-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NsIX9ioHHVEbUGEcQvg+Wp1sIZDhmR09TDIL04Wih9pchAvrF1UtiN07HTQ6pJlD 52xIX6VMflyHYIoJs2EZWQ== 0000950133-97-002928.txt : 19970815 0000950133-97-002928.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950133-97-002928 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVALON PROPERTIES INC CENTRAL INDEX KEY: 0000911536 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 061379111 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12452 FILM NUMBER: 97661489 BUSINESS ADDRESS: STREET 1: 15 RIVER ROAD STREET 2: SUITE 210 CITY: WILTON STATE: CT ZIP: 06897 BUSINESS PHONE: 2037616500 MAIL ADDRESS: STREET 1: 15 RIVER ROAD STREET 2: SUITE 210 CITY: WILTON STATE: CT ZIP: 06897 10-Q 1 AVALON PROPERTIES FORM 10-Q 1 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 Commission file number 1-12452 AVALON PROPERTIES, INC. (Exact name of registrant as specified in its charter) -------------------- Maryland 06-1379111 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 15 River Road Wilton, Connecticut 06897 (Address of principal executive offices) - (Zip Code) (203) 761-6500 (Registrant's telephone number, including area code) -------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- APPLICABLE ONLY TO CORPORATE ISSUERS: ------------------------------------- Indicate the number of shares outstanding of each issuer's classes of common stock as of the latest practicable date: 38,453,318 shares outstanding as of August 8, 1997. =============================================================================== 2 AVALON PROPERTIES, INC. INDEX
PART I FINANCIAL INFORMATION Item 1 Financial Statements Page ---- Condensed Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996...............................................................1 Condensed Consolidated Statements of Operations for the three and six months ended June 30, 1997 and 1996........................................................2 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996........................................................3 Notes to Condensed Consolidated Financial Statements................................4 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................................9 PART II OTHER INFORMATION Item 1 Legal Proceedings..................................................................23 Item 2 Changes in Securities..............................................................23 Item 3 Defaults upon Senior Securities....................................................23 Item 4 Submission of Matters to a Vote of Stockholders....................................23 Item 5 Other Information..................................................................23 Item 6 Exhibits and Reports on Form 8-K...................................................24 Signatures.........................................................................25
3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AVALON PROPERTIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands, except per share data)
ASSETS 6-30-97 12-31-96 -------------- -------------- Real estate Land $ 200,956 $ 169,079 Buildings and improvements 923,310 754,545 Furniture, fixtures and equipment 31,891 27,455 -------------- -------------- 1,156,157 951,079 Less: accumulated depreciation (57,543) (44,547) -------------- -------------- 1,098,614 906,532 Construction in progress (including land) 102,427 130,827 -------------- -------------- TOTAL REAL ESTATE, NET 1,201,041 1,037,359 Cash and cash equivalents 2,752 14,241 Cash in escrow 3,916 3,945 Resident security deposits 7,425 5,995 Investments in joint ventures 2,988 2,573 Deferred financing and other costs, net 7,455 7,702 Deferred development costs, prepaid expenses and other assets 14,246 10,956 -------------- -------------- TOTAL ASSETS $ 1,239,823 $ 1,082,771 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current maturities of long-term notes payable $ 24,145 $ 24,335 Unsecured Facilities 71,500 -- Unsecured senior notes, 7-3/8% due 2002, net of unamortized discount 99,880 99,869 Notes payable 198,125 186,402 Payables for construction 14,967 12,613 Accrued expenses and other liabilities 11,125 10,580 Accrued interest payable 4,890 4,342 Resident security deposits 8,684 6,642 -------------- -------------- TOTAL LIABILITIES 433,316 344,783 -------------- -------------- Minority interest of unitholders in consolidated operating partnership 700 -- Stockholders' equity Preferred Stock, $.01 par value; 20,000,000 shares authorized; 4,455,000 shares of 9% Series A Cumulative Redeemable Preferred Stock issued and outstanding (Aggregate liquidation preference of $111,375) 45 45 4,300,000 shares of 8.96% Series B Cumulative Redeemable Preferred Stock issued and outstanding (Aggregate liquidation preference of $107,500) 43 43 Common Stock, $.01 par value; 80,000,000 shares authorized; 36,285,568 and 33,391,992 shares issued and outstanding at June 30, 1997 and December 31, 1996, respectively 363 334 Additional paid-in capital 829,604 752,159 Deferred compensation (3,976) (1,699) Distributions in excess of accumulated earnings (20,272) (12,894) -------------- -------------- STOCKHOLDERS' EQUITY 805,807 737,988 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,239,823 $ 1,082,771 ============== ==============
See accompanying notes to condensed consolidated financial statements. 1 4 AVALON PROPERTIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in thousands, except per share data)
Three months ended Six months ended ---------------------- ----------------------- 6-30-97 6-30-96 6-30-97 6-30-96 --------- ---------- ---------- ---------- Revenue: Rental income $40,375 $29,329 $77,526 $56,922 Management fees 244 394 499 796 Other income 153 108 273 221 --------- ---------- ---------- ---------- Total revenue 40,772 29,831 78,298 57,939 --------- ---------- ---------- ---------- Expenses: Operating expenses 14,505 11,234 27,761 22,168 Interest expense 3,922 1,663 7,639 4,246 Depreciation and amortization 6,968 5,045 13,527 9,699 General and administrative expenses 1,090 887 2,199 1,850 --------- ---------- ---------- ---------- Total expenses 26,485 18,829 51,126 37,963 --------- ---------- ---------- ---------- Equity in income of joint ventures 1,304 150 2,346 316 Interest income 220 208 495 446 Minority interest 48 135 142 299 --------- ---------- ---------- ---------- Net income before extraordinary item 15,859 11,495 30,155 21,037 Extraordinary item -- -- (1,183) -- --------- ---------- ---------- ---------- Net income 15,859 11,495 28,972 21,037 Dividends attributable to preferred stock (4,914) (2,516) (9,828) (3,602) --------- ---------- ---------- ---------- Net income available to common stockholders $10,945 $ 8,979 $19,144 $17,435 ========= ========== ========== ========== Net income per weighted average common share outstanding (Note 2) $ 0.31 $ 0.29 $ 0.55 $ 0.57 ========= ========== ========== ==========
See accompanying notes to condensed consolidated financial statements. 2 5 AVALON PROPERTIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
Six months ended ------------------------------- 6-30-97 6-30-96 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 28,972 $ 21,037 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 13,527 9,699 Equity in income of joint ventures (128) 79 Amortization of deferred compensation 485 187 Extraordinary item 1,183 -- Decrease (increase) in resident security deposits, net of related liability 612 (72) Decrease (increase) in cash in escrow 29 (105) Increase in prepaid expenses and other assets (3,290) (1,485) Increase in accrued expenses, other liabilities and accrued interest payable 1,325 1,965 ------------- ------------- Total adjustments 13,743 10,268 ------------- ------------- Net cash provided by operating activities 42,715 31,305 ------------- ------------- CASH FLOWS USED IN INVESTING ACTIVITIES: Investment in joint venture (287) (455) Increase in construction payables 2,354 2,007 Purchase and development of real estate (175,823) (124,711) ------------- ------------- Net cash used in investing activities (173,756) (123,159) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock, net 73,825 46,399 Issuance of preferred stock, net -- 107,581 Dividends paid (36,350) (25,038) Borrowings on notes payable 12,088 -- Repayments of notes payable (642) (6,340) Borrowings under Unsecured Facilities 161,000 101,000 Repayments of Unsecured Facilities (89,500) (120,500) Borrowings under construction loans -- 31 Repayments of construction loans -- (10,508) Payments of deferred financing costs (869) (459) ------------- ------------- Net cash provided by financing activities 119,552 92,166 ------------- ------------- Net (decrease) increase in cash (11,489) 312 Cash and cash equivalents, beginning of period 14,241 1,801 ------------- ------------- Cash and cash equivalents, end of period $ 2,752 $ 2,113 ============= ============= Cash paid during period for interest, net of amount capitalized $ 6,692 $ 3,415 ============= =============
See accompanying notes to condensed consolidated financial statements. 3 6 AVALON PROPERTIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except per share data) 1. Organization of the Company and Recent Developments Avalon Properties, Inc. (the "Company") is a self-administered and self-managed Real Estate Investment Trust ("REIT"), as defined under the Internal Revenue Code of 1986 (as amended) and was incorporated under the General Corporation Law of Maryland on August 24, 1993. The Company is engaged principally in the development, construction, acquisition and operation of residential apartment communities in the Northeast and Mid-Atlantic regions of the United States. Additionally, the Company provides management services for communities owned by unrelated parties. On April 7, 1997, pricing on the Company's supplemental unsecured credit facility (the "Supplemental Unsecured Facility") was reduced to .80% over LIBOR. Also, on May 30, 1997, the Supplemental Unsecured Facility was amended and restated to provide for an increase in capacity to $50,000, an extension of the expiration date to March 31, 2000 and the introduction of a competitive bid option. On April 15, 1997, the Company purchased the remaining nine acres of land relating to the development of Avalon at Cameron Court in Alexandria, Virginia for $5,714. On April 17, 1997, the Company completed a direct placement of 2,740,000 shares of its Common Stock to an institutional investor under its existing shelf registration statement at a purchase price of $27.375 per share. Net cash proceeds of approximately $73,500 were used to retire indebtedness under the Company's unsecured credit facilities. On April 18, 1997, the Company purchased the remaining 1.7 acres of land relating to the Avalon Willow development in Mamaroneck, New York for $2,300. This land is adjacent to a 2.3 acre parcel purchased in December 1996. Construction of a 227 apartment home community (Avalon Willow) on the combined four acre site commenced in the second quarter of 1997. On April 28, 1997, the Company completed the loan closing related to the tax-exempt financing for the Avalon Fields apartment community. The Community Development Administration of Maryland issued $12,088 of thirty-year fixed-rate bonds at an all-in rate of 7.57%. The net cash proceeds from the loan closing (approximately $11,565) were used to repay amounts outstanding under the Company's unsecured credit facilities. On May 16, 1997, the Company acquired Avalon at Center Place, a 225 apartment home, high- rise apartment community located in Providence, Rhode Island for $26,000. This nine-story apartment community contains approximately 21,000 square feet of commercial space on the first floor with residential apartment homes on the upper eight floors. This community was managed by the Company prior to its acquisition and is subject to a 149 year land lease. On June 27, 1997, the Company acquired Avalon at Providence Park, a 140 apartment home, garden-style community located in Fairfax City, Virginia for $10,750. 4 7 2. Summary of Significant Accounting Policies Principles of Consolidation of the Company The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned partnerships and subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Real Estate Buildings and improvements are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives of 40 years. The Company's policy is to annually assess any impairment in value by making a comparison of the current and projected operating cash flows of each of its communities over its remaining useful life, on an undiscounted basis, to the carrying amount of each community. Such carrying amounts would be adjusted, if necessary, to reflect an impairment in the value of the assets. The cost of buildings and improvements include capitalized interest, property taxes and insurance incurred during the construction period. Furniture and fixtures are stated at cost and depreciated over their estimated useful lives of seven years. Expenditures for maintenance and repairs are charged to operations as incurred. Significant renovations or betterments that exceed $15 and extend the economic useful life of an asset are capitalized and depreciated over seven years. Deferred Financing and Development Costs Deferred financing costs include fees and costs incurred to obtain financings and are amortized on a straight-line basis over the shorter of the term of the loan or the related credit enhancement facility, if applicable. Fees and other incremental costs incurred in developing new communities are capitalized as deferred development costs and are included in the cost of the community when construction commences. The accompanying condensed consolidated financial statements include a charge to expense for unrecoverable deferred development costs related to pre-development communities that may not proceed to development. Net Income per Common Share Net income per common share for the three months ended June 30, 1997 and 1996 is based upon 35,791,985 and 30,715,884 weighted average shares of common stock outstanding, respectively. Net income per common share for the six months ended June 30, 1997 and 1996 is based upon 34,635,347 and 30,481,694 weighted average shares of common stock outstanding, respectively. Interim Financial Statements These condensed consolidated financial statements are unaudited and were prepared pursuant to the rules and regulations of the Securities and Exchange Commission. However, in the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. The operating results for these periods are not necessarily indicative of the operating results that may be attained for a full fiscal year. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. Recently Issued Accounting Pronouncements During 1997, the Financial Accounting Standard Board issued Statements of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"), No. 129 "Disclosure of Information About Capital Structure" ("SFAS 129") and No. 130 "Reporting Comprehensive Income" ("SFAS 130"). 5 8 SFAS 128 simplifies existing computational guidelines, revises disclosure requirements and increases the comparability of earnings per share data. This statement is effective for financial statements for periods ending after December 15, 1997 and requires restatement of all prior period earnings per share data presented. SFAS 129 establishes standards for disclosing information about an entity's capital structure such as information about securities, liquidation preference of preferred stock and redeemable stock. SFAS 130 specifies the presentation and disclosure requirement for reporting comprehensive income which includes those items which have been formerly reported as a component of shareholders' equity. The impact of adoption of SFAS 128, SFAS 129 and SFAS 130 on the Company's financial results is not expected to be significant. 3. Senior Participating Mortgage Note The Company's ownership of the senior participating mortgage note related to the Town Arbor Partnership ("Avalon Arbor") has been accounted for as an investment in real estate. Minority interest represents the excess of the interest income at the pay rate on the mortgage loan over the cash flow from operations generated by the community. This excess is funded from payments drawn from an escrow account established from contributions by the minority partners. At June 30, 1997, the partnership had $3,026 of cash from these contributions available to fund interest payments. The note bears interest at 10.2%. Upon acquisition, the note was restructured to provide for a 9% pay rate. The difference between the stated interest and the pay rate is deferred interest and is added to the principal. The loan also provides for contingent interest of 50% of gross revenues, as defined, and is payable prior to any payments to the partners. No contingent interest has been paid through June 30, 1997. The note entitles the holder to a 50% net residual value of the property at maturity or upon prior disposition of the property. The note may be prepaid subject to stipulated penalties. 4. Unsecured Facilities The Company's unsecured credit facility (the "Unsecured Facility") is provided by a consortium of six banks that provides for $175,000 in short-term credit and is subject to an annual facility fee of $263. The Unsecured Facility expires on March 31, 2000. As of June 30, 1997, approximately $15,536 of available capacity was used to provide letters of credit and $64,500 was borrowed under the facility. Accordingly, the balance that remains available at June 30, 1997 to be drawn under the Unsecured Facility is $94,964. The Unsecured Facility bears interest based upon a LIBOR, Prime or CD rate election at the Company's option. The current pricing is LIBOR plus .80%, except that up to $75,000 can be competitively bid at lower pricing if market conditions allow. Pricing may be adjusted higher or lower depending on the Company's senior unsecured debt ratings. The Company's Supplemental Unsecured Facility (together with the Unsecured Facility, the "Unsecured Facilities") is provided by First Union National Bank in the amount of $50,000 and is subject to an annual facility fee of $75. The Supplemental Unsecured Facility expires on March 31, 2000 and bears a current interest rate of LIBOR plus .80%. At June 30, 1997, $2,167 of available capacity was used to provide letters of credit and $7,000 was borrowed under the Supplemental Unsecured Facility. Accordingly, the balance that remains available at June 30, 1997 to be drawn under the Supplemental Unsecured Facility is $40,833. The weighted average effective interest rates (excluding the cost of facility fees and unused line of credit fees) on borrowings under the Unsecured Facilities for the six months ended June 30, 1997 and 1996 were 6.5% and 8.5%, respectively. Including the cost of facility fees and unused fees, the weighted average effective interest rates on borrowings under the Unsecured Facilities for the six months ended June 30, 1997 and 1996 were 7.0% and 8.6%, respectively. 6 9 5. Stockholders' Equity The following summarizes the changes in stockholders' equity for the six months ended June 30, 1997:
Distributions Additional in excess of Preferred Common paid-in Deferred accumulated Stock Stock capital compensation earnings Total ---------- --------- ------------ --------------- -------------- ---------- Stockholders' equity, 12-31-96 $ 88 $ 334 $ 752,159 $ (1,699) $ (12,894) $ 737,988 Net income -- -- -- -- 28,972 28,972 Dividends declared -- -- -- -- (36,350) (36,350) Issuance of Restricted Common Stock -- 1 3,648 -- -- 3,649 Deferred compensation, net of amortization -- -- -- (2,277) -- (2,277) Issuance of Common Stock -- 28 73,797 -- -- 73,825 ---------- --------- ------------ --------------- -------------- ---------- Stockholders' equity, 6-30-97 $ 88 $ 363 $ 829,604 $ (3,976) $ (20,272) $ 805,807 ========== ========= ============ =============== ============== ==========
6. Investments in Joint Ventures At June 30, 1997 and December 31, 1996, investments in joint ventures consist of a 50% general partnership interest in Falkland Partners, a 49% equity interest in Avalon Run, an 86.5% effective equity interest in Town Close Associates (the New Canaan Development Right) and 100% of the operating income from the anticipated Avalon Grove joint venture (a Development Community). The following is a combined summary of the financial position of these joint ventures for the periods presented:
6-30-97 12-31-96 ----------- ----------- Assets: Real estate, net $ 98,220 $92,835 Other assets 6,838 5,029 ----------- ----------- Total assets $105,058 $97,864 =========== =========== Liabilities and partners' equity: Mortgage notes payable $ 26,000 $26,000 Other liabilities 3,716 3,786 Partners' equity 75,342 68,078 ----------- ----------- Total liabilities and partners' equity $105,058 $97,864 =========== ===========
At June 30, 1996, the investments in joint ventures include a 50% general partnership interest in Falkland Partners, a 49% equity interest in Avalon Run and an 86.5% effective equity interest in Town Close Associates. The following is a combined summary of the operating results of these joint ventures for the periods presented: 7 10
Three months ended Six months ended ------------------------------ ---------------------------- 6-30-97 6-30-96 6-30-97 6-30-96 ------------- ------------- ------------ ------------- Rental income $ 3,916 $ 2,329 $ 7,289 $ 4,671 Other income 12 14 24 28 Operating expenses (1,280) (908) (2,408) (1,895) Mortgage interest expense (243) (225) (439) (424) Depreciation and amortization (685) (413) (1,256) (820) ------------- ------------- ------------ ------------- Net income $ 1,720 $ 797 $ 3,210 $ 1,560 ============= ============= ============ =============
7. Extraordinary Item In March 1997, the unamortized deferred financing costs associated with the early retirement of the Company's $165,000 unsecured credit facility were written off. 8. Subsequent Events On July 1, 1997, the Company completed a public offering of 2,163,000 shares of common stock at a purchase price of $28.0625 per share. The net cash proceeds from the offering of approximately $57,671 were used primarily to repay amounts outstanding under the Unsecured Facilities. On July 18, 1997, the Company sold a garden-style apartment community, Avalon Farm, located in Frederick, Maryland, to a single buyer for a total sales price of $17,047. The net proceeds from the sale of approximately $16,500 will be used for reinvestment in a new acquisition community. The Company expects to record an accounting gain of $570 from the sale and will structure the sale as a section 1031 like-kind exchange under the Internal Revenue Code to defer the recognition of the taxable gain. 8 11 PART I FINANCIAL INFORMATION (CONTINUED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Certain statements in this Form 10-Q constitute "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The words "believe," "expect," "anticipate," "intend," "estimate," "assume" and other similar expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. In addition, information concerning construction, occupancy and completion of Development Communities and Development Rights (as hereinafter defined) and related cost and EBITDA estimates, are forward-looking statements. Reliance should not be placed on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are in some cases beyond the control of the Company and may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Certain factors that might cause such differences include, but are not limited to, the following: The Company may abandon development opportunities; construction costs of a community may exceed original estimates; construction and lease-up may not be completed on schedule, resulting in increased debt service expense and construction costs and reduced rental revenues; occupancy rates and market rents may be adversely affected by local economic and market conditions which are beyond management's control; financing may not be available on favorable terms; the Company's cash flow may be insufficient to meet required payments of principal and interest; and existing indebtedness may not be able to be refinanced or the terms of such refinancing may not be as favorable as the terms of existing indebtedness. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere herein. RECENT DEVELOPMENTS Acquisitions of Existing Communities. On May 16, 1997, the Company acquired Avalon at Center Place, a 225 apartment home, high-rise apartment community located in Providence, Rhode Island for $26,000,000. This nine-story apartment community contains approximately 21,000 square feet of commercial space on the first floor with residential apartment homes on the upper eight floors. This community was managed by the Company prior to its acquisition and is subject to a 149 year land lease. On June 27, 1997, the Company acquired Avalon at Providence Park, a 140 apartment home, garden-style community located in Fairfax City, Virginia for $10,750,000. Sale of Existing Community. On July, 18 1997, the Company sold a garden-style apartment community, Avalon Farm, located in Frederick, Maryland, to a single buyer for a total sales price of $17,047,000. The net proceeds of approximately $16,500,000 from the sale will be used for reinvestment in a new acquisition community. The Company expects to record an accounting gain of $570,000 from the sale and will structure the sale as a ss.1031 like-kind exchange under the Internal Revenue Code to defer the recognition of the taxable gain. Land Acquisitions for New Development. On April 18, 1997, the Company purchased the remaining 1.7 acres of land relating to the Avalon Willow community in Mamaroneck, New York for $2,300,000. This land is adjacent to a 2.3 acre parcel purchased in December 1996. Construction of a 227 apartment home community (Avalon Willow) on the combined four acre site commenced in the second quarter of 1997. Financing Activities. On April 7, 1997, pricing on the Company's supplemental unsecured credit facility (the "Supplemental Unsecured Facility" and together with the unsecured credit facility, the "Unsecured Facilities") was reduced to .80% over LIBOR. Also, on May 30, 1997, the Supplemental Unsecured Facility was amended and restated to provide for an increase in capacity to $50,000,000, an extension of the expiration date to March 31, 2000 and the introduction of a competitive bid option. 9 12 On April 17, 1997, the Company completed a direct placement of 2,740,000 shares of its Common Stock to an institutional investor under its existing shelf registration statement at a purchase price of $27.375 per share. Net cash proceeds of approximately $73,500,000 were used to retire indebtedness under the Company's Unsecured Facilities. On April 28, 1997, the Company completed the loan closing related to the tax-exempt financing for the Avalon Fields apartment community. The Community Development Administration of Maryland issued $12,088,000 of thirty-year fixed-rate bonds at an all-in rate of 7.57%. The net cash proceeds from the loan closing (approximately $11,565,000) were used to repay amounts outstanding under the Company's Unsecured Facilities. On July 1, 1997, the Company completed a public offering of 2,163,000 shares of common stock at a purchase price of $28.0625 per share. The net cash proceeds from the offering of approximately $57,671,000 were used primarily to repay amounts outstanding under the Unsecured Facilities. GENERAL The Company's operations consist of the development, construction, acquisition and operation of apartment communities in the Mid-Atlantic and Northeast regions of the United States. At June 30, 1997, the Company held a fee simple ownership in 46 completed and operating communities (one of which, Avalon at Center Place, is subject to a 149 year land lease), a general partnership interest in two other communities (a 50% interest in Falkland Chase and a 49% interest in Avalon Run), a 99% general partner interest in a partnership structured as a "DownREIT" (Avalon at Ballston - Vermont/Quincy) and a 100% interest in a senior participating mortgage note secured by another community (Avalon Arbor) which is accounted for as an investment in real estate. The Company also has a fee simple ownership interest in 10 Development Communities. One of the 10 Development Communities is subject to an agreement to form a joint venture. The Company's real estate holdings consist exclusively of apartment communities in various stages of the development cycle and can be divided into three categories: "Current Communities" are apartment communities where construction is complete and the community has either reached stabilized occupancy or is in the initial lease-up process. A "Stabilized Community" is a Current Community that has completed its initial lease-up and has attained a physical occupancy level of 94% or has been completed for one year, whichever occurs earlier. An "Established Community" is a Current Community that has been a Stabilized Community with stabilized operating costs during the current and the beginning of the previous calendar year such that its year-to-date operating results are comparable between periods. "Development Communities" are communities that are under construction and may be partially complete and operating and for which a final certificate of occupancy has not been received. "Development Rights" are development opportunities in the very earliest phase of the development process for which the Company has an option to acquire land or owns land to develop a new community and where related pre-development costs have been incurred and capitalized in pursuit of these new developments. 10 13 RESULTS OF OPERATIONS The changes in operating results from period-to-period are primarily the result of increases in the number of apartment homes owned due to the development and acquisition of additional communities. Where appropriate, comparisons are made on a weighted average basis for the number of occupied apartment homes in order to adjust for such changes in the number of apartment homes. For Stabilized Communities (excluding communities owned by joint ventures), all occupied apartment homes are included in the calculation of weighted average occupied apartment homes for each reporting period. For communities in the initial lease-up phase, only apartment homes of communities that are completed and occupied are included in the weighted average number of occupied apartment homes calculation for each reporting period. The analysis that follows compares the operating results of the Company for the six months ended June 30, 1997 and 1996. Net income increased $4,364,000 (38.0%) to $15,859,000 for the three months ended June 30, 1997 compared to $11,495,000 for the comparable period of the preceding year. Net income increased $7,935,000 (37.7%) to $28,972,000 for the six months ended June 30, 1997 compared to $21,037,000 for the comparable period of the preceding year. The primary reasons for these increases are additional operating income from communities developed or acquired during 1997 and 1996, as well as growth in operating income from existing communities. Rental income increased $11,046,000 (37.7%) to $40,375,000 for the three months ended June 30, 1997 compared to $29,329,000 for the comparable period of the preceding year. Rental income increased $20,604,000 (36.2%) to $77,526,000 for the six months ended June 30, 1997 compared to $56,922,000 for the comparable period of the preceding year. Of the increase for the six month period, $19,037,000 was due to newly completed or acquired communities and $1,567,000 was due to rental rate growth from Established Communities that were owned or completed throughout the period. Overall Portfolio - The $20,604,000 increase in rental income for the six month period is primarily due to increases in the weighted average number of occupied apartment homes as well as an increase in the weighted average monthly rental income per occupied apartment home. The weighted average number of occupied apartment homes increased from 10,312 apartment homes for the six months ended June 30, 1996 to 12,331 apartment homes for the six months ended June 30, 1997 as a result of the development and acquisition of new communities. For the three months ended June 30, 1997, the weighted average monthly revenue per occupied apartment home increased $40 (4.5%) to $931 compared to $891 for the comparable period of the preceding year. For the six months ended June 30, 1997, the weighted average monthly revenue per occupied apartment home increased $40 (4.5%) to $924 compared to $884 for the comparable period of the preceding year. Established Communities - For the three months ended June 30, 1997, the weighted average monthly revenue per occupied apartment home increased $28 (3.2%) to $916 compared to $888 for the comparable period of the preceding year. The average economic occupancy remained unchanged at 96.5%. For the six months ended June 30, 1997, the weighted average monthly revenue per occupied apartment home increased $28 (3.2%) to $909 compared to $881 for the comparable period of the preceding year. The average economic occupancy remained unchanged at 96.0%. Accordingly, rental revenue from Established Communities increased $788,000 (3.2%) and $1,567,000 (3.2%) for the three and six month period ended June 30, 1997, respectively, compared to the comparable periods of the preceding year. Management fees decreased $150,000 (38.1%) to $244,000 for the three months ended June 30, 1997 compared to $394,000 for the comparable period of the preceding year. These fees decreased $297,000 (37.3%) to $499,000 for the six months ended June 30, 1997 compared to $796,000 for the comparable period of the preceding year. These decreases are primarily due to a decline in the number of apartment homes managed for third-party owners during 1997. These declines are due to the sale and the cancellation of management contracts 11 14 of some third-party communities in 1996 as well as the acquisition of one Current Community in the second quarter of 1996 and another Current Community in the second quarter of 1997 that were managed by the Company for third-party owners prior to their acquisitions. Operating expenses increased $3,271,000 (29.1%) to $14,505,000 for the three months ended June 30, 1997 compared to $11,234,000 for the comparable period of the preceding year. These expenses increased $5,593,000 (25.2%) to $27,761,000 for the six months ended June 30, 1997 compared to $22,168,000 for the comparable period of the preceding year. Overall Portfolio - The $5,593,000 increase for the six month period is primarily due to the acquisition of new communities, as well as the completion of Development Communities whereby maintenance, property taxes, insurance and other costs are expensed as communities move from the initial construction and lease-up phase to the stabilized operating phase. Established Communities - Operating expenses increased $93,000 (1.1%) to $8,318,000 for the three months ended June 30, 1997 compared to $8,225,000 for the comparable period of the preceding year. Operating expenses increased $53,000 (.3%) to $16,538,000 for the six months ended June 30, 1997 compared to $16,485,000 for the comparable period of the preceding year. These increases were concentrated in the marketing and insurance categories, offset by lower snow removal costs as a result of the mild weather conditions throughout the Northeast and Mid-Atlantic regions during the first quarter of 1997 as compared to the severe winter weather experienced during the first quarter of 1996. Interest expense increased $2,259,000 (135.8%) to $3,922,000 for the three months ended June 30, 1997 compared to $1,663,000 for the comparable period of the preceding year. Interest expense increased $3,393,000 (79.9%) to $7,639,000 for the six months ended June 30, 1997 compared to $4,246,000 for the comparable period of the preceding year. These increases are primarily attributable to higher outstanding balances under the Company's Unsecured Facilities in 1997 compared to 1996. In addition, the Company assumed approximately $29,900,000 of conventional debt resulting from the acquisitions of two communities in 1996 and completed the loan closings related to the tax-exempt financing for the Avalon West and Avalon Fields communities in December 1996 and April 1997, respectively. These increases were offset by lower interest and credit enhancement costs in connection with the completion of the tax-exempt, credit enhancement facility with the Federal National Mortgage Association ("Fannie Mae") in the third quarter of 1996 and lower pricing under the Unsecured Facilities. Depreciation and amortization increased $1,923,000 (38.1%) to $6,968,000 for the three months ended June 30, 1997 compared to $5,045,000 for the comparable period of the preceding year. Depreciation and amortization increased $3,828,000 (39.5%) to $13,527,000 for the six months ended June 30, 1997 compared to $9,699,000 for the comparable period of the preceding year. These increases reflect additional depreciation expense for recently acquired and developed communities, offset by lower amortization expense of deferred financing costs due to the completion of the new credit enhancement facility with Fannie Mae. General and administrative expenses increased $203,000 (22.9%) to $1,090,000 for the three months ended June 30, 1997 compared to $887,000 for the comparable period of the preceding year. These expenses increased $349,000 (18.9%) to $2,199,000 for the six months ended June 30, 1997 compared to $1,850,000 for the comparable period of the preceding year. These increases are primarily due to higher telecommunication costs and staff additions related to the implementation of the company-wide systems enhancement program, as well as higher compensation expense under the restricted stock grant program. General and administrative expenses as a percentage of total revenue, however, decreased .4% to 2.8% for the six months ended June 30, 1997 compared to 3.2% for the comparable period of the preceding year. Equity in income of joint ventures increased $1,154,000 to $1,304,000 for the three months ended June 30, 1997 compared to $150,000 for the comparable period of the preceding year. This income increased $2,030,000 to $2,346,000 for the six months ended June 30, 1997 compared to $316,000 for the comparable period of the preceding year. These increases are principally the result of the non-recurring income from the 12 15 anticipated Avalon Grove joint venture in which the Company is allocated 100% of the income prior to the formation of the joint venture. Interest income increased $12,000 (5.8%) to $220,000 for the three months ended June 30, 1997 compared to $208,000 for the comparable period of the preceding year. Interest income increased $49,000 (11.0%) to $495,000 for the six months ended June 30, 1997 compared to $446,000 for the comparable period of the preceding year. These increases are primarily due to higher average escrowed cash balances in 1997 compared to 1996. Extraordinary item totaled $1,183,000 for the six months ended June 30, 1997 and reflects the write-off of unamortized deferred financing costs associated with the early retirement of the $165 million unsecured credit facility. FUNDS FROM OPERATIONS Management generally considers Funds from Operations ("FFO") to be an appropriate measure of the operating performance of the Company. The Company believes that in order to facilitate a clear understanding of the operating results of the Company, FFO should be examined in conjunction with net income as presented in the condensed consolidated financial statements included elsewhere in this report. FFO is determined in accordance with a resolution adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, Inc. ("NAREIT"), and is defined as net income (loss) (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sale of property, plus depreciation of real estate assets and after adjustments for unconsolidated partnerships and joint ventures.
ANALYSIS OF FUNDS FROM OPERATIONS ($ in 000's) ---------------------------------------------- Three months ended Six months ended ----------------------------- -------------------------------- 6-30-97 6-30-96 6-30-97 6-30-96 ------------- -------------- -------------- ------------- NET INCOME $ 15,859 $ 11,495 $ 28,972 $ 21,037 Depreciation (real estate related) 6,550 4,426 12,688 8,464 Joint venture adjustment 89 80 170 159 Extraordinary item -- -- 1,183 -- Preferred stock dividends (4,914) (2,516) (9,828) (3,602) ------------- -------------- -------------- ------------- FUNDS FROM OPERATIONS $ 17,584 $ 13,485 $ 33,185 $ 26,058 ============= ============== ============== ============= WEIGHTED AVERAGE SHARES OUTSTANDING 35,791,985 30,715,884 34,635,347 30,481,694 ============= ============== ============== ============= OTHER CAPITALIZED EXPENDITURES AND OTHER INFORMATION Capital expenditures: Community level (1) $ 841 $ 481 $ 1,280 $ 834 Corporate level (2) $ 210 $ 1,081 $ 473 $ 1,591 Loan principal amortization payments $ 321 $ 112 $ 642 $ 236 Capitalized deferred financing costs (3) $ 788 $ 345 $ 869 $ 459
------------------- Footnotes to Analysis of Funds from Operations (1) The Company expenses all recurring non-revenue generating community expenditures, including carpet and appliance replacements. See "Capitalization of Fixed Assets and Community Improvements." (2) Represents the cost of new office equipment and computer costs related to the implementation of a company-wide systems enhancement plan. (3) Substantially all of the deferred financing costs incurred for the six months ended June 30, 1997 relate to the costs incurred on the closing of the Avalon Fields tax-exempt bonds and the closing of new the $175 million unsecured credit facility. 13 16 CAPITALIZATION OF FIXED ASSETS AND COMMUNITY IMPROVEMENTS The Company maintains a policy with respect to capital expenditures that generally provides that only non-recurring expenditures are capitalized. Improvements and upgrades are capitalized only if the item exceeds $15,000, extends the useful life of the asset and is not related to making an apartment home ready for the next resident. Under this policy, virtually all capitalized costs are non-recurring, as recurring make ready costs are expensed as incurred, including costs of carpet and appliance replacements, floor coverings, interior painting and other redecorating costs. Purchases of personal property (such as computers and furniture) are capitalized only if the item is a new addition (i.e., not a replacement) and only if the item exceeds $2,500. The application of these policies for the six months ended June 30, 1997 resulted in non-revenue, generating capitalized expenditures for Stabilized Communities of approximately $96 per apartment home. For the six months ended June 30, 1997, the Company charged to maintenance expense, including carpet and appliance replacements, a total of approximately $5,811,000 for Stabilized Communities or $437 per apartment home. Management anticipates that capitalized costs per apartment home will gradually rise as the Company's portfolio of communities matures. The table on the following page is a summary of expenditures for both recurring maintenance costs (expensed) and community upgrades (capitalized) for the six months ended June 30, 1997. 14 17 EXPENDITURES FOR COMMUNITY AND CORPORATE UPGRADES (CAPITALIZED) AND COMMUNITY MAINTENANCE (EXPENSED) (Dollars in thousands, excepts per home data)
YTD 1997 Capitalized Costs --------------------------------------- Acquisitions, Non-Revenue YTD 1997 Construction Generating Caps Maintenance Expensed Number Balance at Balance at and Revenue -------------------- --------------------- Community of Homes 12-31-96 (1) 6-30-97 (1) Generating Costs Total Per Home Total Per Home - --------------------------- -------- ------------ ------------ ---------------- --------- ---------- -------- ---------- STABILIZED Avalon Watch 512 $ 28,340 $ 28,406 $ -- $ 66 $ 129 $ 203 $ 396 Avalon Pavilions 932 56,523 56,545 -- 22 24 276 296 Avalon Glen 238 30,077 30,100 -- 23 97 121 508 Avalon Walk I 430 34,505 34,524 2 17 40 138 321 Avalon Walk II 334 23,597 23,666 -- 69 207 114 341 Avalon View 288 17,773 17,773 -- -- -- 198 688 Avalon Park 372 19,717 19,815 -- 98 263 207 556 Avalon at Ballston - Washington Towers 344 36,797 36,887 -- 90 262 155 451 Avalon Farm 306 17,332 17,368 -- 36 118 140 458 Avalon at Gayton 328 9,830 9,887 -- 57 174 155 473 Avalon at Hampton I 186 3,702 3,725 3 20 108 92 495 Avalon at Hampton II 231 8,144 8,185 -- 41 177 103 446 Avalon at Dulles 236 11,599 11,626 -- 27 114 140 593 Avalon Knoll 300 7,905 7,939 14 20 67 159 530 Avalon Lea 296 16,101 16,130 -- 29 98 153 517 Avalon at Fairway Hills I 192 9,368 9,396 -- 28 146 94 490 Avalon Ridge 432 25,030 25,148 12 106 245 210 486 Avalon at Symphony Glen 174 8,079 8,115 2 34 195 100 575 Avalon at Park Center 492 37,337 37,368 -- 31 63 201 409 4100 Mass. Avenue 308 34,879 34,897 15 3 10 177 575 Avalon Woods 268 8,235 8,319 -- 84 313 92 343 Avalon at Carter Lake 259 11,502 11,560 -- 58 224 157 606 Avalon Pointe 140 7,748 7,780 -- 32 229 87 621 Avalon Landing 158 9,261 9,282 -- 21 133 106 671 Avalon Birches 312 13,419 13,458 -- 39 125 107 343 Avalon at Lake Arbor 209 11,900 11,902 -- 2 10 141 675 Avalon at Decoverly 368 30,978 31,047 1 68 185 139 378 Avalon Summit 245 16,152 16,286 128 6 24 112 457 Avalon Towers 109 15,826 15,877 -- 51 468 103 945 Longwood Towers 250 16,620 16,623 -- 3 12 191 764 Avalon Fields 192 14,262 14,298 -- 36 188 73 380 Avalon West 120 10,624 10,649 12 13 108 56 467 Avalon Chase 360 23,615 23,626 -- 11 31 189 525 Avalon Pines 174 8,578 8,582 -- 4 23 52 299 Avalon at Fairway Hills II 527 33,807 33,831 17 7 13 223 423 Avalon at Boulders 284 16,038 16,057 -- 19 67 130 458 AutumnWoods 420 30,474 30,498 19 5 12 149 355 Avalon Run East 206 16,002 16,021 19 -- -- 47 228 Avalon Station 223 11,838 11,940 98 4 18 81 363 Avalon Cove 504 85,831 89,539 3,708 -- -- 104 206 Avalon Crossing 132 13,387 13,710 323 -- -- 59 447 Avalon Springs 102 -- 15,493 15,493 -- -- 27 265 Avalon at Ballston - Vermont/Quincy (2) 454 -- 46,702 46,702 -- -- 223 491 Avalon at Center Place (2) 225 -- 26,426 26,426 -- -- 26 116 Avalon at Providence Park (2) 140 -- 11,139 11,139 -- -- 1 7 -------- ------------ ------------ ---------------- --------- ---------- -------- ---------- 13,312 842,732 948,145 104,133 1,280 96 5,811 437 -------- ------------ ------------ ---------------- --------- ---------- -------- ---------- NEW DEVELOPMENTS 3,362 174,188 239,394 65,206 -- -- 80 N/A OTHER Avalon at Lexington 198 14,117 14,325 208(3) -- -- 98 495 Longwood Towers - Renovation -- 6,829 11,796 4,967(4) -- -- -- -- Avalon Green 105 12,294 12,397 103 -- -- 93 886 Avalon Arbor (5) 302 27,822 28,130 -- 308 N/A 167 553 Corporate Level Expenditures -- 3,924 4,397 -- 473 N/A -- -- -------- ------------ ------------ ---------------- --------- ---------- -------- ---------- Grand Total 17,279(6) $1,081,906 $1,258,584 N/A $2,061 N/A $6,249 N/A ======== ============ ============ ================ ========= ========== ======== ==========
- ------------------------ (1) Costs are presented in accordance with generally accepted accounting principles ("GAAP") and exclude the step-up in basis attributed to continuing investors. (2) Acquired in 1997. (3) Payment of contingent land cost to land seller based on operating results. This is the complete and final contingent payment due under the land purchase agreement. (4) Represents renovation costs incurred. (5) Ownership through ownership of the Avalon Arbor mortgage note. See Note 3 to the unaudited condensed consolidated financial statements. Increases in capitalized value relate primarily to accrued interest and do not reflect capitalized community upgrades. (6) Excludes Falkland Chase and Avalon Run, 876 apartment homes owned by joint ventures in which the Company holds a 50% interest and 49% interest, respectively. 15 18 LIQUIDITY AND CAPITAL RESOURCES Liquidity. A primary source of liquidity to the Company is cash flows from operations. Operating cash flows have historically been determined by the number of apartment homes, rental rates and the Company's expenses with respect to such apartment homes. Cash flows used in investing activities and provided by financing activities have historically been dependent on the number of apartment homes under active development and construction or that were acquired during any given period. Cash and cash equivalents increased $639,000 from $2,113,000 at June 30, 1996 to $2,752,000 at June 30, 1997 due to an increase in operating cash flow and an increase in financing activities, offset by an increase in cash used by investing activities (mainly attributable to an increase in the number of newly developed and acquired communities). Net cash provided by operating activities increased by $11,410,000 from $31,305,000 at June 30, 1996 to $42,715,000 at June 30, 1997 primarily due to an increase in operating income from newly developed and acquired communities and Established Communities. Cash used in investing activities increased by $50,597,000 from $123,159,000 at June 30, 1996 to $173,756,000 at June 30, 1997 primarily due to an increase in the number of apartment homes under development from an average of 2,664 in the first six months of 1996 to 3,362 in the first six months of 1997. Net cash provided by financing activities increased by $27,386,000 from $92,166,000 at June 30, 1996 to $119,552,000 at June 30, 1997 primarily due to the increased borrowings under the Unsecured Facilities, offset by an increase in dividends paid. The Company regularly reviews short-term liquidity needs and the adequacy of Funds from Operations and other expected liquidity sources to meet these needs. The Company's primary short-term liquidity needs are to fund normal recurring operating expenses, debt service payments and the minimum dividend payment required to maintain the Company's REIT qualification under the Internal Revenue Code. Management anticipates that these needs will be fully funded from cash flows provided by operating activities. Normal recurring expenditures for maintenance and repairs (including carpet and appliance replacements) are funded from the operating cash flows of Stabilized Communities and are expensed as incurred. Major upgrades or community improvements are capitalized and depreciated over the expected economic useful life of the item only if the expenditure exceeds $15,000 per occurrence and only if the expenditure extends the economic useful life of the community. Purchases of personal property (such as computers and furniture) are capitalized only if the item is a new addition (i.e., not a replacement) and only if the item exceeds $2,500. The application of these policies for the six month period ended June 30, 1997 resulted in non-revenue, generating capitalized expenditures for Stabilized Communities of $96 per apartment home. Permanent mortgage indebtedness will require balloon payments coming due over the years 1997 to 2002, including $24,145,000 in November 1997 and $100,000,000 in 2002. Additionally, an aggregate of $44,655,000 principal amount of bonds will require remarketing or have credit enhancements that will mature in the fourth quarter of 1997. Certain of these payments may be accelerated upon the termination of credit enhancements if such credit enhancements are not renewed or replaced. The Company believes that it will be able to successfully remarket these bonds and obtain renewal or replacement credit enhancements. Since Management anticipates that only a small portion of the principal of such indebtedness will be repaid prior to maturity and the Company may not have funds on hand sufficient to repay such indebtedness, it may be necessary for the Company to refinance this debt. Such refinancing could be accomplished through additional debt financing, which may be collateralized by mortgages on individual communities or groups of communities, by uncollateralized private or public debt offerings or by additional equity offerings. There can be no assurance that such additional debt financing or debt offerings will be available on terms satisfactory to the Company. Capital Resources. To sustain the Company's active development and acquisitions program, continuous access to the capital markets is required. Management intends to match the long-term nature of its real estate 16 19 assets with long-term cost effective capital. The Company has demonstrated regular and continuous access to the capital markets since its initial public offering, raising approximately $774.2 million and over $487.9 million in the last 18 months. Management follows a focused strategy to help ensure uninterrupted access to capital. This strategy includes: 1. Hire, train and retain associates with a strong resident service focus, which should lead to higher rents, lower turnover and reduced operating costs; 2. Manage, acquire and develop institutional quality communities with in-fill locations that should provide consistent, sustained earnings growth; 3. Operate in markets with growing demand (as measured by household formation and job growth) and high barriers to entry. These characteristics combine to provide a favorable supply-demand balance, which the Company believes will create a favorable environment for future rental rate growth while protecting existing and new communities from new supply. This strategy is expected to result in a high level of quality to the revenue stream; 4. Maintain a conservative capital structure largely comprised of equity and with modest, cost-effective leverage. Secured debt will generally be avoided and used primarily to secure low cost, tax-exempt debt. Such a structure should promote an environment for ratings upgrades that can lead to a lower cost of capital; 5. Timely, accurate and detailed disclosures to the investment community; and 6. Conservative accounting practices that provide a high level of quality to reported earnings. Management believes that these strategies provide a disciplined approach to capital access that is expected to ensure that capital resources are available to fund portfolio growth. The following is a discussion of specific capital transactions, arrangements and agreements that are important to the capital resources of the Company. Unsecured Facilities On March 31, 1997, the Company obtained a new Unsecured Facility for $175,000,000. This new facility replaced the previous $165,000,000 unsecured credit facility. The new Unsecured Facility is provided by a consortium of six banks and is subject to an annual facility fee of $262,500. The Unsecured Facility expires in March 2000. Borrowings under the new facility bear an interest rate of .80% over LIBOR. A competitive bid option is available for up to $75 million which may result in lower pricing if market conditions allow. At June 30, 1997, $64,500,000 was borrowed, $15,536,000 was used to provide letters of credit and $94,964,000 was available for borrowing under the Unsecured Facility. The Company will use borrowings under the Unsecured Facility for capital expenditures, acquisitions of developed or undeveloped communities, construction, development and renovation costs, credit enhancement for tax-exempt bonds and for working capital purposes. The Company's Supplemental Unsecured Facility is provided by First Union National Bank in the amount of $50,000,000 and is subject to an annual facility fee of $75,000. The Supplemental Unsecured Facility expires in March 2000 and bears an interest rate of LIBOR plus .80%. At June 30, 1997, $2,167,000 of available capacity was used to provide letters of credit and $7,000,000 was borrowed under the Supplemental Unsecured Facility. Accordingly, the balance that remains available at June 30, 1997 to be drawn under the Supplemental Unsecured Facility is $40,833,000. See Financing Commitments on the following page for modifications to the Supplemental Credit Facility. Interest Rate Protection Agreements The Company is not a party to any long-term interest rate agreements. The Company intends, however, to evaluate the need for long-term interest rate protection agreements as interest rate market conditions dictate and has engaged a consultant to assist in managing the Company's interest rate risks and exposure. 17 20 Financing Commitments/Transactions Completed On April 7, 1997, pricing on the Company's Supplemental Unsecured Facility was reduced to .80% over LIBOR. Also, on May 30, 1997, the Supplemental Unsecured Facility was amended and restated to provide for an increase in capacity to $50,000,000, an extension of the expiration date to March 31, 2000 and the introduction of a competitive bid option. On April 17, 1997, the Company completed a direct placement of 2,740,000 shares of its Common Stock to an institutional investor under its existing shelf registration statement at a purchase price of $27.375 per share. Net cash proceeds of approximately $73,500,000 were used to retire indebtedness under the Company's Unsecured Facilities. On April 28, 1997, the Company completed the loan closing related to the tax-exempt financing on the Avalon Fields community. The Community Development Administration of Maryland issued approximately $12,100,000 of thirty-year fixed-rate bonds at an all-in rate of 7.57%. The net cash proceeds from the loan closing (approximately $11,600,000 million) were used to repay amounts outstanding under the Company's Unsecured Facilities. On July 1, 1997, the Company completed a public offering of 2,163,000 shares of common stock at a purchase price of $28.0625 per share. The net cash proceeds from the offering of approximately $57,671,000 were used primarily to repay amounts outstanding under the Unsecured Facilities. Future Financing Needs Substantially all of the capital expenditures to complete the communities currently under construction will be funded from the Unsecured Facilities and/or issuance of debt or equity securities. Except for Longwood Towers, the Company has no present plans for any major capital improvements to any of the Current Communities. The renovation of Longwood Towers is being funded by advances under the Unsecured Facilities, operating cash flow or other financing sources over the next year. Management expects to continue to fund deferred development costs related to future developments from Funds from Operations and advances under the Unsecured Facilities. The Company believes that these sources of capital are adequate to take each of the proposed communities to the point in the development cycle where construction can commence. Management anticipates that available borrowing capacity under the Unsecured Facilities and Funds from Operations will be adequate to meet future expenditures required to commence construction of each of the Development Rights. In addition, the Company currently anticipates funding construction of some (but not all) of the Development Rights under the expected remaining capacity of the Unsecured Facilities. However, before the construction of a Development Right commences, the Company intends, if necessary, to issue additional equity or debt securities, arrange additional capacity under the Unsecured Facilities or future credit facilities or obtain additional construction loan commitments not currently in place to ensure that adequate liquidity sources are in place to fund the construction of a Development Right, although no assurance can be given in this regard. The table on the following page summarizes debt maturities for the next five years (excluding the Unsecured Facilities): 18 21 AVALON PROPERTIES, INC. DEBT MATURITY SCHEDULE (Dollars in thousands)
Balance Outstanding at --------------------------- All-in Maturity Community Interest Rate Date 12-31-96 06-30-97 - --------------------------------------------- -------------- ------------ ------------ ------------- Tax-Exempt Bonds: Fixed Rate * Avalon Lea (Custodial Receipts) (1) 5.71% Nov-07 $ 16,782 $ 16,814 * Avalon Ridge (Custodial Receipts) (1) 5.69% Nov-07 26,724 26,779 * Avalon at Dulles 7.04% Jul-24 12,360 12,360 * Avalon at Hampton II 7.04% Jul-24 11,550 11,550 * Avalon at Symphony Glen 7.06% Jul-24 9,780 9,780 * Avalon View 7.55% Aug-24 19,487 19,415 * Avalon at Lexington 6.56% Feb-25 15,284 15,179 * Avalon Knoll 6.95% Jun-26 14,070 13,995 * Avalon Landing 6.85% Jun-26 6,969 6,931 * Avalon West 7.73% Dec-36 8,771 8,749 * Avalon Fields 7.57% May-27 -- 12,079 --------- --------- 141,777 153,631 Variable Rate * Avalon at Fairway Hills I Jun-26 11,500 11,500 * Avalon at Hampton I Jun-26 8,060 8,060 * Avalon Pointe Jun-26 6,387 6,387 --------- --------- 25,947 25,947 Conventional Loans: Fixed Rate * AutumnWoods 9.25% Nov-97 24,335 24,145 Unsecured Senior Notes 7.375% Sep-02 99,869 99,880 * Avalon Pines 8.00% Dec-03 5,529 5,490 * Avalon Walk II 8.93% Nov-04 13,149 13,057 --------- --------- 142,882 142,572 Variable Rate-None -- -- --------- --------- Total notes payable - excluding Unsecured Facilities $310,606 $322,150 ========= ========= Total Maturities --------------------------------------------------------------- Balance Community of 1997 1998 1999 2000 2001 Thereafter - ---------------------------------------------- ----------- ------- -------- --------- -------- ----------- Tax-Exempt Bonds: Fixed Rate * Avalon Lea (Custodial Receipts) (1) $ -- $ -- $ -- $ -- $ -- $ 16,814 * Avalon Ridge (Custodial Receipts) (1) -- -- -- -- -- 26,779 * Avalon at Dulles -- -- -- -- -- 12,360 * Avalon at Hampton II -- -- -- -- -- 11,550 * Avalon at Symphony Glen -- -- -- -- -- 9,780 * Avalon View 101 230 290 330 350 18,114 * Avalon at Lexington 108 226 240 255 271 14,079 * Avalon Knoll 77 163 175 187 200 13,193 * Avalon Landing 39 83 89 95 101 6,524 * Avalon West 22 46 50 53 57 8,521 * Avalon Fields 70 127 137 147 157 11,441 -------- ------ ------- ------- ------- --------- 417 875 981 1,067 1,136 149,155 Variable Rate * Avalon at Fairway Hills I -- -- -- -- -- 11,500 * Avalon at Hampton I -- -- -- -- -- 8,060 * Avalon Pointe -- -- -- -- -- 6,387 -------- ------ ------- ------- ------- --------- -- -- -- -- -- 25,947 Conventional Loans: Fixed Rate * AutumnWoods 24,145 -- -- -- -- -- Unsecured Senior Notes -- -- -- -- -- 99,880 * Avalon Pines 56 103 112 121 131 4,967 * Avalon Walk II 93 202 221 241 264 12,036 -------- ------ ------- ------- ------- --------- 24,294 305 333 362 395 116,883 Variable Rate-None -- -- -- -- -- -- -------- ------ ------- ------- ------- --------- Total notes payable - excluding Unsecured Facilities $24,711 $1,180 $1,314 $1,429 $1,531 $291,985 ======== ====== ======= ======= ======= =========
(1) Subject to remarketing November 1, 1997. * Indicates loan is collateralized by the community. 19 22 BUSINESS CONDITIONS; INFLATION The Company's principal markets are characterized by high barriers to entry and restrictive zoning and it often takes years to obtain entitlements to build an apartment community. For this reason, little new rental product has been added in recent years. For the markets north of Maryland, Management is not aware of any significant level of planned apartment construction starts. For the Washington, D.C. metropolitan area, permitting activity has increased, with 8,000 apartment homes in planning for delivery over the next 36-month period. Estimated absorption during this period totals 9,000 apartment homes, which would create a supply-demand balance that would be favorable for owners of multifamily apartment communities. At June 30, 1997, Management had positioned the Company's portfolio of Established Communities, excluding communities owned by joint ventures, to a physical occupancy level of 97.2% and achieved an average economic occupancy of 96.0% for the six months ended June 30, 1997. Average economic occupancy for the portfolio for the six months ended June 30, 1996 was 96.0%. This continued high occupancy was achieved through aggressive marketing efforts combined with limited and targeted pricing adjustments. This positioning has resulted in overall growth in rental revenue from Established Communities between periods. It is Management's strategy to maximize total rental revenue through management of rental rates and occupancy levels. If market and economic conditions change, Management may adopt a strategy of maximizing rental rates, which could lead to lower occupancy levels, if Management believes that this strategy will maximize rental revenue. Given the currently high occupancy level of the portfolio, Management anticipates that, for the foreseeable future, any rental revenue and net income gains from currently owned and Established Communities would be achieved primarily through higher rental rates and enhanced operating cost leverage provided by high occupancy, rather than through continued occupancy gains. Substantially all of the leases at the Current Communities are for a term of one year or less, which may enable the Company to realize increased rents upon renewal of existing leases or commencement of new leases. Such short-term leases generally minimize the risk to the Company of the adverse effects of inflation, although as a general rule these leases permit residents to leave at the end of the lease term without penalty. The Company's current policy is to permit residents to terminate leases upon 60-days written notice and payment of one month's rent as compensation for early termination. Short-term leases combined with relatively consistent demand allow rents, and therefore cash flow from the Company's portfolio of apartments, to provide an attractive inflation hedge. DEVELOPMENT COMMUNITIES At June 30, 1997, 10 Development Communities were under construction. The total capitalized cost of these Development Communities, when completed, is currently expected to be approximately $373.0 million. The Company intends to periodically update the projections in the table on the following page to the extent Management believes there may be or has been a material change in these projections on an aggregate basis. There can be no assurance that the Company will complete the Development Communities, that the Company's budgeted costs, leasing, start dates, completion dates, occupancy or estimates of "EBITDA as % of Total Budgeted Cost" will be realized or that future developments will realize comparable returns. In accordance with GAAP, the Company capitalizes interest expense during construction until each building obtains a certificate of occupancy, thereafter, interest for each completed building is expensed. Capitalized interest for the three months ended June 30, 1997 and 1996 totaled $2,505,000 and $3,482,000, respectively. Capitalized interest for the six months ended June 30, 1997 and 1996 totaled $5,016,000 and $6,314,000, respectively. The following page presents a summary of Development Communities: 20 23 DEVELOPMENT COMMUNITIES SUMMARY
NUMBER OF BUDGETED ESTIMATED ESTIMATED EBITDA AS % APARTMENT COST CONSTRUCTION INITIAL COMPLETION STABILIZATION OF TOTAL HOMES ($ MILLIONS) START OCCUPANCY DATE DATE(1) BUDGETED COST(2) ----------- -------------- ------------- ----------- ------------ ------------- ---------------- Conventionally Financed - ----------------------- Avalon Gates Trumbull, CT 340 $ 35.0 Q3 1994 Q2 1996 Q3 1997 Q4 1997 9.8% Avalon Grove (3) Stamford, CT 402 52.5 Q1 1995 Q3 1996 Q3 1997 Q4 1997 12.2% Avalon Commons Smithtown, NY 312 31.8 Q1 1996 Q1 1997 Q3 1997 Q4 1997 10.2% Avalon Crescent Tysons Corner, VA 558 57.3 Q1 1996 Q4 1996 Q4 1997 Q1 1998 10.8% Avalon Gardens Nanuet, NY 504 53.1 Q3 1996 Q3 1997 Q4 1998 Q1 1999 10.8% Avalon Court Melville, NY 154 17.8 Q4 1996 Q2 1997 Q1 1998 Q2 1998 10.7% Avalon at Fair Lakes Fairfax, VA 234 23.2 Q1 1997 Q1 1998 Q3 1998 Q4 1998 10.0% Avalon at Faxon Park Quincy, MA 171 15.8 Q1 1997 Q1 1998 Q3 1998 Q1 1999 11.0% Avalon Willow Mamaroneck, NY 227 41.8 Q2 1997 Q3 1998 Q1 1999 Q2 1999 9.2% Avalon at Cameron Court Alexandria, VA 460 44.7 Q2 1997 Q1 1998 Q4 1998 Q1 1999 10.3% ------------ ------------- ---------------- 3,362 $ 373.0 10.6% ============ ============= ================
------------ (1) Stabilized occupancy is defined as the first full quarter of 94% or greater occupancy. (2) Projected EBITDA represents gross potential earnings projected to be achieved based on current rents prevailing in the respective community's local market (without adjustment for potential growth factors) and before interest, income taxes, depreciation, amortization and extraordinary items, minus (a) economic vacancy and (b) projected stabilized operating expenses. Total budgeted cost includes all capitalized costs projected to be incurred to develop the respective Development Community, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees. (3) Currently anticipated to be held by a joint venture. 21 24 DEVELOPMENT RIGHTS The Company is considering the development of 18 new apartment communities. The status of these Development Rights range from land owned or under contract for which design and architectural planning has just commenced to land under contract or owned by the Company with completed site plans and drawings where construction can commence almost immediately. There can be no assurance that the Company will succeed in obtaining zoning and other necessary governmental approvals or the financing required to develop these communities, or that the Company will decide to develop any particular community. Further, there can be no assurance that construction of any particular community will be undertaken or, if undertaken, will begin at the expected times assumed in the financial projections or be completed at the total budgeted cost. Although there is no assurance that all or any of these communities will proceed to development, the successful completion of all of these communities would ultimately add approximately 5,114 institutional-quality apartment homes to the Company's portfolio. At June 30, 1997, the cumulative capitalized costs incurred in pursuit of the 18 Development Rights were approximately $13.6 million, including the capitalized cost of $6.4 million related to the purchase of land in New Canaan, Connecticut. Many of these apartment homes will offer features like those offered by the communities currently owned by the Company. The 18 Development Rights that the Company is currently pursuing are summarized below. DEVELOPMENT RIGHTS SUMMARY
TOTAL ESTIMATED BUDGETED NUMBER OF COST LOCATION HOMES ($ MILLIONS) ------------------------ ----------- -------------- 1. Freehold, NJ 452 $ 38.0 2. New Canaan, CT(1) 104 24.4 3. Greenburgh - II, NY 500 71.2 4. Greenburgh - III, NY 266 41.8 5. Darien, CT 172 21.0 6. Fort Lee, NJ 351 53.7 7. Peabody, MA 434 35.9 8. Hull, MA 162 14.8 9. Jersey City - II, NJ 268 48.3 10. New Rochelle, NY 375 57.3 11. Melville - II, NY 356 36.3 12. Wilmington, MA 204 19.3 13. Gaithersburg - II, MD 96 8.9 14. Bronxville, NY (1) 110 20.1 15. Parsippany, NJ 460 63.2 16. Danbury, CT 268 24.4 17. Yonkers, NY 256 33.7 18. Florham Park, NJ 280 37.9 ----------- -------------- Total 5,114 $ 650.2 =========== ==============
(1) Currently anticipated that the land seller will retain a minority limited partnership interest. 22 25 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In March 1996, Procida Construction Corporation, the original contractor selected to build Avalon Cove, notified the Company that it was not able to complete the contract within the guaranteed maximum price and subsequently defaulted on its contractual obligations. In April 1996, the Company filed a demand for arbitration with the American Arbitration Association in New York against Procida Construction Corporation to recover any excess over the original guaranteed maximum price contract and instituted suit in the U.S. District Court to compel arbitration. Procida Construction has since filed Chapter 11 Bankruptcy, and consequently no assurance can be provided that collection efforts will be successful. Procida Construction has an unspecified claim against Avalon Properties, Inc. arising out of its termination. Management believes this claim is without merit. However, should Procida Construction prevail, Management believes that the cost of this claim would not have a material adverse impact on the financial condition or results of operations of the Company. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS The Annual Meeting of Stockholders of Avalon Properties, Inc. was held on May 6, 1997, at which meeting each of the five Directors then serving and previously nominated for election as a Director and a new nominee for election as a Director were elected to serve until the 1998 Annual Meeting of Stockholders and until their respective successors shall be duly elected and qualified. Of 33,534,789 shares outstanding and eligible to vote at the Annual Meeting of Stockholders, 28,468,202 shares were present in person or by proxy. Of the votes cast, 28,446,055 were cast in favor of the reelection of Richard L. Michaux and authority was withheld as to 22,147 shares; 28,446,546 votes were cast in favor of the reelection of Charles H. Berman and authority was withheld as to 21,656 shares; 28,451,755 votes were cast in favor of the reelection of Michael A. Futterman and authority was withheld as to 16,447 shares; 28,451,755 votes were cast in favor of the reelection of Christopher B. Leinberger and authority was withheld as to 16,447 shares; 28,451,755 votes were cast in favor of the election of Richard W. Miller and authority was withheld as to 16,447 shares; and 28,452,246 votes were cast in favor of the reelection of Allen D. Schuster and authority was withheld as to 15,956 shares. Certain amendments to the Avalon Properties, Inc. 1995 Amended and Restated Equity Incentive Plan were approved by the Company's stockholders at the Annual Meeting of Stockholders by the affirmative vote of 21,196,063 shares; 4,994,238 shares were voted against, 2,254,488 shares were broker no votes and 23,413 shares abstained from voting. ITEM 5. OTHER INFORMATION On April 17, 1997, the Company completed a direct placement of 2,740,000 shares of its Common Stock to an institutional investor under its existing shelf registration statement at a purchase price of $27.375 per share. Net cash proceeds of approximately $73,500,000 were used to retire indebtedness under the Company's Unsecured Facilities. On July 1, 1997, the Company completed a public offering of 2,163,000 shares of common stock at a purchase price of $28.0625 per share. The net cash proceeds from the offering of approximately $57,671,000 were used primarily to repay amounts outstanding under the Company's Unsecured Facilities. 23 26 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibit No. Description 10.14 Amended and Restated Revolving Credit Agreement dated as of May 30, 1997 27.1 Financial Data Schedule b) No reports of Form 8-K have been filed by the Company for the period covered by this report. 24 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AVALON PROPERTIES, INC. Date: August 12, 1997 By /s/ RICHARD L. MICHAUX -------------------------------------------- Richard L. Michaux, Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) Date: August 12, 1997 By /s/ THOMAS J. SARGEANT -------------------------------------------- Thomas J. Sargeant, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) 25 EX-10.14 2 AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT 1 Exhibit 10.14 AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT dated as of May 30, 1997 among AVALON PROPERTIES, INC., and FIRST UNION NATIONAL BANK OF VIRGINIA 1 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS 1 SECTION 1.1 Definitions 1 SECTION 1.2 Accounting Terms and Determinations 13 SECTION 1.3 Types of Borrowing 14 ARTICLE II THE CREDITS 14 SECTION 2.1 Commitment to Lend 14 SECTION 2.2 Notice of Committed Borrowing 14 SECTION 2.3 Money Market Borrowing 15 SECTION 2.4 Funding of Loans 18 SECTION 2.5 Note 18 SECTION 2.6 Letters of Credit 18 SECTION 2.7 Interest Rate 20 SECTION 2.8 Fees 21 SECTION 2.9 Mandatory Expiration; Extension Options 22 SECTION 2.10 Mandatory Prepayment 23 SECTION 2.11 Optional Prepayments 23 SECTION 2.12 General Provisions as to Payments 24 SECTION 2.13 Funding Losses 24 SECTION 2.14 Computation of Interest and Fees 25 SECTION 2.15 Use of Proceeds 25 SECTION 2.16 Letter of Credit Usage Absolute 25 SECTION 2.17 Method of Electing Interest Rates 26 ARTICLE III CONDITIONS 27 SECTION 3.1 Closing 27 SECTION 3.2 Borrowings 28 ARTICLE IV REPRESENTATIONS AND WARRANTIES 29 SECTION 4.1 Existence and Power 29 SECTION 4.2 Power and Authority 29 SECTION 4.3 No Violation 29 SECTION 4.4 Financial Information 30 SECTION 4.5 Litigation 30 SECTION 4.6 Compliance with ERISA 30 SECTION 4.7 Environmental Matters 31 SECTION 4.8 Taxes 31 SECTION 4.9 Full Disclosure 31 SECTION 4.10 Solvency 32 SECTION 4.11 Use of Proceeds; Margin Regulations 32 SECTION 4.12 Governmental Approvals 32 SECTION 4.13 Investment Company Act; Public Utility Holding Company Act 32 SECTION 4.14 Patents, Trademarks, etc. 32 SECTION 4.15 Ownership of Property 32 SECTION 4.16 No Default 32
2 3 SECTION 4.17 Licenses, etc. 33 SECTION 4.18 Compliance With Law 33 SECTION 4.19 No Burdensome Restrictions 33 SECTION 4.20 Brokers' Fees 33 SECTION 4.21 Labor Matters 33 SECTION 4.22 Insurance 33 SECTION 4.23 Organizational Documents 33 SECTION 4.24 Principal Offices 34 SECTION 4.25 REIT Status 34 ARTICLE V AFFIRMATIVE AND NEGATIVE COVENANTS 34 SECTION 5.1 Information 34 SECTION 5.2 Payment of Obligations 37 SECTION 5.3 Maintenance of Property; Insurance 38 SECTION 5.4 Conduct of Business and Maintenance of Existence 38 SECTION 5.5 Compliance With Laws 38 SECTION 5.6 Inspection of Property, Books and Records 38 SECTION 5.7 Existence 39 SECTION 5.8 Financial Covenants 39 SECTION 5.9 Restriction on Fundamental Changes 40 SECTION 5.10 Changes in Business 40 SECTION 5.11 Fiscal Year; Fiscal Quarter 40 SECTION 5.12 Margin Stock 40 SECTION 5.13 Unsecured Debt 40 SECTION 5.14 No Other Unsecured Debt 40 ARTICLE VI DEFAULTS 41 SECTION 6.1 Events of Default 41 SECTION 6.2 Rights and Remedies 43 SECTION 6.3 Actions in Respect of Letters of Credit 43 ARTICLE VII CHANGE IN CIRCUMSTANCES 45 SECTION 7.1 Increased Cost and Reduced Return 45 SECTION 7.2 Taxes 46 ARTICLE VIII MISCELLANEOUS 47 SECTION 8.1 Notices 47 SECTION 8.2 No Waivers 47 SECTION 8.3 Expenses; Indemnification 47 SECTION 8.4 Set-Offs 48 SECTION 8.5 Amendments and Waivers 48 SECTION 8.6 Successors and Assigns 48 SECTION 8.7 Governing Law; Submission to Jurisdiction 49 SECTION 8.8 Marshaling; Recapture 50 SECTION 8.9 Counterparts; Integration; Effectiveness 50 SECTION 8.10 WAIVER OF JURY TRIAL 50 SECTION 8.11 Survival 50 SECTION 8.12 Domicile of Loans 50
3 4 SECTION 8.13 Limitation of Liability 50 SECTION 8.14 Recourse Obligation 51 SECTION 8.15 Confidentiality 51 SECTION 8.16 Legal Rate 51
4 5 AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT This AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT (this "Agreement" or this "Credit Agreement") dated as of May 30, 1997, among AVALON PROPERTIES, INC., a Maryland corporation (the "Borrower") and FIRST UNION NATIONAL BANK OF VIRGINIA, a National Banking Association ("First Union" or "Bank"), WITNESSETH: THAT WHEREAS, the parties hereto have previously entered into a Revolving Credit Agreement dated as of February 29, 1996, as amended by a First Amendment to Revolving Credit Agreement, dated as of June 30, 1996, by a Second Amendment to Revolving Credit Agreement, dated as of October 24, 1996, and by a Third Amendment to Revolving Credit Agreement dated as of April 7, 1997 (as so amended, the "Original Credit Agreement"); and WHEREAS, the parties desire to amend and restate the Original Credit Agreement in its entirety upon the terms and conditions set forth herein; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS 1. Definitions. The following terms, as used herein, have the following meanings: "Adjusted London Interbank Offered Rate" has the meaning set forth in Section 2.7(a). "Agreement" shall mean this Credit Agreement as the same may from time to time hereafter be modified, supplemented or amended. "Applicable Interest Rate" means, with respect to any Loan, the interest rate applicable to such Loan from time to time. "Applicable Margin" means, with respect to each Loan, the respective percentages per annum determined, at any time, based on the range into which the Borrower's Credit Rating then falls, in accordance with the following table. Any change in the Borrower's Credit Rating causing it to move to a different range on the table shall effect an immediate and automatic 5 6 change in the Applicable Margin. In the event that the Borrower's Credit Rating is such that the Rating Agencies' ratings are split between a higher and lower range on the table below, the Applicable Margin shall be based upon the average of the Applicable Margins applicable to such ratings. In the event that only one Rating Agency has set the Borrower's Credit Rating, then the Applicable Margin shall be based on such rating only.
Range of Borrower's Applicable Margin Credit Rating for EuroDollar (S&P/Moody's Loans (% per Ratings) annum) A-/A3 or higher 0.550 BBB+/Baa1 0.625 BBB/Baa2 0.800 BBB-/Baa3 0.950 Below BBB-/Baa3 1.125
"Bank" means First Union National Bank of Virginia, its successors and permitted assigns. "Bankruptcy Code" shall mean Title 11 of the United States Code, entitled "Bankruptcy," as amended from time to time, and any successor statute or statues. "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multi-employer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Borrower" means Avalon Properties, Inc., a Maryland corporation qualified as a real estate investment trust, and its successors. "Borrower's Credit Rating" means the Borrower's senior implied rating as assigned by the Rating Agencies or the rating assigned the Borrower's senior unsecured long term indebtedness by the Rating Agencies, whichever is applicable. "Borrower's SEC Reports" means the Borrower's annual report on Form 10-K for the year ended December 31, 1996, Borrower's Form 10-Q for the three month period ended March 31, 1997, each, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. "Borrowing" means a borrowing hereunder consisting of a Loan or Loans made to the Borrower by the Bank pursuant to this Agreement. "Capital Expenditures" shall mean, for any period, the sum of all expenditures (whether paid in cash or accrued as a liability) by the Borrower which are capitalized on the balance sheet of the Borrower in conformity with GAAP. "Capitalized Interest" shall mean interest which is not expensed under GAAP. 6 7 "Cash and Cash Equivalents" shall mean (i) cash, (ii) direct obligations of the United States Government, including without limitation, treasury bills, notes and bonds, (iii) interest bearing or discounted obligations of Federal agencies and Government sponsored entities or pools of such instruments offered by Approved Banks and dealers, including without limitation, Federal Home Loan Mortgage Corporation participation sale certificates, Government National Mortgage Association modified pass through certificates, Federal National Mortgage Association bonds and notes, and Federal Farm Credit System securities, (iv) time deposits, Domestic and EuroDollar certificates of deposit, bankers acceptances, commercial paper rated at least A-1 by Standard & Poors Corporation ("S&P") and P-1 by Moody's Investors Services, Inc. ("Moody's") and/or guaranteed by an Aa rating by Moody's, a AA rating by S&P or better rated credit, floating rate notes, other money market instruments and letters of credit each issued by Approved Banks, (v) obligations of domestic corporations, including, without limitation, commercial paper, bonds, debentures and loan participations, each of which is rated at least AA by S&P and/or Aa2 by Moody's and/or guaranteed by an Aa rating by Moody's, a AA rating by S&P or better rated credit, (vi) obligations issued by states and local governments or their agencies, rated at least MIG-1 by Moody's and/or SP-1 by S&P and/or guaranteed by an irrevocable letter of credit of an Approved Bank, (vii) repurchase agreements with major banks and primary government security dealers fully secured by the U.S. Government or agency collateral equal to or exceeding the principal amount on a daily basis and held in safekeeping, and (viii) real estate loan pool participations, guaranteed by an AA rating given by S&P or Aa2 rating given by Moody's or better rated credit. "Charges" has the meaning set forth in Section 8.16. "Closing Date" means the date of this Agreement. "Code" or "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended, and as it may be further amended from time to time, any successor statutes thereto, and applicable U.S. Department of Treasury regulations issued pursuant thereto in temporary or final form. "Combined Asset Value" shall mean the book value of the assets of the Borrower (including Minority Holdings) and its Consolidated Subsidiaries, calculated on a consolidated basis, in accordance with GAAP, but without deduction for depreciation and net of monetary obligations which are not for borrowed money (such as accounts payable and working capital liabilities). "Commitment" means the maximum amount that the Bank has committed to lend pursuant to this Agreement, which amount is Fifty Million Dollars ($50,000,000), as such amount may be reduced from time to time pursuant to Section 2.11. "Committed Loan" means a loan made by the Bank pursuant to Section 2.1; provided, that, if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Committed Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. 7 8 "Consolidated Subsidiary" means at any date any Subsidiary or other entity which is consolidated with the Borrower in accordance with GAAP. "Consolidated Tangible Net Worth" means at any date the consolidated stockholders' equity of the Borrower and its Consolidated Subsidiaries less their consolidated Intangible Assets, all determined as of such date. For purposes of this definition "Intangible Assets" means with respect to any such intangible assets, the amount (to the extent reflected in determining such consolidated stockholders' equity) of (i) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of assets of a going concern business made within twelve months after the acquisition of such business) subsequent to September 30, 1994, in the book value of any-asset (other than Real Property Assets) owned by the Borrower or a Consolidated Subsidiary and (ii) all unamortized debt discount and expense, unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, anticipated future benefit of tax loss carry-forwards, copyrights, organization or developmental expenses and other intangible assets. "Construction Asset Cost" shall mean, with respect to Real Property Assets in which construction of improvements has begun (as evidenced by foundation excavation) but have not yet been completed (as such completion shall be evidenced by a certificate of occupancy or its equivalent) the aggregate, good faith estimated cost of construction of such improvements, including land acquisition costs. "Contingent Obligation" as to any Person means, without duplication, (i) any contingent obligation of such Person required to be shown on such Person's balance sheet in accordance with GAAP, and (ii) any obligation required to be disclosed in the footnotes to such Person's financial statements, guaranteeing partially or in whole any Non-Recourse Debt, lease, dividend or other obligation, exclusive of contractual indemnities (including, without limitation, any indemnity or price-adjustment provision relating to the purchase or sale of securities or other assets) and guarantees of non-monetary obligations (other than guarantees of completion) which have not yet been called on or quantified, of such Person or of any other Person. The amount of any Contingent Obligation described in clause (ii) shall be deemed to be (a) with respect to a guaranty of interest or interest and principal, or operating income guaranty, the Net Present Value of the sum of all payments required to be made thereunder (which in the case of an operating income guaranty shall be deemed to be equal to the debt service for the note secured thereby), calculated at the Applicable Interest Rate, through (i) in the case of an interest or interest and principal guaranty, the stated date of maturity of the obligation (and commencing on the date interest could first be payable thereunder), or (ii) in the case of an operating income guaranty, the date through which such guaranty will remain in effect, and (b) with respect to all guarantees not covered by the preceding clause (a), an amount equal to the stated or determinable amount of the primary obligation in respect of which such guaranty is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as recorded on the balance sheet and on the footnotes to the most recent financial statements of the Borrower required to be delivered pursuant to Section 4.4 hereof. Notwithstanding anything contained herein to the contrary, guarantees of completion shall not be deemed to be Contingent Obligations unless and until a claim for 8 9 payment or performance has been made thereunder, at which time any such guaranty of completion shall be deemed to be a Contingent Obligation in an amount equal to any such claim. Subject to the preceding sentence, (i) in the case of a joint and several guaranty given by such Person and another Person (but only to the extent such guaranty is recourse, directly or indirectly to the Borrower), the amount of the guaranty shall be deemed to be 100% thereof unless and only to the extent that such other Person has delivered Cash or Cash Equivalents to secure all or any part of such Person's guaranteed obligations, (ii) in the case of joint and several guarantees given by a Person in whom the Borrower owns an interest (which guarantees are non-recourse to the Borrower), to the extent the guarantees, in the aggregate, exceed 15% of Combined Asset Value, the amount in excess of 15% shall be deemed to be a Contingent Obligation of the Borrower, and (iii) in the case of a guaranty (whether or not joint and several) of an obligation otherwise constituting Debt of such Person, the amount of such guaranty shall be deemed to be only that amount in excess of the amount of the obligation constituting Debt of such Person. Notwithstanding anything contained herein to the contrary, "Contingent Obligations" shall be deemed not to include guarantees of Unused Commitments or of construction loans to the extent the same have not been drawn. All matters constituting "Contingent Obligations" shall be calculated without duplication. "Debt" of any Person means, without duplication, (A) as shown on such Person's balance sheet (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property, and (ii) all indebtedness of such Person evidenced by a note, bond, debenture or similar instrument (but only to the extent disbursed with respect to construction loans), (B) the face amount of all letters of credit issued for the account of such Person and, without duplication, all unreimbursed amounts drawn thereunder (except to the extent any such letter of credit is intended as a guaranty of the Debt of a Consolidated Subsidiary), (C) all Contingent Obligations of such Person, (D) all payment obligations of such Person under any interest rate protection agreement (including, without limitation, any interest rate swaps, caps, floors, collars and similar agreements) and currency swaps and similar agreement which were not entered into specifically in connection with Debt set forth in clauses (A), (B) or (C) hereof. For purposes of this Agreement, Debt (other than Contingent Obligations) of the Borrower shall be deemed to include only the Borrower's pro rata share (such share being based upon the Borrower's percentage ownership interest as shown on the Borrower's annual audited financial statements) of the Debt of any Person in which the Borrower, directly or indirectly, owns an interest, provided that and to the extent that such Debt is non-recourse, both directly and indirectly, to the Borrower. Debt shall not include any undrawn but uncancelled amounts under this facility but shall include the aggregate face amount of all letters of credit then issued and outstanding pursuant to this Agreement. "Default" means any condition or event which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Defaulted Non-Recourse Debt" shall have the meaning set forth in Section 5.2 hereof. "Development Projects" shall have the meaning set forth in Section 5.1(m) hereof. 9 10 "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in Virginia and Connecticut are authorized by law to close. "Effective Date" means the date this Agreement becomes effective in accordance with Section 8.9. "Environmental Affiliate" means any partnership, joint venture, trust or corporation in which an equity interest is owned by the Borrower, either directly or indirectly. "Environmental Approvals" means any permit, license, approval, ruling, variance, exemption or other authorization required under applicable Environmental Laws. "Environmental Claim" means, with respect to any Person, any notice, claim, demand or similar communication (written or oral) by any other Person alleging potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damage, property damages, personal injuries, fines or penalties arising out of, based on or resulting from (i) the presence, or release into the environment, of any Materials of Environmental Concern at any location, whether or not owned by such Person or (ii) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law, in each case (with respect to both (i) and (ii) above) as to which there is a reasonable possibility of an adverse determination with respect thereto and which, if adversely determined, would have a Material Adverse Effect on the Borrower. "Environmental Laws" means any and all federal, state, and local statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Materials of Environmental Concern or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Materials of Environmental Concern or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means the Borrower, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "EuroDollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "EuroDollar Lending Office" means such office, branch or affiliate as the Bank may from time to time hereafter designate as its EuroDollar Lending Office. 10 11 "EuroDollar Loan" means any Loan to be made by the Bank pursuant to this Agreement. "EuroDollar Reserve Percentage" has the meaning set forth in Section2.7(a). "Event of Default" has the meaning set forth in Section 6.1. "Existing Agented Facility" means the credit facility of up to One Hundred Seventy-Five Million Dollars ($175,000,000) available to the Borrower pursuant to the Revolving Credit Agreement dated as of March 31, 1997, among the Borrower, certain banks, and Morgan Guaranty Trust Company of New York as Co-Agent and Co-Managing Agent, and Fleet Bank, National Association, as Co-Agent and Co-Managing Agent, and NationsBank, National Association, as Co-Agent, as the same may be modified, supplemented or amended from time to time. "Extension Date" shall have the meaning set forth in Section 2.9. "Extension Notice" shall have the meaning set forth in Section 2.9. "Extension Option" shall have the meaning set forth in Section 2.9. "FFO" means "funds from operations" defined to mean Net Income (Loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructurings and sales of properties, plus depreciation and amortization, after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis. "Facility Fee" is defined in Section 2.8(a). "Facility Fee Percentage" means the applicable percentage per annum determined, at any time, based on the range into which the Borrower's Credit Rating then falls, in accordance with the following table. Any change in the Borrower's Credit Rating causing it to move to a different range on the table shall effect an immediate and automatic change in the Facility Fee Percentage. In the event that the Borrower's Credit Rating is such that the Rating Agencies' ratings are split between a higher and lower range on the table below, the Facility Fee Percentage shall be based upon the average of the Facility Fee Percentages applicable to such ratings. In the event that only one Rating Agency has set the Borrower's Credit Rating, then the Facility Fee Percentage shall be based on such rating only.
Range of Borrower's Credit Facility Fee Rating (S&P/Moody's Percentage Ratings) (% per annum) -------- ------------- A-/A3 or higher 0.150 BBB+/Baa1 0.150 BBB/Baa2 0.150 BBB-/Baa3 0.30 Below BBB-/Baa3 0.375
11 12 "Federal Reserve Board" means the Board of Governors of the Federal Reserve System as constituted from time to time. "Fixed Charges" means with respect to any fiscal period, the sum of (a) interest expense according to GAAP (including Capitalized Interest) plus (b) the aggregate of all scheduled principal payments on Debt according to GAAP made during that fiscal period for the Borrower and its Consolidated Subsidiaries and for Debt guaranteed under a Contingent Obligation (but excluding balloon payments of principal due upon the stated maturity of a Debt), plus (c) the aggregate of all dividends payable on the Borrower's or any Consolidated Subsidiary's preferred stock. For the purposes of this definition, (i) interest on Fixed Rate Indebtedness shall be the actual interest payable on such Debt and (ii) interest on Floating Rate Indebtedness shall be assumed to be the greater of (A) the actual interest payable on such Debt or (B) an assumed interest rate of 6 and 1/4% per annum for tax-exempt Debt and an assumed interest rate of 9% per annum for non-tax-exempt Debt, except that, if any of the foregoing in (A) or (B) above is subject to an interest rate cap agreement purchased by the Borrower or a Consolidated Subsidiary, the interest rate shall be assumed to be the lower of the actual interest payable on such Debt or the capped rate of such interest rate cap agreement. In no event shall any dividends payable on the Borrower's or any Consolidated Subsidiary's common stock be included in Fixed Charges. "Fixed Rate Indebtedness" means all Debt which accrues interest at a fixed rate. "Floating Rate Indebtedness" means all Debt which is not Fixed Rate Indebtedness and which is not a Contingent Obligation or an Unused Commitment. "GAAP" means generally accepted accounting principles recognized as such in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination. "Indemnitee" has the meaning set forth in Section 8.3(b). "Interest Period" means: with respect to each Borrowing, the period commencing on the date of such Borrowing specified in the Notice of Borrowing or on the date specified in the applicable Notice of Interest Rate Election and ending 30, 60, 90 or 180 days (or one year, if available, as such availability may be determined by the Bank in its sole discretion) thereafter, as the Borrower may elect in the applicable Notice of Borrowing; provided that: 1. any Interest Period which would otherwise end on a day which is not a EuroDollar Business Day shall be extended to the next succeeding EuroDollar Business Day unless such EuroDollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding EuroDollar Business Day; 12 13 2. any Interest Period which begins on the last EuroDollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last EuroDollar Business Day of a calendar month; 3. if any Interest Period includes a date on which a payment of principal of the Loans is required to be made under Section 2.10 but does not end on such date, then (i) the principal amount (if any) of each EuroDollar Loan required to be repaid on such date shall have an Interest Period ending on such date and (ii) the remainder (if any) of each such EuroDollar Loan shall have an Interest Period determined as set forth above; 4. any Interest Period which would otherwise end after the Maturity Date shall end on the Maturity Date; and 5. if the Borrower fails to specify an Interest Period at the time of a Borrowing or at the expiration of any Interest Period in excess of the one (1) month LIBOR Rate, then the Interest Period for such Borrowing shall be the one (1) month LIBOR Rate. "Legal Rate" has the meaning set forth in Section 8.16. "Letter(s) of Credit" shall have the meaning provided in Section 2.2. "Letter of Credit Collateral" shall have the meaning provided in Section 6.3. "Letter of Credit Collateral Account" shall have the meaning provided in Section 6.3. "Letter of Credit Documents" shall have the meaning provided in Section 2.16. "Letter of Credit Usage" means at any time the sum of (i) the aggregate maximum amount available to be drawn under the Letters of Credit then outstanding, assuming compliance with all requirements for drawing referred to therein, and (ii) the aggregate amount of the Borrower's unpaid obligations under this Agreement in respect of the Letters of Credit. "LIBOR Auction" means a solicitation of Money Market Quotes setting forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.3. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the effect of creating a security interest, in respect of such asset. For purposes of this definition, materialman's, mechanic's and labor liens shall not be included in the definition of Lien. For the purposes of this Agreement, the Borrower or any Consolidated Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Limited Minority Holdings" means Minority Holdings in which either (i) the Borrower has a less than forty percent (40%) ownership interest or (ii) the Borrower neither 13 14 controls nor shares control of the management of such Minority Holdings. As used in this definition only, the term "control" shall mean the authority to make major management decisions as well as the management of day-to-day operations of such entity. "Loan" means a EuroDollar Loan or a Money Market Loan and "Loans" means EuroDollar Loans, Money Market Loans or any combination of the foregoing. "Loan Documents" means this Agreement and the Note. "London Interbank Offered Rate" (the "LIBOR Rate") has the meaning set forth in Section 2.6(a). "Margin Stock" shall have the meaning provided such term in Regulation U and Regulation G of the Federal Reserve Board. "Material Adverse Effect" means an effect resulting from any circumstance or event or series of circumstances or events, of whatever nature, which does or could reasonably be expected to, (i) materially and adversely impair, on more than an interim basis, the ability of the Borrower and its Consolidated Subsidiaries, taken as a whole, to fulfill its material obligations, or (ii) cause a Default. "Material Plan" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $5,000,000. "Materials of Environmental Concern" means and includes pollutants, contaminants, wastes, toxic and hazardous substances, petroleum and petroleum by-products. "Maturity Date" shall mean the date when all of the obligations hereunder shall be due and payable which shall be March 31, 2000, unless extended pursuant to the terms of Section 2.9 or unless accelerated pursuant to the terms hereof. "Minority Holdings" means partnerships and corporations held or owned by the Borrower which are not consolidated with the Borrower on the Borrower's financial statements. "Money Market Loan" means a loan to be made by the Bank pursuant to a LIBOR Auction. "Money Market Margin" has the meaning set forth in Section 2.3(d)(ii)(C). "Money Market Quote" means an offer by the Bank to make a Money Market Loan in accordance with Section 2.3. "Multi-employer Plan" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. 14 15 "Net Income" shall mean net income of the Borrower (including any income attributable to the Borrower's ownership in Minority Holdings) and its Consolidated Subsidiaries determined in accordance with GAAP. "Net Operating Cash Flow" shall mean Net Income of the Borrower plus depreciation and amortization and interest (to the extent previously deducted from Net Income) but less Capital Expenditures which are not related to new construction or significant rehabilitation at any Real Property Asset during the applicable period. As used herein, the term "significant rehabilitation" shall mean a rehabilitation that occurs less than six months after the Borrower acquires a Real Property Asset or has an aggregate cost (with respect to any individual Real Property Asset) equal to or in excess of $2,000 per apartment unit at such Real Property Asset. "Net Present Value" shall mean, as to a specified or ascertainable dollar amount, the present value, as of the date of calculation of any such amount using a discount rate equal to the Base Rate in effect as of the date of such calculation; provided however, that such amounts shall be deemed to have been incurred on January 1 of the applicable calendar year. "Non-Recourse Debt" shall means Debt of the Borrower or any Consolidated Subsidiary for which the right of recovery of the obligee thereof is limited to recourse against the Real Property Assets securing such Debt (subject to such limited exceptions to the non-recourse nature of such Debt such as fraud, misappropriation, misapplication and environmental, as are usual and customary in like transactions at the time of the incurrence of such Debt). "Note" means the promissory note of the Borrower, substantially in the form of EXHIBIT A hereto, evidencing the obligation of the Borrower to repay the Loans. "Notice of Borrowing" means a Notice of Committed Borrowing (as defined in Section 2.2), or a Notice of Money Market Borrowing (as defined in Section 2.3(e). "Obligations" means all obligations, liabilities and indebtedness of every nature of the Borrower, from time to time owing to the Bank under or in connection with this Agreement or any other Loan Document, including, without limitation, (i) the outstanding principal amount of any Loans at such time, plus (ii) the Letter of Credit Usage at such time. "Operating Lease" means, with respect to any Person, any lease of an asset which is not a lease required to be capitalized under GAAP, other than any such lease under which such Person is the lessor. "Operating Rent" means, as of the last day of any fiscal period, the aggregate rent payable with respect to that fiscal period to a lessor under an Operating Lease. "Parent" means, with respect to the Bank, any Person controlling such Bank. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. 15 16 "Period Fraction" means with respect to any period of time, a fraction, the numerator of which is the actual number of days in such period, and the denominator of which is three hundred and sixty (360). "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan (other than a Multi-employer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Prepayment Date" shall have the meaning set forth in Section 2.10. "Rating Agencies" means, collectively, Standard & Poor's Ratings Group and Moody's Investors' Services, Inc. "REOC" shall have the meaning set forth in Section 4.6(c). "Real Property Assets" means the real property assets (including interests in participating mortgages in which the Borrower's interest therein is characterized as equity according to GAAP) currently owned directly or indirectly by the Borrower and listed on Schedule 4.15(a) annexed hereto, as such may be modified from time to time to reflect sales, transfers, assignments, conveyances, acquisitions, and purchases of real property assets. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Secured Debt" means Debt of the Borrower and its Consolidated Subsidiaries secured by a Lien. "Stabilized Real Estate Value" means, with respect to any period, the preceding three (3) month Net Operating Cash Flow of the Real Property Assets on an annualized basis capitalized at a rate of 9%. "Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Borrower. "Solvent" means, with respect to any Person, that the fair saleable value of such Person's assets exceeds the Debts of such Person. "Term" has the meaning set forth in Section 2.9. 16 17 "Termination Event" shall mean (i) a "reportable event," as such term is described in Section 4043 of ERISA (other than a "reportable event" not subject to the provision for 30-day notice to the PBGC), or an event described in Section 4062(e) of ERISA, (ii) the withdrawal by any member of the ERISA Group from a Multi-employer Plan during a plan year in which it is a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), or the incurrence of liability by any member of the ERISA Group under Section 4064 of ERISA upon the termination of a Multi-employer Plan, (iii) the filing of a notice of intent to terminate any Plan under Section 4041 of ERISA, other than in a standard termination within the meaning of Section 4041 of ERISA, or the treatment of a Plan amendment as a distress termination under Section 4041 of ERISA, (iv) the institution by the PBGC of proceedings to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or cause a trustee to be appointed to administer, any Plan or (v) any other event or condition that might reasonably constitute grounds for the termination of, or the appointment of a trustee to administer, any Plan or the imposition of any liability or encumbrance or Lien on the Real Property Assets or any member of the ERISA Group under ERISA. "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "Unimproved Assets" means Real Property Assets upon which no material improvements have been completed which completion is evidenced by a certificate of occupancy or its equivalent. "Unimproved Asset Value" means the book value of Unimproved Assets, determined in accordance with GAAP. "Unimproved Land" means Real Property Assets upon which no construction of material improvements has been or is expected to be commenced in a material way within ninety (90) days from the date such Real Property Asset was acquired by the Borrower or, as applicable, its Consolidated Subsidiary, as certified to the Bank by the chief financial officer of the Borrower; Real Property Assets which have previously been excluded from this definition as the result of the delivery of the above-referenced certification will be deemed to be Unimproved Land if, after the delivery of such certification, no such construction is commenced within such ninety day period and will continue to be deemed Unimproved Land until such time as the chief financial officer of the Borrower shall certify to the Bank that construction of material improvements has commenced therein in a material way. "Unimproved Land Value" means the book value of Unimproved Land, determined in accordance with GAAP. 17 18 "United States" means the United States of America, including the fifty states and the District of Columbia. "Unleveraged Assets" means (i) Real Property Assets which are not subject, in any part, to a Lien and which are not (a) Unimproved Assets or (b) owned directly or indirectly by a Limited Minority Holding and (ii) Cash and Cash Equivalents of the Borrower or its Consolidated Subsidiaries which are not subject, in any part, to a Lien. "Unleveraged Asset Value" means the book value of Unleveraged Assets, determined in accordance with GAAP (but without deduction for depreciation). "Unsecured Debt" means Debt of the Borrower and all Consolidated Subsidiaries which is not secured by a Lien. "Unused Commitments" shall mean an amount equal to all unadvanced funds (other than unadvanced funds in connection with any construction loan) which any third party is obligated to advance to the Borrower or another Person or otherwise pursuant to any loan document, written instrument or otherwise (in the case of a loan to another Person, the Borrower's share of the Debt shall be calculated in the same manner as that set forth in the last sentence of the definition of "Debt"). 1. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Bank; provided that, if the Borrower notifies the Bank that the Borrower wishes to amend any covenant in Article V to eliminate the effect of any change in GAAP on the operation of such covenant (or if the Bank notifies the Borrower that the Bank wishes to amend Article V for such purpose), then the Borrower's compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner reasonably satisfactory to the Borrower and the Bank. 2. Types of Borrowings. The term "Borrowing" denotes the aggregation of Loans of the Bank to be made to the Borrower pursuant to Article II on the same date, all of which Loans are of the same type (subject to Article VII) and have the same initial Interest Period. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a "EuroDollar Borrowing" is a Borrowing comprised of EuroDollar Loans) or by reference to the provisions of Article II under which participation therein is determined (i.e., a "Committed Borrowing" is a Borrowing under Section 2.1, while a "Money Market Borrowing" is a Borrowing in which the bank participants are determined on the basis of bids by the Bank, and other banks participating in the Existing Agented Facility, in accordance with Section 2.3). 18 19 1.THE CREDITS 1. Commitment to Lend. The Bank agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower or issue Letters of Credit on behalf of the Borrower from time to time during the term hereof in amounts such that the aggregate principal amount of Loans by the Bank at any one time outstanding together with the Bank's Letter of Credit Usage shall not exceed the amount of this Commitment. The aggregate amount of Loans together with Letter of Credit Usage shall not exceed Fifty Million Dollars ($50,000,000). Each Borrowing outstanding under this Section 2.1 (other than a Borrowing in connection with a draw under a Letter of Credit) shall be in an aggregate principal amount of $500,000, or an integral multiple of $500,000 in excess thereof (except that a Borrowing in an amount other than $500,000 or a multiple thereof may be allowed to enable the Borrower to borrow the maximum aggregate Commitment available hereunder). Subject to the limitations set forth herein, any amounts repaid may be reborrowed. 2. Notice of Committed Borrowing. 1. The Borrower shall give the Bank notice (a "Notice of Committed Borrowing") not later than 10:00 A.M. (McLean, Virginia, time) two (2) EuroDollar Business Days before each Committed Borrowing under this Agreement, specifying: 1. the date of such Borrowing, which shall be a EuroDollar Business Day, 2. the aggregate amount of such Borrowing, and 3. the duration of the Interest Period applicable to such Borrowing, subject to the provisions of the definition of Interest Period. 1. The Borrower shall give the Bank written notice that it desires to have Letters of Credit (a "Letter of Credit") issued hereunder no later than 10:00 A.M., McLean, Virginia, time, at least four (4) Domestic Business Days prior to the date of such issuance. Each such notice shall specify (i) the aggregate amount of the requested Letters of Credit, (ii) the individual amount of each requested Letter of Credit and the number of Letters of Credit to be issued, (iii) the date of such issuance (which shall be a Domestic Business Day), (iv) the name and address of the beneficiary, (v) the expiration date of the Letter of Credit (which in no event shall be later than ten (10) Domestic Business Days prior to the Maturity Date), (vi) the purpose and circumstances for which such Letter of Credit is being issued, and (vii) the terms upon which each such Letter of Credit may be drawn down (which terms shall not leave any discretion to the Bank). Each such notice may be revoked telephonically by the Borrower to the Bank any time prior to the date of issuance of the Letter of Credit by the Bank, provided such revocation is confirmed in writing by the Borrower to the Bank and the Bank within one (1) Domestic Business Day by facsimile. No later than 10:00 A.M. McLean, Virginia, time on the date that is four (4) Domestic 19 20 Business Days prior to the date of issuance, the Borrower shall specify a precise description of the documents and the verbatim text of any certificate to be presented by the beneficiary of such Letter of Credit, which if presented by such beneficiary prior to the expiration date of the Letter of Credit would require the Bank to make a payment under the Letter of Credit; provided that the Bank may, in its reasonable judgment, require changes in any such documents and certificates only in conformity with changes in customary and commercially reasonable practice or law and provided further, that no Letter of Credit shall require payment against a conforming draft to be made thereunder on the following Domestic Business Day that such draft is presented if such presentation is made later than 10:00 A.M. McLean, Virginia, time (except that if the beneficiary of any Letter of Credit requests at the time of the issuance of its Letter of Credit that payment be made on the same Domestic Business Day against a conforming draft, such beneficiary shall be entitled to such a same day draw, provided such draft is presented to the Bank no later than 10:00 A.M. McLean, Virginia, time and provided further that, prior to the issuance of such Letter of Credit, the Borrower shall have requested to the Bank that such beneficiary shall be entitled to a same day draw). In determining whether to pay on such Letter of Credit, the Bank shall be responsible only to determine that the documents and certificates required to be delivered under the Letter of Credit have been delivered and that they comply on their face with the requirements of that Letter of Credit. 1. Money Market Borrowings. 1. Money Market Option. In addition to Committed Borrowings pursuant to Section 2.1, the Borrower may, as set forth in this Section, request the Bank during the Term to make offers to make Money Market Loans to the Borrower, subject to the limitations set forth in Section 2.1. The Bank may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. 2. Money Market Quote Request. When the Borrower wishes to request offers to make Money Market Loans under this Section, it shall transmit to the Bank (concurrently with such transmission to the Morgan Agent pursuant to the Existing Agented Facility) by telex or facsimile transmission a Money Market Quote Request substantially in the form of EXHIBIT C hereto so as to be received not later than 10:30 A.M. (McLean, Virginia, time) on the fifth EuroDollar Business Day prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction (or such other time or date as the Borrower and the Bank shall have mutually agreed) specifying: 1. the proposed date of Borrowing, which shall be a EuroDollar Business Day, 2. the aggregate amount of such Borrowing, which shall be $25,000,000 or a larger multiple of $500,000, and 3. the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. 20 21 The Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within five (5) EuroDollar Business Days (or such other number of days as the Borrower and the Bank may agree) of any other Money Market Quote Request. 1. Invitation for Money Market Quotes. A Money Market Quote Request shall constitute an invitation by the Borrower to the Bank to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section. 2. Submission and Contents of Money Market Quotes. 1. The Bank may submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Money Market Quote Request. Each Money Market Quote must comply with the requirements of this subsection (d) and shall be provided to the Borrower no later than 2:00 P.M. (McLean, Virginia, time) on the fourth EuroDollar Business Day prior to the proposed date of Borrowing. Subject to Articles III and VI of this Agreement, any Money Market Quote so made shall be irrevocable except with the written consent of the Borrower. 2. Each Money Market Quote shall be in substantially the form of EXHIBIT D hereto and shall in any case specify: 1. the proposed date of Borrowing, 2. the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (x) must be $25,000,000 or a larger multiple of $500,000, (y) may not exceed the principal amount of Money Market Loans for which offers were requested and (z) may be subject to an aggregate limitation as to the principal amount of Money Market Loans for which offers being made by such quoting Bank may be accepted, and 3. the margin above or below the applicable London Interbank Offered Rate (the "Money Market Margin") offered for each such Money Market Loan, expressed as a percentage (specified to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate. A Money Market Quote may set forth up to five (5) separate offers by the quoting Bank with respect to each Interest Period specified in the related Money Market Quote Request. 1. Any Money Market Quote shall be disregarded if it: 1. is not substantially in conformity with EXHIBIT D hereto or does not specify all of the information required by subsection (d)(ii) above; 2. contains qualifying, conditional or similar language; 3. proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes; or 4. arrives after the time set forth in subsection (d)(i). 21 22 1. Acceptance and Notice by the Borrower. Not later than 10:30 A.M. (McLean, Virginia, time) on the third EuroDollar Business Day prior to the proposed date of Borrowing (or such other time or date as the Borrower and the Bank shall have mutually agreed not later than the date of the Money Market Quote Request for the first LIBOR Auction for which such change is to be effective) the Borrower shall notify the Bank of its acceptance or non-acceptance of the Bank's offer. In the case of acceptance, such notice (a "Notice of Money Market Borrowing") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Money Market Quote in whole or in part; provided that: 1. the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request; 2. the principal amount of each Money Market Borrowing must be $25,000,000 or a larger multiple of $500,000; 3. acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be; and 4. the Borrower may not accept any offer that is described in subsection (d)(iii) or that otherwise fails to comply with the requirements of this Agreement. 1. Funding of Loans. Upon receipt from the Borrower of a Notice of Committed Borrowing in accordance with Section 2.2 hereof or a Notice of Money Market Borrowing in accordance with Section 2.3 hereof (each a "Notice of Borrowing"), and provided that all of the conditions set forth in Section 3.2 hereof have been satisfied, the Bank shall, no later than 12:00 noon (McLean, Virginia, time) on the date of each Borrowing or issuance of a Letter of Credit, as applicable, each as indicated in the Notice of Borrowing, fund such advance or issue the Letter of Credit, as applicable. 1. Note. 1. The Loans shall be evidenced by a single promissory Note in the form of EXHIBIT A hereto payable to the order of the Bank in the principal face amount of Fifty Million Dollars ($50,000,000). 2. The Bank shall record the date, amount and maturity of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and may, if the Bank so elects in connection with any enforcement of its Note, endorse on the appropriate schedule appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under 22 23 the Note. The Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. 3. The Loans shall mature, and the principal amount thereof shall be due and payable, on the Maturity Date. 4. There shall be no more than fifteen (15) EuroDollar Loans outstanding at any one time. 1. Letters of Credit. 1. Subject to the terms contained in this Agreement and the other Loan Documents, upon the receipt of a Notice of Borrowing requesting the issuance of a Letter of Credit, the Bank shall issue a Letter of Credit or Letters of Credit in such form or as is reasonably acceptable to the Borrower, in an aggregate amount equal to the amount requested, provided that after the issuance of such Letters of Credit, (i) the Letter of Credit Usage shall not exceed, in the aggregate, fifty percent (50%) of the aggregate Commitment of the Bank, and (ii) the Letter of Credit Usage, when added to the aggregate principal amount of the Loans outstanding or requested, shall not exceed, in the aggregate, the aggregate Commitment of the Bank at such time. 2. Each Letter of Credit shall be issued in the minimum aggregate amount of Fifty Thousand Dollars ($50,000) or any amount in excess of thereof. 3. In the event of any request for a drawing under any Letter of Credit by the beneficiary thereunder, the Bank shall notify the Borrower on or before the date on which the Bank intends to honor such drawing, and, except as provided in this subsection (c), the Borrower shall reimburse the Bank, in immediately available funds, on the same day on which such drawing is honored in an amount equal to the amount of such drawing. Notwithstanding anything contained herein to the contrary, however, unless the Borrower shall have notified the Bank prior to 11:00 A.M. (McLean, Virginia, time) on the Domestic Business Day immediately prior to the date of such drawing that the Borrower intends to reimburse the Bank for the amount of such drawing with funds other than the proceeds of the Loans, the Borrower shall be deemed to have timely given a Notice of Committed Borrowing pursuant to Section 2.2, requesting a Borrowing on the date on which such drawing is honored and in an amount equal to the amount of such drawing. 4. If, after the date hereof, any change in any law or regulation or in the interpretation thereof by any court or administrative or governmental authority charged with the administration thereof shall either (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against letters of credit issued by, or assets held by, or deposits in or for the account of, or participations in any letter of credit, upon the Bank or (ii) impose on the Bank any other condition regarding this Agreement as it pertains to the Letters of Credit or any participation therein and the result of any event referred to in the preceding clause (i) or (ii) shall be to increase the cost to the Bank of issuing or maintaining any Letter of Credit, then the Borrower 23 24 shall pay to the Bank, upon written demand therefor to the Borrower from the Bank, such additional amounts as shall be required to compensate the Bank for such increased costs or reduction in amounts received or receivable hereunder together with interest thereon at an interest rate equal to the 30 day LIBOR Rate plus the Applicable Margin. The amount specified in the written demand shall, absent manifest error, be final and conclusive and binding upon the Borrower. 5. The Borrower hereby agrees to protect, indemnify, pay and save the Bank harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorney's fees and disbursements) which the Bank may incur or be subject to as a result of (i) the issuance of the Letters of Credit, other than as a result of the gross negligence or willful misconduct of the Bank or (ii) the failure of the Bank to honor a drawing under any 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 (collectively, "Governmental Acts"). As between the Borrower and the Bank, the Borrower assumes all risks of the acts and omissions of, or misuses of the Letters of Credit issued by the Bank by, the beneficiaries of any Letter of Credit. In furtherance and not in limitation of the foregoing, the Bank shall not be responsible (i) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of such Letters of Credit, even if it should in fact prove to be in any and all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) for the validity or insufficiency of any instrument transferring or assigning or purporting to transfer or assign any such 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; (iii) for failure of the beneficiary of any Letter of Credit to comply fully with conditions required in order to draw upon such Letter of Credit; (iv) for errors, omissions, interruptions or delays in transmission or delivery of any message, by mail, cable, telegraph, telex, facsimile transmission, or otherwise; (v) for errors in interpretation of any technical terms; (vi) for any loss or delay in the transmission or otherwise of any documents required in order to make a drawing under any Letter of Credit or of the proceeds thereof; (vii) for the misapplication by the beneficiary of any Letter of Credit of the proceeds of such Letter of Credit; and (viii) for any consequence arising from causes beyond the control of the Bank including any Governmental Acts. None of the above shall affect, impair or prevent the vesting of the Bank's rights and powers hereunder. In furtherance and extension and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by the Bank under or in connection with the Letters of Credit issued by it or the related certificates, if taken or omitted in good faith, shall not put the Bank under any resulting liability to the Borrower. 1. Interest Rate. 1. All amounts advanced hereunder and under the Note shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the Adjusted London Interbank Offered Rate applicable to such Interest Period 24 25 plus the Applicable Margin. Such interest shall be payable for each Interest Period on the last day thereof. The "Adjusted London Interbank Offered Rate" applicable to any Interest Period means a rate per annum equal to the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (i) the London Interbank Offered Rate applicable during such Interest Period by (ii) 1.00 minus the EuroDollar Reserve Percentage. The "London Interbank Offered Rate" (sometimes referred to herein as the "LIBOR Rate") applicable to any Interest Period means the annual rate of interest designated as the British Bankers' Association settlement rate which appears on the display on page 3750 (under the caption "USD" of the Telerate Services, Incorporated, screen or on such other display as may replace such page) as of 11:00 AM (London time) two (2) EuroDollar Business Days before the first day of such Interest Period as the rate per annum for thirty (30) day, sixty (60) day, ninety (90) day, one hundred eighty (180) day (or one year, if available, as such availability may be determined by the Bank in its sole discretion) deposits, as applicable, in the London interbank market; provided, however, that if no offered quotations appear on the Telerate Services, Incorporated, screen or if quotations are not given on such screen for a period to time comparable to such Interest Period, then the LIBOR Rate applicable to such Interest Period shall be the rate of interest determined by the Bank to be the prevailing rate per annum quoted to it at approximately 10:00 AM (Eastern time) two (2) EuroDollar Business Days before the first day of such Interest Period by two (2) or more New York EuroDollar deposit dealers of recognized standing selected by the Bank for the offering of dollar deposits to the Bank by leading banks in the London interbank market for thirty (30) day, sixty (60) day, ninety (90) day, one hundred eighty (180) day (or one year, if available, as such availability may be determined by the Bank in its sole discretion) periods, as applicable, and in the amount approximately equal to the Loan or Loans for which the LIBOR Rate is being determined. In the event that more than one LIBOR Rate is reported, then the LIBOR Rate shall be equal to the highest such rate. "EuroDollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors, of the Federal Reserve System (or any successor) for determining the maximum reserve requirement applicable to the Bank (or, if the Bank has no liabilities subject to a EuroDollar Reserve Percentage, to a member bank of the Federal Reserve System in New York City with Deposits exceeding Five Billion Dollars ($5,000,000,000)) in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on EuroDollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any bank to United States residents). The Adjusted London Interbank Offered Rate shall be adjusted automatically on and as of the effective date of any change in the EuroDollar Reserve Percentage. 1. Subject to the provisions of Article VII, each Money Market Loan shall bear interest on the outstanding principal amount thereof for the Interest Period applicable thereto, at a rate per annum equal to the sum of the Adjusted London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.7(a) as if the related Money Market Loan were a 25 26 Committed Loan) plus (or minus) the Money Market Margin quoted by the Bank in accordance with Section 2.3. 2. In the event that, and for so long as, any Event of Default shall have occurred and be continuing, the outstanding principal amount of the Loans, and, to the extent permitted by applicable law, overdue interest in respect of all Loans, shall bear interest at the annual rate equal to the sum of the Applicable Interest Rate for Committed Loans plus four percent (4%). 1. Fees. 1. Facility Fee. The Borrower shall pay to the Bank a facility fee accruing at a rate per annum equal to the then applicable Facility Fee Percentage on the Commitment, such fee being payable quarterly in arrears. The Facility Fee shall be payable in arrears on each January 1, April 1, July 1 and October 1 during the Term. 2. Letter of Credit Fee. During the Term, but provided that no Event of Default shall have occurred and be continuing, the Borrower shall pay to the Bank a Letter of Credit Fee in an amount equal to the LC Applicable Rate per annum on the daily average of such issued and undrawn Letters of Credit, which fee shall be payable, in arrears, on each January 1, April 1, July 1 and October 1 during the term. From the occurrence, and during the continuance, of an Event of Default, such fee shall be increased to be equal to 4% per annum on the daily average of such issued and undrawn Letters of Credit. For purposes hereof, the "LC Applicable Rate" shall be deemed to mean the respective percentages per annum determined, at any time, based upon the range into which the Borrower's Credit Rating then falls, in accordance with the following table. Any change in the Borrower's Credit Rating causing it to move to a different range on the table shall effect an immediate and automatic change in the LC Applicable Rate. In the event that the Borrower's Credit Rating is such that the Rating Agencies' ratings are split between a higher and lower range on the table below, the LC Applicable Rate shall be based upon the average of the LC Applicable Rates applicable to such ratings. In the event that only one Rating Agency has set the Borrower's Credit Rating, then the LC Applicable Rate shall be based on such rating only.
Range of Borrower's Credit Rating LC Applicable Rate (S&P/Moody's Ratings) (% per annum) --------------------- ------------- A-/A3 or higher 0.575 BBB+/Baa1 0.75 BBB/Baa2 0.875 BBB-/Baa3 1.00 Below BBB-/Baa3 1.50
1. Fees Non-Refundable. All fees set forth above shall be deemed to have been earned on the date payment is due in accordance with the provisions hereof and shall be non-refundable. The obligation of the Borrower to pay such fees in accordance with the provisions hereof shall be 26 27 binding upon the Borrower and shall inure to the benefit of the Bank regardless of whether any Loans are actually made. 1. Mandatory Expiration; Extension Options. The term (as such may be extended pursuant to this Section 2.9, the "Term") of the Commitment shall terminate and expire on the third (3rd) anniversary of the Effective Date (the "Maturity Date"), except that, subject to the following conditions, the Borrower shall have two options (each, an "Extension Option") exercisable upon delivery by the Borrower of written notice thereof to the Bank (each an "Extension Notice") on or before sixty (60) days prior to the Maturity Date, to extend the Term of the Commitment and the Maturity Date for additional one year periods, such that, in the event that the first Extension Option is exercised, the Term and the Maturity Date shall be extended until the fourth (4th) anniversary of the Extension Date and if both the first and the second Extension Options are exercised, the Term and the maturity Date shall be extended until the fifth (5th) anniversary of the Effective Date. The Borrower's right to exercise the first Extension Option shall be subject to the following terms and conditions: (i) the Bank shall have consented in writing to such Extension within thirty (30) days after receipt of the first Extension Notice, which consent shall be in the sole discretion of the Bank, (ii) no Default or Event of Default shall have occurred and be continuing both on the date the Borrower delivers the Extension Notice to the Bank and on March 31, 2000, (the "First Extension Date"), (iii) the Borrower's Credit Rating shall be no lower than BBB/Baa2, and (iv) the Borrower shall pay to the Bank on the First Extension Date a fee equal to 0.125% of the then uncancelled Commitment. The Borrower's right to exercise the second Extension Option shall be subject to the following terms and conditions: (i) the Borrower shall have exercised, and the Bank shall have consented to the exercise of, the first Extension Option, (ii) the Bank shall have consented in writing to such Extension within thirty (30) days after receipt of the second Extension Notice, which consent shall be in the sole discretion of the Bank, (iii) no Default or Event of Default shall have occurred and be continuing both on the date the Borrower delivers the second Extension Notice to the Bank and on March 31, 2001 (the "Second Extension Date"), (iv) the Borrower's Credit Rating shall be no lower than BBB/Baa2, and (v) the Borrower shall pay to the Bank on the Second Extension Date a fee equal to 0.125% of the then uncancelled Commitment. The Borrower's delivery of any Extension Notice shall be irrevocable. Upon the date of the termination of the Term, any Loans then outstanding (together with accrued interest thereon) shall be due and payable on such date and any undrawn and issued Letters of Credit shall be returned to the Bank. 1. Mandatory Prepayment. If at any time (i) the Borrower or any Consolidated Subsidiary sells, transfers, assigns or conveys assets, the book value of which (computed in accordance with GAAP but without deduction for depreciation) in the aggregate of all such sales, transfers, assignments, foreclosures, or conveyances occurring within the Term equals or exceeds $200,000,000 in any eighteen (18) month period, or (ii) aggregate Limited Minority Holdings of the Borrower and its 27 28 Consolidated Subsidiaries exceed fifteen percent (15%) of Combined Asset Value (the date either such event shall occur being the "Prepayment Date"), the Commitment shall be terminated and the Borrower shall be required to prepay all amounts outstanding hereunder in their entirety as if the Prepayment Date is the Maturity Date. The Borrower shall immediately make such prepayment together with interest accrued to the date of the prepayment on the principal amount prepaid and shall return or cause to be returned all Letters of Credit to the Bank. In connection with the prepayment of a EuroDollar Loan prior to the maturity thereof, the Borrower shall also pay any applicable expenses pursuant to Section 2.13. Amounts prepaid pursuant to this Section 2.10 may not be reborrowed. As used in this Section 2.10 only, the phrase "sells, transfers, assigns or conveys" shall not include (i) sales or conveyances among the Borrower and any Consolidated Subsidiaries, or (ii) mortgages secured by Real Property Assets. 1. Optional Prepayments. 1. The Borrower may, upon at least one (1) Domestic Business Day's notice to the Bank, prepay the Loan in whole at any time, or from time to time in part in amounts aggregating Five Hundred Thousand Dollars ($500,000) or any larger multiple of Five Hundred Thousand Dollars ($500,000), by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. 2. The Borrower may, upon at least one (1) Domestic Business Day's notice to the Bank (by 11:00 A.M. McLean, Virginia, time of such Domestic Business Day), reimburse the Bank for the amount of any drawing under a Letter of Credit in whole or in part in any amount. 3. The Borrower may at any time return any undrawn Letters of Credit to the Bank in whole, but not in part. 4. Except as provided in Article 7, the Borrower may not prepay all or any portion of the principal amount of any EuroDollar Loan prior to the end of the Interest Period applicable thereto unless the Borrower shall also pay any applicable expenses pursuant to Section 2.13. Any such prepayment shall be upon at least three (3) EuroDollar Business Days notice to the Bank. Each such optional prepayment shall be in the amounts set forth in Section 2.11(a) above. 5. The Borrower may not prepay any Money Market Loan. 6. The Borrower may at any time and from time to time cancel all or any part of the Commitment by the delivery to the Bank of a notice of cancellation within the applicable time periods set forth in Sections 2.11(a) and (d) if there are Loans then outstanding or, if there are no Loans outstanding at such time, upon at least five (5) Domestic Business Days notice to the Bank, whereupon, in either event, all or such portion of the Commitments, as applicable, shall terminate on the date set forth in such notice of cancellation, and, if there are any Loans then outstanding, the Borrower shall prepay, as applicable, all or such portion of Loans outstanding on such date in accordance with the requirements of Section 2.11(a) and (d). The Borrower shall be 28 29 permitted to designate in its notice of cancellation which Loans, if any, are to be prepaid. In no event shall the Borrower be permitted to cancel Commitments for which a Letter of Credit has been issued and is outstanding unless the Borrower returns such Letter of Credit to the Bank. 7. Any amounts so prepaid pursuant to Section 2.11(a), (b), (c) or (d) may be reborrowed. In the event the Borrower elects to cancel all or any portion of the Commitments pursuant to Section 2.11(f) hereof, such amounts may not be reborrowed. 1. General Provisions as to Payments. The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 12:00 Noon (McLean, Virginia, time) on the date when due, in Federal or other funds immediately available, to the Bank. Whenever any payment of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal or interest on the EuroDollar Loans shall be due on a day which is not a EuroDollar Business Day, the date for payment thereof shall be extended to the next succeeding EuroDollar Business Day unless such EuroDollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding EuroDollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. 2. Funding Losses. If the Borrower makes any payment of principal with respect to any EuroDollar Loan (pursuant to Articles II, VI or VII or otherwise) on any day other than the last day of the Interest Period applicable thereto, or the last day of an applicable period fixed pursuant to Section 2.7, or if the Borrower fails to borrow any EuroDollar Loan, or if the Borrower shall deliver a Notice of Interest Rate Election specifying that a EuroDollar Loan shall be converted on a date other than the first (1st) day of the then current Interest Period applicable thereto, after notice has been given to the Bank the Borrower shall reimburse the Bank within 15 days after certification by the Bank of such loss or expense for any resulting loss or expense incurred by it, including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or failure to borrow, provided that the Bank shall have delivered to the Borrower a certification as to the amount of such loss or expense, which certification shall set forth the basis for such loss or expense and shall be conclusive in the absence of manifest error. 3. Computation of Interest and Fees. Interest fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). 4. Use of Proceeds. The Borrower shall use the proceeds of the Loans for the purpose of property acquisitions, rehabilitation, construction, development, financing (except that Letters of Credit which are used for credit enhancement may only be used in connection with financings in the tax exempt market) and improvement of multi-family apartment buildings and general working capital needs of the Borrower. 29 30 5. Letter of Credit Usage Absolute. The obligations of the Borrower under this Agreement in respect of any Letter of Credit shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement (as the same may be amended from time to time) and such other agreement or instrument under all circumstances, including, without limitation, to the extent permitted by law, the following circumstances: 1. any lack of validity or enforceability of any Letter of Credit or any other agreement or instrument relating thereto (collectively, the "Letter of Credit Documents") or any Loan Document; 2. any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations of the Borrower in respect of the Letters of Credit or any other amendment or waiver of or any consent by the Borrower to departure from all or any of the Letter of Credit Documents or any Loan Document, provided that the Bank shall not consent to any such change or amendment unless previously consented to in writing by the Borrower; 3. any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the obligations of the Borrower in respect of the Letters of Credit; 4. the existence of any claim, set-off, defense or other right that the Borrower may have at any time against any beneficiary or any transferee of a Letter of Credit (or any Persons for whom any such beneficiary or any such transferee may be acting), the Bank (other than a defense based on the gross negligence or willful misconduct of the Bank) or any other Person, whether in connection with the Loan Documents, the transactions contemplated hereby or by the Letters of Credit Documents or any unrelated transaction; 5. any draft or any other document presented under or in connection with any Letter of Credit or other Loan Document proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; provided that payment by the Bank under such Letter of Credit against presentation of such draft or document shall not have constituted gross negligence or willful misconduct of the Bank; 6. payment by the Bank against presentation of a draft or certificate that does not comply with the terms of the Letter of Credit; provided that such payment shall not have constituted gross negligence or willful misconduct of the Bank; and 7. any other circumstance or happening whatsoever other than the payment in full of all obligations hereunder in respect of any Letter of Credit or any agreement or instrument relating to any Letter of Credit, whether or not similar to any of the foregoing, that might otherwise constitute a defense available to, or a discharge of, the Borrower; provided that such other circumstance or happening shall not have been the result of gross negligence or willful misconduct of the Bank. 30 31 1. Method of Electing Interest Rates. 1. The Loans included in each Borrowing shall bear interest initially at the rate required by this Agreement based on the Interest Period specified by the Borrower in the applicable Notice of Committed Borrowing. Thereafter, the Borrower may from time to time elect to continue such Loans as EuroDollar Loans for an additional Interest Period, in each case effective on the last day of the then current Interest Period applicable to such Loans, or on such other date designated by the Borrower in the Notice of Interest Rate Election, provided the Borrower shall pay any losses pursuant to Section 2.13. Each such election shall be made by delivering a notice (a "Notice of Interest Rate Election") to the Bank at least two (2) EuroDollar Business Days before the conversion or continuation selected in such notice is to be effective. A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Loans; provided that (i) the portion to which such Notice applies, and the remaining portion to which it does not apply, are each $500,000 or any larger multiple of $500,000, (ii) there shall be no more than fifteen (15) EuroDollar Loans outstanding at any time, (iii) no Event of Default has occurred and is continuing (upon the occurrence of an Event of Default, Section 2.7(c) would apply), and (iv) no Interest Period shall extend beyond the Maturity Date. 2. Each Notice of Interest Rate Election shall specify: 1. the Loans (or portion thereof) to which such notice applies; and 2. the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the requirements of subsection 2.17(a) above; and 3. the duration of the additional Interest Period. 1. CONDITIONS 1. Closing. The closing hereunder shall occur on the date (the "Closing Date") when each of the following conditions is satisfied (or waived by the Bank), each document to be dated the Closing Date unless otherwise indicated: 1. the Borrower shall have executed and delivered to the Bank a Note dated on or before the Closing Date complying with the provisions of Section 2.5; 2. the Borrower and the Bank shall have executed and delivered a duly executed original of this Agreement; 3. the Bank shall have received an opinion of David Hagner et. al., counsel for the Borrower, acceptable to the Bank and its counsel; 31 32 4. the Bank shall have received all documents the Bank may reasonably request relating to the existence of the Borrower, the authority for and the validity of this Agreement and the other Loan Documents, and any other matters relevant hereto, all in form and substance satisfactory to the Bank. Such documentation shall include, without limitation, the articles of incorporation of the Borrower, as amended, modified or supplemented to the Closing Date, certified to be true, correct and complete by a senior officer of the Borrower as of a date not more than ten (10) days prior to the Closing Date, together with a good standing certificate from the Secretary of State (or the equivalent thereof) of Maryland and from the Secretary of State (or the equivalent thereof) of each other State in which the Borrower is required to be qualified to transact business, each to be dated not more than thirty (30) days prior to the Closing Date; 5. the Bank shall have received all certificates, agreements and other documents and papers referred to in this Section 3.1 and Section 3.2, unless otherwise specified, in sufficient counterparts, satisfactory in form and substance to the Bank in its sole discretion; 6. the Borrower shall have taken all actions required to authorize the execution and delivery of this Agreement and the other Loan Documents and the performance thereof by the Borrower; 7. the Bank shall be satisfied that the Borrower is not subject to any present or contingent environmental liability which could have a Material Adverse Effect; 8. the Bank shall have received all fees due and payable pursuant to Section 2.8 hereof on or before the Closing Date, and the fees and expenses accrued through the Closing Date of the Bank's counsel; 9. the Bank shall have received copies of all consents, licenses and approvals, if any, required in connection with the execution, delivery and performance by the Borrower, and the validity and enforceability, of the Loan Documents, or in connection with any of the transactions contemplated thereby, and such consents, licenses and approvals shall be in full force and effect; and 10. the Bank shall have received the audited financial statements of the Borrower and its Consolidated Subsidiaries for the fiscal year ending December 31, 1996. 1. Borrowings. The obligation of the Bank to make a Loan or to issue a Letter of Credit on the occasion of any Borrowing is subject to the satisfaction of the following conditions: 1. the Closing Date shall have occurred on or prior to June 9, 1997; 2. receipt by the Bank of a Notice of Borrowing as required by Section 2.2 and 2.4 or 2.3; 3. immediately after such Borrowing, the aggregate outstanding principal amount of the Loans and Letter of Credit Usage will not exceed the aggregate amount of the Commitment; 32 33 4. immediately after such Borrowing, the aggregate outstanding undrawn issued Letters of Credit shall not exceed 50% of the Commitment; 5. immediately before and after such Borrowing, no Default or Event of Default shall have occurred and be continuing both before and after giving effect to the making of such Loans or issuing such Letters of Credit; 6. the representations and warranties of the Borrower contained in this Agreement shall be true and correct in all material respects on and as of the date of such Borrowing both before and after giving effect to the making of such Loans; 7. no law or regulation shall have been adopted, no order, judgment or decree of any governmental authority shall have been issued, and no litigation shall be pending, which does or seeks to enjoin, prohibit or restrain, the making or repayment of the Loans, the issuance of any Letter of Credit or the consummation of the transactions contemplated by this Agreement; and 8. no event, act or condition shall have occurred after the Closing Date which, in the reasonable judgment of the Bank has had or is likely to have a Material Adverse Effect; Each Borrowing hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (c), (d), (e), (f), (g), and (h) of this Section. In the event that the Bank in good faith and in accordance with commercially reasonable standards believes that the Borrower is not entitled to request a Borrowing as a result of the occurrence of a Material Adverse Effect, then the Bank shall notify the Borrower of the existence of such Material Adverse Effect, together with a reasonable description thereof. Notwithstanding the foregoing, the Bank shall have no obligation to make, continue or convert any Loans hereunder in the event that the Bank reasonably believes that a Material Adverse Effect has occurred. 1. REPRESENTATIONS AND WARRANTIES In order to induce the Bank to make the Loans or issue the Letters of Credit, the Borrower makes the following representations and warranties as of the Closing Date. Such representations and warranties shall survive the effectiveness of this Agreement, the execution and delivery of the other Loan Documents and the making of the Loans and the issuance of the Letters of Credit or participations therein. 1. Existence and Power. The Borrower is a corporation, duly formed, validly existing and in good standing as a corporation under the laws of Maryland and has all powers and all material 33 34 governmental licenses, authorizations, consents and approvals required to own its property and assets and carry on its business as now conducted or as it presently proposes to conduct and has been duly qualified and is in good standing in every jurisdiction in which the failure to be so qualified and/or in good standing is likely to have a Material Adverse Effect. 2. Power and Authority. The Borrower has the corporate power and authority to execute, deliver and carry out the terms and provisions of each of the Loan Documents and has taken all necessary corporate action to authorize the execution and delivery on behalf of the Borrower and the performance by the Borrower of such Loan Documents. The Borrower has duly executed and delivered each Loan Document, and each such Loan Document constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms, except as enforceability may be limited by applicable insolvency, bankruptcy or other laws affecting creditors rights generally, or general principles of equity whether such enforceability is considered in a proceeding in equity or at law. 3. No Violation. Neither the execution, delivery or performance by or on behalf of the Borrower of the Loan Documents, nor compliance by the Borrower with the terms and provisions thereof nor the consummation of the transactions contemplated by the Loan Documents, (i) will materially contravene any applicable provision of any law, statute, rule, regulation, order, writ, injunction or decree of any court or governmental instrumentality or (ii) will materially conflict with or result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of the Borrower or any of its Consolidated Subsidiaries pursuant to the terms of any indenture, mortgage, deed of trust, or other agreement or other instrument to which the Borrower (or of any partnership of which the Borrower is a partner) or any of its Consolidated Subsidiaries is a party or by which it or any of its property or assets is bound or to which it is subject, or (iii) will cause a material default by the Borrower under any organizational document of any Person in which the Borrower has an interest, or cause a material default under the Borrower's articles of incorporation or by-laws. 4. Financial Information. 1. The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries dated as of December 31, 1996, and March 31, 1997, and the related consolidated statements of the Borrower's financial position for the fiscal periods then ended, reported on in the case of periods ended December 31, 1996, by Coopers & Lybrand and set forth in the Borrower's SEC Reports, copies of which have been delivered to the Bank, fairly present, in conformity with GAAP, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal periods. 2. Since December 31, 1996, (i) nothing has occurred having a Material Adverse Effect upon the Borrower and its Consolidated Subsidiaries (including without limitation the Real 34 35 Property Assets) considered as a whole and (ii) except as previously disclosed to the Bank, the Borrower has not incurred any material indebtedness or guaranty. 1. Litigation. There is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, (i) the Borrower or any of its Consolidated Subsidiaries, (ii) the Loan Documents or any of the transactions contemplated by the Loan Documents or (iii) any of its assets, before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could, individually or in the aggregate, have a Material Adverse Effect upon the Borrower or its Consolidated Subsidiaries or which in any manner draws into question the validity of this Agreement or the other Loan Documents. 2. Compliance with ERISA. 1. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multi-employer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. 2. The transactions contemplated by the Loan Documents will not constitute a nonexempt prohibited transaction (as such term is defined in Section 4975 of the Code or Section 406 of ERISA) that could subject the Bank to any tax or penalty or prohibited transactions imposed under Section 4975 of the Code or Section 502(i) of ERISA. 3. The Borrower is a Real Estate Operating Company ("REOC") within the meaning of Regulation Section 2510.3101(e) of ERISA. 1. Environmental Matters. In the ordinary course of its business, the Borrower conducts an ongoing review of' the effect of Environmental Laws on the business, operations and properties of the Borrower and its Consolidated Subsidiaries, including without limitation the Real Property Assets, in the course of which it identifies and evaluates associated liabilities and costs (including, without limitation, any capital or operating expenditures required for clean-up or closure of properties presently or previously owned, any capital or operating expenditures required to achieve or maintain compliance with environmental protection standards imposed by law or as a condition of any license, permit or contract, any related constraints on operating activities, including any periodic or permanent shutdown of any facility or reduction in the level 35 36 of or change in the nature of operations conducted thereat, any costs or liabilities in connection with off-site disposal of wastes or Materials of Environmental Concern, and any actual or potential liabilities to third parties, including employees, and any related costs and expenses). On the basis of this review, the Borrower has reasonably concluded that such associated liabilities and costs, including the costs of compliance with Environmental Laws, are unlikely to have a Material Adverse Effect on the Borrower and its Consolidated Subsidiaries. 2. Taxes. United States Federal income tax returns of the Borrower and its Consolidated Subsidiaries have been examined and closed through the fiscal year ended December 31, 1996. The Borrower and its Consolidated Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any Consolidated Subsidiary. The charges, accruals and reserves on the books of the Borrower and its Consolidated Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate. 3. Full Disclosure. All information heretofore furnished by the Borrower to the Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrower to the Bank will be, true and accurate in all material respects on the date as of which such information is stated or certified. The Borrower has disclosed to the Bank in writing any and all facts which have or may have (to the extent the Borrower can now reasonably foresee) a Material Adverse Effect on the Borrower and its Consolidated Subsidiaries or materially affect the ability of the Borrower to perform its obligations under this Agreement or the other Loan Documents. 4. Solvency. On the Closing Date and after giving effect to the transactions contemplated by the Loan Documents occurring on the Closing Date, the Borrower will be Solvent. 5. Use of Proceeds; Margin Regulations. All proceeds of the Loan or Letters of Credit will be used by the Borrower only in accordance with the provisions hereof. No part of the proceeds of the Loan will be used by the Borrower to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock. Neither the making of the Loan nor the use of the proceeds thereof will violate or be inconsistent with the provisions of Regulations G, T, U or X of the Federal Reserve Board. 6. Governmental Approvals. No order, consent, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with the execution, delivery and performance of any Loan Document or the consummation of any of the transactions contemplated thereby other than those that have already been duly made or obtained and remain in full force and effect. 7. Investment Company Act; Public Utility Holding Company Act. The Borrower is not (x) an "investment company" or a company "controlled" by an "investment company," within the 36 37 meaning of the Investment Company Act of 1940, as amended, (y) a "holding company" or a "subsidiary company" of a "holding company" or an "affiliate" of either a "holding company" or a "subsidiary company" within the meaning of the Public Utility Holding Company Act of 1935, as amended, or (z) subject to any other federal or state law or regulation which purports to restrict or regulate its ability to borrow money. 8. Patents, Trademarks, etc. The Borrower has obtained and holds in full force and effect all patents, trademarks, servicemarks, tradenames, copyrights and other such rights, free from burdensome restrictions, which are necessary for the operation of its business as presently conducted, the impairment of which is likely to have a Material Adverse Effect. 9. Ownership of Property. Schedule 4.15(a) attached hereto and made a part hereof sets forth all the real property owned or leased by the Borrower and Persons in which the Borrower, directly or indirectly, owns an interest as of the Closing Date. As of the Closing Date, the Borrower and such Persons have good and insurable fee simple title to all of such real property, subject to customary encumbrances and liens as of the date of this Agreement. As of the date of this Agreement, there are no mortgages, deeds of trust, indentures, debt instruments or other agreements creating a Lien against any of the Real Property Assets except as disclosed on Schedule 4.15(b). 10. No Default. No Default or Event of Default exists under or with respect to any Loan Document and the Borrower is not in default in any material respect beyond any applicable grace period under or with respect to any other material agreement, instrument or undertaking to which it is a party or by which it or any of its property is bound in any respect, the existence of which default is likely to result in a Material Adverse Effect. 11. Licenses, etc. The Borrower has obtained and holds in full force and effect, all franchises, licenses, permits, certificates, authorizations, qualifications, accreditation, easements, rights of way and other consents and approvals which are necessary for the operation of its businesses as presently conducted, the absence of which is likely to have a Material Adverse Effect. 12. Compliance With Law. The Borrower and each of the Real Property Assets are in compliance with all laws, rules, regulations, orders, judgments, writs and decrees, including, without limitation, all building and zoning ordinances and codes, the failure to comply with which is likely to have a Material Adverse Effect. 13. No Burdensome Restrictions. The Borrower is not a party to any agreement or instrument or subject to any other obligation or any charter or corporate or partnership restriction, as the case may be, which, individually or in the aggregate, is likely to have a Material Adverse Effect. 14. Brokers' Fees. The Borrower has not dealt with any broker or finder with respect to the transactions contemplated by this Agreement or otherwise in connection with this Agreement, 37 38 and none of such parties has done any acts, had any negotiations or conversation, or made any agreements or promises which will in any way create or give rise to any obligation or liability for the payment by the Borrower of any brokerage fee, charge, commission or other compensation to any party with respect to the transactions contemplated by the Loan Documents, other than the fees payable hereunder. 15. Labor Matters. There are no collective bargaining agreements or Multi-employer Plans covering the employees of the Borrower and none of such Persons has suffered any strikes, walkouts, work stoppages or other material labor difficulty within the last five years. 16. Insurance. The Borrower currently maintains insurance at 100% replacement cost insurance coverage in respect of each of the Real Property Assets, as well as comprehensive general liability insurance (including "builders' risk") against claims for personal, and bodily injury and/or death, to one or more persons, or property damage, as well as workers' compensation insurance, in each case with respect to the Real Property Assets with insurers having an A.M. Best policyholders' rating of not less than A-VIII in amounts that a prudent owner of assets such as the Real Property Assets would maintain. 17. Organizational Documents. The documents delivered pursuant to Section 3.1(d) constitute, as of the Closing Date, all of organizational documents (together with all amendments and modifications thereof) of the Borrower. The Borrower represents that it has delivered to the Bank true, correct and complete copies of each of the documents set forth in this Section 4.23. 18. Principal Offices. As of the Closing Date, the principal office, chief executive office and principal place of business of the Borrower is 15 River Road, Wilton, Connecticut 06897. 19. REIT Status. The Borrower qualifies as a real estate investment trust under the Code. 1. AFFIRMATIVE AND NEGATIVE COVENANTS The Borrower covenants and agrees that, so long as the Commitment or any portion thereof remains outstanding: 1. Information. The Borrower will deliver to the Bank: 1. as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of Borrower's financial position for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Securities and Exchange 38 39 Commission by Coopers & Lybrand or other independent public accountants of nationally recognized standing; 2. as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Borrower, (i) a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of Borrower's financial position for such quarter and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in the case of such Borrower's financial position in comparative form the figures for the corresponding quarter and the corresponding portion of the Borrower's previous fiscal year, and (ii) and such other information reasonably requested by the Bank; 3. simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the chief financial officer or the chief accounting officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Section 5.8 below on the date of such financial statements; (ii) stating whether, to such officer's knowledge, any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; and (iii) certifying (x) that such financial statements fairly present the financial condition and the results of operations of the Borrower on the dates and for the periods indicated, on the basis of GAAP, with respect to the Borrower subject, in the case of interim financial statements, to normally recurring year-end adjustments, and (y) that such officer has reviewed the terms of the Loan Documents and has made, or caused to be made under his or her supervision, a review in reasonable detail of the business and condition of the Borrower during the period beginning on the date through which the last such review was made pursuant to this Section 5.1(c) (or, in the case of the first certification pursuant to this Section 5.1(c), the Closing Date) and ending on a date not more than ten (10) Domestic Business Days prior to the date of such delivery and that (1) on the basis of such financial statements and such review of the Loan Documents, no Event of Default existed under Section 6.1(b) with respect to Sections 5.8 and 5.9 at or as of the date of said financial statements, and (2) on the basis of such review of the Loan Documents and the business and condition of the Borrower, to the best knowledge of such officer, no Default or Event of Default under any other provision of Section 6.1 occurred or, if any such Default or Event of Default has occurred, specifying the nature and extent thereof and, if continuing, the action the Borrower proposes to take in respect thereof and (3) no event has occurred which would give rise to a mandatory prepayment pursuant to Section 2.10 hereof. Such certificate shall, set forth the calculations required to establish the matters described in clauses (i) and (iii) above; 4. simultaneously with the delivery of each set of financial statements referred to in clause (a) above, a statement of the firm of independent public accountants which reported on such statements (i) whether anything has come to their attention to cause them to believe that any 39 40 Default existed on the date of such statements and (ii) confirming the calculations set forth in the officer's certificate, delivered simultaneously therewith pursuant to clause (c) above; 5. (i) within five (5) days after any officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (ii) promptly and in any event within ten (10) days after the Borrower obtains knowledge thereof, notice of (x) any litigation or governmental proceeding pending or threatened against the Borrower or the Real Property Assets as to which there is a reasonable possibility of an adverse determination and which, if adversely determined, is likely to individually or in the aggregate, result in a Material Adverse Effect, (y) any other event, act or condition which is likely to result in a Material Adverse Effect, and (z) any event giving rise to a mandatory prepayment pursuant to Section 2.10. 6. promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; 7. promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower shall have filed with the Securities and Exchange Commission; 8. if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multi-employer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multi-employer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth details as to such occurrence and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; 40 41 9. promptly and in any event within five (5) Domestic Business Days after the Borrower obtains actual knowledge of any of the following events, a certificate of the Borrower, executed by an officer of the Borrower, specifying the nature of such condition and the Borrower's or, if the Borrower has actual knowledge thereof, the Environmental Affiliate's proposed initial response thereto: (i) the receipt by the Borrower, or, if the Borrower has actual knowledge thereof, any of the Environmental Affiliates of any communication (written or oral), whether from a governmental authority, citizens group, employee or otherwise, that alleges that the Borrower, or, if the Borrower has actual knowledge thereof, any of the Environmental Affiliates, is not in compliance with applicable Environmental Laws, and such noncompliance is likely to have a Material Adverse Effect, (ii) the Borrower shall obtain actual knowledge that there exists any Environmental Claim pending against the Borrower or any Environmental Affiliate or (iii) the Borrower obtains actual knowledge of any release, emission, discharge or disposal of any Material of Environmental Concern that is likely to form the basis of any Environmental Claim against the Borrower or any Environmental Affiliate which in any such event is likely to have a Material Adverse Effect; 10. promptly and in any event within five (5) Domestic Business Days after receipt of any material notices or correspondence from any company or agent for any company providing insurance coverage to the Borrower relating to any loss in excess of $250,000 of the Borrower, copies of such notices and correspondence; 11. within 45 days after the end of each quarter of each fiscal year of the Borrower, an updated Schedule 4.15(a) and 4.15(b), certified by the chief financial officer of the Borrower as true, correct and complete as of the date such updated schedules are delivered; 12. within 45 days after June 30 and December 31, a cash flow statement with respect to each Unleveraged Asset, showing year to date summaries of cash receipts, payments and disbursements with respect to each Unleveraged Asset, together with a certification of the chief financial officer of the Borrower stating that such cash flow statement is true and correct and fairly represents the income and expenses of such Unleveraged Asset; 13. within 45 days after June 30 and December 31, a statement containing (i) a listing of all new construction projects and Real Property Assets then undergoing significant rehabilitation (collectively, "Development Projects"), (ii) a list of overall cash payments and disbursements for each such Development Project, and (iii) a reasonable good faith estimate of the cost to complete each such Development Project, such that such Development Project is open to the public and available for rental, together with a certification of the chief financial officer of the Borrower certifying that, as of the date of such certification, such statement is true and correct and fairly represent the scope, expenses, costs of completion of such Development Projects; 14. within 45 days after the end of each fiscal quarter a letter from the Chief Financial Officer of the Borrower in the form of EXHIBIT B; and 41 42 15. from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Bank may reasonably request in writing. 1. Payment of Obligations. The Borrower and its Consolidated Subsidiaries will pay and discharge, at or before maturity, all its respective material obligations and liabilities including, without limitation, any obligation pursuant to any agreement by which it or any of its properties is bound and any liabilities, except where such liabilities may be contested in good faith by appropriate proceedings, and will maintain in accordance with GAAP, appropriate reserves for the accrual of any of the same. Notwithstanding the foregoing, the Borrower and its Consolidated Subsidiaries will not be required to pay and discharge at or before maturity any Debt that is Non-Recourse Debt provided that (i) the Borrower notifies the Bank no less than ten (10) days after the date a monetary default beyond applicable notice and grace periods occurs under such Non-Recourse Debt, which notice shall set forth the Borrower's good faith belief of the outstanding principal amount of such Non-Recourse Debt which is in default and (ii) the principal amount of Non-Recourse Debt for which, without duplication, either a monetary default has occurred beyond applicable notice and grace periods and is continuing or the Real Property Asset securing such Non-Recourse Debt has been foreclosed by or surrendered to the holder of such Non-Recourse Debt (such Non-Recourse Debt being hereinafter referred to as "Defaulted Non-Recourse Debt") does not, during the Term exceed $75,000,000 in the aggregate, and the Borrower delivers a certificate of its chief financial officer confirming to the Bank that (1) assuming the Borrower is in default under such Non-Recourse Debt, and assuming the foreclosure or surrender of the Real Property Asset securing such Non-Recourse Debt, that Borrower is still in compliance with the covenants set forth in Section 5.8 hereof, and (2) that the aggregate principal amount of Defaulted Non-Recourse Debt has not exceeded $75,000,000 at any time during the Term. 2. Maintenance of Property; Insurance. 1. The Borrower will keep, and will cause each Consolidated Subsidiary to keep, all property useful and necessary in its business, including without limitation the Real Property Assets (for so long as it constitutes Real Property Assets), in good repair, working order and condition, ordinary wear and tear excepted, except that, with respect to Real Property Assets securing Defaulted Non-Recourse Debt which have not been foreclosed by or surrendered to the holder of such Non-Recourse Debt, the Borrower will only be required to maintain such assets in the manner required by law, code or statute. 2. The Borrower shall maintain insurance comparable to that described in Section 4.22 hereof with insurers meeting the qualifications described therein, which insurance shall in any event not provide for materially less coverage than the insurance in effect on the Closing Date, and (b) furnish to the Bank from time to time, upon written request, certificates of insurance and such other information relating to such insurance as the Bank may reasonably request. The Borrower will deliver to the Bank (i) on the date of the first Borrowing hereunder, a certificate dated such date showing the amount of coverage as of such date, (ii) upon request of the Bank 42 43 from time to time full information as to the insurance carried, (iii) within five (5) days of receipt of notice from any insurer a copy of any notice of cancellation or material change in coverage from that existing on the date of this Agreement and (iv) forthwith, notice of any cancellation or nonrenewal of coverage by the Borrower. 1. Conduct of Business and Maintenance of Existence. The Borrower will continue to engage in business of the same general type as now conducted by the Borrower, and will preserve, renew and keep in full force and effect, its corporate existence and its respective rights, privileges and franchises necessary or desirable in the normal conduct of business. 2. Compliance with Laws. The Borrower will comply in all material respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws, and all zoning and building codes with respect to the Real Property Assets and ERISA and the rules and regulations thereunder) except where the necessity of compliance therewith is contested in good faith by appropriate proceedings. 3. Inspection of Property, Books and Records. The Borrower will keep proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit representatives of the Bank to visit and inspect any of its properties, including without limitation the Real Property Assets, to examine and make abstracts from any of its books and records and to discuss its affairs, finances and accounts with its officers, employees and independent public accountants, all at such reasonable times, upon reasonable prior notice and as often as may reasonably be desired. 4. Existence. The Borrower shall do or cause to be done, all things necessary to preserve and keep in full force and effect its existence and its patents, trademarks, service marks, tradenames, copyrights, franchises, licenses, permits, certificates, authorizations, qualifications, accreditation, easements, rights of way and other rights, consents and approvals the nonexistence of which is likely to have a Material Adverse Effect. 5. Financial Covenants. 1. Debt. Debt of the Borrower and its Consolidated Subsidiaries will at no time exceed 50% of Combined Asset Value. 2. Minimum Consolidated Tangible Net Worth. Consolidated Tangible Net Worth of the Borrower and its Consolidated Subsidiaries will at no time be less than $400,000,000. 3. Dividends. The Borrower will not, as determined on an aggregate basis, pay any dividends in excess of 95% of the Borrower's annual FFO, except to the extent necessary to maintain the Borrower's status as a real estate investment trust. 43 44 4. Fixed Charge Coverage. The ratio of Net Operating Cash Flow of the Borrower and its Consolidated Subsidiaries to Fixed Charges of the Borrower and its Consolidated Subsidiaries (for any period of four consecutive fiscal quarters) shall at all times be equal to or greater than 2:1. 5. Unleveraged Asset Ratio. The ratio of Unleveraged Asset Value of the Borrower to Unsecured Debt of the Borrower shall at no time be less than 2:1. 6. Unimproved Land Value Percentage. Unimproved Land Value of the Borrower and its Consolidated Subsidiaries shall at no time exceed ten percent (10%) of Combined Asset Value of the Borrower and its Consolidated Subsidiaries. 7. Secured Debt Ratio. Secured Debt of the Borrower and its Consolidated Subsidiaries shall at no time exceed 37.5% of Combined Asset Value of the Borrower and its Consolidated Subsidiaries. 8. Limits on Negative Pledges. Neither the Borrower nor any Consolidated Subsidiary will agree to limits on Liens on Unleveraged Assets except in connection with the public offering of unsecured Debt of the Borrower. 9. Combined Asset Value. The Combined Asset Value of the Borrower and its Consolidated Subsidiaries shall at no time fall below $385,000,000. 10. Construction Asset Costs. Construction Asset Costs of the Borrower and its Consolidated Subsidiaries shall at no time (i) during the period commencing the date hereof and ending on the earlier of (x) June 30, 1997, or (y) the date that the Real Property Asset known as "Avalon Cove," located in jersey City, New Jersey, has obtained a certificate of occupancy or its equivalent (such earlier date, being the "End Date") exceed thirty-eight percent (38%) of Stabilized Real Estate Value and (ii) during the period commencing on the End Date and continuing to the Maturity Date, exceed thirty percent (30%) of Stabilized Real Estate Value. 1. Restriction on Fundamental Changes. 1. The Borrower shall not enter into any merger or consolidation, unless (i) the Borrower is the surviving entity, (ii) the entity which is merged into Borrower is predominately in the multi-family real estate business and (iii) the creditworthiness of the surviving entity's long term unsecured debt or implied senior debt, as applicable, is not lower than the Borrower's creditworthiness two months immediately preceding such merger. The Borrower shall not liquidate, wind-up or dissolve (or suffer any liquidation or dissolution), discontinue its business or convey, lease, sell, transfer or otherwise dispose of, in one transaction or series of transactions, all or any substantial part of its business or property, whether now or hereafter acquired. Nothing 44 45 in this Section shall be deemed to prohibit the sale or leasing of portions of the Real Property Assets in the ordinary course of business. 2. The Borrower shall not amend its articles of incorporation, by-laws, or other organizational documents in any manner that would have a Material Adverse Effect without the Bank's consent, which shall not be unreasonably withheld. 3. The Borrower shall deliver to the Bank copies of all amendments to its articles of incorporation, by-laws, or other organizational documents no less than ten (10) days after the effective date of any such amendment. 1. Changes in Business. The Borrower shall not enter into any business which is substantially different from that conducted by the Borrower on the Closing Date after giving effect to the transactions contemplated by the Loan Documents. 2. Fiscal Year; Fiscal Quarter. The Borrower shall not change its fiscal year or any of its fiscal quarters. 3. Margin Stock. None of the proceeds of the Loan will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any Margin Stock. 4. Unsecured Debt. No Consolidated Subsidiary shall create, incur or guaranty any Unsecured Debt (excluding trade payables incurred in the ordinary course of business). 5. No Other Unsecured Debt. Except as provided for in this Agreement and in the Existing Agented Facility, the Borrower shall not, without the prior written approval of the Bank, borrow any additional funds on an unsecured basis, obtain any additional unsecured loans or unsecured revolving credit facilities or pledge any collateral to any Bank under the Existing Agented Facility. The foregoing shall not be construed to prevent the Borrower from incurring trade payables in the ordinary course of business. 1. DEFAULTS 1. Events of Default. If one or more of the following events ("Events of Default") shall have occurred and be continuing: 1. the Borrower shall fail to pay when due any principal of, or interest on, the Loan, any fees or any other amount payable hereunder; 2. the Borrower shall fail to observe or perform any covenant contained in Section 5.8 (a), (b), (c), (d), (e), (g), (h), (i) or (j), Section 5.9 (a) or (b), or Sections 5.10 to 5.14, inclusive; 45 46 3. the Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 30 days after written notice thereof has been given to the Borrower by the Bank, or if such default is of such a nature that it cannot be completely remedied within said period of thirty (30) days (other than payment of any monetary amount or a default pursuant to Section 5.8(f)) such additional period of time as may be reasonably necessary to cure same, provided the Borrower commences such cure within said thirty (30) day period and diligently prosecutes same, until completion, but in no event shall such extended period exceed one hundred twenty (120) days; 4. any representation, warranty, certification or statement made by the Borrower in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); 5. the Borrower shall default in the payment when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) of any amount owing in respect of any Debt which is not Non-Recourse Debt or Debt guaranteed by the Borrower (other than the Obligations) and such default shall continue beyond the giving of any required notice and the expiration of any applicable grace period; or the Borrower shall default in the performance or observance of any obligation or condition with respect to any such Debt or any other event shall occur or condition exist beyond the giving of any required notice and the expiration of any applicable grace period, if the effect of such default, event or condition is to accelerate the maturity of any such indebtedness or to permit (without any further requirement of notice or lapse of time) the holder or holders thereof, or any trustee or agent for such holders, to accelerate the maturity of any such indebtedness; 6. the aggregate principal amount of Defaulted Non-Recourse Debt shall exceed $75,000,000 at any time during the Term; 7. the Borrower shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; 8. an involuntary case or other proceeding shall be commenced against the Borrower seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and 46 47 unstayed for a period of seventy-five (75) days; or an order for relief shall be entered against the Borrower under the federal bankruptcy laws as now or hereafter in effect; 9. one or more judgments or decrees in an aggregate amount of Ten Million Dollars ($10,000,000) or more shall be entered by a court or courts of competent jurisdiction against the Borrower or its Consolidated Subsidiaries (other than any judgment as to which, and only to the extent, a reputable insurance company has acknowledged coverage of such claim in writing) and (x) any such judgments or decrees shall not be stayed, discharged, paid, bonded or vacated within ten (10) days or (y) enforcement proceedings shall be commenced by any creditor on any such judgments or decrees; 10. there shall be a change in the majority of the Board of Directors of the Borrower during any twelve month period; 11. any Person (including affiliates of such Person) shall acquire more than twenty percent (20%) of the common shares of the Borrower; 12. the Borrower shall cease at any time to qualify as a real estate investment trust under the Code; 13. if any Termination Event with respect to a Plan shall occur as a result of which Termination Event or Events any member of the ERISA Group has incurred or may incur any liability to the PBGC or any other Person, and the sum (determined as of the date of occurrence of such Termination Event) of the insufficiency of such Plan and the insufficiency of any and all other Plans with respect to which such a Termination Event shall occur and be continuing (or, in the case of a Multi-employer Plan with respect to which a Termination Event described in clause (ii) of the definition of Termination Event shall occur and be continuing, the liability of the Borrower and the ERISA Affiliates related thereto) is equal to or greater than $1,000,000 and, in the case of a Termination Event with respect to a Plan of any ERISA Affiliate other than any Borrower, the liability therefor could reasonably be asserted against any member of the ERISA Group; and 14. if any member of the ERISA Group shall commit a failure described in Section 402(f)(1) of ERISA or Section 412(n)(1) of the Code and the amount of the lien determined under Section 402(f)(3) of ERISA or Section 412(n)(3) of the code that could reasonably be expected to be imposed on any member of the ERISA Group or their assets in respect of such failure shall be equal to or greater than $1,000,000; and 15. an Event of Default shall occur under the Existing Agented Facility and the same shall remain uncured or unwaived (any such waiver shall be in writing) after the expiration of applicable grace and cure periods. 1. Rights and Remedies. 47 48 1. Upon the occurrence of any Event of Default described in Sections 6.1(f), (g) or (h), the Commitment and any obligation to issue Letters of Credit hereunder shall immediately terminate and the unpaid principal amount of, and any and all accrued interest on, the Loan and any and all accrued fees and other Obligations hereunder shall automatically become immediately due and payable, with all additional interest from time to time accrued thereon and without presentation, demand, or protest or other requirements of any kind (including, without limitation, valuation and appraisement, diligence, presentment, notice of intent to demand or accelerate and notice of acceleration), all of which are hereby expressly waived by the Borrower; and upon the occurrence and during the continuance of any other Event of Default, the Bank may, by written notice to the Borrower, terminate the Commitment and any obligation to issue Letters of Credit hereunder and may, in addition to the exercise of all of the rights and remedies permitted the Bank at law or equity or under the Note and this Agreement, declare the unpaid principal amount of and any and all accrued and unpaid interest on the Loan and any and all accrued fees and other Obligations hereunder to be, and the same shall thereupon be, immediately due and payable with all additional interest from time to time accrued thereon and without presentation, demand, or protest or other requirements of any kind other than as provided in the Loan Documents (including, without limitation, valuation and appraisement, diligence, presentment, notice of intent to demand or accelerate and notice of acceleration), all of which are hereby expressly waived by the Borrower. 1. Actions in Respect of Letters of Credit. 1. If, at any time and from time to time, any Letter of Credit shall have been issued hereunder and an Event of Default shall have occurred and be continuing, then, upon the occurrence and during the continuation thereof, the Bank may make a demand upon the Borrower to, and forthwith upon such demand (but in any event within ten (10) days after such demand), the Borrower shall pay to the Bank, in same day funds at the Bank's office designated in such demand, for deposit in a special cash collateral account (the "Letter of Credit Collateral Account") to be maintained in the name of the Bank and under its sole dominion and control, an amount equal to the amount of the Letter of Credit Usage under the Letters of Credit. Interest shall accrue on the Letter of Credit Collateral Account at a rate equal to the rate on overnight funds. 2. The Borrower hereby pledges and assigns to the Bank and grants to the Bank a lien on and a security interest in the following collateral (the "Letter of Credit Collateral"): 1. the Letter of Credit Collateral Account, all cash deposited therein and all certificates and instruments, if any, from time to time representing or evidencing the Letter of Credit Collateral Account; 48 49 2. all notes, certificates of deposit and other instruments from time to time hereafter delivered to or otherwise possessed by the Bank for or on behalf of the Borrower in substitution for or in respect of any or all of the then existing Letter of Credit Collateral; 3. all interest, dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the then existing Letter of Credit Collateral; and 4. to the extent not covered by the above clauses, all proceeds of any or all of the foregoing Letter of Credit Collateral. The lien and security interest granted hereby secures the payment of all obligations of the Borrower now or hereafter existing hereunder and under any other Loan Document. 1. The Borrower hereby authorizes the Bank to apply, from time to time after funds are deposited in the Letter of Credit Collateral Account, funds then held in the Letter of Credit Collateral Account to the payment of any amounts, in such order as the Bank may elect, as shall have become or shall become due and payable by the Borrower to the Bank in respect of the Letters of Credit. 2. Neither the Borrower nor any Person claiming or acting on behalf of or through the Borrower shall have any right to withdraw any of the funds held in the Letter of Credit Collateral Account, except as provided in Section 6.3(h). 3. The Borrower agrees that it will not (i) sell or otherwise dispose of any interest in the Letter of Credit Collateral or (ii) create or permit to exist any lien, security interest or other charge or encumbrance upon or with respect to any of the Letter of Credit Collateral, except for the security interest created by this Section 6.3. 4. If any Event of Default shall have occurred and be continuing, the Bank may, in its sole discretion, without notice to the Borrower except as required by law and at any time from time to time, charge, set off or otherwise apply all or any part of first, (x) amounts previously drawn on any Letter of Credit that have not been reimbursed by the Borrower and (y) any Letter of Credit Usage described in clause (ii) of the definition thereof that are then due and payable and second, any other unpaid Obligations then due and payable against the Letter of Credit Collateral Account or any part thereof, in such order as the Bank shall elect. The Bank may also exercise, in its sole discretion, in respect of the Letter of Credit Collateral Account, in addition to the other rights and remedies provided herein or otherwise available to it, all the rights and remedies of a secured party upon default under the Uniform Commercial Code in effect in the Commonwealth of Virginia at that time. 5. The Bank shall be deemed to have exercised reasonable care in the custody and preservation of the Letter of Credit Collateral if the Letter of Credit Collateral is accorded 49 50 treatment substantially equal to that which the Bank accords its own property, it being understood that, assuming such treatment, the Bank shall not have any responsibility or liability with respect thereto. 6. At such time as all Events of Default have been cured or waived in writing, all amounts remaining in the Letter of Credit Collateral Account shall be promptly returned to the Borrower. Absent such cure or written waiver, any surplus of the funds held in the Letter of Credit Collateral Account and remaining after payment in full of all of the Obligations of the Borrower hereunder and under any other Loan Document after the Maturity Date shall be paid to the Borrower or to whomsoever may be lawfully entitled to receive such surplus. 1. CHANGE IN CIRCUMSTANCES 1. Increased Cost and Reduced Return. 1. If, on or after (x) the date hereof, in the case of any Committed Loan or any obligation to make Committed Loans, or (y) the date of the related Money Market Quote, in the case of any Money Market Loan, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System (but excluding with respect to any EuroDollar Loan any such requirement with respect to which the Bank is entitled to compensation during the relevant Interest Period under Section 2.16)), special deposit, insurance assessment or similar requirement against assets of, deposits with or for the account of, or credit extended by, the Bank or shall impose on the Bank or on the London interbank market any other condition affecting its EuroDollar Loans, its Note, or its obligation to make EuroDollar Loans, and the result of any of the foregoing is to increase the cost to the Bank of making or maintaining any EuroDollar Loan, or to reduce the amount of any sum received or receivable by the Bank under this Agreement or under its Note with respect thereto, by an amount deemed by the Bank to be material, then, within 15 days after demand by the Bank, the Borrower shall pay to the Bank such additional amount or amounts as will compensate the Bank for such increased cost or reduction. 2. If the Bank shall have reasonably determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not 50 51 having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of the Bank (or its Parent) as a consequence of the Bank's obligations hereunder to a level below that which the Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount reasonably deemed by the Bank to be material, then from time to time, within fifteen (15) days after demand by the Bank, the Borrower shall pay to the Bank such additional amount or amounts as will compensate the Bank for such reduction. 1. Taxes. 1. Any and all payments by the Borrower to or for the account of the Bank hereunder or under any other Loan Document shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding taxes imposed on the Bank's income, and franchise taxes imposed on the Bank, by the jurisdiction under the laws of which the Bank is organized or any political subdivision thereof and, taxes imposed on its income, and franchise or similar taxes imposed on it (all such non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note or Letter of Credit or participation therein to the Bank (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 7.2) the Bank receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Bank, the original or a certified copy of a receipt evidencing payment thereof. 2. In addition, the Borrower agrees to pay any present or future stamp or documentary taxes and any other excise or property taxes, or charges or similar levies which arise from any payment made hereunder or under any Note or Letter of Credit or participation therein or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note (hereinafter referred to as "Other Taxes"). 3. The Borrower agrees to indemnify the Bank for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 7.2) paid by the Bank and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be made within fifteen (15) days from the date the Bank makes demand therefor. 1. 51 52 MISCELLANEOUS 1. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party at its address set forth on the signature pages hereof with a duplicate copy thereof, in the case of the Borrower, to Pamela Rothenberg, Esq., David Hagner, et al., 1120 19th Street, N.W., 8th Floor, Washington, D.C., 20038, and, in the case of the Bank, with a duplicate copy thereof to Robert M. Gordon, Esq., Shaw Pittman Potts & Trowbridge, 201 Liberty Street, S.W., Leesburg, Virginia 20175. Each such notice, request or other communication shall be effective (i) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, (ii) if given by a nationally recognized overnight carrier, 24 hours after such communication is deposited with such carrier with postage prepaid, (iii) if given by facsimile transmission, when transmitted to the facsimile number specified and confirmation of receipt is received, or (iv) if given by any other means, when delivered at the address specified in this Section. 2. No Waivers. No failure or delay by the Bank in exercising any right, power or privilege hereunder or under the Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. 3. Expenses; Indemnification. 1. The Borrower shall pay (i) all reasonable out-of-pocket expenses of the Bank (including reasonable fees and disbursements of counsel to the Bank), in connection with the preparation and administration of this Agreement, the Loan Documents and the documents and instruments referred to therein, the administration of the Loans, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all reasonable out-of-pocket expenses incurred by the Bank, including fees and disbursements of counsel for the Bank, in connection with the enforcement of the Loan Documents and the instruments referred to therein and such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. 2. The Borrower agrees to indemnify the Bank, and its affiliates and directors, officers, agents and employees (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such indemnitee shall be designated a party thereto) that may at any time (including, without limitation, at any time following the payment of the Obligations) be imposed on, asserted against or incurred by any Indemnitee as a result of, or arising out of, or in any way related to or by reason of, (i) any of the transactions contemplated by the Loan Documents or the 52 53 execution, delivery or performance of any Loan Document, (ii) any violation by the Borrower or the Environmental Affiliates of any applicable Environmental Law, (iii) any Environmental Claim arising out of the management, use, control, ownership or operation of property or assets by the Borrower or any of the Environmental Affiliates, including, without limitation, all on-site and off-site activities involving Materials of Environmental Concern, (iv) the breach of any environmental representation or warranty set forth herein, (v) the grant to the Bank of any Lien in any property or assets of the Borrower or any stock or other equity interest in the Borrower, and (vi) the exercise by the Bank of its rights and remedies (including, without limitation, foreclosure) under any agreements creating any such Lien (but excluding, as to any Indemnitee, any such losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements incurred solely by reason of the gross negligence or willful misconduct of such Indemnitee as finally determined by a court of competent jurisdiction). The Borrower's obligations under this Section shall survive the termination of this Agreement and the payment of the Obligations. 1. Set-Offs. In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence and during the continuance of any Event of Default, the Bank is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to the Borrower or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special, time or demand, provisional or final) and any other indebtedness at any time held or owing by the Bank (including, without limitation, by branches and agencies of the Bank wherever located) to or for the credit or the account of the Borrower against and on account of the Obligations of the Borrower then due any payable to the Bank under this Agreement or under any of the other Loan Documents, including, without limitation, all interests in obligations purchased by the Bank. Notwithstanding anything to the contrary contained herein, the Bank may, by separate agreement with the Borrower, waive its right to setoff contained herein or granted by law and any such written waiver shall be effective against the Bank under this Section 8.4. 2. Amendments and Waivers. Any provision of this Agreement or the Note or other Loan Documents may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Bank. 3. Successors and Assigns. 1. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement or the other Loan Documents without the prior written consent of the Bank. Except to the extent permitted by Sections 8.6(b) and (c), the Bank agrees that it will not sell or participate interests in the Note or otherwise assign the Debt to an unrelated lending institution or person without the prior written consent of the Borrower. A transfer or assignment of the Note or the Debt as a result of a merger, acquisition, 53 54 or sale of the Bank shall not be considered an assignment of the Note or the Debt for these purposes and shall not require the consent of the Borrower. 2. The Bank may at any time grant (i) prior to the occurrence of an Event of Default, to one or more banks or other financial institutions in the business of making or participating in loans similar to the Loans in minimum amounts of not less than $5,000,000 and (ii) after the occurrence and during the continuation of an Event of Default and during the continuation of an Event of Default, to any Person in any amount (in each case, a "Participant"), participating interests in its Commitment or any or all of its Loans. Any participation made during the continuation of an Event of Default shall not be affected by the subsequent cure of such Event of Default. In the event of any such grant by the Bank of a participating interest to a Participant, whether or not upon notice to the Borrower, the Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower shall continue to deal solely and directly with the Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which the Bank may grant such a participating interest shall provide that the Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article VII and Section 2.6(d) with respect to its participating interest. 3. In addition, nothing in this Agreement or any other of the Loan Documents shall prohibit the Bank from pledging or assigning its interests hereunder, including any related collateral, to any Federal Reserve Bank in accordance with applicable law. 1. Governing Law; Submission to Jurisdiction. 1. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE COMMONWEALTH OF VIRGINIA (WITHOUT GIVING EFFECT TO THE PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW). 2. Any legal action or proceeding with respect to this Agreement or any other Loan Document and any action for enforcement of any judgment in respect thereof may be brought in the courts of the Commonwealth of Virginia or of the United States of America for the Eastern District of Virginia, and, by execution and delivery of this Agreement, the Borrower hereby accepts for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of the aforesaid courts and appellate courts from any thereof. The Borrower irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the hand delivery, or mailing of copies thereof by registered or certified mail, postage prepaid, to the Borrower at its address set forth below. The Borrower hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of 54 55 any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Loan Document brought in the courts referred to above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. Nothing herein shall affect the right of the Bank to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Borrower in any other jurisdiction. 1. Marshaling; Recapture. The Bank shall be under no obligation to marshal any assets in favor of the Borrower or any other party or against or in payment of any or all of the Obligations. To the extent the Bank receives any payment by or on behalf of the Borrower in connection with this Agreement, which payment or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to the Borrower or its estate, trustee, receiver, custodian or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such payment or repayment, the Obligation or part thereof which has been paid, reduced or satisfied by the amount so repaid shall be reinstated by the amount so repaid and shall be included within the liabilities of the Borrower to the Bank as of the date such initial payment, reduction or satisfaction occurred. 2. Counterparts; Integration; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. This Agree_ment shall become effective upon receipt by the Bank and the Borrower of counterparts hereof signed by each of the parties hereto (the date of such receipt being deemed the "Effective Date"). 3. WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK EACH HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 4. Survival. All indemnities set forth herein shall survive the execution and delivery of this Agreement and the other Loan Documents and the making and repayment of the Loans hereunder. 5. Domicile of Loans. The Bank may transfer and carry its Loans at, to or for the account of any domestic or foreign branch office, subsidiary or affiliate of the Bank. 6. Limitation of Liability. No claim may be made by the Borrower or any other Person acting by or through the Borrower against the Bank or the affiliates, directors, officers, employees, attorneys or agent of any of them for any consequential or punitive damages in respect of any claim for breach of contract or any other theory of liability arising out of or related to the transactions contemplated by this Agreement or by the other Loan Documents, or any act, 55 56 omission or event occurring in connection therewith; and the Borrower hereby waives, releases and agrees not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. 7. Recourse Obligation. This Agreement and the Obligations hereunder are fully recourse to the Borrower. Notwithstanding the foregoing, no recourse under or upon any obligation, covenant, or agreement contained in this Agreement shall be had against any officer, director, shareholder or employee of the Borrower except in the event of fraud or misappropriation of funds on the part of such officer, director, shareholder or employee. 8. Confidentiality. The Bank agrees to use reasonable precautions to keep confidential, in accordance with its customary procedures for handling confidential information of this nature and in accordance with safe and sound practices, any nonpublic information supplied by the Borrower or its agents pursuant to this Agreement which is identified by the Borrower as being confidential at the time the same is delivered to the Bank, provided that nothing herein shall limit the disclosure of any such information (i) to the extent required by statute, rule, regulation or judicial process, (ii) to counsel for the Bank, (iii) to examiners, auditors or accountants (provided that with respect to such auditors or accountants only, they agree to be bound by the restrictions set forth in this Section 8.15) or (iv) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) first agrees to be bound by these provisions. The Bank shall not be deemed to have breached this Section 8.15 if a prohibited disclosure of confidential information by such party is inadvertent. 9. Legal Rate. Notwithstanding anything in this Credit Agreement or any Loan Document to the contrary, if at any time the interest rate applicable to the Note, together with all fees and charges which are treated as interest under applicable law (collectively, the "Charges") as provided for in this Credit Agreement or in any other document executed in connection herewith, or otherwise contracted for, charged, received, taken or reserved by the Bank shall exceed the maximum lawful rate (the "Legal Rate") which may be contracted for, charged, taken, received or reserved by the Bank in accordance with applicable law, the rate of interest payable under such Note, together with all Charges payable, shall be limited to the Legal Rate and any interest or Charges not so charged, taken, received or reserved by the Bank at such time shall be spread, prorated or amortized over the term of such Note to be fullest extent permitted by law. 56 57 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. AVALON PROPERTIES, INC. By: ----------------------------- Thomas J. Sargeant Secretary and Chief Financial Officer Facsimile number: (203) 761-6560 FIRST UNION NATIONAL BANK OF VIRGINIA By: ---------------------------- Timothy L. Leon Vice President Facsimile number: (703) 760-6290
EXHIBITS: EXHIBIT A NOTE EXHIBIT B SCHEDULE 5.1(n) LETTER EXHIBIT C FORM OF MONEY MARKET QUOTE REQUEST EXHIBIT D FORM OF MONEY MARKET QUOTE SCHEDULES: SCHEDULE 4.15(a) SCHEDULE 4.15(b)
57 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 APR-01-1997 JUN-30-1997 2,752 0 0 0 0 14,246 1,258,584 57,543 1,239,823 39,666 322,150 0 88 363 805,356 1,239,823 0 40,772 0 21,473 0 0 3,922 15,859 0 0 0 0 0 15,859 .31 0
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