability insurance for the Indemnitees hereunder. C. At all times from and after the date hereof, the General Partner may cause the Partnership to establish and maintain any and all reserves, working capital accounts and other cash or similar balances in such amounts as the General Partner, in its sole discretion, deems appropriate and reasonable from time to time. D. In exercising its authority under this Agreement, the General Partner may, but shall not be obligated to, take into account the tax consequences to any Partner of any action taken by it. The General Partner and the Partnership shall not, however, have liability to an Additional Limited Partner under any circumstances as a result of an income tax liability incurred by such Additional Limited Partner as a result of an action (or inaction) by the General Partner pursuant to its authority under this Agreement. Section 7.2 Certificate of Limited Partnership. To the extent that such action is determined by the General Partner to be reasonable and necessary or appropriate, the General Partner shall file amendments to the Certificate and do all the things to maintain the Partnership as a limited partnership (or a partnership in which the limited partners have limited liability) under the laws of the State of Delaware and each other state, or the District of Columbia, in which the partnership may elect to do business or own property. The General Partner shall use all reasonable efforts to cause to be filed such other certificates or documents as may be reasonable and necessary or appropriate for the formation, continuation, qualification and operation of a limited partnership (or a partnership in which the limited partners have limited liability to the extent provided by applicable law) in the State of Delaware and any other state, or the District of Columbia, in which the Partnership may elect to do business or own property. Section 7.3 Restrictions on Authority. Subject to Section 8.4(C), after the Effective Date, without the consent of holders of a majority of the outstanding Partnership Units held by the Special Limited Partners, the General Partner may not consent to the Partnership participating in any merger, consolidation or other combination with or into another Person or sale of all or substantially all of its assets. 17 19 Section 7.4 Reimbursement of LXP. A. Except as provided in this Section 7.4 and elsewhere in this Agreement (including the provisions of Articles 5 and 6 regarding distributions, payments and allocations to which it may be entitled), the General Partner shall not be compensated for its services as general partner of the Partnership. B. LXP and the General Partner shall be reimbursed by the Partnership for the product of (i) the Relative Interest and (ii) all expenses the General Partner and LXP incurs relating to the formation and organization of the General Partner, the Partnership and the Limited Partner, and any other issuance of REIT Shares pursuant to Section 4.2 hereof. C. In the event that LXP shall elect to purchase from stockholders REIT Shares pursuant to any stock repurchase program or for the purpose of delivering such REIT Shares to satisfy an obligation under Section 8.4 of this Agreement, any dividend reinvestment program adopted by LXP, any employee stock purchase plan adopted by LXP, or any other similar obligation or arrangement undertaken by LXP in the future, the purchase price paid by LXP for such REIT Shares and any other expenses incurred by LXP in connection with such purchase shall be considered expenses of the Partnership and shall be reimbursed to LXP to such extent, subject to the condition that, if such REIT Shares are sold, LXP shall contribute to the Partnership, through the General or Limited Partner, any proceeds received by LXP for such REIT Shares (provided that REIT shares delivered to an Additional Limited Partner in exchange for Partnership Units pursuant to Section 8.4 shall not be considered a sale of REIT Shares for such purpose). Section 7.5 Indemnification. A. The Partnership shall indemnify and hold harmless each Indemnitee from and against any and all losses, claims, damages, liabilities, joint or several, expenses (including, without limitation, attorney's fees and other legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the Mergers or to the operations of the Partnership as set forth in this Agreement in which such Indemnitee may be involved, or is threatened to be involved, as a party or otherwise; provided that the Partnership shall not indemnify an Indemnitee for such Indemnitee's breach of duty of loyalty to the Partnership or for acts or omissions not taken by the Indemnitee in good faith or which involve intentional misconduct or a knowing violation of law or in which such Indemnitee received an improper personal benefit. The General Partner is hereby authorized and empowered, on behalf of the Partnership, to enter into one or more indemnity agreements consistent with the provisions of this Section 7.5 in favor of any Indemnitee having or potentially having liability for any such indebtedness. It is the intention of this Section 7.5.A that the Partnership indemnify each Indemnitee to the fullest extent permitted under the Act. The termination of any proceeding by judgment, order or settlement does not create a presumption that the Indemnitee did not meet the requisite standard of conduct set forth in this Section 7.5.A. The termination of any proceeding by conviction of an Indemnitee or upon a plea of nolo contendere or its equivalent by an Indemnitee, or an entry of an order of probation against an Indemnitee prior to judgment, creates a rebuttable presumption that such Indemnitee acted in a manner contrary to that specified in this Section 7.5.A with respect to the subject matter of such proceeding. 18 20 B. Reasonable expenses incurred by an Indemnitee who is a party to a proceeding may be paid or reimbursed by the Partnership in advance of the final disposition of the proceeding upon receipt by the Partnership of (i) a written affirmation by the Indemnitee of the Indemnitee's good faith belief that the standard of conduct necessary for indemnification by the Partnership as authorized in Section 7.5.A has been met and (ii) a written undertaking by or on behalf of the Indemnitee to repay the amount if it shall ultimately be determined that the standard of conduct has not been met. C. The indemnification provided by this Section 7.5 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise. D. The Partnership may, but shall not be obligated to, purchase and maintain insurance on behalf of any of the Indemnitees and such other Persons as the General Partner shall determine against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership's activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. E. In no event may an Indemnitee subject any of the Partners to personal liability by reason of the indemnification provisions set forth in this Agreement. F. The provisions of this Section 7.5 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. Any amendment, modification or repeal of this Section 7.5 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the Partnership's liability to any Indemnitee under this Section 7.5 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted. ARTICLE 8 RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS Section 8.1 Management of Business. The Limited Partners and Assignees shall not take part in the operation, management or control of the Partnership's business, transact any business in the Partnership's name or have the power to sign documents for or otherwise bind the Partnership. The transaction of any such business by the General Partner, any of its Affiliates or any officer, director, employee, partner, agent or trustee of the General Partner, the Partnership or any of their Affiliates, in their capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Limited Partners or Assignees under this Agreement. 19 21 Section 8.2 Outside Activities of Additional Limited Partners. Neither the Partnership nor any Partner shall have any rights by virtue of this Agreement in any business ventures of any Additional Limited Partner or Assignee. None of the Additional Limited Partners nor any other Person shall have any rights by virtue of this Agreement or the partnership relationship established hereby in any business ventures of any other Person (other than the General Partner and the Initial Limited Partner to the extent expressly provided herein) and such Person shall have no obligation pursuant to this Agreement or otherwise to offer any interest in any such business ventures to the Partnership, any Additional Limited Partner or any such other Person, even if such opportunity is of a character which, if presented to the Partnership, any Additional Limited Partner, or such other Person, could be taken by such Person. Section 8.3 Return of Capital. Except pursuant to the right of redemption set forth in Section 8.4, no Partner shall be entitled to the withdrawal or return of his Capital Contribution, except to the extent of distributions made pursuant to this Agreement or upon termination of the Partnership as provided herein. Section 8.4 Redemption Rights. A. Subject to Section 8.4.B or C, on or at any time after the Initial Redemption Date, each Special Limited Partner shall have the right (the "Redemption Right") to require the Partnership to redeem on a Specified Redemption Date all or a portion of the Partnership Units held by such Special Limited Partner for the Share Redemption Amount or Cash Redemption Amount, as applicable, to be delivered by the Partnership. The Redemption Right shall be exercised pursuant to a Notice of Redemption delivered to the General Partner by the Special Limited Partner who is exercising the Redemption Right (the "Redeeming Partner"). The General Partner shall redeem the Special Limited Partner Units for the Share Redemption Amount. A Special Limited Partner may not exercise the Redemption Right for fewer than one thousand (1,000) Partnership Units or, if such Special Limited Partner holds fewer than one thousand (1,000) Partnership Units, all of the Partnership Units held by such Special Limited Partner. The Redeeming Partner shall have no right, with respect to any Partnership Units so redeemed, to receive any distributions paid after the Specified Redemption Date. The Assignee of any Special Limited Partner may exercise the rights of such Special Limited Partner pursuant to this Section 8.4, and such Special Limited Partner shall be deemed to have assigned such rights to such Assignee and shall be bound by the exercise of such rights by such Special Limited Partner's Assignee. In connection with any exercise of such rights by such Assignee on behalf of such Special Limited Partner, the Redemption Amount shall be delivered by the Partnership directly to such Assignee and not to such Special Limited Partner. B. Following the date that at least 50% of the Partnership Units held by the Special Limited Partners immediately following the Effective Date have been redeemed in accordance with the provisions of Section 8.4, LXP or the General Partner may require the remaining Special Limited Partners to redeem their Partnership Units for the Redemption Amount to be delivered by the Partnership. The right of the General Partner under this Section 8.4.B shall be exercised pursuant to a notice delivered to all remaining Special Limited Partners. 20 22 Such redemption shall be effective on the date specified in the notice, which date shall be at least 30 days after the notice is sent to the Special Limited Partners. C. At any time that (i) the General Partner shall be considering a sale of all or substantially all of its assets, or a merger, consolidation, stock issuance, stock redemption or other similar transaction that would result in a change in the beneficial ownership of the General Partner by 50% or more, or (ii) the Partnership shall be considering a sale of all or substantially all of its assets or a merger, consolidation, or issuance or redemption of partnership interests which would result in a change in the beneficial ownership in Partnership capital or profits of 50% or more, then the General Partner shall have the right to redeem the Partnership Units held by all, but not less than all, of the Additional Limited Partners (other than the Special Limited Partners) for the Redemption Amount provided that such redemption is contingent upon the completion of such transaction. In such event, the General Partner shall provide notice to the Limited Partners and such Limited Partners shall be required to surrender their Partnership Units for cancellation. The rights of such Additional Limited Partners shall be limited to the receipt of the Redemption Amount. D. In connection with any REIT Shares delivered to any Additional Limited Partner upon the redemption of Partnership Units held by such Additional Limited Partner, it is intended that such Additional Limited Partner be able to resell publicly such REIT Shares pursuant to the provisions of Rule 144 under the Securities Act of 1933, but without the need to comply with the holding period requirements of Rule 144(d). To the extent that counsel to LXP reasonably determines that resales of any such REIT Shares cannot be made pursuant to the provisions of Rule 144, and without the need to comply with the holding period requirements of Rule 144(d), LXP agrees, at its sole cost and expense, if requested by Special Limited Partners representing a majority of the Partnership Units (including REIT Shares delivered upon exchange of such Partnership Units) held by such Special Limited Partners, or by Additional Limited Partners representing a majority of the Partnership Units (including REIT Shares delivered upon the exchange of such Partnership Units) held by such class of Additional Limited Partners, to include REIT Shares that may be (or already have been) acquired by any Special Limited Partner or any Additional Limited Partner, as the case may be, in an effective registration statement under the Securities Act of 1933; provided that LXP's obligations to include such REIT Shares in such an effective registration statement shall be conditioned upon Special Limited Partners representing a majority of the Partnership Units (including REIT Shares delivered upon exchange of such Partnership Units) held by such Special Limited Partners or, where applicable, by Additional Limited Partners representing a majority of the Partnership Units (including REIT Shares delivered upon the exchange of such Partnership Units) held by such class of Additional Limited Partners, agreeing to be bound by a customary registration rights agreements to be prepared by LXP. In addition, any Additional Limited Partner whose REIT Shares are included in such registration statement must also agree to be bound by the terms and provisions of a registration rights agreement. E. Notwithstanding the provisions of Section 8.4.A or Section 8.4.B, a Subsequent Partner shall not be entitled to exercise the Redemption Right pursuant to Section 8.4.A or Section 8.4.B if the delivery of REIT Shares to such Subsequent Partner on the Specified Redemption Date would be prohibited under the Declaration of Trust and shall be 21 23 subject in any event to the issuance of REIT Shares being in compliance with all applicable Federal and State securities laws. F. Notwithstanding any other provision of this Agreement, upon the occurrence of a Capital Event prior to the Specified Redemption Date, the proceeds of which are distributed to the Partners, and ultimately proportionately to the shareholders of the General Partner, the Percentage Interest of each Partner shall, from the date of such Capital Event, be equal to (i) the product of (a) such Partner's Percentage Interest prior to such Capital Event and (b) the difference between (x) the fair market value of the assets of the Partnership and (y) any amounts distributed to such Partner as a result of the Capital Event, divided by (ii) the fair market value of the assets of the Partnership after such distribution. The General Partner shall adjust the number of Partnership Units owned by each Partner to appropriately reflect the adjustments made by this Section 8.4.F. ARTICLE 9 BOOKS, RECORDS, ACCOUNTING AND REPORTS Section 9.1 Records and Accounting. The General Partner shall keep or cause to be kept at the principal office of the Partnership those records and documents required to be maintained by the Act and other books and records deemed by the General Partner to be appropriate with respect to the Partnership's business. The books of the Partnership shall be maintained, for financial and tax reporting purposes, on an accrual basis in accordance with generally accepted accounting principles, or on such other basis as the General Partner determines to be necessary or appropriate. Section 9.2 Fiscal Year. The fiscal year of the Partnership shall be the calendar year. ARTICLE 10 TAX MATTERS Section 10.1 Preparation of Tax Returns. The General Partner shall arrange for the preparation and timely filing of all returns of Partnership income, gains, deductions, losses and other items required of the Partnership for federal and state income tax purposes and shall use all reasonable efforts to furnish, within ninety (90) days of the close of each taxable year, the tax information reasonably required by the Additional Limited Partners for federal and state income tax reporting purposes. Section 10.2 Tax Elections. Except as otherwise provided herein, the General Partner shall, in its sole and absolute discretion, determine whether to make any available election pursuant to the Code; provided that, the General Partner shall make the election under Section 754 of the Code in 22 24 accordance with applicable Regulations thereunder. The General Partner shall have the right to seek to revoke any such elections (including, without limitation, the election under Section 754 of the Code) upon the General Partner's determination in its sole and absolute discretion that such revocation is in the best interests of the Partners. Section 10.3 Tax Matters Partner. A. The General Partner shall be the "tax matters partner" of the Partnership for federal income tax purposes. The tax matters partner is authorized but not required, to take any action on behalf of the Partners of the Partnership in connection with any tax audit or judicial review proceeding to the extent permitted by law. B. The taking of any action and the incurring of any expense by the tax matters partner in connection with any such audit or proceeding, except to the extent required by law, is a matter in the sole and absolute discretion of the tax matters partner and the provisions relating to indemnification of the General Partner set forth in Section 7.7 of this Agreement shall be fully applicable to the tax matters partner in its capacity as such. C. The tax matters partner shall receive no compensation for its services. All third party costs and expenses incurred by the tax matters partner in performing its duties as such (including legal and accounting fees and expenses) shall be borne by the Partnership. Nothing herein shall be construed to restrict the Partnership from engaging an accounting firm to assist the tax matters partner in discharging its duties hereunder, so long as the compensation paid by the Partnership for such services is reasonable. Section 10.4 Withholding. Each Additional Limited Partner hereby authorizes the Partnership to withhold from or pay on behalf of or with respect to such Additional Limited Partner any amount of federal, state, local, or foreign taxes that the General Partner determines that the Partnership is required to withhold or pay with respect to any amount distributable or allocable to such Additional Limited Partner pursuant to this Agreement. Any amount paid on behalf of or with respect to an Additional Limited Partner shall constitute a loan by the Partnership to such Additional Limited Partner which loan shall be repaid by such Additional Limited Partner within fifteen (15) days after notice from the General Partner that such payment must be made unless (i) the Partnership withholds such payment from a distribution which would otherwise be made to such Additional Limited Partner or (ii) the General Partner determines, in its sole and absolute discretion, that such payment may be satisfied out of the available funds of the Partnership which would, but for such payment, be distributed to Additional Limited Partner. Any amounts withheld pursuant to the foregoing clauses (i) or (ii) shall be treated as having been distributed to such Additional Limited Partner. Any amounts payable by a Limited Partner hereunder shall bear interest at the base rate on corporate loans at large United States money center commercial banks, as published from time to time in The Wall Street Journal, such interest to accrue from the date such amount is due (i.e., fifteen (15) days after demand) until such amount is paid in full. 23 25 ARTICLE 11 TRANSFERS AND WITHDRAWALS Section 11.1 Transfer. A. The term "transfer," when used in this Article 11 with respect to a Partnership Unit, shall be deemed to refer to a transaction by which a Partner purports to assign all or any part of its Partnership Interest to another Person, and includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise. The term "transfer" when used in this Article 11 does not include any redemption of Partnership Units by an Additional Limited Partner or acquisition of Partnership Units from an Additional Limited Partner by the General Partner pursuant to Section 8.4. B. No Partnership Interest shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article 11. Any transfer or purported transfer of a Partnership Interest not made in accordance with this Article 11 shall be null and void. Section 11.2 Transfer of Partnership Interests by the General Partner and the Initial Limited Partner. A. The General Partner may not transfer any of its General Partner Interest except to the Initial Limited Partner or LXP. The General Partner may not withdraw as General Partner except in connection with the complete transfer of its Partnership Interest as permitted hereunder. B. The Initial Limited Partner may not transfer any of its Partnership Interests, except to the General Partner or LXP. The Initial Limited Partner may not withdraw as Initial Limited Partner except in connection with the complete transfer of its Partnership Interest as permitted hereunder. C. If LXP acquires any or all of the Partnership Interests of the General Partner or the Initial Limited Partner as permitted hereunder, LXP agrees that it will not transfer any of its Partnership Interests, except to the Initial Limited Partner or to the General Partner. LXP may not withdraw as Partner except in connection with the complete transfer of any Partnership Interest as permitted hereunder. D. Any transferee who acquires a Partnership Interest under this Section 11.2 may become a Substituted Additional Limited Partner, or a successor General Partner upon such terms specified by the General Partner, including the delivery to the General Partner of such documents or instruments, including powers of attorney, as may be required in the discretion of the General Partner in order to effect such Person's admission as a Partner. Section 11.3 Additional Limited Partners' Rights to Transfer. A. Subject to the provisions of Section 11.3.E, no Additional Limited Partner shall have the right to transfer all or any portion of its Partnership Interest, or any of such 24 26 Additional Limited Partner's rights as a Special Limited Partner, without the prior written consent of the General Partner, which consent may be given or withheld by the General Partner in its sole and absolute discretion. Any purported transfer of a Partnership Interest by an Additional Limited Partner in violation of this Section 11.3.A shall be void ab initio and shall not be given effect for any purpose by the Partnership. B. If an Additional Limited Partner is subject to Incapacity, the executor, administrator, trustee, committee, guardian, conservator or receiver of such Additional Limited Partner's estate shall have all the rights of a Special Limited Partner, but no more rights than those enjoyed by other Special Limited Partners, as the case may be, for the purpose of settling or managing the estate and such power as the Incapacitated Additional Limited Partner possessed to transfer all or any part of its interest in the Partnership. The Incapacity of an Additional Limited Partner, in and of itself, shall not dissolve or terminate the Partnership. C. The General Partner may prohibit any transfer otherwise permitted under Section 11.3.E by an Additional Limited Partner of his Partnership Units (i) if, in the opinion of legal counsel to the Partnership, such transfer would require filing of a registration statement under the Securities Act of 1933 or would otherwise violate any federal, state, or foreign securities laws or regulations applicable to the Partnership or the Partnership Units or, (ii) if the transferring Additional Limited Partner, fails or is unable to obtain and deliver to the Partnership, after request therefor is made by the General Partner, a legal opinion from counsel acceptable to the General Partner, addressed to the Partnership and the General Partner, that such registration is not required in connection with such transfer and that such transfer does not violate any federal, state or foreign securities laws or regulations applicable to the Partnership or the Partnership Units. D. No transfer by an Additional Limited Partner of its Partnership Units may be made to any Person if (i) in the opinion of legal counsel for the Partnership, it would result in the Partnership being treated as an association taxable as a corporation or would cause the General Partner to lose its REIT status under the Code or (ii) such transfer is effectuated through an "established securities market" or a "secondary market (or the substantial equivalent thereof)" within the meaning of Section 7704(b) of the Code. E. Notwithstanding the provisions of Section 11.3.A (but subject to the provisions of Section 11.3.C and 11.3.D), an Additional Limited Partner may, with or without the consent of the General Partner, transfer all or a portion of his Partnership Units to (i)(a) a member of his Immediate Family, or a trust for the benefit of a member of his Immediate Family, (b) an organization that qualifies under Section 501(c)(3) of the Code and that is not a private foundation within the meaning of Section 509(a) of the Code or (c) in the case of an Additional Partner that is a partnership, a partner in the Additional Limited Partner in a distribution by that Additional Limited Partner to its partners under the partnership agreement of such Additional Limited Partner or (ii) a lender as security for a loan made to or guaranteed by the Additional Limited Partner, provided that in connection with any such transfer the lender does not acquire greater rights with respect to the Partnership Units than those held by the transferring Additional Limited Partner. 25 27 Section 11.4 Substituted Additional Limited Partners. A. No Additional Limited Partner shall have the right to substitute a transferee in his place. The General Partner shall, however, have the right to consent to the admission of a transferee of the interest of an Additional Limited Partner pursuant to this Section 11.4 as a Substituted Additional Limited Partner which consent may be given or withheld by the General Partner in its sole and absolute discretion. The General Partner's failure or refusal to permit a transferee of any such interests to become a Substituted Additional Limited Partner shall not give rise to any cause of action against the Partnership or any Partner. B. A transferee who has been admitted as a Substituted Additional Limited Partner in accordance with this Article 11 shall have all the rights and powers and be subject to all the restrictions and liabilities of the transferor Additional Limited Partner under this Agreement. C. Upon the admission of a Substituted Additional Limited Partner, the General Partner shall amend Exhibit A, where applicable, to reflect the name, address, number of Partnership Units, and Percentage Interest of such Substituted Additional Limited Partner, and to eliminate or adjust, if necessary, the name, address and interest of the predecessor of such Substituted Additional Limited Partner. Section 11.5 Assignees. If the General Partner, in its sole and absolute discretion, does not consent to the admission of any permitted transferee under Section 11.3 as an Additional Limited Partner, as described in Section 11.4, such transferee shall be considered an Assignee for purposes of this Agreement. An Assignee shall be deemed to have had assigned to it, and shall be entitled to receive, distributions from the Partnership and the share of Net Income, Net Losses, Recapture Income, and any other items of income, gain, loss, deduction and credit of the Partnership attributable to the Partnership Units assigned to such transferee, but shall not be deemed to be a holder of Partnership Units for any other purpose under this Agreement, and shall not be entitled to vote such Partnership Units in any matter presented to the Additional Limited Partners for a vote (such Partnership Units being deemed to have been voted on such matter in the same proportion as all other Partnership Units held by Special Limited Partners or other Additional Limited Partners, where applicable, are voted). In the event any such transferee desires to make a further assignment of any such Partnership Units, such transferee shall be subject to all the provisions of this Article 11 to the same extent and in the same manner as any Additional Limited Partner desiring to make an assignment of Partnership Units. Section 11.6 General Provisions. A. No Additional Limited Partner may withdraw from the Partnership other than as a result of a permitted transfer of all of such Additional Limited Partner's Partnership Units in accordance with this Article 11 or pursuant to redemption of all of its Partnership Units under Section 8.4. B. Any Additional Limited Partner who shall transfer all of his Partnership Units in a transfer permitted pursuant to this Article 11 shall cease to be an Additional Limited Partner upon the admission of an Assignee of such Partnership Units as a Substituted Additional 26 28 Limited Partner. Similarly, any Additional Limited Partner who shall transfer all of his Partnership Units pursuant to a redemption of all of his Partnership Units under Section 8.4 shall cease to be an Additional Limited Partner. C. Transfers pursuant to this Article 11 may only be made on the first day of a fiscal quarter of the Partnership, unless the General Partner otherwise agrees. D. If any Partnership Unit is transferred or assigned in compliance with the provisions of this Article 11, or redeemed or transferred pursuant to Section 8.4 on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items attributable to such Partnership Unit for such Partnership Year shall be allocated to the transferor Partner or the Redeeming Partner, as the case may be, and, in the case of a transfer or assignment other than a redemption, to the transferee Partner, by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. Solely for purposes of making such allocations, each of such items for the calendar month in which a transfer or assignment occurs shall be allocated to the transferee Partner, and none of such items for the calendar month in which a transfer or a redemption occurs shall be allocated to the transferor Partner or the Redeeming Partner, as the case may be. All distributions of Operating Cash Flow attributable to such Partnership Unit with respect to which the Partnership Record Date is before the date of such transfer, assignment or redemption shall be made to the transferor Partner or the Redeeming Partner, as the case may be, and, in the case of a transfer or assignment other than a redemption, all distributions of Operating Cash Flow thereafter attributable to such Partnership Unit shall be made to the transferee Partner. ARTICLE 12 ADMISSION OF PARTNERS Section 12.1 Admission of Subsequent Partner. No person shall be admitted as a Partner except in accordance with the terms of this Agreement and upon obtaining the consent of the General Partner. Any prospective Partner must submit to the General Partner (i) evidence of acceptance in form satisfactory to the General Partner of all of the terms and conditions of this Agreement, and (ii) such other documents or instruments, including powers of attorney, as may be required in the discretion of the General Partner in order to effect such Person's admission as a Partner. A. The admission of any Person as a Subsequent Partner shall become effective on the date upon which the name of such Person is recorded in the books and records of the Partnership, following the consent of the General Partner to such admission. B. If any Subsequent Partner is admitted to the Partnership on any day other than the first day of a Partnership Year, then Net Income, Net Losses, each item thereof and all other items allocable among Partners and Assignees for such Partnership Year shall be allocated among such Subsequent Partner and all other Partners and Assignees by taking into account their varying interests during the Partnership Year in accordance with Section 706(d) of the Code, using the interim closing of the books method. Solely for purposes of making such allocations, 27 29 each of such items for the calendar month in which an admission of any Subsequent Partner occurs shall be allocated among all the Partners and Assignees including such Additional Limited Partner. All distributions of Operating Cash Flow with respect to which the Partnership Record Date is before the date of such admission shall be made solely to Partners and Assignees other than the Subsequent Partner, and all distributions of Operating Cash Flow thereafter shall be made to all the Partners and Assignees including such Subsequent Partner. Section 12.2 Amendment of Agreement and Certificate of Limited Partnership. For the admission to the Partnership of any Partner, the General Partner shall take all steps necessary and appropriate under the Act to amend the records of the Partnership and, if necessary, to prepare as soon as practicable an amendment of this Agreement (including an amendment of Exhibit A) and, if required by law, shall prepare and file an amendment to the Certificate. ARTICLE 13 DISSOLUTION, LIQUIDATION AND TERMINATION Section 13.1 Dissolution. The Partnership shall not be dissolved by the admission of Substituted Additional Limited Partners or Subsequent Partners or by the admission of a successor General Partner in accordance with the terms of this Agreement. Upon the withdrawal of the General Partner, any successor General Partner shall continue the business of the Partnership. The Partnership shall dissolve, and its affairs shall be wound up, upon the first to occur of any of the following ("Liquidating Events"): A. the expiration of its term as provided in Section 2.5 hereof; B. an event of withdrawal of the General Partner, as defined in the Act, unless (i) at the time of such event there is at least one remaining general partner of the Partnership who carries on the business of the Partnership (and each remaining general partner of the Partnership is hereby authorized to carry on the business of the Partnership in such an event) or (ii) within ninety (90) days after such event, all Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of such event, of LXP as the General Partner of the Partnership (and LXP agrees to become a general partner of the Partnership); C. entry of a decree of judicial dissolution of the Partnership pursuant to the provision of the Act; or D. the sale of all or substantially all of the assets and properties of the Partnership. 28 30 Section 13.2 Winding Up. A. Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Partners. No Partner shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Partnership's business and affairs. The General Partner or, in the event there is no remaining General Partner, any Person elected by a majority in interest of the Limited Partners (the General Partner or such other Person being referred to herein as the "Liquidator") shall be responsible for overseeing the winding up and dissolution of the Partnership and shall take full account of the Partnership's liabilities and property and the Partnership property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom shall be applied and distributed in the following order: (1) First, to the satisfaction of all of the Partnership's debts and liabilities, including all contingent, conditional or immature claims and obligations to creditors other than the Partners (whether by payment or the making of reasonable provision for payment thereof); (2) Second, to the payment and discharge of all of the Partnership's debts and liabilities to the General Partner; (3) Third, to the payment and discharge of all of the Partnership's debts and liabilities to the other Partners; (4) The balance if any, to the Partners in accordance with the positive Capital Account balances of the Partners, after giving effect to all contributions, distributions, and allocations for all periods. The General Partner shall not receive any additional compensation for any services performed pursuant to this Article 13. B. Notwithstanding the provisions of Section 13.2.A hereof which require liquidation of the assets of the Partnership, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Partnership the Liquidator determines that an immediate sale of part or all of the Partnership's assets would be impractical or would cause undue loss to the Partners, the Liquidator may, in its sole and absolute discretion (subject to its obligation to gradually settle and close the Partnership's business under Section 17-803 of the Act), defer for a reasonable time the liquidation of any assets except those necessary to satisfy liabilities of the Partnership (including to those Partners as creditors). Section 13.3 Negative Capital Accounts. A. Except as provided in this Section 13.3, no Partner, general or limited, shall be liable to the Partnership or to any other Partner for any negative balance outstanding in each such Partner's Capital Account, whether such negative Capital Account results from the allocation of Net Losses, or other items of deduction and loss to such Partner or from distributions to such Partner. 29 31 B. Subject to Section 13.3.C, if any Special Limited Partner on the date of the "liquidation" of his respective interest in the Partnership (within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g)), including a redemption under Section 8.4, would, following a hypothetical sale of Partnership assets and the liquidation of the Partnership, have a negative balance in his Capital Account, then such Special Limited Partner shall contribute in cash to the capital of the Partnership the amount required to increase his Capital Account as of such date to zero. Any such contribution required of such Special Limited Partner hereunder shall be made on or before the later of (i) the end of the Partnership Year in which the interest of such Special Limited Partner is liquidated or (ii) the ninetieth (90th) day following the date of such liquidation. C. After the death of a Special Limited Partner, the executor of the estate of such Special Limited Partner may elect to reduce (or eliminate) the deficit Capital Account restoration obligation of such Special Limited Partner. Pursuant to Section 13.3.B. such election may be made by such executor by delivering to the General Partner within two hundred seventy (270) days of the death of such Special Limited Partner a written notice setting forth the maximum deficit balance in his Capital Account that such executor agrees to restore under Section 13.3.B, if any. If such executor does not make a timely election pursuant to this Section 13.3.C (whether or not the balance in his Capital Account is negative at such time), then a Special Limited Partner's estate (and the beneficiaries thereof who receive distribution of Partnership Units therefrom) shall be deemed to have a deficit Capital Account restoration obligation as set forth pursuant to the terms of Section 13.3.B. Section 13.4 Deemed Distribution and Recontribution. Notwithstanding any other provision of this Article 13, in the event the Partnership is liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g) but no Liquidating Event has occurred, the Partnership's property shall not be liquidated, the Partnership's liabilities shall not be paid or discharged, and the Partnership's affairs shall not be wound up. Instead, for federal income tax purposes and for purposes of maintaining Capital Accounts pursuant to Exhibit B hereto, the Partnership shall be deemed to have distributed the property in kind to the Partners, who shall be deemed to have assumed and taken such property subject to all Partnership liabilities, all in accordance with their respective Capital Accounts. Immediately thereafter, the General Partner and Limited Partners shall be deemed to have re-contributed the Partnership property in kind to the Partnership, which shall be deemed to have assumed and taken such property subject to all such liabilities. Section 13.5 Rights of the Limited Partners. Except as otherwise provided in this Agreement, the Limited Partners shall look solely to the assets of the Partnership for the return of its Capital Contribution and shall have no right or power to demand or receive property other than cash from the Partnership. Section 13.6 Waiver of Partition. Each Partner hereby waives any right to partition of the Partnership property. 30 32 ARTICLE 14 AMENDMENT OF PARTNERSHIP AGREEMENT Section 14.1 Amendments. A. This Agreement may be amended with the consent of the General Partner, the Initial Limited Partner, and the Special Limited Partners representing a majority of Partnership Units held by such Special Limited Partners, but such amendments shall not require the approval of any Additional Limited Partners other than the Special Limited Partners. B. Notwithstanding Section 14.1.A, the General Partner shall have the power, without the consent of any other Partner to amend this Agreement as may be required to facilitate or implement any of the following purposes: (1) to add to the obligations of the General Partner or surrender any right or power granted to the General Partner or any Affiliate of the General Partner for the benefit of the Limited Partners; to set forth the designation, rights, powers, duties, and preferences of the holders of any additional Partnership Interests issued pursuant to Section 4.2.A hereof; (2) to reflect a change that is of an inconsequential nature and does not adversely affect the Limited Partners in any material respect, or to cure any ambiguity, correct or supplement any provision in this Agreement not inconsistent with law or with other provisions, or make other changes with respect to matters arising under this Agreement that will not be inconsistent with law or with the provisions of this Agreement; and (3) to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling, or regulation of a federal or state agency or contained in federal or state law. The General Partner shall provide notice to the other Partners when any action under this Section 14.1.B is taken. C. Notwithstanding Sections 14.1.A and 14.1.B hereof, this Agreement shall not be amended without the consent of each Partner adversely affected if such amendment would (i) convert a Limited Partner's interest in the Partnership into a general partner interest, (ii) modify the limited liability of a Limited Partner in a manner adverse to such Partner, (iii) alter or modify the Redemption Right and REIT Shares Amount as set forth in Section 8.4 in a manner adverse to such Partner, or (iv) amend this Section 14.1.C. Further, no amendment may alter the restrictions on the General Partner's authority set forth in Section 7.3 without the consent specified in that section. 31 33 ARTICLE 15 GENERAL PROVISIONS Section 15.1 Addresses and Notice. Any notice, demand, request or report required or permitted to be given or made to a Partner or Assignee under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by other means of written communication to the Partner or Assignee at the address set forth in Exhibit A or such other address of which the Partner shall notify the General Partner in writing. Section 15.2 Titles and Captions. All article or section titles or captions in this Agreement are for convenience only. They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof. Except as specifically provided otherwise, references to "Articles" and "Sections" are to Articles and Sections of this Agreement. Section 15.3 Pronouns and Plurals. Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. Each reference herein to Partnership Units held by the General Partner or a Special Limited Partner shall be deemed to be a reference to Partnership Units held by such Partner in its role as such. Section 15.4 Further Action. The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement. Section 15.5 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns. Section 15.6 Waiver. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver or any such breach or any other covenant, duty, agreement or condition. 32 34 Section 15.7 Counterparts. This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart. Each party shall become bound by this Agreement immediately upon affirming its signature hereto. Section 15.8 Applicable Law. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law. Section 15.9 Invalidity of Provisions. If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. Section 15.10 Entire Agreement. This Agreement contains the entire understanding and agreement among the Partners with respect to the subject matter hereof and supersedes the Prior Agreement and any other prior written or oral understandings or agreements among them with respect thereto. 33 35 IN WITNESS WHEREOF, the parties hereto have executed this Agreement under seal as of the date first written above. GENERAL PARTNER: Lex GP-1, Inc. By _____________________________ Name: Antonia G. Trigiani Title: Vice President LIMITED PARTNER: Lex LP-1, Inc. By _____________________________ Name: Antonia G. Trigiani Title: Vice President SPECIAL LIMITED PARTNERS By _____________________________ On behalf of the Special Limited Partners set forth on Exhibit A Acknowledged and Accepted: LEXINGTON CORPORATE PROPERTIES TRUST By__________________________ Name: Wilson Eglin Title: President 34 36 EXHIBIT B CAPITAL ACCOUNT MAINTENANCE 1. Capital Accounts of the Partners A. The Partnership shall maintain for each Partner a separate Capital Account in accordance with the rules of Regulations Section 1.704-1(b)(2)(iv). Such Capital Account shall be increased by (i) the amount of all Capital Contributions and any other deemed contributions made by such Partner to the Partnership pursuant to this Agreement and (ii) all items of Partnership income and gain (including income and gain exempt from tax) computed in accordance with Section 1.B hereof and allocated to such Partner pursuant to Section 6.1.A of the Agreement and Exhibit C hereof, and decreased by (x) the amount of cash or Agreed Value of all actual and deemed distributions of cash or property made to such Partner pursuant to this Agreement and (y) all items of Partnership deduction and loss computed in accordance with Section 1.B hereof and allocated to such Partner pursuant to Section 6.1.B of the Agreement and Exhibit C hereof. B. For purposes of computing the amount of any item of income, gain, deduction or loss to be reflected in the Partners' Capital Accounts, unless otherwise specified in this Agreement, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for federal income tax purposes determined in accordance with Section 703(a) of the Code (for this purpose all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in taxable income or loss), with the following adjustments: (1) Except as otherwise provided in Regulation Section 1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss and deduction shall be made without regard to any election under Section 754 of the Code which may be made by the Partnership; provided that the amounts of any adjustments to the adjusted bases of the assets of the Partnership made pursuant to Section 734 of the Code as a result of the distribution of property by the Partnership to a Partner (to the extent that such adjustments have not previously been reflected in the Partners' Capital Accounts) shall be reflected in the Capital Accounts of the Partners in the manner and subject to the limitations prescribed in Regulations Section 1.704-1(b)(2)(iv)(m)(4). (2) The computation of all items of income, gain, loss and deduction shall be made without regard to the fact that items described in Sections 705(a)(1)(B) or 705(a)(2)(B) of the Code are not includable in gross income or are neither currently deductible nor capitalized for federal income tax purposes. (3) Any income, gain or loss attributable to the taxable disposition of any Partnership property shall be determined as if the adjusted basis of such property as of such date of disposition were equal in amount to the Partnership's Carrying Value with respect to such property as of such date. B-1 37 (4) In lieu of the depreciation, amortization, and other cash recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year. (5) In the event the Carrying Value of any Partnership Asset is adjusted pursuant to Section 1.D hereof, the amount of any such adjustment shall be taken into account as gain or loss from the disposition of such asset. (6) Any items specially allocated under Section 2 of Exhibit C hereof shall not be taken into account. C. Generally, a transferee (including any Assignee) of a Partnership Unit shall succeed to a pro rata portion of the Capital Account of the transferor; provided that if the transfer causes a termination of the Partnership under Section 708(b)(1)(B) of the Code, the Partnership's properties shall be deemed, solely for federal income tax purposes, to have been distributed in liquidation of the Partnership to the holders of Partnership Units (including such transferee) and re-contributed by such Persons in reconstitution of the Partnership. In such event, the Carrying Values of the Partnership properties shall be adjusted immediately prior to such deemed distribution pursuant to Section l.D.(2) hereof. The Capital Accounts of such reconstituted Partnership shall be maintained in accordance with the principles of this Exhibit B. D. (1) Consistent with the provisions of Regulations Section 1.704-1(b)(2)(iv)(f), and as provided in Section 1.D.(2), the Carrying Values of all Partnership assets shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as of the times of the adjustments provided in Section 1.D.(2) hereto, as if such Unrealized Gain or Unrealized Loss had been recognized on an actual sale of each such property and allocated pursuant to Section 6.1 of the Agreement. (2) Such adjustments shall be made as of the following times: (a) immediately prior to the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (b) immediately prior to the distribution by the Partnership to a Partner of more than a de minimis amount of property as consideration for an interest in the Partnership; and (c) immediately prior to the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); provided that adjustments pursuant to clauses (a) and (b) above shall be made only if the General Partner determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership. (3) In accordance with Regulations Section 1.704-1(b)(2)(iv)(e) the Carrying Value of Partnership assets distributed in kind shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Partnership property, as of the time any such asset is distributed. (4) In determining Unrealized Gain or Unrealized Loss for purposes of this Exhibit B, the aggregate cash amount and fair market value of all Partnership assets (including cash or cash equivalents) shall be determined by the General Partner using such reasonable method of valuation as it may adopt, or in the case of a liquidating distribution B-2 38 pursuant to Article 13 of the Agreement, be determined and allocated by the Liquidator using such reasonable methods of valuation as it may adopt. The General Partner, or the Liquidator, as the case may be, shall allocate such aggregate value among the assets of the Partnership (in such manner as it determines in its sole and absolute discretion to arrive at a fair market value for individual properties). E. The provisions of this Agreement (including this Exhibit B and the other Exhibits to this Agreement) relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Partnership, the General Partner, or the Limited Partners), are computed in order to comply with such Regulations, the General Partner may make such modification, provided that it is not likely to have a material effect on the amounts distributable to any Person pursuant to Article 13 of the Agreement upon the dissolution of the Partnership. The General Partner also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of Partnership Capital reflected on the Partnership's balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-1(b)(2)(iv)(q), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b). 2. No Interest No interest shall be paid by the Partnership on Capital Contributions or on balances in Partners' Capital Accounts. 3. No Withdrawal No Partner shall be entitled to withdraw any part of his Capital Contributions or his Capital Account or to receive any distribution from the Partnership, except as provided in this Agreement. B-3 39 EXHIBIT C SPECIAL ALLOCATION RULES 1. Special Allocation Rules Notwithstanding any other provision of the Agreement or this Exhibit C, the following special allocations shall be made in the following order: A. Minimum Gain Chargeback. Notwithstanding the provisions of Section 6.1 of the Agreement or any other provisions of this Exhibit C, if there is a net decrease in Partnership Minimum Gain during any Partnership Year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, as determined under Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(f)(6). This Section l.A is intended to comply with the minimum gain chargeback requirements in Regulations Section 1.704-2(f) and for purposes of this net decrease only, each Partner's Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Section 6.1 of this Agreement with respect to such Partnership Year and without regard to any decrease in Partner Minimum Gain during such Partnership Year. B. Partner Minimum Gain Chargeback. Notwithstanding any other provision of Section 6.1 of the Agreement or any other provisions of this Exhibit C (except Section l.A. hereof), if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Partnership Year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5), shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(i)(4). This Section 1.B is intended to comply with the minimum gain chargeback requirement in such Section of the Regulations and shall be interpreted consistently therewith. Solely for the purposes of this Section 1.B, each Partner's Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Section 6.1 of the Agreement or this Exhibit C with respect to such Partnership Year, other than allocations-pursuant to Section 1.A hereof. C. Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations or distributions described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), and after giving effect to the allocations required under Sections l.A and l.B hereof, such Partner has an Adjusted Capital Account Deficit, items of Partnership income and gain shall be specifically allocated to such C-1 40 Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, its Adjusted Capital Account Deficit created by such adjustments, allocations or distributions as quickly as possible. D. Nonrecourse Deductions. Nonrecourse Deductions for any Partnership Year shall be allocated to the Partners in accordance with their respective Percentage Interests. If the General Partner determines in its good faith discretion that Nonrecourse Deductions for any Partnership Year must be allocated in a different ratio to satisfy the safe harbor requirements of the Regulations promulgated under Section 704(b) of the Code, the General Partner is authorized, upon notice to the Initial Limited Partner and the Limited Partners, to revise the prescribed ratio for such Partnership Year to the numerically closest ratio which does satisfy such requirements. E. Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for any Partnership Year shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i)(2). F. Code Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such item of gain or loss shall be specially allocated to the Partners in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations. 2. Allocations for Tax Purposes A. Except as otherwise provided in this Section 2, for federal income tax purposes, each item of income, gain, loss and deduction shall be allocated among the Partners in the same manner as its correlative item of "book" income, gain, loss or deduction is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit C. B. In an attempt to eliminate Book-Tax Disparities attributable to a Contributed Property or Adjusted Property, items of income, gain, loss and deduction shall be allocated for federal income tax purposes among the Partners as follows: (1) (a) In the case of a Contributed Property, such items attributable thereto shall be allocated among the Partners consistent with the principles of Section 704(c) of the Code that takes into account the variation between the 704(c) Value of such property and its adjusted basis at the time of contribution; and (b) any item of Residual Gain or Residual Loss attributable to a Contributed Property shall be allocated among the Partners in the same manner as its correlative item of "book" gain or loss is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit C. C-2 41 (2) (a) In the case of an Adjusted Property, such items shall (1) first, be allocated among the Partners in a manner consistent with the principles of Section 704(c) of the Code to take into account the Unrealized Gain or Unrealized Loss attributable to such property and the allocations thereof pursuant to Exhibit B and (2) second, in the event such property was originally a Contributed Property, be allocated among the Partners in a manner consistent with Section 2.B.(1) of this Exhibit C; and (b) any item of Residual Gain or Residual Loss attributable to an Adjusted Property shall be allocated among the Partners in the same manner as its correlative item of "book" gain or loss is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit C. (3) All other items of income, gain, loss and deduction shall be allocated among the Partners in the same manner as their correlative item of "book" gain or loss is allocated pursuant to Section 6.1 of the Agreement and Section 1 of this Exhibit C. C. To the extent Regulations promulgated pursuant to 704(c) of the Code permit a partnership to utilize creative methods to eliminate the disparities between the value of property and its adjusted basis (including, without limitation, the implementation of curative allocations), the General Partner shall have the authority to elect the method used by the Partnership and such election shall be binding on the Partners. Without limiting the foregoing, the General Partner shall take all steps (including, without limitation, implementing curative allocations) that it determines are necessary or appropriate to ensure that the amount of taxable gain required to be recognized by the General Partner upon a disposition by the Partnership of any Contributed Property or Adjusted Property does exceed the sum of (i) the gain that would be recognized by the General Partner if such property had an adjusted tax basis at the time of disposition equal to the 704(c) Value of such property plus (ii) the deductions for depreciation, amortization or other cost recovery actually allowed to the General Partner with respect to such property for federal income tax purposes (after giving effect to the "ceiling rule"). C-3 42 EXHIBIT D-1 NOTICE OF REDEMPTION The undersigned Special Limited Partner hereby irrevocably (i) redeems ___________ Partnership Units in Net 3 Acquisition L.P. in accordance with the terms of the Second Amended and Restated Agreement of Limited Partnership of Net 3 Acquisition L.P., as amended, and the Redemption Right referred to therein, (ii) surrenders such Partnership Units and all right, title and interest therein, and (iii) directs that the Redemption Amount deliverable upon exercise of the Redemption Right be delivered to the address and placed in the name(s) and at the address(es) specified below. The undersigned hereby represents, warrants, certifies and agrees (a) that the undersigned has good, marketable and unencumbered title to such Partnership Units, free and clear of the rights or interests of any other person or entity, (b) that the undersigned has the full right, power and authority to redeem and surrender such Partnership Units as provided herein, (c) that the undersigned has obtained the consent or approval of all persons or entities, if any, having the right to consent to or approve such redemption and surrender, (d) that if the undersigned is acquiring REIT Shares, the undersigned is doing so with the understanding that such REIT Shares may only be resold or distributed pursuant to a registration statement under the Securities Act of 1933 or in a transaction exempt from the registration requirements of such Act and (e) that Lexington Corporate Properties Trust may refuse to transfer such REIT Shares as to which evidence satisfactory to it of such registration or exemption is not provided to it. Dated: _____________ Name of Special Limited Partner: ____________________________________________ (Signature of Special Limited Partner) ____________________________________________ (Street Address) ____________________________________________ (City) (State) (Zip Code) D-1-1 43 Signature Guaranteed by: ________________________________________ If REIT Shares are issued, issue them to: Please insert social security or identifying number: Name: D-1-2